A plunge with no end in sight

FEW NEWS stories have received adequate coverage amidst the WikiLeaks hysteria that has consumed the media in recent days. One recent news story, encapsulated in a mere statistic, would be mostly ignored in even a slow news cycle. Yet despite this lack of news coverage, its significance for the direction of the economy could not be greater.

"The Census Bureau reported last week that the median price for a new home fell from $226,300 in September to $194,900 in October, a one-month decline of 13.9 percent," writes Dean Baker, economist at the Center for Economic and Policy Research (CEPR). "The October data suggests that house prices may again be falling rapidly."

Despite widespread claims of economic recovery, the housing bubble appears to be continuing its deflation. What does this mean? Simply, the so-called "housing crisis" has not yet hit bottom.

But this crisis did not originate in the housing sector, and its consequences, likewise, will not remain within the housing sector.

"True" recovery--whatever that means at this point--requires a rebound of the housing sector. That is to say, we have never grown our way out of recession without a robust recovery of the housing market.

Today, nearly 15 million Americans are "underwater" when it comes to their mortgages, meaning they owe more than the house is worth. This disparity in the value of a mortgage and its current market value will continue as homeowners are forced to bump down the prices of their homes in order to sell--a trend that forces down the value of all homes, whether on the market or not.

The only factor that has propped up the housing market since the bubble burst in 2007 was the first-time homebuyers tax credit, which amounted to an $8,000 tax rebate for qualified homebuyers.

This credit, in the words of economist Dean Baker, "effectively amounted to a transfer to the seller, or in the case of many underwater sellers, to the investors holding the mortgage. From this perspective, the tax credits were good policy for banks and other mortgage holders, but provided little benefit to homebuyers. They also did nothing to sustain the housing market over the long run."

LET'S BREAK down Dean's analysis and look at its implications.

For mortgage-holding homeowners, as well as the banks that own the mortgages, the tax credit appeared to provide some advantage. The tax credit served to artificially prop up the value of homes on the market, because demand for the homes on the market was essentially subsidized by the increased demand due to the credit. Essentially, skittish new homebuyers were coaxed into the market with the promise of the tax rebate.

In other words, home prices were held artificially above market price, because a home could be bought at the value of, say, $150,000, though after the tax rebate, the buyer is effectively paying less than that.

So, in the extreme short term, the outcome is that: (1) The mortgage holder sells their home for above-market value; (2) The bank transfers the mortgage at above-mortgage value; and finally, (3) The new homebuyer has managed to purchase a home valued at $150,000, while receiving a check from the IRS for $8,000 (minus other federal taxes owed, of course) to off-set the cost of the home-purchase.

All parties involved appear to have gained a significant advantage from the tax credit.

But unfortunately, a home purchase is not at all like a sale on laundry detergent. The nature of the home-commodity in a privatized market system is that it contains both use value and exchange value. Despite the fact that the home is not consumed in hours or days, but rather fixed in space and time, the home exists as the material mediator of value in the market system.

The extension of credit (a mortgage) by the bank (that kindly allows the mortgage-holder to live in the house while the bank effectively owns its value) over the course of time (often 20-30 years) projects the homebuyer into a barrage of market forces that are completely outside of the buyer's control.

In the absence of the tax rebate, the price the homebuyer was willing to pay plunged, and homeowners were compelled to slash their asking price in order to spark a sale. This competitive activity devalues all homes, once again, whether on the market or not.

The loss of equity for many first-time buyers now exceeds the size of their tax credit, explains Baker. In other words, they would have been far better off buying at current prices without the credit, than having bought earlier in the year and received the benefit of the credit.

In simple terms: the stimulus failed to halt the plunge in home prices and, due to the downward pressure in the value of homes, many of the new homeowners are already underwater.

AS USUAL, the dominant strand of mainstream economic theory fails to capture the essence of this movement of price and value. This is because these theories attempt to capture these brief snapshots highlighted by the supposed bonanza on the housing market produced by the tax credit. The passage of time and the movement of the value-price relationship quickly ruin this supposed housing bonanza.

Unfortunately for them (and we Americans, who suffer from their shortcomings), this "capture and comparison" of snapshots tells us nothing about the relations or movements of price and value within capitalism.

Thus, when it comes to understanding the complexities of politics and the economy, we remain clueless at best, and reactionary at worst.

Jobs or no jobs, corporate profits or no corporate profits--when the value of the "nest-egg" of home-owning Americans is continuing to decline, working-class Americans are not in a recovery. On the contrary, we are still sinking; and we have yet to hit bottom.

It is time for an honest assessment of our government's goals and strategies. Temporary stimulus has proven to be ineffective at halting the downward spiral in which we find ourselves today. Wall Street is once again enjoying record profit rates while average Americans sink into lower depths of despair and desperation.

Plummeting home values are not the only harsh realities faced by the working class. After all, capitalism did not stagnate into this crisis; rather it grew into this crisis as a result of overproduction. (See David McNally on "The mutating crisis of global capitalism" in the International Socialist Review.)

Now that the bubbles have burst, we are reaping the consequences which, as I said above, reach far beyond the housing sector. An average unemployment rate of 9.6 percent (and those rates are in excess of 20 percent in certain localities and among certain demographics) creates a reserve of unemployed workers, to be set against one another by corporate interests in order to force workers to accept lower wages and benefits.

As if suspended over a crowded highway, working Americans are walking a tightrope when it comes to the simple act of reproducing our vital resources within this capitalist system. All the while, there exists a bipartisan movement waiting to slash what little is left of our social safety net.

In this so-called "sovereign debt crisis" the answer from the ruling class to every question is austerity and more austerity--more cuts in the living standards of working-class people across the world. In essence, the working class is walking the tightrope without a net. And the risk of going splat on the pavement below is looking more likely every day.

Homeowners are sinking into deeper debt, workers remain underpaid, under-employed, or unemployed, and the promise of a comfortable retirement looks bleaker for most working people. The ruling class touts economic recovery.

We say: "What recovery?"