Interesting Comment at Calculated Risk

By on August 30, 2007

This was an interesting comment on the extent of the housing bubble and the possible repercussions from it:

I’m a big supporter of Dean Baker’s work on most things economics but especially the housing bubble. Anyone read a report written earlier than his August ’02 paper, “The Run-Up in Home Prices: Is It Real or Is It Another Bubble?” found at pu…ing_2002_08.pdf

One thing just leaps out at me. Before the Fed lowered interest rates to 1% in 2003 and left them there for over a year, and before virtually anyone in economics was even suspecting that U.S. housing markets might be in a bubble, Baker was already warning of a potential sharp decline in wealth for U.S. house owners.

He estimated that if it were a little bubble, losses could be $1,319 billion, and if it were a big bubble, losses could be $2,638 billion. His latest estimates of “bubble wealth” amount to over $8,000 billion.

We are going to lose this wealth – we can do it the relatively slow way ala Japan the last 17 years, or we can do it the fast way ala 1930s U.S./1980s Texas oil patch, or we can do it somewhere in between.

So much discussion is relegated to mortgage financing (for some good reasons), but it’s NOT the crux of the big picture in housing. It’s the NASDAQ, gold, tulip bulb, Florida land boom all over again but on a much larger scale for the broad U.S. population, as over 70% of households are “owners”.

We’re still in revulsion – the stage in the mania when people panic and flood the market with their assets; it’s just that in housing they don’t have to sell, merely list. When we hit discredit, as we’re likely about to, people will liquidate at what they think are steep discounts – 10% here and there – and six months or a year later they’re no longer “bargains”, as more and more people panic because the all important trend has clearly reversed.

If I have any point to this, I can perhaps relate it to all the discussion about workouts and bailouts and defaults – that’s NOT even the largest concern, in the macro sense. It’s the phantom equity we as a nation of house owners will lose from this crash; and it just sickens me that not 5 years ago the equity markets proved that asset classes can STILL take back all the phantom equity and then some, but the establishment and many others are in total denial.

I think we’ll end up like Japan, until oil production hits terminal decline. Then we’ll be in the 1930s.
inOrlando| 08.29.07 – 8:04 pm |

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