
No Housing Bubble Trouble (2005) - jwallaceparker
http://www.cato.org/publications/commentary/no-housing-bubble-trouble
======
calhoun137
This reminds me of this you tube video, called "Peter Schiff Was Right":
<http://www.youtube.com/watch?v=2I0QN-FYkpw>

It's basically a bunch of people screaming at Peter Schiff that he has no idea
what he is talking about, when he was basically predicting everything that
happened. Apparently Peter Schiff is pretty smart, I watched a bunch of these
videos and listened to his radio show. He is now predicting a massive drop in
the dollar due to inflation.

~~~
toomuchtodo
Is there any way to profit or take advantage of a drop in the dollar besides
forex trading?

~~~
joshAg
buy a bunch of stuff (eg: gold oil, water, food, cars) now on credit and sell
it for more than you borrowed after the dollar's value tanks?

~~~
marssaxman
A house, perhaps?

------
nkoren
Compare to The Economist's take, at roughly the same time:

"The worldwide rise in house prices is the biggest bubble in history. Prepare
for the economic pain when it pops"

<http://www.economist.com/node/4079027?story_id=4079027>

That article was instrumental in convincing me to quit being an architect in
2007, since it was obvious that a real estate crash would bode ill for that
profession.

When it comes to economic advice, I won't be taking any from the Cato
Institute.

------
angersock
Perhaps the money shot for the article:

    
    
      In short, we are asked to worry about something that has 
      never happened for reasons still to be coherently 
      explained. “Housing bubble” worrywarts have long been 
      hopelessly confused. It would have been financially 
      foolhardy to listen to them in 2002. It still is.
    

:D

~~~
anigbrowl
I found that especially hilarious having been through a painful housing
bubble-pop in the UK in the early 90s.

------
natmaster
I am curious how an advocate of Keysian economics is a fellow at an
institution that heralds itself as being "...dedicated to the principles of
individual liberty, limited government, free markets and peace."

~~~
nhashem
Keynesian economics is mostly just based on the idea that consumer demand
drives the economy ("aggregate demand"). This demand usually is discussed in
terms of consumer spending, but this is frequently misrepresented by strawmen
such as "Keynesians just thinks reckless spending is the solution to
everything" or "Keynesians think the way to get out of debt is more debt."

This is false. For example, it's not contradictory to believe in Keynesian
fundamentals and supply-side economics, if you think tax cuts would indeed
stimulate private spending to the point of increased tax revenue (which
actually did happen when marginal tax rates were cut from 91% to 70% as was
done in 1964[0]). You can also be a Keynesian and believe in a balanced
budget, if you think deficits are causing inflation that the Fed needs to keep
interest rates high to fight, and thus those high interest rates are
suppressing private sector economic activity (as was true in the 1990s[1]).

The Great Recession has caused the bizarre circumstance of a liquidity trap[2]
-- simply lowering interest rates isn't stimulating economic activity, and
inflation is low. The Keynesian prescriptions for this are unconventional
monetary policy (the Fed's "quantitative easing," which can be done because
there's little risk of inflation) and government fiscal deficits (to make up
for the lack of consumer demand). Somehow this gets warped into thinking that
people like Ben Bernanke and Paul Krugman think you can solve any economic
problem by printing dollars and/or getting into more debt.

[0] <http://en.wikipedia.org/wiki/Revenue_Act_of_1964>

[1]
[http://www.washingtonpost.com/blogs/wonkblog/wp/2012/08/06/w...](http://www.washingtonpost.com/blogs/wonkblog/wp/2012/08/06/what-
we-can-learn-from-clintons-1993-tax-hike/)

[2] <http://en.wikipedia.org/wiki/Liquidity_trap>

~~~
adventured
The notion that inflation is low is a lie. The CPI was substantially altered
in the early 1990s to mask the huge increases in prices that have gone on.

Housing is skyrocketing again right now, fueled by a massive inflation binge
the likes of which the planet has never seen before. The cheap money is
flowing into assets (stocks, real estate), as the Fed said it intentionally
wanted to have happen.

Nationally housing values are now climbing at a 10%+ annual clip again (20% in
Phoenix, with markets like DC at all time highs), driven by the Fed's
inflationary posture of QE + hyper low interest rates. That equates to
trillions of dollars worth of asset inflation annually. Housing is one of the
most important inflation metrics, and it's going up massively right now.

It's not the economy rebounding causing it. How do I know? Well beyond the
obvious QE + low mortgage rates + lack of job creation, we're creating almost
zero construction jobs right now (compare that to the last two times housing
prices soared).

Stocks have been juiced (inflated) by the easy money policies, leading to an
S&P that now has a higher PE ratio than the last bubble. And given that S&P
earnings are now eroding backwards, said PE ratio will probably continue to
expand beyond that.

