Thursday, August 17, 2006
I got that sinking feeling
Billmon has an excellent article on the topic of the Southern Califorian Property Bubble
He goes on to talk about the new financing gimiicks and high levels of speculative investment in the Southern Califoria market (which is also true of the Southern Florida and New York Metro markets) and how this as exascebated the problem and made the danger of this bubble greater then the most.
How hard the bubble falls depends largely on the US federal reserve. The Fed can drop interest rates in the US to try to stimulate the housing market in these markets. However, this makes the US and US national debt less attractive for foreign investors at a time when the Bush administration is rolling up the biggest deficits in the history of the world.
Jax
Real estate markets are less liquid and have higher transaction costs, and since houses are a consumption item as well as an asset, what traditionally happens when the bubble bursts is that sales just dry up. Nobody wants to buy at quoted prices (usually based on previous, overinflated appraisals) but sellers aren't willing -- and often aren't able -- to sell for less. So the market can't clear, as Southern California markets aren't clearing now.The Japanese property bubble, which is the most famous of my lifetime crippled the Japanese economy for a decade (Of course, Japan, being a creditor country did not use the quickest tool to get the markets moving again... Run inflations and get the nomial value of the properties up the level of bubble peak, even if the real values are much lower. They didn't do this because the value of all the Yen denomination debt in the world-- and there is alot--would fall).
This tends to make housing busts last a long time, as home "owners" gradually capitulate to reality and lenders (or in the S&L industry's case, the federal government) slowly write off all that bad debt and dispose of all those foreclosed homes. That's one reason why the collapse in real estate values that accompanied the Great Depression didn't bottom out until the late 1940s.
He goes on to talk about the new financing gimiicks and high levels of speculative investment in the Southern Califoria market (which is also true of the Southern Florida and New York Metro markets) and how this as exascebated the problem and made the danger of this bubble greater then the most.
How hard the bubble falls depends largely on the US federal reserve. The Fed can drop interest rates in the US to try to stimulate the housing market in these markets. However, this makes the US and US national debt less attractive for foreign investors at a time when the Bush administration is rolling up the biggest deficits in the history of the world.
Jax
