Federal Reserve officials at their March meeting stressed the need to make sure record-low interest rates don't feed new speculative bubbles in stocks or other assets. ...I do worry, however, that many people at the Fed still incorrectly believe that bubbles are impossible to detect until after they burst.
To aid the recovery, the Fed held the target range for its bank lending rate at zero to 0.25 percent. It's stood at that level since December 2008. And it maintained a pledge — in place for a year — to keep rates at rock-bottom levels. ...
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for a second straight meeting was the sole member to oppose keeping that pledge. Analysts saw Hoenig as concerned that holding rates too low for too long could feed some new speculative bubble in assets such as stocks or commodities.
Fed members noted the importance of closely monitoring financial markets and institutions to help detect risks at an early stage. They cited, in particular, the need to monitor asset prices and loan levels.
Information collected by Fed staff hasn't revealed significant threats in the financial markets or widespread high-risk-taking, the minutes concluded. Still, Fed officials said they would be on the watch for any such threats.
The Fed, though, has been attacked on Capitol Hill and elsewhere for failing to detect risks leading up to the financial crisis. ...
Some also blame for the Fed for feeding the housing bubble that eventually burst and plunged the country into the worst recession since the 1930s. Critics contend the Fed did so by holding rates too low for too long after the 2001 recession.
Update: More news suggesting the Fed may be gradually changing its stance on asset bubbles.
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Just so everyone gets a more global perspective on house prices compared to median income, the most ABSURD real estate bubble in the world (perhaps in the Universe) is in India, and is closely followed by China. In most Indian and Chinese metros, median home prices are over 200 times (yes two hundred times) the median income. Over 90% of the population has no chance whatsoever of buying a home. Prices in India have gone up a THOUSAND times in the past 30 years. Now compare that to the USA. Even in the so called bubble areas in the USA, home prices have gone up only 5 times in the past 30 years. In most of the country, home prices have only doubled or tripled in the last 30 years. And the median price to median income multiple in the USA is less than 3 in most of the country, and well below 10 in the so called bubble areas. And yet, we scream ourselves hoarse about homes being unaffordable. Just compare to places like India and China. And no, population density is not a factor. Japan has similar density too, but housing has been in a slump there for 20 years.
ReplyDeleteAnonymous said...
ReplyDeleteIn most Indian and Chinese metros, median home prices are over 200 times (yes two hundred times) the median income.
That seems a bit unbelievable. It would require most people in those areas to be homeless. The cap rates would have to be so low, it would make no financial sense for landlords to rent out homes when they could sell them instead. Got a source to back up your claims?
Prices in India have gone up a THOUSAND times in the past 30 years. ... Even in the so called bubble areas in the USA, home prices have gone up only 5 times in the past 30 years. In most of the country, home prices have only doubled or tripled in the last 30 years.
Something tells me you're not adjusting for inflation. If home prices went up 1000-fold, it means nothing if we don't know how much incomes went up.
Sure, James...there is no shortage of this information online, but I will give you a few links below for India. I will give you links for China later...
ReplyDeleteRemember this though...the median annual income in India even in its metros is less than $2000.00. Median sized apartments in these metros cost about $150000.00 at least, and single family homes with land cost in the $500000.00 range. People that were lucky to own property 20 years ago have now become multi-millionaires in USD terms. Also note that the features and facilities available in and around these houses in India are pathetic, far below even third world country status. However, they cost more than most homes in America.
http://www.globalpropertyguide.com/Asia/India/Price-History
(a part of this article shows average home price to average income in Mumbai for 2000 and 2006. That has doubled since)
http://www.industrialeconomist.com/capital-notes.htm
(see the table that shows prices in the last 20 years in the central Chennai, India suburb of Mylapore)
http://www.zamanzar.com/New+Delhi/Residential-Property-Prices.html
(Shows asking prices in New Delhi)
You are right in that I was indeed using nominal prices without adjusting for inflation. Inflation in India has been high in the past several years, running close to 10%. Incomes have gone up about 10 times in the past 30 years. The Indian currency (Rupee) was about 7 to a US dollar in the 1970s. It is now around 45. So you get an idea of how much the Indian currency has depreciated, but nothing explains the absurd real estate bubble.
ReplyDeleteNow where do many people in these Indian metros "live" since homes are so unaffordable? Simple, many are still in slums on unathorized land where cheap mud huts/shacks are built. Also, many people "huddle" into the same home, so it is common to have 10 people living in one house. This is mostly extended family, so not joint purchase by unrelated individuals. I cannot stress this enough, but most city infrastructure and house features are PATHETIC in India.
ReplyDeleteSimple, many are still in slums on unathorized land where cheap mud huts/shacks are built. Also, many people "huddle" into the same home, so it is common to have 10 people living in one house.
