Monday, February 06, 2006

Is 17 Percent Gain 'In The Bag?'

Link To This Post

A letter to the editor in today's Ventura County Star, written by Mark Morgan of Camarillo, refers to a January 26, 2006, article about the 17th annual Economic Forum at the Thousand Oaks Civic Arts Plaza. At that forum, Gary Watts, a real estate forecaster who seems to hold a lot of sway with real estate agents, told the audience "2006 is already in the bag, ladies and gentlemen." Watts had put out a report in December that called the Housing Bubble "bogus."

Here's the text of Morgan's letter:
RE: your Jan. 26 article, "Housing analyst says prices will keep going up:

Gary Watts proclaims 2006 is "in the bag" for a 17 percent housing-price gain. It's possible. It's also possible that the bubble he so blithely dismisses will burst before or after that happens. When buyers disappear, prices must fall. When this bubble breaks, it will have nasty repercussions for all.

Watts may not understand asset bubbles any better than Alan Greenspan. Like all historic manias, this one is/was built on a credit bubble, though the present one is the largest — magnitudes larger — than any ever inflated. Credit-induced asset bubbles become self-reinforcing: With ample money/credit, housing prices rose, speculators entered the market and drove prices higher. Bystanders became excited and joined the fray. (How many people per capita now hold Realtor licenses?)

The Fed helped maintain an ample supply of cheap, easy-to-borrow money (look how lending standards have slid). Investment returns were so high, so quick, that more people were sucked into the mania. And now, never have we had so many people dependent on an industry that is so useless to America's long-term economic prospects (we can't trade our overpriced houses with the world, unlike computer chips, autos, etc).

Essentially, pricing mechanisms have broken down — especially in California — and people are chasing a good thing as long as it lasts. Beware. Remember the stock market in 2000.

What will stop it all? Fear. Some "unforeseen" event will turn the spigot of easy money off, likely this year. Unfortunately, massive debts have been created in the meantime, and American saving rates are negative. Many people are borrowing against home equity to pay current bills. Sadly, an Experian-Gallup poll in May showed that some 65 percent of Americans hadn't heard anything about a housing bubble.

While Watts' arguments may seem comforting — that Ventura County and California are immune to market swings, we're in a new era where the old models don't apply. Buildable land is limited and demand will forever grow are simply false assumptions.

Has Watts forgotten the last downturn in local real estate? Japan, an island nation, thought like Watts, that limited land would forever support high housing prices. Do a search with Google to see how their housing prices collapsed to 1975 levels in a matter of years.

Inflated housing prices create perilous circumstances for average workers to navigate. Sure, some of us are debt-free and won't be hurt as badly as those whose no-down, zero-percent loans will soon readjust. Just don't be conned into believing that it can't or won't happen again. It's a cycle, folks, and we're fast approaching the tail end.

One more thought: Read Murray Rothbard's "America's Great Depression" (1963) and judge how similar current events are to the 1920s. Read how housing and commodity prices exploded, the business cycle enigma was permanently solved and how the Federal Reserve came to proclaim that its main job was to ensure price stability (echoing words of Ben Bernanke and Milton Friedman).

Investigate. And think.

— The Boy in the Big Housing Bubble