The Real Cost of the Housing Bubble

Posted by: Michael Mandel on May 23

“The insanity continues.” So writeth Angry Bear, exploring more signs of a runaway housing market.

Assuming that there is a housing bubble—which looks more and more certain—what are its real costs? First, of course, are the bankruptcies and foreclosures which will come when housing prices fall, or even stop rising. From a macro sense, I’m not terribly worried about those. The U.S. financial system is strong enough to absorb them, and much of the cost will be born by foreigners who have bought mortgage-backed securities.

The bigger issue is the misuse of capital. Housing investment now stands at 5.8% of GDP, just barely below the 40-year peak of 5.83%, set in 1973. To put it another way, the housing boom is a 40-year flood.

Every dollar going into housing is a dollar that is not going somewhere else, such as tech and telecom spending.

Repeat after me: Very low interest rates distort the economy by shifting resources to rate-sensitive sectors.

Note: Plenty of stuff on real estate out there. See also The Big Picture doing a real estate wrap-up.

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Reader Comments

David

May 23, 2005 11:06 AM

Very good observation on your part, Mr. Mandel.

It's been constantly argued that the real estate market is the bedrock of a local economy even moreso than industry or investment. That may be true, but the fluctuations of real estate ultimately hurt the consumer more than any unfair industrial job or a stock turned sour.

The best long-term solution would be to simply educate people along all economic lines early in their lives on issues of due diligence. We already have too many "new rich" who are simply unaware of the financial big picture or even the reality of their own portfolio.

Foisting such problems, assuming you have the money, on a CPA or broker will only give you options, not give you the right ones to choose.

Jack Krupansky

May 23, 2005 12:05 PM

Sorry, but it's more than a little misleading for you or anybody to categorically state that "Every dollar going into housing is a dollar that is not going somewhere else, such as tech and telecom spending." Each of those dollars is not simply going into a hole in the ground, but is spread throughout the entire economy like fertilizer. Much of that dollar pays employees in the housing sector who in turn spend the money on things like technology. Everything that those employees spend money on is going to be classified as "revenue" by businesses receiving those dollars, who in turn spend some fraction of that money on technology and other business infrastructure investments. I would invite you to do some journalistic research to find out what fraction of each dollar spent on housing does in fact eventually end up as technology or telecom or other business investment, as opposed to each dollar spent at starbucks, at a movie theater or DVD rental, an airline ticket, on a Slurpee, or placed in a bank savings account [after all, we're supposed to be saving more, aren't we?]. Or, if that doesn't sound like fun, how about simply doing a graphic diagram that shows how exactly each dollar of spending on housing does flow through the economy.

I hate to have to say this, but a line like "Every dollar going into housing is a dollar that is not going somewhere else, such as tech and telecom spending" is a true throwaway line that I would characterize as "puff". Just be thankful that I'm not your editor!

So, as I was saying, "Show me the money [flows]!"

And finally, I'd like to see a chart, by state, of the percentage of homes that are financed in a speculative manner (e.g., interest only) versus those financed with conservate, long-term fixed-rate mortgages. Also show, by state, the statistics for how long homes had been owned before sold in the past six months. I'm sure there are some short-term flippers [just like in the stock market, by the way], but anecdotes never tell the whole or overall story. If there really is a true "bubble" [across the national housing market], lets see the numbers.

-- Jack Krupansky

Apple Blogger

May 24, 2005 11:45 PM

" I hate to have to say this, but a line like "Every dollar going into housing is a dollar that is not going somewhere else, such as tech and telecom spending" is a true throwaway line that I would characterize as "puff". Just be thankful that I'm not your editor!"

Hey genius, it's a blog. Blogs don't have editors. That's the whole point.

Apple Blogger

May 24, 2005 11:45 PM

" I hate to have to say this, but a line like "Every dollar going into housing is a dollar that is not going somewhere else, such as tech and telecom spending" is a true throwaway line that I would characterize as "puff". Just be thankful that I'm not your editor!"

Hey genius, it's a blog. Blogs don't have editors. That's the whole point.

David H

May 26, 2005 04:16 PM

So, try to make the case to me that Tech is a better place to spend my money. I have a garage full of obsolete computers, screens, game toys, vcrs and thermostats. Why would all this obsolescence be more valuable to the economy than my house?

Tech is One sector. Housing is Another. Both are important to a diverse and strong economy in balance. The housing sector is out of whack at the moment. The marble countertops (long term value)aren't the problem; the square footage is (energy inefficient).

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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