Wall Street Still Loves Big Tech Stocks: Analysts See Further Upside Ahead Of Crucial Earnings Week

Despite a brutal selloff so far this year in the tech sector, Wall Street analysts remain cautiously optimistic about Big Tech stocks ahead of upcoming second-quarter earnings this week, with the majority of experts predicting that companies like Apple, Microsoft and Alphabet can continue to post strong profits in the long run.

Though tech stocks have been hard-hit this year (with the Nasdaq down 25%) amid surging inflation, rising interest rates and ongoing recession fears, a majority of Wall Street analysts still maintain buy ratings on Apple, Alphabet, Meta, Microsoft and Amazon ahead of key earnings results this week.

Three firms reiterated buy ratings on several big names Monday: Deutsche Bank predicted solid results from Apple, Bank of America expects Facebook parent Meta to see ad revenue take a smaller hit than expected and Oppenheimer predicts “robust” growth in Amazon’s AWS cloud services business.

Analysts note that while the tech sector is already slowing down, hiring across the board amid the more challenging economic environment, after a big selloff earlier this year, valuations are now looking much more attractive.

Netflix and Tesla saw their stocks rally last week after “better than feared” results, while Snap delivered “another train wreck quarter that highlights a digital ad slowdown, Apple iOS privacy headwinds and TikTok competition further heating up,” according to Wedbush analyst Dan Ives.

While there’s been some “good and bad news” in the tech sector, “there are some encouraging signs” and investors can now buy shares in some of the biggest companies at a more attractive entry point, says Lindsey Bell, chief markets and money strategist for Ally.

Among the more than 250 combined analysts covering the five Big Tech companies reporting earnings this week—Apple, Alphabet, Meta, Microsoft and Amazon—fewer than five have sell ratings—a sign of just how bullish Wall Street is on some of America’s most valuable tech companies.

Alphabet and Microsoft kick off Big Tech earnings on Tuesday. Meta reports Wednesday, Apple and Amazon on Thursday. “Investors should be selective when picking stocks within the tech sector,” says David Trainer, CEO of New Constructs. “The strongest types of stocks are the ones where cash flows are strong and valuations underestimate the company’s ability to generate cash flows in the future.”

He especially likes Google parent Alphabet, which is trading at a “much cheaper” valuation than its peers and should continue to outperform, thanks to its ability to keep innovating. Trainer is “not as confident” about Facebook parent Meta, however, questioning the company’s “ability to sustain profits,” especially as it struggles to retain users amid increased competition from the likes of TikTok. His firm also remains bullish and “big fans” of Apple, though the stock is still somewhat expensive, he adds.

All of the Big Tech stocks have seen big losses so far this year, though they have recovered somewhat in recent months. Meta has suffered the greatest losses, with its market value falling by roughly half as Facebook’s ad business continues to struggle. Amazon and Alphabet are both down roughly 25%, Microsoft more than 20% and Apple 15%.

I am a senior reporter at Forbes covering markets and business news. Previously, I worked on the wealth team at Forbes covering billionaires and their wealth.

Source: Wall Street Still Loves Big Tech Stocks: Analysts See Further Upside Ahead Of Crucial Earnings Week

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In a single two-and-a-half-hour stretch on Jan. 25, Microsoft Corp. stock erased $156 billion of its shareholders’ money, then rebounded, recovering all of its losses and adding $74 billion. In one sense this was just another lurch in the markets’ wild ride in 2022, as investors adjust to recovering economies and the prospect of rising interest rates. But it also points to a new environment in which the most valuable U.S. tech companies are going to have to work harder to justify their trillion-dollar or near-trillion-dollar valuations.

The Big Tech companies are still doing well. The day after Microsoft’s earnings, Apple reported a quarterly performance that wildly exceeded expectations. On Feb. 1, Alphabet also beat analysts’ projections. Share prices for both companies spiked—but remain below their peaks. The way Microsoft’s white-knuckle afternoon played out is particularly illustrative of the shifting environment: At 4 p.m. New York time, it released quarterly financial results.

They exceeded analysts’ expectations, except for one crucial number: Growth slowed slightly at its lucrative Azure cloud computing business. Investors panicked, sending shares down as much as 6.8% in aftermarket trading. Shortly after 6 p.m., Chief Financial Officer Amy Hood told analysts that cloud computing growth would accelerate again in the next fiscal quarter. The stock jumped, erasing the earlier losses.

Short-term stock gyrations have limited predictive power. But the activity around Microsoft’s earnings highlighted how negatively investors are now inclined to react to slowing growth at key units, even if revenue and earnings beat expectations.

A standard way to look at how excited investors are about a particular company is to compare its share price with its expected earnings. In January 2017 the stocks of the five most valuable tech companies—Apple, Amazon, Facebook, Google, and Microsoft—traded in line with the S&P 500 as a whole, at 19 times their predicted earnings. By September 2020 that multiple for the Big Tech companies was 42, while the market as a whole traded at a 27 multiple.

Investors were rewarded. Apple shareholders enjoyed an average 43% annual return over the past five years if they reinvested all their dividends back into the stock. Microsoft, Amazon, and Google generated average returns of 38%, 28%, and 26%, respectively. Even Facebook’s relatively modest 18% outperformed the S&P 500’s average of 16%.

The lockdowns helped widen the gap between tech and everyone else, according to Kasper Elmgreen, the head of equities at Amundi SA. “The economy gets turned off, so we had an historic economic contraction that hit [vehicular] traffic, leisure, industrials, construction, financial services, and so forth hardest,” he says.

That could be changing. The Covid-19 omicron wave is receding in many places, and businesses that suffered during the pandemic could benefit more than tech companies from a renewed recovery. This could send investors looking to increase their stakes in companies they’ve spurned for the past two years while they focused on the tech giants.

“The whole case for investing in these companies and inflating their premiums was the fact that growth was scarce and they had the strongest growth prospects in the S&P 500,” says Gina Martin Adams, the chief equity strategist for Bloomberg Intelligence in New York. “As economic conditions improve, that premium will naturally deflate.”

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Dow Jumps 700 Points, Analysts ‘Cautiously Optimistic’ After More Solid EarningsNZ sharemarket falls another 0.2%, underperforms Wall Street Stuff.co.nz

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The Future of Remote Work, According To 6 Experts

Whether you’re a remote work booster or a skeptic, there are lots of unanswered questions about what happens next for remote work, especially as Covid-19 restrictions continue to fade and as fears of a recession loom.

