Economic Myths Fan Bubble Denial
Reuters is running another bubble denial story. Frank Nothaft, chief economist with Freddie Mac, "If the local economy is doing lousy, I can assure you that the housing market is not going to do well either."
They may have attributed that quote to the wrong economist, but let's explore that last point. In Rockford Illinois. "'A year ago, in April 2004, the average sale price was $US118,000 and now it's almost $US135,000,' the broker said. 'Everybody's asking the same thing: how long can this train keep going?'"
"Employers in the Rockford metropolitan area cut 9400 jobs between March 2001 and March 2005, as the area lost a fifth of its manufacturing jobs. Rockford's unemployment rate was 6.1 per cent in March. 'In our area, we are starting to see some affordability issues,' Mr Nalewanski said. 'We've had a decline in salaries due to the exodus of manufacturing jobs and their replacement with service jobs.'"
The concept of rising wages as a driver of home price appreciation might be valid, except real wages are actually declining. And in that scenario, wouldn't prices move up in some relation to wage increases? Normal supply/demand economics don't explain this housing market because it is a speculative mania, one of the biggest ever seen.
To finish with some quotes by the courageous Dean Baker. "People are betting on the value of their homes rising, and they're not saving. This is a classic bubble. We may be seeing the bubble spreading' from the east and west coasts to inland areas. 'People are buying homes every day and paying much more than they'll be able to sell them for. A lot of people are going to find themselves a lot poorer than they expected,' he said."