Via the Piggington blog, from Soros' latest book. I'm going to see Soros at the London School of Economics in a couple of days and I'll ask for his comments on this if I can...
You just know the Soros's, the Buffets etc are way the heck out of real estate and hording cash to buy at distressed prices in a few years. And you know the Trumps are screwed.
I believe we are currently in the midst of a gigantic real estate bubble. It was caused by the determination of the Federal Reserve Bank not to allow a stock market decline in 2001 to turn into a self-reinforcing rout.
The federal funds rate was lowered to 1 percent. Mortgage institutions encouraged mortgage holders to refinance their mortgages and withdraw the excess equity. They lowered their lending standards and introduced new products such as adjustable rate mortgages (ARMs), “interest only” mortgages, and promotional “teaser rates.”
All this encouraged speculation in residential housing units. House prices started to rise at double-digit rates. This served to reinforce speculation, and the rise in house prices made the owners feel rich; the result was a consumption boom that has sustained the economy in recent years.
Again, the bubble can be attributed to a short-circuit between the value of assets and the act of valuation. This short-circuit is called the wealth effect.
June 26, 2006
Posted by blogger at 6/26/2006