June 1, 2014

The Real Problem With Housing Bubble Era Thinking

This topic suggested was cross posted from an exchange earlier this week. “What is the real problem with Housing Bubble era thinking?”

“The big-name economists who have bought into the Housing Bubble paradigm have lost sight of the fundamental equilibrium relationship between home prices and incomes. The traditional perspective of housing as a consumption good providing shelter to owner-occupant households has been supplanted by a New Era view that owning homes is the sure path to investment gains.”

“Since the leaders of government agencies with an interest in housing policy have generally bought into the view of housing as a financial investment, rather than a source of shelter, policies have been adopted to try to drive increases in the investment ‘value’ of housing, and metrics (e.g. Case-Shiller/S&P Index, Zesstimates, etc) have been devised to measure the success of government programs to increase the value of housing.”

“Although the fundamental equilibrium relationship between household incomes and home prices has not gone away, it is routinely ignored by the stumped experts who can’t figure out why the flow of housing market transactions is in the toilet again. Why is it whatsoever surprising that policies engineered to pump up home prices would end up pricing most U.S. households out of the market?”

A reply, “The fact that, after six years, the pooh-bahs running the show haven’t figured out that falling incomes = falling house/car/retail sales tells you all you need to know about their intelligence. Or that their income streams depend on the various fantasies associated with home ownership.”

One said, “Worse - due to their cheap free money policy they have actual pulled in future demand and burned it all.”

And this, “Oh I think they’re smarter than that, but in their greed they’ve decided to loot their country’s treasury via guaranteed mortgages because they don’t know what else to do other than wait for “American Innovation” to rescue the economy. Off-shored jobs, obesity, retiring boomers, etc., add up to a perfect economic storm.”

The original commenter said, “They may indeed be smarter than that, in which case their official pronouncements to the contrary are thinly-veiled lies.”

One added, “The banks loaned out too much money, and it can’t be repaid. The short term solution is to loan out more. The long term solutions is….well…they don’t seem to have a long term solution.”

The Columbus Dispatch. “Just a few months into his job, Federal Housing Finance Agency Director Mel Watt has signaled that government-backed mortgage giants Fannie Mae and Freddie Mac again will promote easy lending standards for homebuyers. Never mind that it was this approach that created the housing bubble and crash that precipitated the Great Recession.”

“Watt was among the strongest defenders of Fannie and Freddie even when there were clear signs of trouble by 2007. After he was nominated last year, The Dispatch editorialized that in his 20 years in Congress, ‘Watt has been directly involved with and personifies the actions that led to the housing bust and resulting financial crisis of several years ago that still haunts the U.S. economy.’”

“The game, started in the 1990s, goes like this: Politicians call for programs to boost homeownership, especially among minority buyers who they say are being unfairly shut out of the American Dream. They get votes by playing the populist, while reaping big donations from financial institutions that stand to benefit from more mortgage business with little risk, based on the expectation of a government bailout in case of trouble.”

“The problem is, this scheme of policymaking-for-votes-and-donations ended up sending the U.S. economy into crisis, from which it has not fully recovered. But the opportunity to look like a hero while raking in donations apparently is too seductive for many politicians to abandon.”

PBS News Hour. “Chris Martenson runs PeakProsperity.com as an ‘econoblogger.’ The Ph.D. neuroscientist, who also has an MBA, explains to Paul Solman in the web exclusive video above, the power of exponential growth means that the American economy is constantly multiplying in size. But since the 1980s, so have our debts. In fact, debts have grown at nearly twice the rate of economic growth. What’s even more worrisome to Martenson is that no one, certainly not the Fed, seems to be doing anything about it.”

“Martenson:We have an economy that’s based on growth. We want to grow all the time. Not a lot — 3 percent real, maybe 5 percent nominal growth. We want jobs to grow; we’d like to see more auto sales next year, we want more houses sold. And it’s always on a percentage basis. Whenever anything is growing by some percent amount over a unit of time, it sort of takes this characteristic curve shape. It’s not a straight growth…If we said we want our town to grow by 5 percent a year, in 14 years, that means twice as many people are going to be living in that town.”

“So even if our economy’s growing at just 3 percent a year, we’re going to be doubling it every 24 years, right. When your child grows up from an infant and is 24 years old — a young adult with still a lot of life in front of them — the world is twice as big. So how many more times can the world be twice as big?”

“And [we see] the same thing when we look at the credit markets. All total credit market debt — state, federal, local, household, corporate — it’s been growing exponentially as well. And here’s where the story got a little odd for me: it’s really only been since the early 1980s that we and most of the OECD countries, but the United States [especially], started doing something really uniquely different. We started growing our debts at a rate roughly twice what the underlying economy was growing at.”

“What the Federal Reserve is doing is running the biggest social monetary experiment ever, and I say ’social experiment’ because money is the glue of any society. It’s an act of trust. They are eroding that trust consciously and I believe with precious little training or history to guide them.”

“I see all the central banks acting in cahoots at this point in time to maintain this apparent stability that we’ve got, but the pressures are building, not relieving, is how I look at it. The time I wish, like 2008 — that was the moment to have the conversation with ourselves. It wasn’t a housing bubble; it wasn’t Lehman. Those were symptoms. It was a 40-year-long credit bubble experiment where we thought we could borrow faster and more than we were earning and that would have been the moment to say: How do we get back in line here?”

“As long as we’re just perpetuating the status quo, papering over, saying: let’s just get joblessness down and then we’ll open this up to conversation. Listen, an emergency’s no time to have a hard conversation. What they’re really doing here is they’re denying us the opportunity to say, what should we be doing differently?”

Bits Bucket for June 1, 2014

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