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What is, is


I just added a wing to my ATM, I mean, house.


Kevin - If you look in today's online version of the WSJ you will also find an extensive article titled "What housing bubble?" You can read the article but the author's basic conclusion is pretty scary.

-Minyan JB

Thank you for the link MJB. The author's main thesis is: "There is no housing bubble." Among the evidence he uses to support this conclusion are the fact that he believes the strong housing market is a function of a variety of factors with "real" economic underpinnings: low interest rates, job growth, parental contributions, optimistic view of future earnings power. He goes on to cite three "myths" of housing: too much capacity, risky mortgage products fueling appreciation, and speculators driving prices higher.

All of this is basically a way of echoing the popular denial-based saying that, "What is, is." Blind acceptance. Sure, the economic underpinnings cited by the author may be "real" in the sense that they exist, but this ignores the reality of why those "real" economic underpinnings exist.

The "What is, is" crowd, and it is definitely a crowd, will say the why is irrelevant. They will say that houses have an intrinsic value that resides almost solely in the "homeowner." I put "homeowner" in quotes because having a mortgage payment is not the same thing as owning a home - but is clearly being treated the same by many because they believe they have borrowed to invest in a perpetually rising asset that has economic utility. This entire argument strikes me as quite similar to one used in the last bubble we had, which was in virtual real estate. In 1999 a domain name, arguably, had even more utility than a house, at least judging by the "real" economic underpinnings driving prices for the Web addresses of the world (domain name sold for $8 million), (domain name sold for $5.1 million), or (domain name sold for $2.9 million). Moreover, they were, at that time, more liquid than houses (they can be vacated and "remodeled" in a matter of seconds), and they offered real utility, a virtual home for any kind of business imaginable. Of course, as we later learned, the "why" of those "real" economic underpinnings proved to be rather important as the misallocation of capital that drove the boom eventually resulted in dramatic distortions that were ignored by those embracing the trend.

There is no question that there are many "real" economic factors driving real estate prices, but without understanding how those factors came to exist, and why, there is no basis for evaluating when those factors will change, or how far from reality the misallocation of resources will move.
Housing prices have risen nearly 50% in the past five years, according to the FDIC. The amount of liquidity that has been injected into the economy since 2000 has been staggering, and while the S&P 500 since 2000 is down 15%, the Nasdaq is down 46% and the Dow is down about 7.5%, housing prices have boomed over that same period as mortgage rates have fallen to near 30-year lows and the Fed Funds rate, from a high of 6.5% in 2000, fell to as low as 1% in June 2003 before this series of hikes began. And just like that we have a housing boom on our hands. Why? Well, what is, is. Just lucky I guess.

No positions in stocks mentioned.

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