Monday, May 12, 2008

Housing misconceptions

Mike "Mish" Shedlock points out this morning that the housing bust is not unique to the United States. Spain and Australia, in addition to the U.K. are seeing home prices fall, and pounds and euros are evaporating in the process. Mish is an ardent deflationist, irrespective of the headline-popping rise in the cost of fuel and food.

One comment stood out today in Mish's post -


Because the rise in inflation (money supply and credit) fueled asset prices in the 1990's, the housing bubble from 2001 to 2006, and stocks from 2003 until recently. None of this was properly measured for the simple reason it is impossible to measure the effect of credit inflation on the stock market or housing market.

The misguided hope that housing prices are at or near the bottom ignores the reason for the boom in prices during the earlier part of the decade. As Mish points out, prices were not driven by an increased ability to pay. Instead, unnaturally low interest rates fueled creative lending which fueled speculation which fueled creative lending which fueled speculation.

The chart below courtesy of James Ballenger, shows home prices vs. incomes during the housing bust. Banking on a
ppreciation is wishful thinking as long as banks are wary to lend.



Creative lending is not coming back any time soon, income growth is stagnant, and the economy - by most intelligent measures - is already in recession. Anyone in the market for a home should be patient. Don't try and catch a falling knife. Even if prices don't fall too much further from here, they won't rebound any time soon. There's plenty of time to find the right deal.

Check out our sister site, Cirios Real Estate.


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