Thursday, October 25, 2007

Dazed and Confused

Skimmed an article online regarding yesterday's report on existing home sales. What really strikes me, is the shock that these "experts" display with regard to how quickly and strongly the bubble has burst. How can they be so surprised about this? Are they really being genuine, or were they pushing their product the way RE Agents and mortgage brokers are?

Year after year people were astonished at how the market was going like gangbusters....was there no rigorous analysis as to what was driving this unprecedented growth? Stating it was fueled by low interest rates is not rigorous analysis.....and is akin to blaming the subsequent correction on subprime....its not the whole story.

In what industry have we ever seen 50%-100% appreciation in 5-7 years (okay so there might be a few....like perhaps oil..but I haven't checked the charts) without some type of correction?

As a percentage of a family's budget, housing tends to be the biggest monthly expense. If oil goes up by 50%, yes, it will affect consumption to some degree, but as a percentage of our net income, its still small potatoes compared to housing (unless you are one of the crazy live-in-Sac but commute-to-Bay-Area folks).

In other words, there really is a natural cap on the price of housing, and its directly related to income. Other items can be substituted to a degree. Buy things at Wal-Mart as opposed to Target or Macys. And the mix of items a family buys can change in response to price. Spend more on gas, and less on movies.

But housing....its not something you can change your consumption of on a day to day basis (once you are past your 20s). How did the "experts" miss this chapter in their economics courses?

2 comments:

Patient Renter said...
This comment has been removed by the author.
Patient Renter said...

"What really strikes me, is the shock that these "experts" display with regard to how quickly and strongly the bubble has burst. How can they be so surprised about this?"

It's too tough to call, but I'd like to think they're just genuinely idiots.

Dean Baker recently addressed this exact topic. One thing he argues is that the "experts" just "get caught up in the psychology of financial bubbles along with everyone else". The paper is worth a read.

http://www.cepr.net/content/view/1266/8/