Running Out of Bubbles

Discussion in 'Economics' started by trader99, May 27, 2005.

  1. trader99


    Interesting point of view. What's the next bubble that the Fed can create to replace the housing one?


    Running Out of Bubbles

    Published: May 27, 2005

    Remember the stock market bubble? With everything that's happened since 2000, it feels like ancient history. But a few pessimists, notably Stephen Roach of Morgan Stanley, argue that we have not yet paid the price for our past excesses.

    I've never fully accepted that view. But looking at the housing market, I'm starting to reconsider.

    In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another. "There is room," he wrote, "for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing."

    As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.

    Now the question is what can replace the housing bubble.

    Nobody thought the economy could rely forever on home buying and refinancing. But the hope was that by the time the housing boom petered out, it would no longer be needed.

    But although the housing boom has lasted longer than anyone could have imagined, the economy would still be in big trouble if it came to an end. That is, if the hectic pace of home construction were to cool, and consumers were to stop borrowing against their houses, the economy would slow down sharply. If housing prices actually started falling, we'd be looking at a very nasty scene, in which both construction and consumer spending would plunge, pushing the economy right back into recession.

    That's why it's so ominous to see signs that America's housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble.

    Some analysts still insist that housing prices aren't out of line. But someone will always come up with reasons why seemingly absurd asset prices make sense. Remember "Dow 36,000"? Robert Shiller, who argued against such rationalizations and correctly called the stock bubble in his book "Irrational Exuberance," has added an ominous analysis of the housing market to the new edition, and says the housing bubble "may be the biggest bubble in U.S. history"

    In parts of the country there's a speculative fever among people who shouldn't be speculators that seems all too familiar from past bubbles - the shoeshine boys with stock tips in the 1920's, the beer-and-pizza joints showing CNBC, not ESPN, on their TV sets in the 1990's.

    Even Alan Greenspan now admits that we have "characteristics of bubbles" in the housing market, but only "in certain areas." And it's true that the craziest scenes are concentrated in a few regions, like coastal Florida and California.

    But these aren't tiny regions; they're big and wealthy, so that the national housing market as a whole looks pretty bubbly. Many home purchases are speculative; the National Association of Realtors estimates that 23 percent of the homes sold last year were bought for investment, not to live in. According to Business Week, 31 percent of new mortgages are interest only, a sign that people are stretching to their financial limits.

    The important point to remember is that the bursting of the stock market bubble hurt lots of people - not just those who bought stocks near their peak. By the summer of 2003, private-sector employment was three million below its 2001 peak. And the job losses would have been much worse if the stock bubble hadn't been quickly replaced with a housing bubble.

    So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. After all, the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what's left?

    Mr. Roach believes that the Fed's apparent success after 2001 was an illusion, that it simply piled up trouble for the future. I hope he's wrong. But the Fed does seem to be running out of bubbles.
  2. the next bubble will be in collection agencies and substandard financing. oh yeah and defense contractors when bush gets us deeper in the sh*t over thar.
  3. McCloud


  4. nkhoi


    anything online, especially from gambling to entertainment or are they the same now
  5. Morgan Stanley economists examine the data behind the housing bubble and conclude that some of the warning signs have been overblown. They see "froth" but not a "bubble."


    "In contrast, HMDA (Home Mortgage Disclosure Act) data in our view measure the proportion of investor sales (including vacation homes) more accurately, and indicate a substantially lower proportion — closer to 13-15%. "

  6. napa


    How about hedonically adjusted CPI/NFP/../whatever bubble?
  7. toc


    The bubble that is going to crash is the US$. The stock market crash was the NASDAQ crash and rest of the value in big dow jones stocks was eroded by the US$ devaluation by 33% already. Some 20% more to go. If interest rates keep on rising then housing sector will pop eventually.

    If we take inflation out of the appreciation of the housing prices over last 30 years, then net is only .5% into the pockets of the house owners. Basically, even the slow moving asset class like real estate has its own cycle and those who timed it well are the ones coming out with double digit gains, over the decades, real estate is just an alternative to paying rent.
  8. tinmanet


    not with a bang but a whimper... no great crash, just a great decline as the $30 trillion tsunami of unfunded medicare debt rolls in
  10. I have been a big advocate that there was a housing bubble here in San Diego where I live. However, after waiting in vain for the bubble to pop for the last two years I have come to the realization that it doesn't have to pop anytime soon. This market here could stablize and drift up right up to the next presidential election cycle.

    Rates are the key and I don't see them getting much higher. As long as rates stay low and the economy keeps growing then there is nothing to get the sell off going.

    #10     May 29, 2005