Sunday, May 22, 2005

BUBBLE BUBBLE TOIL AND TROUBLE

f
Surrounded by mountains of billowing white froth, Greenspan peers owlishly through his lookinglasses and sees "many local bubbles". We suppose when these bubbles cover the landscape he might note, "There are bubbles everywhere". But then, he might not. We can only guess at what goes through his brain.

Last month, Greenspan told real estate buyers to use adjustable mortgages.
"But it's not hard to see that there are a lot of local bubbles," he said Friday, without specifying these local markets. Greenspan said price surges might "simmer down" as housing became less affordable.

"It's pretty clear that it's an unsustainable underlying pattern," the Fed chief said. "People are reaching to be able to pay the prices to be able to move into a home."

The central banker went beyond his comments in February by describing how he saw "very significant acceleration" in the turnover of U.S. homes, partly because of purchases of second homes. He said speculation in both the housing and mortgage markets had accelerated.

Greenspan said buyers were using riskier financing techniques, such as "interest only" loans, to squeeze into houses. Adjustable-rate and interest-only mortgages accounted for nearly two-thirds of new loans in the second half of 2004, according to the Mortgage Bankers Assn.
Now he tells us! Using all sorts of tricks to lower the monthly payments is suddenly a no no! Knock me over with a check book!
Fueling the state's sizzling market has been relatively low mortgage rates. Even as the Fed has pushed up short-term borrowing costs in the last year, long-term rates — those to which most mortgages are tied — have remained near 40-year lows.

A sharp rise in mortgage rates could pop these local bubbles, some experts say. Homeowners with adjustable-rate loans will see their payments jump when long-term rates rise.

What is uncertain, experts say, is just when these bubbles might burst. The stock market didn't crash until 2000, four years after Greenspan's "irrational exuberance" comment.
Perhaps these chuckleheads running things here will figure out the concept of "time lag". It affects all kinds of things, it is a natural property of kinetic energy systems. But of course, people aren't supposed to understand simple scientific rules which govern reality. No fun in that.
Greenspan's remarks Friday before the Economic Club of New York were largely about energy prices. A modest easing in oil demand because of higher prices should keep crude oil inventories rising in the United States and elsewhere for some months, he said.
Time lag feedback strikes again. When the world arrives at the Hubbert Oil Peak, one of the effects is a drop in price as everyone is forced to cut back consumption. If oil consuming nations devalue the currency via inflation, this muffles the effects of the Peak so it seems there is no crisis. Prices going down means there is plenty of oil!

This is false. The Peak isn't the end of oil, it is the maximum pumping of oil. This means the year the Peak is reached is when seemingly the oil is gushing like crazy, record amounts. Then the next year, slightly less. Prices go back up with a vengence. Consumption falls yet again. More parts of the earth go dark, Africa is nearly totally dark now already, for example, as seen from space. The remaining users get more oil and pretend all is well. Then the drop accelerates. This is when things begin to fall apart for the chief oil using nations like America, specifically America. America uses oil more recklessly than the whole world combined. Per capita, we consume double the nearest competitors.

This housing bubble and the Hubbert Oil Peak are intimately intertwined. In our foolishness, we are extending exurbia to the breaking point, recklessly creating a hyper-oil consuming culture. This is the last gasp. Just like the last dinosaurs, a sprint towards hugeness then collapse.

As of Wednsday at Calculated Risk:
Here is a great local story on housing in the D.C. area. From "Real Estate Roulette" by Hillary Howard:
"It's expensive to buy a house. Around the Beltway it's not just expensive -- it's hard. Buyers are routinely offering 10 to 15 percent over the seller’s asking price and they're still not getting the deal. Many buyers are even putting escalation clauses in their offers. And, some of those escalation clauses promise to outbid the highest offer. This is what it's come down to."
This is classic sign of hysteria. The fact that the majority of purchases are by speculators and that these people are using dubious instruments such as the new "pay only the interest" loans bodes ill for everyone. The new bankruptcy laws won't help the banks since they will only get to collect back properties that will be nearly worthless in a saturated market. They will be forced to foreclose and sell at firesale prices in the end. We expect to see around $2.5 trillion dollars go up in smoke in this coming bubble collapse. It won't be pretty.

And to anyone who says, "People need housing", just remember, one can live in a tent or under a bridge or triple up with family members easily. More than once in history, people lived under hedgerows while mansions stood silent and empty.
|

Links to this post:

Create a Link

<< Home