How many people are going to work remotely in the future, and will that change in an economic downturn? Will remote work affect their chances of promotion? What does it mean for where people live and the offices they used to work in? Does this have any effect on the majority of people who don’t get to work remotely? If employees don’t have to work in person to be effective, couldn’t their jobs be outsourced?

It turns out there’s a dangerous line between arguing for remote work and arguing yourself out of a job. And since remote work makes employees less visible, they will have to find other ways to let higher-ups know they exist or risk being passed over for pay raises. Remote work will also have long-lasting effects on the built environment, requiring office owners to renovate and allowing employees the potential for a higher quality of living. Finally, what happens during a recession largely depends on whether your company decides to save money by reducing real estate or laying off the employees they never met.

One thing that’s clear is that remote work is not going away. There are, however, a number of ways to make it better and more commonplace, and to ensure that it doesn’t harm you more than it helps.

To get a better idea of what could be coming, we asked some of the most informed remote work thinkers — people who study economics, human resources, and real estate — to make sense of what to expect in the future of remote work. Their answers, edited for length and clarity, are below.

Five years from now, what percentage of the US population will work remotely?

Johnny Taylor Jr., president and CEO of the Society for Human Resource Management: I think that number will never exceed 30 percent fully remote. What percentage will have some remote work? Probably 60 to 65 percent. There are some roles that will never be remote. But even in retail, employers are trying to figure out how to give that worker population some ability to work remotely. One retail company I talked with is going to make it so that the people who work in the store five days a week now do one day a week in customer service remotely.

Nicholas Bloom, economics professor at Stanford University, co-founder of WFH Research: Currently, 10 percent of the US workforce are fully remote and 35 percent are hybrid remote. In five years, I think both numbers will be pretty similar. Pushing this up is continued technological improvements in working-from-home technology. Pushing this down is the pandemic ebbing from memory.

Julie Whelan, global head of occupier research at Coldwell Banker Richard Ellis: The last few years has proven that people are able to work remotely. Now, we are trying to mix a combination of in-person and remote work — that is where the challenges shine. I am not convinced we will see a large jump in fully remote work; I think jobs that are fully remote will always remain the minority.

What has to change for more people to be able to work remotely?

Matthew Kahn, economics professor at the University of Southern California and author of Going Remote: How the Flexible Work Economy Can Improve Our Lives and Our Cities: Firms must have clear performance metrics — ideally ones that can be verified using quantitative data, so that remote workers understand in real time how they are performing. Firms must also figure out how to configure “virtual watercooler” interactions so that remote workers are less likely to feel like they are out of the loop.

Arpit Gupta, assistant professor of finance at New York University Stern School of Business: Companies need to have better ways to onboard new workers and get them involved in corporate culture. They also need to improve remote workers’ ability to connect with different parts of the organization and create better ways to manage new idea generation and creativity. Finally, they need to ensure improved promotion prospects for purely remote workers and the ability to go completely remotely from one firm to another.

Bloom: The main driver of working from home is whether it makes business sense for the organization, and if employees are happy doing this. This is driven by technology and the job task. Over time the technology is slowly improving to support working from home. I have been working on this topic for almost 20 years, and the changes over that period have been incredible.

Twenty years ago, working from home meant telephone calls and emailing or mailing small files. Now it’s all video calls and the cloud. Within 10 years, I predict new major technologies will arise to make this far better. In terms of job tasks, these are also changing to support working from home. For example, my neighbor is a doctor and pre-pandemic was in the office every day, but now sees patients remotely two days a week, as her job tasks now include televisits.

Taylor: We as management have to get comfortable with a total paradigm shift. We constantly say, “That can’t happen.” And the fact of the matter is we have to be willing to challenge our notions of what can’t happen and say, “Can it?” We’re in this dynamic stage where we’re determining whether or not it works. So the question, “Can you work remotely?” is really not the question. Is it possible? Yes, during the pandemic we proved that it’s possible. The question is, will there be trade-offs?

How might remote work affect jobs that aren’t remote?

Gupta: Changing consumption patterns will create more demand for goods and services — and the people who provide them — in the suburbs and remote-friendly destinations, relative to office central business districts in current metropolitan areas.

Bloom: Many non-remote jobs interact with remote workers. Think of retail and food service workers in city centers. If office employees move to remote work, these service workers have to change their location of work, too.

Taylor: More jobs might become partially remote. For a nurse, we’ll give them three days in the hospital and two days as a tele-nurse. So we are thinking a sharing of responsibilities to get to hybrid, even in those roles that absolutely, at the end of the day, largely have to be in person.

Will remote workers find it harder to advance than their in-person colleagues?

Taylor: Yes, point-blank. More than two-thirds of supervisors (67 percent) consider remote workers more easily replaceable than onsite workers, and 62 percent believe fully remote work is detrimental to employees’ career objectives. Managers acknowledged that when they are looking to give an assignment, they oftentimes forget the remote worker. Proximity matters.

Something that is of particular importance to me as an African American is, for years, we argued that we weren’t able to build relationships with the majority community. We didn’t have access to them and therefore visibility. Well, you really lose access and visibility if you’re at home and they’re in the office.

“Working remotely significantly reduces your opportunities to build relationships with people who can influence your career”

I’ve heard this argument that office culture is a white male-dominated relic of the past. That might be. But as long as those white males are in the office making decisions about who is going to be promoted, then you are very likely putting yourself at a disadvantage. It’s not a question of, is that right or wrong, fair or not. It’s just what it is. Working remotely significantly reduces your opportunities to build relationships with people who can influence your career.

Whelan: There is a risk that those people who get more face time are naturally at an advantage to advance faster than others. However, if an organization truly supports flexible work, then behavior around promotions and compensation gains needs to be discussed early, observed closely, and action should be taken if desired outcomes are not met. Just because people may work remotely some of the time — or all of the time, depending on company policy — that doesn’t mean they cannot be visible. So it is incumbent on everyone, including the employee themselves, to make sure people remain visible, front-of-mind, and reviewed based on job performance despite a remote status.

Kahn: The answer to this key question hinges on whether a given firm promotes based on a type of nepotism or based on objective value added to the firm’s core goals. Face-to-face interaction does build up trust and friendship. If bosses play favorites, then the remote workers will have a disadvantage in getting promoted. Those bosses who seek to promote based on a meritocratic criteria will emphasize the value of the quality of face-to-face interactions over the quantity of face-to-face interaction at work. Such an emphasis of quality over quantity of face-to-face interaction will alleviate concerns that remote workers are second-class citizens, as they may visit the headquarters just a few days a month.

