houses: sustaining the economic miracle

the perception of wealth has been keeping the economy afloat since the dot bomb, especially here in the bay area. people are spending money because they think they are wealthier, and their houses are the reason for that perception. the house is worth more, they can comfortably borrow more against it, the “housing ATM”, and decrease their payment. that $100,000 down (i’m being generous) just became a big profit. money seems to be growing on trees these days, doesn’t it? an article in the new york times today splashing a little much needed cold water on the idea of homes as investments, points out that the highly leveraged nature of most mortgages makes them risky in the short-term:

If the home went down by 30 percent, you’d probably be sitting with a bankruptcy attorney,” said Jonathan Golub, United States equity strategist at J. P. Morgan Asset Management in New York. “If your I.B.M. stock goes down by 30 percent, no big deal. So you had $100,000, now you have $70,000. You don’t declare bankruptcy; you just don’t go out to the movies as much, or you retire a year later.

this is the biggest bubble in history (if you haven’t already, read that article from the economist).

Japan provides a nasty warning of what can happen when boom turns to bust. Japanese property prices have dropped for 14 years in a row, by 40% from their peak in 1991. Yet the rise in prices in Japan during the decade before 1991 was less than the increase over the past ten years in most of the countries that have experienced housing booms…And it is surely no coincidence that Japan and Germany, the two countries where house prices have fallen for most of the past decade, have had the weakest growth in consumer spending of all developed economies over that period. Americans who believe that house prices can only go up and pose no risk to their economy would be well advised to look overseas.

this is the economic miracle that bush keeps talking about. like most of the administration’s other “accomplishments”, the economic miracle that’s occuring is a fiction. a sweet fiction, sure. the idea that, just by owning and living in a house, you’ll become wealthier is quite seductive. unfortunately, if the historical data up until 2000 is a gauge, it’s also bullshit
then again, i’m no economist. for all i know the thing could just keep going up and up.






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