The fact that Housing Bubble 2 is now even more magnificent than the prior housing bubble, even while real incomes have stagnated or declined for all but the top earners, is another sign that the Fed, in its infinite wisdom, has succeeded elegantly in pumping up nearly all asset prices to achieve its “wealth effect.” And it continues to do so, come heck or high water. It has in this ingenious manner “healed” the housing market.

    But despite the current “buying panic,” the soaring prices, and all the hoopla round them, there is a fly in the ointment: overall homeownership is plunging.

    The homeownership rate dropped to 63.4% in the second quarter, not seasonally adjusted, according to a new report by the Census Bureau, down 1.3 percentage points from a year ago. The lowest since 1967!


The question is what the Fed should do about. Part of the problem is that Congress has been so intransigent on doing anything like fixing the unemployment rate, that the Fed has been the only player in trying to right the economy over the last 8 years. And what can they do? Manipulate interest rates and print money. Not much else, and unfortunately, we're finding out what the negatives of long term 0% rates produce.

I wonder what the long term consequences of this trend are going to be. Even though housing isn't a very good way to make money, it is a very good way to store money (as prices more or less track inflation over a decades timescale). $1000 toward rent is 100% expenditure, but $1000 toward a mortgage is at least a little money still in your possession (provided you don't refi all your equity away). And of course the interest to principle ratio drops as the mortgage matures. I fear that a whole generation of lifetime renters are going to be particularly fucked when they reach retirement age, and they have nothing of value to sell.

Hopefully interest rates will begin to rise significantly in the near future, and prices can adjust downward in a moderate way. The underlying causes of bubble 1 and 2 are very different, so hopefully they same catastrophe won't ensue when prices eventually decline.

posted by kleinbl00: 1266 days ago