Those firms that figure out these new work configurations will have an edge in attracting and retaining a more diverse workforce.

Bloom: Fully remote workers may find slow career progression, particularly those who are early in their careers. As individuals advance in their careers, however, personal mentoring becomes somewhat less important. It is also worth noting most remote workers in the US are not fully remote. They are mostly hybrid, coming into the office for three days a week on average, and as such, they get a good dose of personal interaction. So, yes, fully remote workers may face some career advancement costs, but hybrid workers likely will face little or no costs.

What’s going to happen to all the offices?

Whelan: Offices will still exist — they will just evolve. The most sought-after locations, the most desirable amenities, and the most productive space design will continue to morph as population migration and work patterns settle into a new place. The workplace today is anywhere you have a mobile device and an internet connection. But the physical office as a place to gather, innovate, and connect cannot easily be replaced.

Bloom: In the short run, not much. The reason is scheduling. Most firms are either letting employees choose their working-from-home days, which typically means Monday and Friday, or are scheduling teams or the whole firm to come in on the same days, often Tuesday, Wednesday, and Thursday. As such, they cannot cut space. Nobody sublets an office on Monday and Friday.

In the longer run, clever scheduling software, like Kadence, will organize teams and working groups to come in on different days: Say the industrials team is in the office on Monday and Tuesday, and the residential team on Wednesday and Thursday. But from talking to hundreds of firms, this is probably some years away from being a major reality. Until that time, office demand will be soft but won’t see major drops.

If you want to look for big impacts on real estate, then focus on city center retail. With office workers working from home about 50 percent of days, retail expenditure in central New York, San Francisco, and other big cities has collapsed, and that retail spending, jobs, and space is moving out to the suburbs.

Kahn: In high-quality-of-life cities, these commercial buildings will be converted into housing as well as schools and centers for our population’s aging senior citizens.

Taylor: There is no question that we’re going to have less demand for the traditional office space. Will it go away? No.

To what extent will remote work affect where people live?

Daryl Fairweather, chief economist at Redfin: Remote work is already affecting where people live. A record nearly one-third of homebuyers looked to relocate out of their home metro in the second quarter of 2022. That’s up from roughly 26 percent before the pandemic. Many people who have the flexibility to move have been doing so during the pandemic, often taking their higher housing budgets with them and, in turn, contributing to higher home prices in the places they’re moving. Nowhere is this more pronounced than in popular Sunbelt cities like Phoenix, Miami, and Austin, which have seen a surge of in-migration from more expensive coastal metros like NYC, San Francisco, and Seattle.

Taylor: We are absolutely seeing people move further away. Hell, I’ve even seen people who have to be in-office two days a week say, “Hey, I live in a totally different city, and I can commute in.” So I can live in Atlanta, work in Washington, DC, buy a plane ticket for those two days, get a hotel, and the math says it’s actually cheaper and better for me to live where I want to live and commute — even if the company doesn’t pay for it, because I don’t have to pay for housing in DC.

Kahn: In expensive superstar cities, working-from-home workers will be more likely to move to the suburban fringe, where land is cheaper and the homes are newer. Remote workers will also seek out beautiful areas that offer them the leisure opportunities they desire. Real estate prices in Santa Barbara, California, have boomed since March 2020 due to its beauty and its proximity to Los Angeles. Perhaps surprisingly, medium-size cities such as Baltimore will gain. Located along the Amtrak Corridor, Baltimore offers easy access to Washington, DC, New York City, and Philadelphia and features much lower housing prices.

How will it affect pay?

Fairweather: Some companies are localizing pay for their workers who relocate and work remotely, but plenty are letting remote workers keep their high salaries. The biggest winners will be coastal workers who move to more affordable places and maintain their salary. They’ll find their money goes much further, not just for housing but for other goods and services.

The biggest losers are people already living in popular migration destinations who may not have the option to move somewhere less expensive, and whose salaries may not go as far as they once did, thanks to both higher inflation and rising home prices in their area. However, some people living in popular migration destinations may be happy that their home values have increased and their local businesses have more high-earning customers.

Bloom: Working from home is a perk, so it means any individual firm offering hybrid-WFH can pay about 5 to 10 percent less. But, of course, there are also general equilibrium effects in that firms compete for talent in a labor market. If every firm offers working from home, no individual firm can cut pay without losing employees.

Will remote work cause companies to hire more contractors or more people outside the US?

Taylor: An employee came to me, and she made a really, really compelling case: “Johnny, I don’t need to come into the office.” She literally gave me a three-page memo making the case for why she could work remotely. And I smiled and said, “Be careful what you pray for. In the process of saying, ‘I don’t need to interact with other people, I’m an individual contributor,’ you’ve literally made the case that your job can be outsourced. And now I don’t have to cover your pension plan, I don’t have to deal with a salary increase every year, I don’t have to do any of that.” And guess what? I did exactly that. I outsourced that role.

Let’s face it, most of us could have a fully contracted environment, but what we want is a culture, people who have a long-term commitment. We want to build leadership; we need management. And we do that by having consistent relationships and getting to develop our people, so there’s a lot of upside to employing people internally and reasons that we don’t outsource. But there’s a lot of space between not doing it and doing a little bit.

Gupta: Yes, to both outside contractors and outside the US employees. But these workers will be more integrated into existing job functions and teams, rather than outsourcing entire processes.

Kahn: This offshoring is a serious possibility. Those firms that require some monthly face-to-face interaction at the corporate headquarters will be less likely to engage in offshoring.

Bloom: This is already happening, from what firms tell me. Anti-immigration policies initiated by Trump have accelerated this process by reducing the ability of foreign workers to migrate to the US. So dozens of firms have said if they can’t get workers to their jobs in the US, they will move their jobs abroad. Working from home has shown how easy it is to have fully remote employees and teams, and in an era of tight domestic labor markets with restricted immigration, moving jobs overseas is one common solution (the other being automation).

But I should point out currently that this is probably good for most US citizens. US labor markets are incredibly tight, generating painful inflation and shortages of goods and services. Try taking a flight, booking a restaurant meal, or hiring a contractor. It is extremely hard, as there is too much demand for labor right now. So having some foreign workers fill that gap in is good news. Of course, if the US hits a hard recession and unemployment rises drastically, that benefit will be less clear.

What will happen to remote work in a recession?

Gupta: I actually suspect remote work will increase. While firms have bargaining power against employees, they mostly want to cut costs like real estate leases, pushing people remote.

Firms are also less interested in onboarding new employees into corporate culture and long-term innovation — two important use cases for the office. It’s more about keeping things going, which can be handled by existing workers at home.

