Friday, March 25, 2005

Burn, Boil and Bubble --- skim the froth of houses

I am worried about a housing bubble. Pittsburgh is not that much of a concern as the population is declining and the housing stock is old. However we are seeing some amazing home valuation appreciation in the Northeast Corridor, and the California Coast --- which is where 50% of the nation's home wealth is stored. Dramatic declines in value are a significant risk to the US economy for two reasons; first consumption spending in the past five years has been overwhelmingly fueled by the sale of assets, and not through income growth. Price declines will destroy a significant amount of paper equity that would otherwise would have been used for consumption spending. Secondly, if used homes are not selling, that will place pressure (slow, as housing prices are downwardly sticky) on the new home market, thus reducing construction employment and the secondary employment effects.

I am stealing the following chart from Matthew Yglesias as he notes a NY Times article that quotes the National Association of Realtors that at least a quarter of all purchases last year were speculative.



Calculated Risk is noting that refinancing activity is slowing down massively and he speculates that this may be the beginning of the end of the asset based economic cycle as there is no more wealth that can be extracred from America's homes at current interest rates.

Barry at the Big Picture is arguing that there is a danger of homes being overvalued due to the very low interest rates that allow for a constant monthly payment to cover a larger capital price than the same payment in the past. The danger as he sees it is a fall of 20%-30% in home values in selected markets.

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