Wednesday, August 24, 2005

HBAS # 6: "The real reason for the housing boom is that American families are getting wealthier"

Interesting argument. This argument appeared in The Conservative Voice magazine under the title There is No Housing Bubble!! . You always need to wonder about a story title that has two exclamation points in it. Joking aside the author writes:

"The real reason for the housing boom is that American families are getting wealthier, which means they can afford to buy bigger and better housing, while the monthly cost of financing those upscale homes out of current income has dropped significantly with the lower mortgage rates"
Wealth is creating this housing boom? Hmm.

  • Incomes are stagnating
  • Savings rates are now at zero
  • The 'wealth' that is being generated is because of the housing boom.


  1. Two exlamation points in the title would seem typical for somebody who mentions gold 13 times in an article about real estate.

  2. Huh? Since when are Americans getting wealthier? Didn't that guy bother to note that incomes have not risen nearly enough to justify the housing prices? Sure, we have more money than our grandparents did, but that's just a weak argument if ever there was one.

  3. My mother just retired and sold her home in Hilton Head for 370K. Six weeks later it is on the market for 600K by the flipper who bought it.

    Hmmm? No housing bubble huh.

  4. We must be getting wealthy really, really, really fast unless the dollar's getting kind of overvalued really, really, really fast.

  5. When we filed our (meager) tax return, we asked our CPA how so many people can afford such expensive properties. She said that a lot of her clients had recently inherited the money.

    I have no reason to doubt that, but inheritances go only so far. Perhaps that nouveau money just continued, temporarily, the notion that home prices can only go up.

    I've move to the sidelines, waiting for prices to go down.

  6. But doomsayers, real disposable personal income in the US has grown by over 12 percent since the end of 2000. Also, the U.S. Department of Labor recently reported that more than 200,000 new jobs were created in July, and two million over the past year. Add to this the fact that there is a growing population and not enough new housing and you have a situation that always causes price increases: not enough supply and too much demand. Are there certain markets which are overheated? Yes. Is the whole US overvalued? No. This mania about the bubble is almost more of a mania than the housing market itself.

  7. There is an extension of credit and leverage by the banks that is way out of wack, agreed, but not unprecendented.

    Q. How many times, when interest rates turn downwards, does mortgage lending action get hot?

    A. Every time.

    Why? Because every time interest rates move lower, our risk as homeowners drifts lower, and banks move higher. After all, why do different loans have different interest rates? It's due to the bank managing its risk vs. reward. Thus, if you can pay for it, wouldn't it always make sense to go 100% all day long?

  8. Cummulative inflation since 2000 is greater than 12%, which means that disposable income adjusted for inflation is lower than in 2000. 90% of new job creation is in the housing sector. The population is growing, but not as fast as available housing when you include rentals. The "not enough housing" comment only holds water if your ignore rentals. We are in a credit bubble. The dollar is artificially inflated because developing nations (especially China) must reinvest the dollars recieved from the current account deficit (trade surplus) back into US dollars. If they want their wages to remain low so their exports to the U.S. can continue to fuel their astronomic economic growth, their currency must remain cheap. Why do you think the Bush administration is strong arming China to raise its currency valuation? We must reduce our trade deficit, but since our wages are so high, we can't do it by exporting. The only solution is to inflate foreign currencies. In a nutshell, the world economy is floating on credit. The american economy is floating on credit which is foreign money infused into the American economy through mortgages. Why do you think that interest rates continued to fall after the Federal Reserve raised rates in June 2004, and the prime rate did not increase until China decided to diversify out of American debt instruments (government bonds) this summer? So technically, we are not in a housing bubble, we are in a currency bubble. But, if you do not believe me, just answer one question. What will happen to the housing market (especially those lovely ARMs, which are 60% of new Southern California mortages) if the prime goes to 9%? Can you spell buyers' market? If someone has a question, or can see something I cannot, please email me at

  9. Remember the Doors song:

    This is the end, Beautiful friend
    This is the end, My only friend, the end
    Of our elaborate plans, the end
    Of everything that stands, the end
    No safety or surprise, the end
    I'll never look into your eyes...again
    Can you picture what will be, So limitless and free
    Desperately in need...of some...stranger's hand
    In a...desperate land
    Lost in a Roman...wilderness of pain
    And all the children are insane, All the children are insane
    Waiting for the summer rain, yeah
    There's danger on the edge of town
    Ride the King's highway, baby
    Weird scenes inside the gold mine
    Ride the highway west, baby
    Ride the snake, ride the snake
    To the lake, the ancient lake, baby
    The snake is long, seven miles
    Ride the snake...he's old, and his skin is cold
    The west is the best, The west is the best
    Get here, and we'll do the rest
    The blue bus is callin' us, The blue bus is callin' us...