Tuesday, August 30, 2005


Housing Bubble Rap Up: August 2005

Before I continue with my cronicle of housing bubble craziness let me say that rarely do I see opportunities in the market that are as clear as I see in the stock market right now. Simply put, short the Dow with a stop at 10650. Less than three hundred points of risk gives you the potential of thousands of points of profit; if this is the beginning of the next phase in the bear market.

Ok, we start this episode of bubblemania with another article about the joys of debt. Not only is debt joyful but if you are mortgaged out the wazoo you are a 'fool'.

"If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years," said David Lereah, chief economist of the National Association of Realtors and author of "Are You Missing the Real Estate Boom?" "It's as if you had 500,000 dollar bills stuffed in your mattress."

He called it "very unsophisticated."

Anthony Hsieh, chief executive of LendingTree Loans, an Internet-based mortgage company, used a more disparaging term. "If you own your own home free and clear, people will often refer to you as a fool. All that money sitting there, doing nothing." [Emph. added]

Before I continue let me say this. If you do have lots of home equity and you have a large chunk of money earning you interest upon which you live then it might make sense to take on a second mortgage. You would take that extra money and by into U.S. treasuries. I just have a feeling that most people are not being prudent with the home equity piggy bank.

The financial services industry is doing all it can to avoid letting consumers be foolish. [Snicker] Ditech.com touts home loans as a way to pay off credit cards, and Morgan Stanley says they're a good way to fund education expenses. Wells Fargo suggests taking a chunk out of your house to finance "a dream wedding."

1) Cutting credit card debt? Maybe, if you are a shopaholic it would be enabling.

2) Fund education? Go into debt so that your little darling can party for 4 years or become a LUG. Your call.

3) Dream wedding? Oh yeah, that's the only one that makes sense.

Many of these are first-time home buyers, and many of them are relatively young. The report calculates that the greatest increase in homeownership rates between 2000 and 2003 came in the 30-to-34 age group. Second-highest was 25-to-29.

"I think what's happening is that a lot of younger renters feel the ship is passing them by," said Hans P. Johnson, one of the authors of the report, titled "California's Newest Homeowners: Affording the Unaffordable." "If they don't buy a house now, they think, they never will."

Here in a nutshell is why Alan Greenspan is the worst Central Banker since John Law. Allowing the money supply to grow and fund a bubble distorts prices. People being people get caught in the mentality that trends will continue forever because humans think linearly.

Put another way, women like houses. It is a symbol of stability. Try telling your wife that you are selling your house to rent an apartment because you want to cash out before the bubble pops. Seem unreasonable? I could see her point. However, try telling your wife that you want to rent for a few more years because you don't want to be stuck in a depreciating asset. I expect you will get the same response either way. NO, house now!

Now back to the topic at hand. The goal of every Central Banker should be price stability. At some point everyone forgot that price stability should apply to assets like houses and stocks. They can get overvalued and then you end up with an economic dislocation that leaves some winners and usually more losers. But even worse, you shake peoples confidence in the free market system which is incredibly ironic to me. A quasi-government agency mismanages the nations currency and who gets blamed, capitalism. I hope that the blame is correctly passed on to the Federal Reserve System but I have a feeling that those politicians who love to bash free markets are going to foist the blame on our laissez faire, (Ha) market driven economy.

Isn't it funny that Paul Krugman can get it right (almost) but the National Review can't.

BuzzCharts and the rest of the supply-side community know better. Because America is being governed by supply-side economic policy, our housing market is very strong. It started with the Clinton capital-gains tax cut in 1997. It slowed down during the deflationary recession of 2000-01. It restarted when the Fed ended the deflation through a series of rate cuts. It was strengthened when President Bush cut taxes in 2001. And it culminated in the economic boom that started when the president implemented the final phase of his tax cuts in May 2003. Obviously, this kind of growth can’t continue forever, otherwise BuzzCharts’ grandchildren will be building their homes on the moon. However, if it’s not a bubble, it can’t burst.

So it is a bubble if it bursts unless it is a deflationary recession. You can quickly figure out with this point of view that the Fed should never raise rates. There is no need if there is no consumer price inflation. Asset price inflation is just peachy with the folks who write about economics at the National Review. It is a shame that they are blind to this possibility and it is comic that they refuse to call the popping of the internet bubble anything but a bubble. They will be similarly blindsided by the housing bubble and they will be rightly painted as cheerleaders for fiscal irresponsibility. Real economic conservatives should be championing a return to commodity standard which took the supply of money out of the hands of a Maestro who is more likely than not going to screw it up. Conservatives don't call upon bureaucrats to control any other aspect of our economy, why is our nation's currency any different?


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