The Mirage of the Mortgage Fix
The sea of inflationary credit is the core problem behind the falling dollar, the subprime crisis, the housing meltdown, not to mention the rise in the national debt and a thousand other problems. No one in Washington seems to understand the reason for the crisis, much less how to fix it. A good indication is President Bush's freeze on subprime mortgage rates. It is a classic case that provides serious lessons for all of us. It shows the political penchant for intervening in the market, the market response, and the further interventions that are called forth when the first round doesn't bring the utopia they imagine. Here is the great mortal threat that intervention poses to the economy: not the first round, not even the second round, but the relentless dynamic of political rescues that drive us further into the pit of state planning. FULL ARTICLE
Comments (12)
"No one in Washington seems to understand the reason for the crisis, much less how to fix it."
Well that depends, is Ron Paul in Washington DC this week? :)
Seriously though, one thing that has always irritated me is that people see houses as an "investment". They are not, they are consumption, they do not create infrastructure, they do not produce like factories, they are not R&D, they are pure consumption. People really shouldn't be "inventing" in them at all. In fact, before the Federal Reserve (from what I've herd) it was very common fro a young couple out of high school to save up for 3 or so years and buy a house cash ... and the average house was under an average years pay. IMHO we've got a lot of adjusting to do before things revert back to the norm.
Published: December 12, 2007 12:39 AM
I agree with David. People should not be inventing in their houses. That's what laboratories and workshops are for.
Published: December 12, 2007 1:13 AM
further to the above "housing-as-investment" comments. it's always struck me as a sign of asia's bright long-term future that they are comparatively poorly housed, and yet factory-rich. in australia, it's the converse. one of the world's best housed nations, but factories? whose future would you be betting on?
Published: December 12, 2007 2:31 AM
I'm not sure a high number of factories compared and lousy houses is necessarily a good thing. My understanding is that the Soviet Union had both a high number of factories (and high utilization of those factories) and lousy houses, but they still went downhill. What needs to be concentrated on is not the absolute number of factories, but the value of the output of those factories.
I do agree that, for the average person, houses should not be considered an investment since houses aren't intended to create an increased ability to consume in the future.
Published: December 12, 2007 11:15 AM
What Lew says is true: "No one in Washington seems to understand the reason for the crisis, much less how to fix it." May of you may have missed the CNBC Republican Presidential Debate focused the Economy. McCain actually said that he would like to see the interest rate go to ZERO! The exact quote is "I'm glad whenever they cut interest rates, I wish interest rates were zero." Afterwards members of the media declared him the winner of the debate. http://www.youtube.com/watch?v=8finCPNCbg8
Published: December 12, 2007 1:54 PM
"I do agree that, for the average person, houses should not be considered an investment since houses aren't intended to create an increased ability to consume in the future."
The purchase of a home should be considered an investment. New split-levels on 80'X100' plots went for $9K in 1960. In 2005, the same homes were selling for $450K, providing they were properly maintained. Real estate values may wax and wane, but in the long run they do increase.
You can neglect your home if you like, but your selling price will be reduced by tens of thousands of dollars. Curb appeal alone adds to the value of a home.
Published: December 12, 2007 3:11 PM
Real estate values may wax and wane, but in the long run they do increase.
I think you mean that real estate prices wax and wane.
"Value" can mean a lot of things. For a real estate salesman, it's just a puff-word, like using "home" all the time instead of "house." To the economist, it has a different meaning, which even though the definition is rather hotly debated, at least the meaning of the word is somewhat better-defined.
When, as now, the price fluctuation is due to housing-specific forms of credit that are heavily manipulated by government, it's becoming increasingly difficult (if not impossible) to know what prices would otherwise be.
Published: December 12, 2007 3:34 PM
Regarding the increase of prices over time, here is an article on the Herengracht index. This study tracked real estate prices in one of Amsterdam's most upscale neighbourhoods. The original study looked at the years 1628-1973 and found that real prices increased by 0.2 per cent per year:
http://www.iht.com/articles/2006/03/03/news/tulips.php?page=1
Published: December 12, 2007 4:40 PM
That study is a fraud at best. How can you track real-estate prices over a 400 year period with not only fluctuations, the rise and fall of markets, yet trends in economic development and social change. Your study does apply to today and
is not accurate, the financial system will cause the real-estate market in housing and commercial properties to collapse by 80%-90% in a downward unstoppable motion, and if you believe in powers at work, think of what happened in 1907 the banking crisis. That would be considered mild at best relative to today’s crisis, which as of yet has not even began to unfold. What we are witness to today, seems to be preparation stages for a system reform, one that is prelude to a new sort of political entity.
Published: December 13, 2007 3:56 PM
fan - I'm not sure what your point is. Are you suggesting that you can't go back and look at over 400 years of historical price information? The whole point of the study is to counter modern "long-run" studies that look at 20 years of house prices and attempt to arrive at some sort of conclusion. And it supports the thesis that we're in a severe global housing bubble at the moment.
Published: December 13, 2007 4:16 PM
The point is simple to understand the bubble in housing and commercial property is the direct result of financial market operations. Prices are not to be looked at historically, rather, the developments and operations of financial markets which has caused this global crisis. By the way a house has been and will be liability not an investment. Only dishonest real-estate agents will tell you any different.
There is no income generated from a house. Just think of the payments, interest, tax, insurance, maintenance, other you pay and ...so on. It's the worst investment I made.
What happened in the past four years is a unnatural disequilibrium, specifically engineered, to change and reform the structure of economic thinking and practice. Setting the stage for political reform, it is so obvious, just see how banks and financial companies are running around each other, trying to dump all of the worthless financial paper, back by even more worthless assets. Prices you say, look again, you are being deliberately miss lead. the house of cards is more like it.
Published: December 13, 2007 7:47 PM
[…]Houses require loans, so the mechanism of choice here is the interest rate. A high rate both discourages borrowing and tends to separate good lenders from bad ones.I agree with David.
http://www.johnbeck.tv
[…]
Published: December 26, 2007 10:57 PM