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So why is the price of one commodity (houses) rising a good thing? But the price of another commodity (say wheat) a bad thing?
i can answer this one, because wheat like oil are consumption commodities. You cannot build networth around them, noone stores a warehouse of wheat/oil as their networth. So when the prices for them go up, and everyone need to buy them daily, that affects the bottomline, same as increasing tax.
housing, can be considered a commodity, but it is a fixed asset. Yes everyone still needs shelter, but it's not a daily consumed product (you dont buy a house everyday). So if the value of a house is high, you have more networth and are willing to spend more, which helps the economy. It's the same as having 100k vs 50k in your saving account.
But just with everything, there is a threshold. What happened in the US was the housing shot up so much, everyone's networth increases by 2-3x folds, so what they do? of course they went out and bought everything. Until noone can afford the houses anymore because it went up so much, then the whole thing came crashing down.
The healthy thing of course is a reasonable increase in housing prices each year (1-3%), so owners feel pretty confident to spend, but you dont get into a bubble situation. The problem with that is the market is made up by humans, not robots or mr.spok. And we know how humans behave....
There will always be a herd rushing somewhere, this time it's housing, next time maybe green technology, or space development, it will raise to an unsustainable level, then come crashing down. Very similar to the behavior of tides/waves. Just this time, housing unlike tech stocks or currency speculation, affected EVERYONE. Even the most conservative americans who never speculated.
With all the money that the Fed is set to pump into the banks, the dollar will lose a ton of money because the over supply. This, and the fact that interest rates are stupidly low, the housing will definitely stale, but you'll have the problem of too many dollars, too low of an interest rate, causing stagflation.
Obama is the modern FDR, he's turning a hard depression into a long, disastrous depression. Bush was the Hoover of our era, which means we haven't learned from history. Except, this time, we are indebted to other nations. Wait until they dump the dollar.
With all the money that the Fed is set to pump into the banks, the dollar will lose a ton of money because the over supply. This, and the fact that interest rates are stupidly low, the housing will definitely stale, but you'll have the problem of too many dollars, too low of an interest rate, causing stagflation.
Obama is the modern FDR, he's turning a hard depression into a long, disastrous depression. Bush was the Hoover of our era, which means we haven't learned from history. Except, this time, we are indebted to other nations. Wait until they dump the dollar.
These boom/bust economies are terrible.
they are trying to drive an elephant on a pin needle. trust me those guys working for obama knows exactly what is happening, their plan is to spend trillions to stabilize everything, then once it's stable enough, pull the money out before inflation kicks in. The bet (elephant on pin) is they can time it perfectly to pull the money. Pull it too early, and the economy/financial destablize again, pull it too late, and inflation kicks in and everyone dumps the dollar.
I am just waiting to see how they execute, it's kind like watching a car trying to fly over a cliff to the other side, you know 90% it will fall into the cliff, but there is a 10% chance it may jump over. If obama pulls this off, i am voting for him in reelection.
they are trying to drive an elephant on a pin needle. trust me those guys working for obama knows exactly what is happening, their plan is to spend trillions to stabilize everything, then once it's stable enough, pull the money out before inflation kicks in. The bet (elephant on pin) is they can time it perfectly to pull the money. Pull it too early, and the economy/financial destablize again, pull it too late, and inflation kicks in and everyone dumps the dollar.
I am just waiting to see how they execute, it's kind like watching a car trying to fly over a cliff to the other side, you know 90% it will fall into the cliff, but there is a 10% chance it may jump over. If obama pulls this off, i am voting for him in reelection.
an excellent analogy/analysis.
they'll do it.
('cause if they don't, it'll be another 12 years before a Dem becomes POTUS again, and never will another person of color be POTUS again)
i can answer this one, because wheat like oil are consumption commodities. You cannot build networth around them, noone stores a warehouse of wheat/oil as their networth. So when the prices for them go up, and everyone need to buy them daily, that affects the bottomline, same as increasing tax.
housing, can be considered a commodity, but it is a fixed asset. Yes everyone still needs shelter, but it's not a daily consumed product (you dont buy a house everyday). So if the value of a house is high, you have more networth and are willing to spend more, which helps the economy. It's the same as having 100k vs 50k in your saving account.
I rent. I do in fact buy a house everyday in effect. Higher house prices mean higher rents in order to make providing rental accommodation profitable.
If wheat prices are high, then people are more likely to invest in growing wheat which involves buying farm machinery which helps the economy, and directly employing people to "work the fields" which also helps the economy, and shipping inputs to the farm and wheat from the farm which again helps the economy.
So how is that different than housing, other than having direct instead of indirect effects which makes wheat arguably better for the economy than housing with respect to high prices.