Kahn: Scenario 1: The boss has discretion over who to fire and is more likely to fire the remote worker, because the boss doesn’t really know this worker and hasn’t built up a friendship with the worker.

Scenario 2: Since remote workers do not bear a fixed daily cost of commuting to the office, such workers can more easily reduce their hours to meet the firm’s new demand for labor. In this case, remote workers may be less likely to be fired.

Taylor: Reversing this — putting this genie back in the bottle — is not going to happen. What I think is more likely to happen during a recession is that productivity will become even more important. And so then you will see employers looking really, really hard at the data because they’re going to have to make choices between employee A and employee B. And so employees who are more productive and more efficient are the people who are going to make it through.

Fairweather: Historically, recessions have lasted longer because it takes time for workers to move to job opportunities. If a salesperson in Cleveland lost her job, she may have had to move to San Francisco to find another sales job. But with remote work, you can do a sales job from anywhere. Hopefully this recession is shorter than historical recessions because of remote work.

Source: The future of remote work, according to 6 experts – Vox

Related contents:

As call centers move to remote work, smaller firms find opportunities Bizjournals

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Twitter Posts $270 Million Loss In First Earnings Report Since Elon Musk ‘Terminated’ $44 Billion Takeover Deal

 

San Francisco-based Twitter reported revenue of $1.2 billion in the second quarter, falling short of average analyst estimates calling for $1.3 billion and slipping 1% from the same period last year.

The company also reported a worse-than-expected loss of $270 million, or 35 cents per share—compared to expectations for a loss of 7 cents per share and a profit of $66 million in the second quarter last year.

In its earnings release, Twitter blamed the disappointing performance on advertising industry headwinds associated with broader economic concerns and uncertainty around Musk’s deal to buy Twitter and take it private.

The firm says it’s not hosting an earnings call, issuing a shareholder letter or sharing financial projections with the deal still in flux.Twitter also disclosed it spent about $33 million related to the acquisition in the second quarter and $19 million on costs associated with layoffs, including some affecting about a third of the firm’s recruiting team.

Twitter stock futures were down 2% to about $38.50 within minutes of the announcement; shares have plunged more than 40% over the past year, while the S&P 500 has fallen about 16%.

Twitter stock has been on a wild ride since Musk acquired a 9% stake in the firm in April, announced a bid to acquire it at a massive premium weeks later and then decided he was “terminating” the deal earlier this month. Shares skyrocketed as much as 60% as the deal gained traction, but soon started collapsing as Musk voiced concerns about fake and spam accounts on the platform. Though Twitter’s board had already approved the takeover, Musk backed out on July 8, pushing shares down nearly 40% from their April highs.

On July 12, Twitter’s board sued Musk for backing out of the deal, asking a Delaware judge to order the billionaire to move forward with the agreement. The trial is being scheduled for October, according to Twitter on Friday. In a note to clients, Wedbush analyst Daniel Ives called Musk’s decision “a disaster scenario for Twitter,” predicting a long legal battle for Twitter to either force the deal through or get Musk to pay a $1 billion termination penalty.

$30 billion. That’s Twitter’s market value on Friday, roughly 22% below Musk’s proposed takeover bid.

I’m a senior reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill..

Source: Twitter Posts $270 Million Loss In First Earnings Report Since Elon Musk ‘Terminated’ $44 Billion Takeover Deal

Critics by:

Twitter and Elon Musk are scheduled to face off in a five-day trial in October over the billionaire’s change of heart about buying the social media company for $44 billion. The decision from Chancellor Kathaleen McCormick, the chief judge at Delaware’s Court of Chancery, was a blow to Musk, whose lawyers sought a trial early next year. But with the Twitter deal now in limbo, McCormick agreed to fast-track the trial during a hearing over Zoom on Tuesday.

“The reality is that delay threatens irreparable harm to the sellers and Twitter,” McCormick said in her ruling from the bench. “The longer the delay, the greater the risk.” Earlier this month, the Tesla and SpaceX CEO said he was calling off the deal because of concerns over how many accounts on Twitter are fake or spam. Last week, Twitter sued Musk to force him to go through with the purchase, accusing him of using the issue of automated bot accounts as a pretext to get out of a deal that was no longer good for him financially.

The October trial date is a win for Twitter, which had requested an expedited four-day trial in September. The uncertainty caused by Musk’s threat to pull out of the deal “inflicts harm on Twitter every hour of every day,” Bill Savitt, Twitter’s lead lawyer, said at the hearing. Musk’s lawyers argued they need more time to investigate his concerns over Twitter’s user figures, and that a trial should not take place before February.

Andrew Rossman, Musk’s lawyer, called Twitter’s request for a September trial “completely unjustifiable,” saying it would take months to analyze Twitter’s data and consult experts. He said Twitter had already dragged its feet about sharing information that Musk said he needed to vet the company’s estimates of fake accounts.

“The answers that he got were alarming,” Rossman said. “The runaround that he got from the company was even more alarming.” Savitt accused Musk of trying to “sabotage” the deal and run out the clock past April 2023, when the $13 billion Musk has lined up from banks to fund the deal expires.

“Mr. Musk has made perfectly clear he has no intention of keeping any of his promises,” Savitt said. “Candidly, we suspect that Mr. Musk wants to delay this trial long enough to never really face a reckoning.”Twitter argued Musk’s fixation on bots is a distraction from the question facing the court: whether Musk broke his legal agreement to buy the company.

Twitter has long said that it estimates less than 5% of daily users are not real people. Musk says he believes the true figure is much higher, but has not presented any evidence for his claim that Twitter is misrepresenting the prevalence of fake accounts on the platform.

Related contents:

Twitter’s Lawsuit Against Elon Musk: The Big Picture The Wall Street Journal

Devin Nunes drops California lawsuit against man he claims was ‘Twitter cow’s’ spouse The Tribune, California

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How Germany Got Hooked on Russian Energy

On Sunday 1 February 1970, senior politicians and gas executives from Germany and the Soviet Union gathered at the upmarket Hotel Kaiserhof in Essen. They were there to celebrate the signing of a contract for the first major Russia-Germany gas pipeline, which was to run from Siberia to the West German border at Marktredwitz in Bavaria. The contract was the result of nine months of intense bargaining over the price of the gas, the cost of 1.2m tonnes of German pipes to be sold to Russia, and the credit terms offered to Moscow by a consortium of 17 German banks.

Aware of the risk of Russia defaulting, the German banks’ chief financial negotiator, Friedrich Wilhelm Christians, took the precaution of asking for a loan from the federal government, explaining: “I don’t do any somersaults without a net, especially not on a trapeze.”

