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Memo to Obama’s New Economic Team: Good Luck

President-Elect Obama’s new economic team was the big announcement of the day on Monday, and overall the reviews were mostly good. Smart, competent, experienced people. Liberal economist Dean Baker did call Tim Geithner, Obama’s Treasury Department choice, a “safe pick,” and explained he bears some responsibility for the current mess, given his role in crafting the $700 billion bailout plan. But still, any criticism was either mild or so inside economic baseball as to be meaningless. (Who cares how well Larry Summers and Geithner will get along?)

Here’s my view. Glad you all are on board. Here’s what you face, right here and now:

Home values in October had their fastest annual decline since the National Association of Realtors began keeping records in 1968. And that’s not even the worst part. In this insightful look at the October numbers, Calculated Risk points out that nearly half the sales were foreclosures. The low prices for foreclosed homes, as we noted earlier in a TWI story, are dragging down home prices overall.

When buyers pick up foreclosed homes at Basement Bob-style prices, it probably means either they are either investors, who will have to hold on to the properties for a while to get any money from them, since flipping doesn’t pay off these days, or they are first-time buyers, who aren’t going to be moving up again anytime soon. Either way, it means there won’t be the kind of rapid turnover of homes that we’ve seen in the past, Calculated Risk says.

From CR:

The turnover rate was boosted in recent years by:

  • Speculative buying (flippers).
  • Speculative buying by first time home buyers (using excessive leverage).
  • Move up buying, especially by Baby Boomers. Although slowing, the turnover rate is still above the median for the last 40 years and substantially above previous troughs.
  • Both types of speculative buying are over for now. And the Baby Boomers have probably bought move up homes, and the next major move will be downsizing in retirement (still a number of years away).
  • And finally – and probably a very important point – homeowners with negative equity, who manage to avoid foreclosure, will be stuck in their homes for years. All of the above suggests the turnover rate – and existing home sales – will fall further, perhaps much further.

As TWI said on Monday, communities like Prince William County are seeing a lot of sales of foreclosed homes, but prices continue plunging. That leaves them stuck to deal with a large inventory of foreclosed properties, some of which are falling into disrepair.

So, Obama’s economic team, fixing up the housing market should be the first thing you tackle. Or maybe you should decide how to bail out Detroit first. Plus, you need to talk about helping homeowners avoid foreclosure – no one has figured out yet how to get loan modifications done successfully, on a large scale. Of course, we need to stimulate the economy, too, and create jobs. How can we shore up consumer confidence, which is lagging at record levels? If another big bank like Citigroup appears to be failing, what’s the best way to handle that? I’m sure you’ll be working on getting credit flowing to consumers again, but in a responsible way.

And that’s just what you have on your plate, before you actually start your jobs. I’m sure that plate will be even more full by the end of January. I’d tell you all congratulations for being picked, but I think good luck is really what you need.

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