Archive for May, 2006

Date: May 30th, 2006, Filed under Housing Bubble News

The Suffolk News-Herald has an interesting OpEd today titled Housing woes.¹ The writer, Andy Prutsok, has good insight in the supply-and-demand situation that has created the rise of prices across every market in the U.S. There are those who say there is no housing bubble, and I actually tend to agree with them — prices are higher, but only because the dollar is worth less. Yet the big problem in high home prices is not the price of the house, but the ability of people to pay for their home. If the dollar should fall, we might see prices in other areas go up much faster than our wages do, which could cause many defaults and foreclosures. Both bring about price falls no matter what the money supply is doing (usually getting worth less). Prutsok closes the article with a great little note: Improved schools, wonderful parks and revitalized villages and neighborhoods are nice, but they don’t mean a heckuvalot to people who don’t have a roof over their heads.

In an artile at TheStreet, a quoted comment from Chicago Fed president Michael Moskow in a CNBC interview makes me wonder how we have faith in the Federal Reserve: Inflation is at the upper end of a level that I think is consistent with price stability and is a situation we have to monitor very carefully². Inflation of the money supply can lead to a more stable pricing index — if prices don’t go up. But prices are going up, and have been going up since 1913 when the Federal Reserve was charter. What is this madman Moskow talking about? Does he understand that prices going up is merely a response to the dollar getting worth less? Housing prices are a complete reflection of easy money and easy credit — both faults of the Federal Reserve.

The Post Trib has an article about the college town of Valparaiso. They’re saying that housing starts are still booming and that properties are going up in the area non-stop — they call it a sure sign of no bubble. But then they say that only 100 new students are arriving to occupy all this new property, and this is in a town that is famous only for its college, not for its industry. When prices are skyrocketing and houses are being built, you may not sense a bubble, but all you have to do is wait. The longer you wait, the uglier things will get. I’m surprised by the good sense that some make in the article: “You can have 500 new houses, but if there are no existing homes being bought and sold, they’re in deep trouble” said Jerome McKibben of McKibben Demographic Research.³

The Mail and Guardian is one of many papers talking about the Chinese State trying to find ways to cool their property bubble. Instead of slowing the growth of their Yuan money supply, they’ll instead play market tricks to try to slow down purchasing. Higher down payments, more taxes and higher interest rates do not slow down a bubble — they just make it more likely to burst in the future. The only thing that affects pricing inflation is money supply inflation — the devaluing of currency by printing more and more. As long as they’ll print more, someone will borrow it, and where they put that new money is where you’ll see inflation.⁴

Just as we saw the usual no-bubble mumbo jumbo in Valparaiso, we’re seeing the same things quoted in the Burlington Free Press. “So many people have reported that it’s a bubble, but it’s not a bubble. What we’ve seen is that even with an increase in housing stock, demand has stayed high,” says Maura Collins, policy and planning coordinator for Vermont Housing Finance Agency. Yet investors continue to borrow in more twisted ways (interest-only loans, 40-year and 50-year mortgages, cash-out mortgages) because the Fed keeps printing more and more money for them to borrow against. As long as they invest this new money in housing, prices will continue to go up. If you want to know if a region is bubble-prone, look at the amount of actual owner-occupiers who are buying rather than just speculating. According to the article, the average cost to build a house has risen from $80 per square foot in 2001 to $145. This isn’t proof of inflation?⁵

The Northeast has problems all over the price with housing and affordability, as is shown in an article in The Call. They’re covering The HousingWorks coalition’s release of its 2006 fact book last week. This fact book covers data on housing affordability throughout Rhode Island’s 39 cities and towns. In Woonsocket, RI, the median home price requires a household income of over US$76,000 per year to afford it using a regular mortgage. Imagine what you’d need if we went back to the old standard, the 25-year mortgage. Here’s why homeowners are taking big risks on ridiculous mortgages: the State says there is no bubble, the realtors say the same, and the analysts confirm it. But no one can afford a home, it seems.⁶

Our friends at Bloomberg let John Wasik talk about the realities of whether or not there is a bubble in an OpEd piece today. He says “While the overall economy may look fairly robust now, all eyes are on the Fed’s inflation-taming policy, which has pushed mortgage rates up.” Interest rate hikes are not inflation taming and that is not the reason for the Fed raising them. The Fed is first and foremost an organization dedicated to created easy markets for the elite to take advantage of. First they lower rates and print more money, making the common consumer seem wealthy. Then they print more money and lower rates more, to sucker more common consumers into buying what they don’t need. Then they print even more money and start to raise rates, allowing the late comers into the pool of idiots trying to make a profit on a depreciating and failing product. As interest rates rise, the Fed continues to print more money, knowing that the elite can cash out, and finally use the new money to pick up the foreclosures, repossessions and tax-sell-offs that the common consumer will be overwhelmed with when wages don’t grow with prices. It happens about every 20 years, and we’re ripe for another wealth transfer from the manic middle class to the sane elite. Which group are you in?⁷

