Friday, March 25, 2005
Real estate-crazed Americans have started behaving in ways that eerily recall the stock market obsession of the late 1990's.
AP-- "Mortgage rates rise above 6 percent":
Rising mortgage rates have now crossed a threshold.
Reuters-- "U.S. mortgage refinancing plunges as rates rise":
Home loan refinancing activity slowed sharply last week after climbing steadily so far this year, as rising interest rates dampened demand...
Forbes-- "Fresh Pricks In Housing Bubble"
First, a new study by the National Association of Realtors shows that 23% of all homes purchased in 2004 were for investment, while another 13% were vacation homes.
Traditionally, one of the bulwarks against a sharp decline in housing prices has been the fact (or belief) that most people live in their homes and would be unlikely to sell even if the market heads downward. But the same logic would not apply to investment homes or vacation homes.
Wall Street Journal-- "In hottest markets, renting is the real bargain"
Potential home buyers increasingly are facing a difficult economic and emotional quandary: Soaring housing prices in many parts of the country have made renting a bargain.
Updated link: Stephen Roach (Morgan Stanley)-- "The Test"
America was much more of a normal economy in 1994 -- with a personal saving rate of 4.8%. It had yet to experience the joys of consuming and saving out of assets. The equity bubble of the late 1990s and the property bubble of the early 2000s -- both outgrowths of extraordinary monetary accommodation, in my view -- changed everything. Now it is a very different animal -- the Asset Economy -- that must come to grips with monetary tightening.
It didn't have to be this way. The big mistake, in my view, came when the Fed condoned the equity bubble in the late 1990s. It has been playing post-bubble defense ever since, fostering an unusually low real interest rate climate that has led to one bubble after another. And that has given rise to the real monster -- the asset-dependent American consumer and a co-dependent global economy that can't live without excess US consumption. The real test was always the exit strategy.
In one of my college anthropology classes, the professor held up a big humanoid leg bone fossil and started discussing it. But everyone in the class was focussed on this huge fin-shaped deformity right in the center of the petrified bone. When the professor allowed for questions, a student immediately asked "What is that sticking out of the middle of the bone?"
"That is pain", the prof replied.
Looking at these articles, I'm also visualizing pain. This isn't a South Sea or Nasdaq Bubble, but even a ten percent average price drop in housing would be brutal.
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