ReplyDeleteYep - a friend of mine with the state dept works in Mumbai. He says the shantytowns are enormous. It makes sense in a town of 14 million people, youve got 10 million living on $400 per year, paying $10 a month in rent.
The remainng 4 million people make somewhere between $300 and $5,000 a month, and median home price might be say $40,000 or so.
Here you would get a goofy ratio of median home price = to 100X income, yet in this case nothing is wrong and prices are in no way out of whack - just the statistics...
In that case
The person that made the last anonymous comment does not seem to have read my earlier comment that stated the prevailing apartment and home prices ($150000 and $500000 respectively). Also see the links that I provided in a later comment. How is this happening? Just an unbelievably long ponzi schema and the belief that home prices will double every year and that you will definitely find the next sucker in the ponzi schema. China is no different, and I will provide links for that shortly
ReplyDeleteKnowing the government, they'll make sure prices don't go up anywhere, ever.
ReplyDeleteHere is the big picture as I see it. India and China are inflating themselves with non-stop self-feeding hype about their growing economies and getting to developed economy status. If there is widespread speculative home purchases, surely it is a huge percentage of your GDP growth. On the other hand, the United States is deflating itself quoting "affordability for all" and similar socialist measures everywhere and will soon be a poor third world country.
ReplyDeleteHurray! I love the for-profit privately owned Federal Reserve. They know what's best for our economy and should be given total control over everything.
ReplyDeleteSame goes for the dozens of Federal Reserves (central banks) worldwide that are owned by the same people.
The IMF is good. So is the World Bank! Hurray! The wisest, most humane and moral individuals on the planet are in charge and every American knows about this and LOVES it! Life is GOOD!!!!
"Just compare to places like India and China. And no, population density is not a factor. Japan has similar density too, but housing has been in a slump there for 20 years."
ReplyDeleteYou are absolutely right. Its a matter of their caste systems and corruption.
When you are the "median", you do some kind of job that you can lose a limb or your life for less than a penny a day wage. If your father's father's father was rich and has a long last name, you work in a cubicle and make more than 99% of the population in your country.
Japan has a middle class, so their "median" actually means something.
When you mix in guys who work and live downtown with the guys who live in a tin hut with their water buffalo and use feces as heating and cooking fuel, you hardly get a true median. So why waste your time trying to prove some point....its nothing like the US or Japan.
Anonymous said...
ReplyDelete"Now where do many people in these Indian metros 'live' since homes are so unaffordable? Simple, many are still in slums on unathorized land where cheap mud huts/shacks are built."
Sorry, but if you're not counting those huts/shacks in your home price statistics, then your home price to income ratio is complete garbage. If most people live in huts or shacks, then the median home price is likely not far above zero.
It would be different if huts/shacks made up a small portion of the housing stock, or if huts/shacks sold for prices close to houses. However, you are comparing the incomes of the entire population to the housing of only the wealthy. That's a major error.
"Also, many people 'huddle' into the same home, so it is common to have 10 people living in one house."
How many people live in a home is irrelevant because you need to compare home price to household income, not personal income. If five people in a household work, then you need to sum all five of their incomes to get the household income. Then compare the home price to the household income.
You are making so many mistakes in your measurements (ignoring inflation, confusing inflation with foreign exchange rates, ignoring the vast majority of homes, using personal income instead of household income, etc.) that it is not surprising that you are coming up with a unrealistic (i.e. impossible!) numbers.
Yeah James put it a lot better than I did with my tin hut and cooking with feces rant. lol
ReplyDeleteI'd love to see us wean away from using credit to buy houses. 100% skin in the game.
ReplyDeleteThere would be great pain in the beginning, but these train of bubbles we seem to live in is causing plenty of pain of its own.
Cars too -- buy it when you have the cash. Otherwise, wait.
We would experience a significant period of contraction, but with all this credit in the system we are living a lie and we see where that has gotten us.
James, James, James....let me appeal to your fairness here....
ReplyDelete1. Did I claim in my first comment that the numbers that I posted were adjusted for inflation? I used non-adjusted numbers for both India and the USA. Because you asked later if it was adjusted for inflation, I answered that in a later comment.
2. Did I state anywhere that the income was "personal" or "household". I only said median income. I did state that the household was mostly extended family. In reality, household income is very close to personal income in India, as there is mostly only a single wage earner.
Don't be quick to judge my calculations as mistakes. I did give you links to check out the data yourself from credible sources, so are you going to blame those as "mistakes" too?
Forget everything else and ponder on this. The median price of a very nice single family home in say Chicago or LA is $400000.00. The median price of an average quality single family home in Mumbai or New Delhi is over $500000.00. Just figure out what household incomes you would associate with these cities and figure out the multiple yourself.
ReplyDeleteLet us say that half the American families live in trailers or camp tents (and at the rate that the great nation of America is being self-destructed, that may happen sooner than you think). Will you then include the values of those trailers or tents in your "median" home price calculations?
ReplyDelete