The Herald has a 4-pager on the battle ahead for Fed Chairman Bernanke. The article quotes Bridgewater Associates, one of the world’s biggest hedge funds. They suggested Bernanke is out of his depth. In a letter to clients, it said: “You’ve got a new academic, waffling Fed chairman, a falling dollar, a falling bond market, rising gold and commodity prices and an underperforming stock market, all with a giant current account deficit. “Bernanke,” Bridgewater declared to clients, “is losing control.”⁸

CNNMoney has an article today titled “Can you still get rich in real estate?” They cover what they call smart moves by buyers, sellers and owners in a variety of markets.⁹

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Date: May 22nd, 2006, Filed under Housing Bubble News

The International Herald Tribune starts off this morning with a look at Bernanke’s future problems: stagflation, inflation, and what they say is the housing market buckling: Housing starts fell 7.4 percent in April to a 17- month low. Homebuilder confidence in May was at its lowest point in almost 11 years. Consumer confidence tumbled this month by the most since last year’s hurricanes. A University of Michigan survey found that consumers are less inclined now to buy a home or a car than at any time in more than a decade. Greenspan passed the baton of ridiculous money supply creation to Bernanke, who will take the blame for the faltering economy. Greenspan took over the Fed in 1987, at the head of a possibly huge stock market crash. Instead of letting the market finally correct itself from 50 years of mistakes, he created a 19 year money supply injection which made investors happy at all the rising charts over that time. Yet the casual investors, and even the expert, doesn’t see that upward moving charts do not mean you’re making a profit. The dollar fell much faster than the charts went up. Now we’re seeing years of housing charts going up and up, but people’s pocketbooks becoming thinner and thinner. What can Bernanke do?

News.com.au offers their perspective on the same problem: stagflation before inflation coupled with a softening of the housing market. Yet the famous Australian paper seems just as untrustworthy in terms of financial analysis with the view on Bernanke’s choices: Low economic growth with high inflation could force the Federal Reserve Bank to continue raising rates at the very time it needs to lower them. The Federal Reserve doesn’t need to lower interest rates nor does it need to raise them. It needs to stop setting the rates and let the banks and the free market decide how much interest to charge. The Fed also needs to stop printing new money each and every week — they need to start deflating the currency base so that savings mean something and markets can have a chance to correct themselves over the next decade. If Bernanke lowers interest rates, all we’ll see is more money creation, leading to more inflation. For over 93 years the Fed has been creating money out of thin air, and the US is on the verge of paying back all those debts in something worse than a recession.

KGW.com title this morning says it all: Housing troubles? Bank on it. They say that any economist worth his salt has been concerned for 15 months, but the true economists were concerned from the first day an average home went up in value. Average homes (covering about 90% of the housing in the US) should go down in price as they get older and newer models spring up. The first day that a house became more expensive over time was the day to be concerned — it is a sign of inflation. Just as your car goes down in price, so should your house, unless there are unique circumstances that make your house more desired than others. The housing bubble started decades ago, and no one should be shocked at economic destruction we’ll face when things finally correct themselves.

Wave3 says Stocks to take new look at inflation. The analysts seem shocked by what they consider a rogue CPI price move hgher, but they’re ignorant to realize that it was a government mistake. The CPI is an index that is manipulated by the U.S. government to give citizens and foreigners the green light for more investment. Rather than reporting the real cost of living increases each year (between 5% and 9% annually if you look at ALL costs), they report numbers that are created out of thin air — just like all that new money. The CPI is the most unreasonable number created by government, because it directly affects how people save and invest their money. Without the fraud of the CPI, the Federal Reserve would not be able to keep creating money out of thin air. Without the Federal Reserve creating money out of thin air, we wouldn’t need the CPI as we wouldn’t see inflation. They both work hand-in-hand with one-another, and we shouldn’t be surprised that they scratch each other’s backs so well.

Saving the best news for last, the Investor’s Business Daily announces New derivatives let home owners hedge against price declines. Now home owners can trade through the Chicago Mercantile Exchange to trade futures and options on housing prices in ten different markets: Boston, Miami, New York, San Diego, San Francisco, Washington, D.C., Chicago, Denver, Las Vegas and Los Angeles. As I’ve always said: one bubble popping in any one market means we’ll see a bubble forming in another market. When a bubble bursts, it is the latecomers who are hurt. The early investors in a pre-bubble market make a huge profit, and they’re quick to invest the money elsewhere, creating another pre-bubble. More derivatives in the U.S. market create a bigger fall for the country’s economy should a recession finally appear. Instead of gambling on the housing market, how about selling, moving and downsizing?

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