College costs? Massive inflation. College costs doubled in ten years against
the backdrop of the great recession. Welcome to government inflation.

Healthcare costs? Massive inflation.

Food prices? Near all time highs.

Energy costs? $90 oil, $3.60 gasoline. Both are prices that would have been
considered beyond outrageous just 10 or 12 years ago. Now that's the new
normal. Meanwhile the US is producing more oil than at any time in the last 30
years, so it's not a supply problem (it's easy to see that by comparing the
available supply of oil and gasoline against 2003 numbers). Our gasoline usage
is back to 2002x levels, but prices are up 175% or so.

Home prices are up 75% to 150% in most major markets over 15 years. Given
incomes aren't soaring, and we have 14.x% real unemployment, that's a dramatic
increase.

Even with gold's sizable pullback with the climb of the dollar in the last few
months, at $1400+, it's also a price that would have been considered
impossible just ten years ago. Ditto silver (up 500% in 10 years) or platinum.

Everything screams: inflation wave.

~~~
philwelch
> Nationally housing values are now climbing at a 10%+ annual clip again (20%
> in Phoenix, with markets like DC at all time highs), driven by the Fed's
> inflationary posture of QE + hyper low interest rates....It's not the
> economy rebounding causing it. How do I know? Well beyond the obvious QE +
> low mortgage rates + lack of job creation, we're creating almost zero
> construction jobs right now (compare that to the last two times housing
> prices soared).

Or it's a combination of the following:

* We just had a housing bubble in the mid-2000's that entailed building lots and lots of houses. Since the population hasn't appreciably increased since then, there are actually enough houses to go around.

* The foreclosures and short-sales caused by the housing bubble popping have shook out, and this is just a reversion to the mean.

> College costs? Massive inflation.

Yeah, who guessed that federally incentivized lending would make the cost of
something go up?

> Healthcare costs? Massive inflation.

Mostly trackable to US health care policy.

> Food prices? Near all time highs.

> Energy costs? $90 oil, $3.60 gasoline.

Well yeah, that's what's making the food costs go up.

> Meanwhile the US is producing more oil than at any time in the last 30
> years, so it's not a supply problem

The US might be, but oil is a global market. Plus, the world is increasingly
forced to use more and more expensive sources of petroleum, like oil sands and
shale, which were not cost-effective just 10 or 12 years ago.

Nonetheless, it's not (purely) a supply problem. You _really_ think that
_quantitative easing_ has a higher impact on energy prices than literally
millions of people in China and India buying petroleum-fueled vehicles and
driving them around? If rising oil prices are an inflationary USD phenomenon,
why do we see the same pattern for Swiss Francs, Emirati Dirhams, Mexican
Pesos, Euros, Iceland Kronas, or Pounds Sterling?
[http://www.indexmundi.com/commodities/?commodity=crude-oil&#...</a><p>As for
precious metals, the simple fact is that the world's mineral resources are
harder and harder to get at over the years, and with the rest of the world
rapidly developing, demand for natural resources is going to increase. But
yes, if you cherry pick parts of the economy where prices are going up and
ignore parts where they aren't, you're going to see an inflation wave.

~~~
brc
>You really think that quantitative easing has a higher impact on energy
prices than literally millions of people in China and India buying petroleum-
fueled vehicles and driving them around?

Yes. Again, supply of oil has increased, and oil/gold ratios are pretty
static. The big leg of the movement is in the USD.

>If rising oil prices are an inflationary USD phenomenon, why do we see the
same pattern for Swiss Francs, Emirati Dirhams, Mexican Pesos, Euros, Iceland
Kronas, or Pounds Sterling?

Most of those currencies have engaged in competitive devaluation against the
USD to prevent exports becoming uncompetitive.

In countries where the currencies have not matched the USD depreciation,
energy prices aren't anywhere near as high.

>As for precious metals, the simple fact is that the world's mineral resources
are harder and harder to get at over the years, and with the rest of the world
rapidly developing, demand for natural resources is going to increase.

Population growth isn't that fast as to force a doubling of commodities in the
short timeframe that has happening. What is required is a flooding of the
denominator - USD.