The relationship would benefit both sides: Germany would supply the machines and high-quality industrial goods; Russia would provide the raw material to fuel German industry. High-pressure pipelines and their supporting infrastructure hold the potential to bind countries together, since they require trust, cooperation and mutual dependence. But this was not just a commercial deal, as the presence at the hotel of the German economic minister Karl Schiller showed.

For the advocates of Ostpolitik – the new “eastern policy” of rapprochement towards the Soviet Union and its allies including East Germany, launched the previous year under chancellor Willy Brandt – this was a moment of supreme political consequence. Schiller, an economist by training, was to describe it as part of an effort at “political and human normalisation with our Eastern neighbours”.

The sentiment was laudable, but for some observers it was a potentially dangerous move. Before the signing, Nato had discreetly written to the German economics ministry to inquire about the security implications. Norbert Plesser, head of the gas department at the ministry, had assured Nato that there was no cause for alarm: Germany would never rely on Russia for even 10% of its gas supplies.

Half a century later, in 2020, Russia would supply more than half of Germany’s natural gas and about a third of all the oil that Germans burned to heat homes, power factories and fuel vehicles. Roughly half of Germany’s coal imports, which are essential to its steel manufacturing, came from Russia.

An arrangement that began as a peacetime opening to a former foe has turned into an instrument of aggression. Germany is now funding Russia’s war. In the first two months after the start of Russia’s assault on Ukraine, Germany is estimated to have paid nearly €8.3bn for Russian energy – money used by Moscow to prop up the rouble and buy the artillery shells firing at Ukrainian positions in Donetsk.

In that time, EU countries are estimated to have paid a total of €39bn for Russian energy, more than double the sum they have given to help Ukraine defend itself. The irony is painful. “For thirty years, Germans lectured Ukrainians about fascism,” the historian Timothy Snyder wrote recently. “When fascism actually arrived, Germans funded it, and Ukrainians died fighting it.”

When Putin invaded Ukraine in February, Germany faced a particular problem. Its rejection of nuclear power and its transition away from coal meant that Germany had very few alternatives to Russian gas. Berlin has been forced to accept that it was a cataclysmic error to have made itself so dependent on Russian energy – whatever the motives behind it. The foreign minister, Annalena Baerbock, says Germany failed to listen to the warnings from countries that had once suffered under Russia’s occupation, such as Poland and the Baltic states. For Norbert Röttgen, a former environment minister and member of Angela Merkel’s Christian Democrat Union (CDU), the German government bowed to industry forces pressing for cheap gas “all too easily”, while “completely ignoring the geopolitical risks”.

In February this year, German Green economic affairs and climate action minister Robert Habeck said that gas storage facilities owned by Gazprom in Germany had been “systematically emptied” over the winter, to drive up prices and exert political pressure. It was a staggering admission of Russia’s power to disrupt energy supplies.“I was wrong,” the former German finance minister, Wolfgang Schäuble, says, simply. “We were all wrong.”

In recent weeks even Frank-Walter Steinmeier, the German president, a totemic figure of the Social Democrats and greatest German advocate of the trade “bridge” between east and west, has recanted. He admits he misread Russia’s intentions as he pursued the construction of a new undersea gas pipeline. “My adherence to Nord Stream 2 was clearly a mistake,” he told German media in April. “We held on to bridges that Russia no longer believed in, and that our partners warned us about.”

This is an extraordinary admission for a man who acted as chief of staff to Gerhard Schröder, the Social Democratic chancellor from 1998 to 2005 and thereafter a lavishly rewarded, and much reviled, lobbyist for Vladimir Putin. Steinmeier was also foreign minister under Chancellor Merkel, and a great evangelist for Wandel durch Handel, the concept that trade and dialogue can bring about social and political change.

How did Germany end up making such a blunder? Some argue that Merkel should have seen that Putin was taking Russia in an authoritarian direction when he announced his return to the presidency in 2011. After Russia’s invasion of Ukraine in 2014, Germany made no move to stop importing Russian gas, and although Merkel threatened to introduce crippling trade sanctions, German industry convinced her to hold back. But some blame a more persistent misjudgment stretching back 50 years, based on a fallacy that authoritarian countries can be transformed through trade.

The Social Democrats have now set up a review into whether the policy of Ostpolitik – first laid out in a landmark speech in July 1963 by Egon Bahr, then the closest adviser to West Berlin’s mayor and chancellor-to-be, Willy Brandt – became deformed over time, especially after securing its great achievement, the fall of the Berlin Wall.

What is extraordinary, retracing the history through memoirs and contemporary records, is how frequently and determinedly Germany was warned, by everyone from Henry Kissinger onwards, that it was making a pact it might live to regret. Kissinger wrote to Richard Nixon on 9 April 1970: “Few people, either inside Germany or abroad, see Brandt as selling out to the East; what worries people is whether he can control what he has started.” Over 50 years, Germany fought numerous battles with a series of US presidents over its growing dependence on Russian energy. In the process, Germany’s foreign office developed a view of American anti-communism as naive, and a belief that only Germany truly understood the Soviet Union.

From the late 1960s, the Federal Republic of Germany tried to open its own direct line of communication with the Soviet leadership, even though its interest in reunification created tensions with the US. When it faced criticism from the US, Germany was wont to cite its unique status. “I cannot imagine there is anyone more interested in being allowed to continue working for detente and balance in Europe than the German people who are forced to live in two states,” Hans-Dietrich Genscher, then the foreign minister, told the German Bundestag in January 1980, to great applause.

But after the fall of the Berlin Wall in 1989, why was Germany still so reluctant to listen to others? A sense of guilt for the atrocities committed against the Soviet Union during the second world war may have played a role. Pride, too, that – through Ostpolitik – it had mended its relations with Moscow. Germany, in a sense, became a double prisoner of its past – bound both to the horrors it had committed, and to its belief that its response to those horrors was correct.

The conflicts between Germany and the US in the 70s and 80s, involving two very different presidents, Jimmy Carter and Ronald Reagan, were some of the most rancorous transatlantic battles since the second world war. “The disputes were all part of West Germany showing independence in foreign policy during the cold war, and that became uncomfortable for some American leaders,” the historian Mary Elise Sarotte said to me.

