> what do you think of the following article?
> David Levenstam
>
> Interest rates and housing
> Bruce Bartlett (archive)
> August 16, 2005
> In the latest easing phase, which began in January
> 2001, the principal impact has been on housing.
Yes. Here is a column I wrote about it recently:
Californias Real Estate Bubble
by Fred E. Foldvary
Dont blame or praise the market for Californias
real estate bubble! The dramatic rise in real estate
prices has been caused by government intervention.
While some property owners are enjoying large capital
gains and higher rental income, the overall outcome of
such bubbles is grim. Millions of Californians are
unable to afford housing unless they live far from
work, share overcrowded quarters, or move to
unfavorable neighborhoods. The worst part of this
bubble is that it is unsustainable. Every economic
depression is caused by the previous boom. House
prices will plunge, defaults will crash the banks, and
many will be unemployed. Californias public finances
will again be in crisis.
DataQuick Real Estate News (www.dqnews.com) reports
that the median sales price in the San Francisco Bay
area has risen to $610,000, up 18.2 percent from June
2004. Real estate in Californias Southland
counties is also hitting new highs. The median price
for a house in California is $427,000, a record high.
Weve been there before. There has been a real
estate cycle in the USA since the early 1800s, with a
period usually of about 18 years. Prices and
construction peak and plateau, and then follows a
major depression. Real estate peaks have preceded the
depressions of 1837, 1857, 1873, 1893, 1929, 1973,
1980, and 1990 (www.foldvary.net/works/cycle.html).
After a depression, real estate recovers as vacancies
are reduced. During the upswing, rents and land
values rise, fueled by low interest rates; indeed, the
Federal Reserve system greatly expanded the money
supply and brought interest rates to historic lows.
Rising real estate prices then attract investors and
speculators, making prices rise even further and
faster.
Government further boosts real estate prices by
providing infrastructure such as streets, security,
transit, and schooling. Landowners pay little of the
cost, the funding being mostly taxes on wages and
profits. Workers pay double for civic goods, once as
higher rent and again with taxes, while new owners pay
high prices, the gains going to the previous owner.
If landowners had to pay for the civic goods, real
estate prices would not rise nearly so high.
Next, bank deposits are guaranteed by the federal
government up to $100,000, so banks face less risk
when they loan for real estate purchase and
development. Bankers sell their mortgages to the
government-sponsored enterprises popularly called
Fannie Mae and Freddie Mac, which in turn sell bonds
to the public. With these guarantees and
government-sponsored mortgage resale markets, banks go
hog-wild, lending out with interest-only mortgages and
adjustable-rate loans to buyers with not so good
credit.
Mortgages are paid from wages and profits, so
eventually, real estate prices stop rising. The real
estate market plateaus. Sales volume drops, but
owners refuse to sell at prices much lower than they
were. Meanwhile, the Fed, fearful of inflation,
reduces the growth of the money supply, hiking up
interest rates, as they are now doing. Higher costs
eventually choke off new investment. That lowers
demand for other goods, and then the economy plunges
into a recession.
With rising unemployment and interest, some owners
cant afford to pay their mortgages, and they go into
default. Properties get dumped on the market. Now
real estate prices collapse as owners are forced to
sell and banks unload properties. Banks fail,
enterprises go bust, unemployment soars, and
governments face financial crises.
The last real estate bottom was in 1990, so if this
is another 18-year cycle, the next depression would be
around 2008. So far, the economy is tracking the
cycle right on schedule. In my judgment, the economy
is entering the plateau stage.
We can see the multiple government interventions that
create the boom-bust cycle: the manipulation of money
and interest rates, the public-works subsidy to
landowners, the federal insurance of deposits, and
governments step-children, Fannie and Freddie. Major
policy changes require a crisis, so unfortunately, we
will just have to ride this real-estate tsunami wave
and then plunge down the financial waterfall that lies
ahead.
This pattern is happening throughout the world. The
subsequent crash will therefore be global. The cause
is the same all over: government financial and fiscal
interventions. So please, when the crash comes, dont
blame the market!
