Monday, June 28, 2004

Housing Watch: Those Who Do Not Learn From History ...

This is an interesting article in the CSM that suffers from bad journalism.

Yet any housing slowdown will have a spillover effect on the economy. Last year, more than 10 percent of the nation's 3.1 percent growth rate was directly related to housing. It's currently still running about that rate - about double its historic contribution to the economy.

Housing is even more important in terms of its indirect contribution. When individuals buy a new home, they often buy new furniture, appliances, carpeting, lighting, even azalea trees. When all is totaled, 20 percent of the US economy may be related to housing, estimates Seiders.

Home values have been growing even faster than builders are pouring new footings. In some parts of the nation, such as California, New York City, Boston, and Washington, houses are up as much as 25 percent over the past year. Last week, the National Association of Realtors reported that nationally, prices of existing homes in May were up 10 percent over than May 2003.

The sharp rise has made some question whether the sector is "the next bubble." But in a study released last week, the Federal Reserve Bank of New York says it doesn't look like a bubble about to burst. Although some markets may be overbought, that's not the case on a national basis, say senior economist Jonathan McCarthy and vice president Richard Peach.

"We're not suggesting there are not pockets of exclusive areas where prices are up dramatically and they can come down dramatically," says Mr. Peach in an interview. "The main point we want to make is that the measures that people use to support the view that there is a bubble are flawed."

Flaws in housing 'bubble' theory

For example, Peach says the large drop in nominal interest rates in the past few years has meant that home buyers can afford larger mortgages. In 1990, the average nominal interest rate of a 30-year fixed-rate loan was more than 10 percent; today, it is closer to 6 percent. "Combined with a 50 percent increase in median family income, there's been a 130 percent increase in the mortgage a family can qualify for," he says. "Over the same period, home prices are up 72 percent - so it's a wonder [that] home prices have not risen [even] more under the circumstances."

Peach also disputes the view that an increasing number of home buyers using adjustable-rate mortgages during a time of rising interest rates constitutes a threat to the economy. "We have seen this before in the beginning of 1987 when there was a fairly big run-up in rates in a short period of time, and the world did not come to an end."[emphasis added]

What's wrong in this article? What else happened after 1987? Can anyone recall? Something related to loose credit, real estate speculation, and loan scandals? Hmmm ... that's right the half a trillion dollar S&L scandal bailout. Along the way we had the market crash of 1987 and "black monday".

So all this economist is saying is that we're looking at similar banking scandals and market crashes like 1987, so it's no reason to worry. Dear lord! Save us from economists! Where do they get these freaks?!?! And this guy is the Vice-President for the Federal Reserve Bank of New York?!?! Okay he can't be that much of an idiot. Obviously the Federal Reserve thinks we are however.

Personally I've always rejected any argument of a "coverup". However either the Federal Reserve Bank is completely inept and hired a moron, or they deliberately sent someone out there to spread disinformation to try to "coverup" a possible market panic/crash. The sad thing is that most Americans, like the journalist who didn't bother to ask the follow up question "...say didn't something bad or two happen to the markets after 1987?", will fall for this until it's too late.

How will it happen? Read Jenman here for the scoop on the disaster in the making. That post was made in 2001, however it's also true that the Fed hasn't been forced to raise interest rates until about now. The Banks can always extend more credit until inflation starts rising. Then they must choose between tightening credit and courting inflation that destroys the value of their asset base. If they tighten credit that's when the fall happens because the speculation has become fueled by credit financed buying that isn't sustainable. When it falls back to sustainable levels it always overshoots because the system needs to restabilize from all the margin calls.

That's how it'll happen. The scary thing is that prices have appreciated even more since this study was conducted. Scary.


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