Carter and the German chancellor Helmut Schmidt had little respect for each other. Carter found Schmidt moody, while the chancellor, in his autobiography, dismissed Carter as an idealistic preacher, who knew nothing of Europe and was “just not big enough for the game”. The two leaders did not just grate personally, they disagreed on issues of substance – including how to protect human rights in Russia. In 1979 Schmidt and Carter came together to jointly adopt the so-called dual track decision, by which Nato would upgrade its nuclear weapons based in Europe, while actively seeking an arms control agreement with Russia. But in other ways their approach was very different.

Schmidt never lacked self-confidence, but like many Germans of that era he carried a deep sense of shame arising from painful war memories. He also believed that the stability of the eastern bloc was in the interest of West Germany, given Russia’s nuclear capability. In his autobiography he wrote that he had wanted to develop trading relations with Russia, in order to foster “a greater Soviet dependence upon European supplies”, in turn leading to “more European influence” on Moscow’s policies. And following the 1973 oil crisis, Schmidt became convinced that the Soviet Union represented a more reliable supplier of energy for Germany than the Gulf states.

Carter, by contrast, saw withholding trade as the better way to influence the Soviets. In July 1978, responding to Moscow’s imprisonment of two Soviet dissidents, Aleksandr Ginzburg and Anatoly Shcharansky, Carter restricted US exports of technology for the exploration and development of the Soviet oil and natural-gas industries.

Yet, collectively, European business went in the opposite direction. Even after the Soviet invasion of Afghanistan in 1979, a large German business delegation went ahead with a visit to Moscow. The Soviets (Soyuzgazexport) and western Europeans (chiefly Ruhrgas and Gaz de France) completed negotiations on a new giant gas project, a 4,500km dedicated pipeline from the giant Urengoy field in West Siberia in late 1980. This deal was projected to increase Germany’s dependence on Russian gas from 15% to 30%. When German ministers reviewed the security implications, they concluded there was no danger of Russia misusing its potential stranglehold. Their reasoning was simple. “Long-term disruption would be against the self-interest of the Soviet Union,” the ministry decided.

In a phone call with Carter on 5 March, Schmidt explained his support for the pipeline by telling the US president, “Those engaging in trade with each other do not shoot at one another.” It was a restatement of Norman Angell’s famous pre-first world war theory that the new interdependence of economies made war unprofitable and thus irrational. According to a note in his diary, Carter responded: “It is not beneficial for the Europeans to expect us to provide the stick and for them to compete with one another about providing the biggest carrot.”

In 1980, Schmidt wrote: “To speak of the Federal Republic’s economic dependence on Moscow to a degree large enough to affect foreign policy indicates ignorance or malice.” Given Germany’s plight now, those words look hopelessly misjudged.

Schmidt faced a more challenging opponent in Carter’s successor, the traditional anti-communist Ronald Reagan. In Reagan’s eyes, German trade with Russia was in direct conflict with western security. Reagan’s view was informed by a CIA assessment submitted in July 1981, which noted a clear trend: from 1970 to 1980, Soviet gas exports to western Europe had risen from 1 billion cubic metres (bcm) a year to 26.5bcm annually.

The CIA warned Reagan that the Urengoy gas project would not only accelerate Soviet economic growth, but provide the Soviets with $8bn in hard currency, facilitating a further military buildup. Far from giving Germany sway over Soviet thinking, “it would provide the Soviets one additional pressure point they could use as part of a broader diplomatic offensive to persuade the West Europeans to accept their viewpoint on East-West issues”.

In arguments that echo today’s debates, the US ambassador to the UN, Jeane Kirkpatrick, complained: “We consistently find in our talks the allies are already significantly dependent: France for 15% [of its] gas, Germany for 30%.” Schmidt assured the Americans that Germany “can go six months in the event of a Soviet cut-off”. The forecast now is that, in such an eventuality, Germany would have to go straight to a form of energy rationing.

Despite various US efforts to persuade Europe to adopt a voluntary ban, including offering alternative sources of energy, in 1981 Ruhrgas AG and Soyusgazexport went ahead and signed a contract for annual imports of 10.5bcm of Soviet gas over a 25-year period. Unemployment in Europe was close to 9% at the time, and European industry needed to boost its energy supplies. At the same time, the US argument about security was dismissed as a veiled way of promoting the US oil industry.

When Moscow backed the imposition of martial law in Poland on 13 December 1981, Reagan thought such a shocking event might persuade Germany to put the pipeline on hold. In a private note to Margaret Thatcher, sent on 19 December 1981, he urged her to back tough sanctions against the Soviets, stating that “this may well be a watershed in the history of mankind. A challenge to tyranny from within.” Unusually for her, Thatcher vacillated, advising Reagan that the Germans “cannot and will not give up the gas pipeline project”.

The US responded to the Soviet intervention by banning US companies from helping with the pipeline. In the summer of 1982 Reagan tried to force European firms to stop working on the pipeline by imposing secondary sanctions on them. Such sanctions are now a commonplace in the US foreign policy armoury, particularly over Iran, but then, they were seen as an incursion into European sovereignty. Thatcher bridled, telling the Commons “it is wrong” for “one very powerful nation [to] prevent existing contracts being fulfilled”.

By November, Reagan had abandoned the attempt to impose sanctions. In a trial of strength in which Europe sided with Germany, the world’s superpower had lost. The new pipeline started pumping on 1 January 1984.

The German advocates of change through trade had won. The US position on Russia was further weakened when the Berlin Wall fell in 1989. The peaceful collapse of communism was trumpeted as a vindication for those that had championed dialogue, and engagement through trade. In a speech to the Brandt Foundation in March 2008, Steinmeier gave full vent to this view: “What Ostpolitik in fact achieved – as is now recognised also by those who criticised it at the time,” he said, “was to make peace in Europe, despite the difficulties, a degree more secure. For the democracy movements in eastern Europe it created new possibilities, new scope for action. It was a key factor, too, in finally ending the confrontation between the two blocs.”

Olaf Scholz, Germany’s current chancellor, remains an adherent of this view, arguing last year that it contributed to the fall of the Soviet Union and laid the basis for democracy and EU membership for much of eastern Europe. The SPD co-leader, Lars Klingbeil, has also insisted that Ostpolitik “was the basis for reunification and the end of the cold war. As a result, there has been a consensus in the federal republic for decades that conflicts can be defused through dialogue. We won’t let that be bad-mouthed.”

