If mortgages begin to expand, we should see a convergence of shelter inflation and non-shelter inflation. (This convergence will probably be associated with rising home prices, which will be erroneously associated with housing inflation.) This happened from 2002 to 2005, also. This should buoy real incomes and help keep the Fed from throttling liquidity, until the "bubble" police start begging for some more self flagellation. As long as liquidity is made available, returns (and prices) of homes and real long term bonds should also converge to long term trends.
A commenter at The Money Illusion recently noted two articles from 2001 and 2002 that were already declaring a housing bubble. The commenter meant this as evidence that there was a bubble and that it was something regulators could have foreseen. Of course, anyone who bought a house in 2001 or 2002 would have done quite well, and would still be sitting on substantial capital gains. From my perspective, those articles are evidence of how the bubble narrative was preordained as an explanation for any economic dislocation, well before the events of the boom and bust played out.
Those two articles (especially the second one) contain several common anti-finance shibboleths. From the first article:
Supply is beginning to outstrip demand...(Robert) Shiller worries about an ominous mix of overdevelopment, inflated home prices and rising consumer debt.From the second article:
(H)omeowners have every reason to keep their homes expensive. And, by coincidence or design, as home-equity finance has gained popularity, so too have no-growth movements, restrictive local zoning laws and other policies that constrain new-home construction.Demand soon outstrips supply.Both of these things, as any sophisticated observer will tell you, are products of some sort of conspiracy of some group of financial interests (builders, rich homeowners and investors, etc.) to keep pushing their "paper" profits up. Paper profits, of course, being a sort of "Wall Street" demon pretender of the sort of incomes and gains that real people create. We know that the economy is composed of (1) Wall Street power brokers whose machinations, even when they are direct contradictions of other supposed machinations, push prices to and fro, for the sole benefit of financial insiders and "the rich" and (2) helpless rubes who, as a group, chase bubbles, like addicts, in a fruitless attempt to escape their ever-descending economic state. These things, we know, a priori.
The red team/blue team drama has latched on to these notions, which are firmly rooted in banal cognitive biases, because it allows for much more predictable arguments about cause. If our understanding of outcomes is allowed to adjust for experience and empirical review, political debate will be complicated. If we can all agree on unchanging, false premises, then we can get to the important work of arguing about whether the canard was the fault of Republicans or Democrats. And, since most of these markets involve complicated tradeoffs, we can all agree on things, like, that rising home prices are lining the pockets of the 1% while they also simultaneously make it harder and harder for working families to afford a home. Every transaction includes a buyer and a seller, which is sort of like magical pixie dust for populist rhetoric.
Only a naïf would suggest that prices are, you know, information about underlying economic fundamentals, or that reasonable people, upon witnessing a massive increase in prices among the most widely distributed middle class asset, might consider it a sign of a very healthy middle class.
Bond and home prices are about 2% away from their widest typical relative returns.
As mortgages expand, home prices should rise, creating a sort of virtuous cycle of liquidity creation. Forward inflation expectations of about 2.5%, with real long term interest rates around 1.5% (nominal rates of 4%) would equate to real estate yields of about 3% - 3.5%, which would be associated with a decent rise in nominal home prices.
There is a monthly cycle with these loans, and the March to April comparisons have been strong. All in all, I'd say today's reports are tentatively good news.
Nice blogging.
ReplyDeleteSeems like a few in the indicators now flashing yellow. Time will tell.