The Housing Bubble Is Bubbling

One should learn from one`s mistakes, but Americans apparently do not. The great crisis of 2008 was brought on by the securitization of sub-prime housing mortgages …

Dr. Walter Snyder –

Wally`s Newsletter No. 160

To a lesser degree the same mistake was made again with the securitization of sub-prime auto loans, and now the housing market is once more preparing the basis for another crisis. The April sales figures for housing were down 5.4% YoY due to price increases.

Thanks to extremely low mortgage rates there was a rush to buy up until March. At the same time prices went higher due to the demand. Price discovery was thus fostered by the distorted working of the law of supply and demand with mortgage interest rates at 4% against a more “normal” US rate of 6% or a bit higher, possibly 7%. Since most workers earning minimum wages can hardly afford to buy a house anyway even at low prices, they were closed out of the market when prices rose. The middle class earners who could afford to finance higher-priced housing did so and thus brought about even higher prices until the cost of financing up-market housing went beyond the means of most middle-class people aspiring to own their own home, which is supposed to be part of the American dream. Americans are slowly coming to realize that reality is divorced from dreams.

So the net result is that housing sales have diminished in number, and that means that an economy that depends on the consumption of consumer goods for up to 70% of its activity is headed for a recession or worse. The impending Fed rate increase, expected for mid-June, the high level of credit card debt and the catastrophe of sub-prime auto loans defaulting en masse all presage hard times for construction companies building houses. The new homes will be too expensive for the great majority of the population.

The root of the problem is excessively low interest rates that have produced a new equilibrium in the housing market. Lowering interest rates stimulated demand for housing, which in turn resulted in higher prices that became too high for many people. In this way asset price inflation has also come to the housing market although this came about by a route different from that of the stock market.

This is one problem plaguing the American economy. What it all means though is that Main Street is seeing the American dream fade away, enveloped by a storm cloud of debt and the fog of MSM (Main Stream Media) cheering on the Wall Street shysters while the BLS claims that unemployment is at 4.5%. Do not believe it.