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Wednesday, June 01, 2005
 
Toil and Trouble

Garance Franke-Ruta really misses the point about the housing bubble:

There's been plenty of talk over the past week about "froth" in the real-estate market, much of it very general and a lot of it irrelevant to most local markets, which tend to more closely resemble middling Tampa or Phoenix than super-hot spots like San Francisco or West Palm Beach. Consequently, all this bubble talk can't be taken too seriously -- what really matters are the regional fundamentals, which too few people pay attention to.

Yes, some markets are more overheated than others, but everyone should be very concerned about what is happening in the housing market, and not just because of those who are currently having problems. Franke-Ruta's focus is completely wide of the main issues.

Let's pay attention to who's really getting hurt in this market, eh? As Richard Yamarone, director of economic research at Argus Research, told The New York Times, "What does it matter if a 'professional home flipper' gets burned in a housing downturn?'

Well, it matters, because all the non-flippers will also get burned, and will, in many cases find their outstanding debt far outstrips the real value of their homes. It matters because financial institutions will tighten credit restrictions beyond recognition, making loans of all kinds much more difficult to come by (and, not incidentally, shrinking the pool of potential homebuyers, further reducing prices). It matters because everyone across the homeowning spectrum will be and feel poorer, which will dampen the consumer spending that has kept the American economy afloat for the past several years. It matters because of the huge pressure that will be brought to bear on the government to bail out profligate lenders and unlucky (ill-informed) homeowners with higher taxes at the same time as the economy is stagnating or worse. It matters because a rapid enough popping of the bubble has the potential to push the U.S. (and world) economy into a full-blown depression.

Finally, any discussion of "the [real estate] fundamentals" that doesn't take into account the cheap money made available through historically low interest rates and absurdly lax lending controls isn't going to explain anything. If foreclosures are at record levels now, while rates are at rock-bottom and prices continue to rise, what's going to happen when conditions go south?

(For those interested, a thorough overview of the U.S. real estate situation is available here.)