There is nothing in housing data to suggest the market will come roaring back anytime soon, according to Paul Krugman, economist and columnist at The New York Times.
Instead, it's likely any positive movement in housing will be gradual as a depressed U.S. economy continues with low interest rates that "will last for quite a while," Krugman said at HousingWire's REthink Symposium.
"We will be seeing low interest rates for a very long time," the Nobel laureate said. "The thing about housing … housing prices were stable for a long period of time, then they soared and came back down."
Krugman eased fears over inflation, but had a dire forecast for the overall U.S. economy. He drew comparisons to Japan in the 1990s saying, "The idea that it is going to turn around any day now is one of the great fallacies of our time."
"You are caught in a world where what the Fed can do is add or subtract liquidity from the system. If the Fed buys Treasury bills, all it is doing is trading one zero interest rate asset with another. It really doesn't do anything. Normal monetary policy has no traction in this environment. So a lot of perverse things become true. We are in a world where people try to save more, and they end up depressing consumer demand. If you depress consumer demand, businesses have no reason to invest," Krugman said.
As a way out of the slow recovery, he supports the Fed's expansionary monetary policies, including the QE2 program to reinvest maturing securities into long-term Treasurys and advocates for more expansionary monetary policy, saying fears over inflation as an outcome have been greatly exaggerated.
"Interest rates will not spike when QE2 ends," said Krugman. "I see no reason to believe anything dramatic will happen when the program goes down."
The Federal Reserve
plans to continue QE2 through the end of the second quarter
Despite the political turmoil surrounding the program, Krugman said he is aggressive on monetary policy and would prefer more, not less, intervention.
"I would be doing a QE3 that would be both larger and broader-based than QE2," Krugman said. "I would be buying longer-term debt and a fair portion of private-sector debt as well."
In terms of interest rates going up in the near future, Krugman said, "People keep thinking the Fed will raise interest rates soon, but by historical standards it has no reason to move quickly on that front. In general, given the low inflation rates, it would be odd for the Fed to raise rates until unemployment falls below 7%."
The outcome of America's debt crisis and current financial condition is likely to be reductions in health care spending in big government programs like Medicare and higher taxes, Krugman told the audience of mortgage finance executives.
Write to: Kerri Panchuk.