Printing _any_ currency leads to inflation across the board. When it is the
'reserve' currency of the world, you get global inflation. There is nothing to
argue in this; it is the stated aim of the QE policies.

~~~
philwelch
> In countries where the currencies have not matched the USD depreciation,
> energy prices aren't anywhere near as high.

Name a currency where oil prices have remained stable over the past ten years.
I can't find one. Even oil-rich countries have seen their oil prices
skyrocket.

> Population growth

It's not about population growth. It's about economic development. 2 billion
Chinese and Indians doing subsistence farming or riding bicycles don't raise
the price of oil. 2 billion Chinese and Indians buying cars for the first time
does. You honestly think there's no relationship between the rising cost of
oil and the smog blanketing Chinese cities in recent years?

You want to talk precious metals? Half of platinum is used for automobiles,
and another 30% is used for jewelry. Two sectors where demand goes up when
previously poor countries suddenly get richer. Half of gold is jewelry as
well. About 40% of gold is bought for investment, which if anything indicates
a speculative bubble.

> What is required is a flooding of the denominator - USD.

So name another currency that doesn't show this. I picked Icelandic krona
specifically because most critics of how the US responded to the global
economic crisis hail Iceland as an example of doing it right. But their
petroleum costs have risen as much as ours.

> Printing any currency leads to inflation across the board.

False. Expanding the monetary base _in excess of economic growth_ leads to
inflation.

------
codeulike
Would have been more prescient/anti-prescient if it discussed CDCs and the
Rating Agencies in some way. At any point in time there are people shouting
"bubble" and "no bubble" about anything. How close people got to figuring out
the underlying mechanisms of the 2008 economy-blue-screen-of-death is more
interesting.

(Yes, the economy blue-screened, we re-booted in safe mode but we're still not
sure if we've fixed the drivers yet)

------
olympus
I don't think the author was wrong (which seems to be the underlying
implication of this article popping up seven years later). Sure, the housing
bubble burst, but that was over a year after he wrote this article. A lot can
change with the economy in a year, and obviously not everyone in 2005 thought
that housing prices would fall. Indeed, if the majority of people in 2005 had
thought that prices were going to fall then prices would have peaked in 2005
instead of 2006. If you look back after every downturn you will always find
people who were bearish and you'll call them smart. You'll also find bulls
like this guy and you'll call them dumb. But maybe it's more about being lucky
or unlucky.

~~~
chime
I remember writing about the bubble in my blog back in 2005 (
<http://chir.ag/200510301225> ). Though I wrote that 9 months after this
article was published, nothing really had changed - prices were still rising,
home sales were strong, everyone had equity. I had been monitoring the housing
market since early 2004 and saw tons of articles on both sides of the
argument.

I bought a house in June 2005, being fully aware that there is a big chance
the bubble could pop. As a result, even though I could've gotten a bigger
house or taken out a home equity loan, I bought the smallest house I could be
comfortable in for 5+ years and did not take out any loans. Meanwhile my
coworkers who were also in my salary range bought houses 25-50% more
expensive.

From the article:

> That would be unpleasant news for home sellers, but good news for buyers.
> And what sellers lose when selling one house they often save when buying
> another. Any risk of loan defaults would be negligible.

When a lot of sellers lose, it brings down the market.

> At the national level, what could possibly kick national home prices
> downstairs? There is nothing to suggest massive job loss ahead or a huge
> oversupply of new homes.

When there are a lot of sellers and too few buyers, there is a huge oversupply
of homes (new and old).

You're right that nobody can tell the truth about future. E.g. who knows if 1
bitcoin is going to be worth $100, $1, or $1,000,000 some day. However, the
author was clearly ignoring the signs that worried a lot of people, including
myself.

~~~
meric
Good on you! Your first house is a only a hedge, no point paying more
insurance than you need to. There is no advantage to property price rises if
you only own one house, therefore, there is no point buying a house bigger
than you need, if you plan to live in it for the long term.

~~~
throwaway1979
Two of our friends just bought starter homes in Westchester NY (for around
400k). If I were to buy a house like that for cash, it would take me quite a
while to save up that much lucre. That said, I think low interest rates were a
big motivator to my friends. When interest rates are so low, keeping liquid
savings doesn't seem to make sense.

------
kislayverma
I love these time-capsule style re-posts.

~~~
wladimir
Me too. It's one of the only ways of keeping people that make long-term
predictions accountable. Usually, no one calls them out if they were wrong,
they only get the attention and praise if they were right.

~~~
kislayverma
True. I think if we analyzed the predictions of so called 'experts' before and
after the fact of any event, the result would be extremely embarrassing.

But then, we should already know that.

~~~
EliRivers
I seem to recall that something along these lines for political punditry was
discussed in "The Signal and the Noise" by that chap Nate Silver.

I think (but could well be mis-remembering) one of his conclusions was that
since these pundits are for entertainment value rather than serious
prediction, nobody in charge of putting them in front of the camera cares
much.

~~~
kislayverma
It's also about half of Nasim Taleb's content. He repeatedly asserts that
outside of the hard sciences like physics, there are no experts.

------
saosebastiao
Well that is embarrassing.

