Housing Optimists Are "Not Paying Attention" to the Facts, Says Dean Baker

Among the crowded ranks of economists and market watchers, Dean Baker stands out. Baker presciently called the housing bubble when he published  “The Run-up in Home Prices: Is It Real or Is It Another Bubble?” in 2002.

So does our guest Baker see the so-called housing recovery now? "No. I mean I think people that are saying that just aren't paying attention to what's in front of their eyes," says Baker, an American economist and co-director of the Center for Economic and Policy Research.

"I think we’re going to see a big fall-off in purchases for the rest of 2010 and even into 2011,” Baker says. “So the idea that somehow the market is stable, that housing prices will rise anytime soon – it’s really hard to make a case for that."

Baker lays out several reasons for his bearish case:

• Programs that lifted the market, including the tax credit for first-time buyers, have expired.
• The Federal Reserve is exiting the mortgage market, which will likely push rates to 5.5% to 6% by the end of the year.
• There's still an inventory glut and rental rates are falling in many markets, notes Baker, author of "False Profits: Recovering from the Bubble Economy." He says the rental market doesn't lie.

Naturally the housing bulls disagree. Hedge-fund manager John Paulson, for example, said housing prices in hard-hit California will begin to rise this year, setting the stage for a wider recovery, as the FT reports.

So what are the chances of, say, another tax credit or purchase of mortgage-backed securities? "I think they'd be reluctant to do that because of the signal it would send," Baker says in the accompanying clip. "I mean it would send this unambiguous signal things really are bad, worse than had been advertised." 

Click on the player to learn about Baker's idea to let struggling homeowners stay in their homes, and prevent home inventory from climbing even higher.