It's a bit strange, to go from a voice in the wilderness, mocked, laughed at, discredited, to being spot-on and going mainstream.
Housing Panic is here folks. You, the loyal HP'ers, are vindicated. Victory is ours, and it is sweet, yet it is so painful, so, so painful...
Get ready HP'ers. The time is neigh. The hour of the Great Reckoning is here.
How the Fed failed to prevent the housing bubble
There is total detachment from the bad news now pouring out of the US economy. For several years, the booming housing market has made the difference between recession and recovery for the US economy. Zooming house valuations provided private households with the collateral that allowed them to replace the missing income growth with a borrowing binge.
But as the housing market is sagging, this major source of higher consumer spending is plainly drying up, and most obviously and importantly, income growth is by no means catching up.
In 2005, real disposable incomes of private households in the United States increased $93.8 billion, or 1.2%, while their debts grew $1,208.6 billion, or 11.7%. Total consumer spending on goods, services and new housing accounted for 92% of real GDP growth.
Most economic data have softened, with the downtrend accelerating. In the face of this fact, it could not be doubted that Mr Ben Bernanke and most others in the Federal Reserve were anxious to stop their rate hikes. In question was only whether they would dare to do so in view of the high and rising inflation rates. They dared.
They even disappointed those who had predicted the combination of a declared “pause” with hawkish remarks about fighting inflation.
Present American folklore has it that a protracted slump in house prices is impossible. Let us say for many people it is unthinkable. And that is precisely one reason why this housing bubble could go to such unprecedented excess. The little historical knowledge we have about bursting housing bubbles is from a study published by the International Monetary Fund in its World Economic Outlook of April 2003. It presents past experience in a very different light. Here are some excerpts on decisive points:
“To qualify as a bust, a housing price contraction had to exceed 14%, compared with 37% for equities. Housing price busts were slightly less frequent than equity price crashes...Most housing price busts clustered around 1980-82 and 1989-92, while equity price busts were more evenly distributed across time...
"Housing price crashes differ from equity price busts also in other three important dimensions. First, the price corrections during house price busts averaged 30%, reflecting the lower volatility of housing prices and the lower liquidity in housing markets. Second, housing price crashes lasted about four years, about 11/2 years longer than equity price busts. Third, the association between booms and busts was stronger for housing than for equity prices.”
September 25, 2006
Posted by blogger at 9/25/2006