Yet a number of historians and writers believe that this rosy picture of Ostpolitik is misleading. “The idea that Willy Brandt’s policy of detente towards Moscow led in a straight line to the fall of the iron curtain and German unity is at least an over-simplification,” says the historian Jan Behrends. German journalist Thomas Urban, author of a new book critiquing Ostpolitik, believes its role in the fall of the wall and German reunification has been exaggerated:

“It was military buildup by Reagan and the flooding of the market with cheap oil that led to the collapse of the Soviet Union,” he told me. The Russian government budget had grown so dependent on energy for its revenue, he said, that when the price of oil plummeted in the mid-1980s, Russia’s lifeline to external capital dried up. “Gorbachev could no longer fund the overseas wars and the Soviet Republics,” he said. “But this argument was entirely missing in the German debate, especially on the left.”

Urban argued that Ostpolitik’s theory of change suffered from two basic misconceptions: the belief that political change in eastern Europe could only come from engaging with the elite in power, rather than from civilian movements, and second, that “security must be the key to everything”. By the turn of the century, the advocates of change through trade were in their pomp. Chancellor Schröder, with growing confidence, promoted the idea of a strategic partnership with Russia. He invited the new Russian president, Vladimir Putin, to address the Bundestag in 2001, where he won over his audience by giving the speech in fluent German and declaring “the cold war is over”.

Schröder, at the time of Putin’s address, saw a perfect confluence of interests between Europe, Germany and Russia: peace, stability, multilateralism and economic growth. Putin, Schröder was convinced, “wants to transform Russia into a democracy”.

In this favourable political climate, pro-Russian German lobbyists such as Klaus Mangold, chairman of the powerful German Committee on Eastern European Economic Relations, pursued the construction of yet another gas pipeline, this time taking gas from Vyborg under the Baltic Sea to Germany – the first Nord Stream. The scheme was especially controversial since it would bypass Poland, Belarus and Ukraine, reducing those countries’ incomes, weakening their bargaining power and depriving them of badly needed transit fees. The €7.4bn pipeline construction costs were to be borne by the private German companies BASF and E.ON, and the majority Russian state-owned Gazprom.

This time, protests against the pipeline did not just come from the US, but from the states that had recently emerged from Soviet rule, such as Poland and Lithuania. Radosław Sikorski, then Poland’s defence minister, notoriously compared the plan to the 1939 Molotov-Ribbentrop non-aggression pact between Nazi Germany and the Soviet Union, which paved the way for the invasion of Poland.

Yet on 8 September 2005, 10 days before the election in which Schröder’s Social Democrats lost to Angela Merkel’s conservatives, the Nord Stream 1 contract was signed in Berlin by representatives of Gazprom, E.ON and BASF. Putin stood alongside Schröder at the signing ceremony.

Schröder has since been singled out for his role in creating Germany’s dependence on Russian energy, and getting very rich in the process. But the distinguished former German diplomat Wolfgang Ischinger recently argued that Schröder should not take the blame for giving the go-ahead to Nord Stream 20 years ago: most German politicians, he told the New York Times in April, did not question whether they were getting into an unhealthy dependence on Russian energy. In the article, Schröder made the same case: “It never occurred to anyone that this could become a problem. It was just a way of procuring gas for Germans, for Germany’s heavy industry, and also for the chemical industry, with fewer problems and disruptions.”

Thereafter it seemed, whatever the setbacks in German-Russian relations, nothing could shift the faith in trade – not Russia’s “peace enforcement operation” in Georgia in August 2008, not the Russian disruption of the gas pipelines in a dispute with Ukraine in January 2009, nor the news that Putin was planning to return to the presidency in 2012, replacing Dmitry Medvedev, in whom Frank-Walter Steinmeier had placed his faith. In 2011, the year Nord Stream finally opened, German total trade exports to Russia rose 34% to €27bn.

Then came the Russian invasion of Ukraine in February 2014. Initially, Russia’s incursion seemed to mark a turning point. Merkel’s condemnation was clear: the annexation of Crimea was contrary to international law. Sanctions were duly imposed, and German exports to Russia fell.

Following the 2014 invasion, serious German media such as Frankfurter Allgemeine Zeitung published lengthy articles looking at the options for how Germany could wean itself off its dangerous dependency on Russian energy. Many of the proposals, such as new liquid gas terminals to allow Germany to import gas from other countries such as Qatar and the US, are the same ones under discussion now, which shows how little actual diversification was achieved. When I spoke to a Qatari energy official last month, he recounted how they spent five years trying to break into the German energy market, only to find their route blocked at every turn.

Some German sanctions on Russia continued for many years, but the advocates of change through trade gradually re-established their ground. It seemed nothing Russia could do would shake their confidence. On 4 September 2015, at the Vladivostok economic forum, with Putin in attendance, an agreement was signed for the construction of the Nord Stream 2 gas pipeline on the Baltic seabed, which would vastly increase Germany’s reliance on Russian natural gas. Gazprom would also take over Germany’s gas storage business, thereby handing control of German energy reserves to a foreign power.

Various theories – some grubby, some metaphysical – have been proposed to explain Germany’s dogged refusal to see the dangers in its dependency on Russia. One argument places the blame on SPD politicians and civil servants who were allowed to move seamlessly between public office and Putin’s employment, and worked hard to manipulate the EU and German regulatory environment to suit Gazprom.

Then there is the question of the German-Russian industrial lobby, as symbolised by the German-Russian Forum, which was closely linked with, and partly funded by, German companies active in Russia. (The Forum was suspended after the invasion of Ukraine.) Its board of trustees consisted mainly of business people, often with economic interests in Russia. Its chairman, Matthias Platzeck, the former SPD minister president of Brandenburg, seemed genuinely shocked by Putin’s invasion: “I was wrong because until recently I thought what happened was unthinkable.”

The historian Sarotte said there is no clear evidence that business had exerted greater influence in politics in Germany than in other countries. Nevertheless, over the years, Russia showed an ability to suborn, and in some cases corrupt, the German political class. The Polish foreign minister, Zbigniew Rau, on a visit to Berlin in late May, called German Ostpolitik a “fiasco”. German rhetoric around the political value of interdependence, he said, crudely boiled down to gaining a competitive advantage through cheap energy.

Thomas Urban, examining the psychological roots of Ostpolitik, pinpoints two emotions in Germany’s relationship with Russia: nostalgia and guilt. He described to me “the memory of Bismarck, who saw the alliance with Russia as an anchor of stability in Europe. But then there was also the feeling of guilt because of the German attack on the Soviet Union in 1941, with millions of dead. It meant it was difficult to criticise the Red Army or the Soviet repression since to do so means you do not recognise the greatest crimes in history. It makes Germany blind to the black side of the Soviet Union. It also permits Putin’s propaganda by talking only of the Russian war dead, and not those that were killed in Ukraine and Belarus.”

