Housing Bubble Reaches 'Profound' Stage

(SEATTLE) (UPDATE1) 08/06/04 - New signs are rapidly emerging that a dangerous house pricing bubble has taken hold in the US. What's surprising is where the most troubling signs are found -- in arguments of individuals claiming there is no such bubble, from such places as Fannie Mae and Freddie Mac, who sit atop the world's largest pile of mortgage debt.

Recently, Freddie Mac's economist said house bubbles might only exist when prices go up rapidly -- but in order for a bubble to form, economic problems would have to exist which impact affordability in the long term. In a recent presentation at UCLA, Amy Crews Cutts, the deputy chief economist at Freddie Mac, said she believed job growth was on the verge of catching up with house prices. This was a bold prediction, considering the level of home price ascent recently, which month after month, has been breaking records. Nevertheless, some people probably believed her analysis. [1]

Now, just a few weeks after Amy gave her speech, we learn that the nation is in the midst of her worst nightmare--US Job growth for July was once again weak, and the months prior were also revised down. Moreover, there are signs that average mortgage payments are going up, which is starting to sap funds from consumers budgets -- a dramatic turnaround from a year ago when refinancing was adding to consumer budgets. At the same time, recent reports show wage growth below inflation, and more college grads without jobs (Economic Policy Institute, et. al).

Moreover, increasing evidence shows the house building industry is sapping resources from the potential recovery of non-construction jobs, due to a peculiar detail of US inflation accounting which defines rises in construction materials and homes to be completely outside of other calculations ('owners equivalent of rent'). In short, housing inflation can spiral out of control, and money will still be lent regardless. That's because in the early 1980s, the US started calculating housing costs in terms of apartment cost, which set off a long cycle of house price inflation.

But the housing industry has grown large -- and other industries which might provide jobs are being out-competed by house building, with inflation rates for some materials in the triple digits, and lenders making home loans no matter how high. Indeed, a number of recent corporate announcements show jobs being moved offshore due to high US prices. Caterpillar, among others, had an earnings shortfall due to high inflation.

Yet, a recent consumer confidence survey show confidence is at a recent high -- even though jobs and wages are scarce. The reason given? Numerous US news articles cite Americans happy with the price rises of their homes. With housing starting to weigh both on the consumer budget and the job recovery, consumer confidence is headed for a fall--because it is false, since confidence is consuming the basis of its own perception. [2]

What's for sure, is until the housing bubble shows signs of correcting significantly, jobs and perceptions can't be set right, and the economy will be in a state of disorder much like that of the high-tech bubble.

FOOTNOTES:

(1) 'Bubbles? What Bubbles?' 'Household Income Must Grow At Least As Fast As Home Prices'

(2) 'My wife sells new homes to first-time home buyers. They're buying right and left' Confidence Surges to High Level, AP News 08/06

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