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.
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.