Much of Germany’s belief in trade with Russia was born of wishful thinking. It led Steinmeier as foreign minister, for instance, to look constantly for signs of reform, ignoring foreign office advice that he needed a plan B in case Germany’s faith in Russia turned out to be ill-founded. In 2016, Steinmeier gave a deeply sincere, almost elegiac speech at Yekaterinburg University asking whether Germany and Russia were still capable of listening to one another. He admitted the annexation of Crimea had been a low point, but hoped dialogue was still possible, urging both sides not to turn their backs on one another.

It was the speech of a man who sensed the tide was going out, and who feared his belief in dialogue no longer matched the spirit of harsher times: “In political discussions, we sometimes hear opinions expressed by people who are not interested in the slightest in understanding others; people who have already made up their minds about the other side; people who don’t even bother reading because they think they already know the answer.” What he described as the “supposed antagonism” between the west and Russia, he feared was becoming entrenched and ideologically driven, running counter to the pursuit of diplomacy and peace.

Now, as Germany’s president and head of state, Steinmeier has been told by Ukrainian officials that his record as the promoter of Russian interests in Germany means he is not welcome in Kyiv at this time. It seems a shame. There would be no need for him to fall to his knees – as Willy Brandt did in Warsaw in 1970, apologising for his nation’s wartime crimes – but he could give a sober reflection on what precisely went wrong with Germany’s eastern policy for so long. For, one way or another, a reckoning is still needed.

By

Source: ‘We were all wrong’: how Germany got hooked on Russian energy | Germany | The Guardian

Housing Market ‘In Free Fall’ As New Construction Plummets

The number of housing starts, or ​​new houses on which construction started, plunged 14.4% to about 1.5 million last month from 1.8 million in April—sharply below economic projections calling for nearly 1.7 million starts, the Census Bureau reported Thursday.

Building permits also fell more than expected, coming in at less than 1.7 million in May despite expectations they would remain roughly flat from April at about 1.8 million. In emailed comments Thursday, Pantheon Macro chief economist Ian Shepherdson attributed the sharper-than-expected decline to an “abrupt and rapid” drop in new-home sales facing builders, who “overbuilt” since early 2021 to capitalize on demand that’s now “in free fall” and must slow construction to prevent a big hit to profits.

“This is still the early stages of the housing rollover,” adds Shepherdson, predicting the next few months will bring further steep declines in housing construction as additional interest rate hikes make home buying more expensive and push demand even lower.

Home builder stocks took a hit after the data, with the S&P Homebuilders Select Industry Index, which includes home-manufacturing giants such as Masco and Owens Corning, plunging more than 4% Thursday, while the S&P 500 fell 3%. One bright spot in the report: Home completions climbed to the highest level since 2007, which should help home price increases—clocking in at the quickest pace this century—slow from about 20% to the low single digits by the end of next year, says Comerica Bank chief economist Bill Adams.

Historically high savings rates and government stimulus measures helped ignite a home buying frenzy during the pandemic, but signs of a slowdown have quickly emerged as the Federal Reserve embarks on its most aggressive interest-rate-hiking cycle in two decades. According to data released last month, pending home sales slid for the sixth consecutive month in April to the lowest level in nearly a decade, while new home sales plunged nearly 17% from March. More recently, the average interest rate on the popular 30-year fixed mortgage spiked 5.5% to more than 6.2% this week—the highest level since the 2008 financial crisis.

The Fed’s Wednesday rate hike is “likely to accelerate the slowing of the housing market” and eliminate construction jobs, says Mace McCain, chief investment officer at Texas-based Frost Investment Advisors. “We’ll be watching job openings and layoffs closely as the Fed continues to tighten into a slowing economy.”54

“[Fed Chair Jerome] Powell yesterday said the housing market is undergoing a reset, but it’s much more than that,” says Shepherdson, referring to comments Powell made after instituting the largest interest rate hike in 28 years on Wednesday. Speaking to reporters, the Fed chair suggested rising mortgage rates may not be long-lived, saying, “Home buyers need a reset. . . . Ideally, we do our work in a way where the housing market settles in a new place and housing and credit availability are at appropriate levels.”

I’m a senior reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business

Source: Housing Market ‘In Free Fall’ As New Construction Plummets—Here’s When ‘Reset’ Could Cool Prices

Critics by Dean Baker

Given other economic data it is certainly plausible that the rate of house price decline is accelerating. The unemployment rate has risen by more than 3 percentage points from its low in 2007, with involuntary part-time rising by another 2 percentage points. If there are twice as many people who fear unemployment or short hours as who actually end up unemployed or working short hours, then the weak economy would have reduced the number of potential homebuyers by 15 percent.

In addition, the plunge in house prices will also reduce demand, since it has destroyed home equity. By some estimates, close to 20 percent of mortgage holders are underwater. After deducting realtor fees and other closing costs, tens of millions of current homeowners would not have enough equity left to make the down payment on a new home. In this respect, many long-time homeowners will face the same difficulty as first-time homebuyers in raising the money needed for a down payment. With the sharp drop in the stock market destroying savings, few of these homeowners will have enough financial wealth to make a down payment.

The danger in this situation is that house prices will go into a downward spiral, with declining house prices destroying equity. The loss of equity reduces the number of potential buyers in the market, putting further downward pressure on prices. This sort of downward spiral will have further negative effects on the economy. As homeowners lose more equity, they will feel the need to cut back further on consumption. In addition, with more homes underwater, default rates will rise with the losses on each foreclosure increasing.

Unfortunately, there has been little real discussion to date of measures that could arrest this sort of price decline. A serious effort would focus on sustaining prices in markets where the bubble has already deflated. Efforts to sustain house prices in markets where the bubble is still deflating will almost certainly fail, and will result in the government wasting money on a failed effort.

However, in the markets where sale prices are in line with rents, it would be desirable for the government to try to prevent prices from overshooting. It can do this by directly intervening in the market, buying up foreclosed properties. This could be an effective policy that carries little downside risk. In fact, this policy certainly carries less risk than continuing to allow Fannie Mae and Freddie Mac to guarantee mortgages in markets where the bubble is still deflating……

Related contents:

Mortgages Surge Past 6% And Hit Their Highest Level Since 2008: Housing Market Could ‘Torpedo’ US Economy, Expert Warns 

Housing Market Boom ‘Is Over’ As New Home Sales Implode–Here’s What To Expect From Prices This Year 

Mortgage Demand Plunges To 22-Year Low As ‘Worsening’ Affordability Deters Buyers—But Here’s Why Prices Will Still Rise

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