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Housing Bubble: Are We There Yet?

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Tags Booms and Busts

05/08/2005

Tyler Cowen wonders whether we are in a housing bubble.

Housing can be lived in, most buyers have only one home, transaction costs are relatively high, and rarely are homes sold and resold in a matter of days. All those features militate against a housing bubble.

Japan and Hong Kong have in common with the US that people live in their homes. Also, citizens in these countries have transaction costs associated with home purchases and sales. Nonetheless, both experienced housing bubbles after their equity bubbles. The average home in Japan is now selling well off its peak value. As for homes rarely being sold and resold in a matter of days, known as "flipping", that is becoming increasingly common, another indicator of a highly speculative market. Doug Noland, one of the more articulate analysts of the ongoing credit and housing bubble is interviewed at Welling&Co on the credit bubble at Back to Fear?. In the interview, he states that:

[in] California, where home prices climbed 20% over the past year. That means that this year, mortgage credit there has an inflationary bias: More credit will be created simply because of the prices of the homes have gone up. Even if the number of transactions is flat this year with last, 15%-20% more credit will be created. And home prices have risen across the whole nation, which will feed more speculative excess, more transactions and more credit creation.

Even Freddie Mac, which has been moaning about falling originations and fewer refinancings, estimates total mortgage credit growth of 11.9% this year (vs. a record $1.19 trillion, or 12.8% increase, in 2004). That is the dynamic that I'm not sure the Fed fully appreciates. Yet it is a key dynamic because all of this new mortgage credit is creating distorted spending patterns, and, especially, over-consumption.

Yet the Fed doesn't seem to have a problem with it. From what I'm reading, they seem to be expecting a natural slowdown in the growth of mortgage credit this year. But that's just not the way that bubbles work. It won't gently slow just because rates have risen a little bit. Inching rates up in baby steps isn't going to curb mortgage borrowing, no way. Speculative psychology is so strong in housing, they're really going to have to ratchet rates up.

Another of the more perceptive critics of Greenspan and his bubbles, William Fleckenstein, describes how the recently released Fed minutes reveal that they knew that there was a stock market bubble in 1999. One wonders, will the 2004-2005 minutes, to be released in 2009 and later, reveal a similar consciousness of the current housing mania? See Fed Sees Bubbles, by William Fleckenstein.

Economist Paul Kasriel, an Austrian in the private sector analyzes how Growth in Household Debt Is Concentrated in Mortgage Debt (see also: Kasriel, Households - Still Running on Empty!). According to Kasriel, mortgage debt is the funding of consumption through credit creation, which necessarily removes funds that would otherwise be available for productive investment In The April 11th issue of the Daily Reckoning, Bill Bonner reports (and while you are there, check out the Mogambo's column half way down while you are on the site)

Half the new jobs created in California in the last two years are connected to residential real estate. Now, 10% of all private sector jobs in the state are connected to the house price bubble.

A bit more of this and we will achieved the state in which we can all get rich trading houses back and forth without the necessity of anyone having a job. For more on the real estate bubble, see:

Robert Blumen is an independent enterprise software consultant based in San Francisco.

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