Housing Bubble? What Bubble? Just Look (June 2005)
There is a "debate" of sorts on whether the U.S. is experiencing a housing bubble. This chart ends the debate. It's really not much of a debate; the real estate and housing industries quite naturally state there is no bubble, and their proof is highly evocative of the dot-com stock market bubble circa 1999: there is no bubble because rising demand and cheap mortgages are both permanent features of the American housing market. (Back then, the claim was that as the Internet boom was permanent, so would be profits. "Dow 100,000"!)
If only it were so simple. As this chart from the book Irrational Exuberance shows, demand (in the form of rising population) has been steady for decades. Yet housing prices have exploded only in the past few years. So much for "demand" being the proximate cause. Ah, the industry retorts, but money is cheap now; that's what's driving housing higher. This chart reveals that money has been cheap for much of the past 60 years--and there was no hockey-stick rise in house prices. But the costs of construction have gone up, the industry notes; but this too is wrong; adjusted for inflation, costs are lower than in the early 80s.
This chart effectively dismantles all claims that "fundamental" economic issues are driving the housing market. All these same drivers have been present since 1950, and the most striking feature of the chart is that housing costs were basically flat (adjusted for inflation), with a few blips up in the late 70s and 80s, from 1950 thru the late 90s.
So what's been driving the housing market mania? The only answer left is speculation--the same craziness which led to the dot-bomb stock market implosion. The outlines of the near future are growing sharper; we need only look to the U.K. and Australia, whose housing bubble preceded ours, for a glimpse of our own future. There, housing prices have started to fall; sales and mortgage re-finances have plummeted, along with (quite predictably) consumer spending. After all, where were the consumers getting all that cash to spend? From their mortgage re-fi's, of course.
Look out below. So here is what will unfold in 2006: the great unraveling. Prices dip, sales fall, re-finances disappear, speculators (the buyers of a third of all new homes and condos) unload their spec properties, and then the long-term consequences begin: massive lay-offs in the construction and mortgage lending industries, consumer spending dries up, deflating Asia's exports to the U.S. With less trade surplus dollars to put into U.S. bonds, Asia can no longer prop up low interest rates in the U.S. Rates rise, further depressing the sagging housing market. The virtuous circle unravels and a new, unvirtuous circle takes its place: each downtrend strengthens another.
But don't worry--there's no bubble.
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copyright © 2005 Charles Hugh Smith. All rights reserved in all media.
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