Anyone who keeps the bulk of their net worth in a depreciating asset (in real terms considering maintenance costs) that is subject to a property tax and also changes their present day consumption levels based in changes in its value (as opposed to changes in the holding costs) isn't making economically rational decisions.
Make a whole country out of such people and look out below for the economy. Though I guess we just saw that
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But just with everything, there is a threshold. What happened in the US was the housing shot up so much, everyone's networth increases by 2-3x folds, so what they do? of course they went out and bought everything. Until noone can afford the houses anymore because it went up so much, then the whole thing came crashing down.
The healthy thing of course is a reasonable increase in housing prices each year (1-3%), so owners feel pretty confident to spend, but you dont get into a bubble situation. The problem with that is the market is made up by humans, not robots or mr.spok. And we know how humans behave....
There will always be a herd rushing somewhere, this time it's housing, next time maybe green technology, or space development, it will raise to an unsustainable level, then come crashing down. Very similar to the behavior of tides/waves. Just this time, housing unlike tech stocks or currency speculation, affected EVERYONE. Even the most conservative americans who never speculated.
/rant off
Housing bubble affected me just as much as tech stocks did. My rents haven't increased more than they were pre-bubble (mind you I was in another country so I might be mistaken about rents in the 90s and early 2000s in the US).
Sure the knock on effect have been more fun, but they aren't actually the result of the housing bubble they're the result of loose monetary policy - the same thing that drove the tech bubble - and gambling banks.
they are trying to drive an elephant on a pin needle. trust me those guys working for obama knows exactly what is happening, their plan is to spend trillions to stabilize everything, then once it's stable enough, pull the money out before inflation kicks in. The bet (elephant on pin) is they can time it perfectly to pull the money. Pull it too early, and the economy/financial destablize again, pull it too late, and inflation kicks in and everyone dumps the dollar.
I am just waiting to see how they execute, it's kind like watching a car trying to fly over a cliff to the other side, you know 90% it will fall into the cliff, but there is a 10% chance it may jump over. If obama pulls this off, i am voting for him in reelection.
The real question is how can they pull the money out again?
The traditional method is to jack interests rates into the teens and soak up existing dollars by the Fed reducing their balance sheet (and hence the money supply) by selling stuff back to the market.
High interests rates would not only crater the economy, but crater the US government since it couldn't afford to pay the interest on the treasuries it needs to issue to fund itself. And the fed now has toxic waste on its balance sheet that the market doesn't want back thanks very much.
If they pull it off, then yes keep those guys in for as long as possible, they're geniuses with magic powers.
Checking recent home sales ... the house around the corner from me has a colorful history.
Bought in 2004 ............. $230,000
Sold in 2006 ............... $460,000
Foreclosed in 2008 by US Bank
Bought in Jan 2009......... $135,000 .... not bad for a 5 bedroom ranch.
I rent. I do in fact buy a house everyday in effect. Higher house prices mean higher rents in order to make providing rental accommodation profitable.
If wheat prices are high, then people are more likely to invest in growing wheat which involves buying farm machinery which helps the economy, and directly employing people to "work the fields" which also helps the economy, and shipping inputs to the farm and wheat from the farm which again helps the economy.
So how is that different than housing, other than having direct instead of indirect effects which makes wheat arguably better for the economy than housing with respect to high prices.
Anyone who keeps the bulk of their net worth in a depreciating asset (in real terms considering maintenance costs) that is subject to a property tax and also changes their present day consumption levels based in changes in its value (as opposed to changes in the holding costs) isn't making economically rational decisions.
Make a whole country out of such people and look out below for the economy. Though I guess we just saw that
comeon you know you are stretching the logic - buying wheat machinery to produce wheat when the prices are up to stimulate the economy? .
People buy rice everyday to eat, people keep 1 house. If rice goes up in price, they have less money. If house goes up in price, they have more money. It's really that simple. This assumes the majority of the gdp are home owners, which they are (or were).
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Housing bubble affected me just as much as tech stocks did. My rents haven't increased more than they were pre-bubble (mind you I was in another country so I might be mistaken about rents in the 90s and early 2000s in the US).
of course it didnt affect you (or me), because we are renting. But all the home owners, even the responsible ones with 20% down 30 yr fixed and able to afford their mortgage got burned, when their house dropped in price. Even if they have no intention to sell, their unrealized networth is much less now, and that impacts their spending mentally just as much as if they sold the house.
The real question is how can they pull the money out again?
The traditional method is to jack interests rates into the teens and soak up existing dollars by the Fed reducing their balance sheet (and hence the money supply) by selling stuff back to the market.
High interests rates would not only crater the economy, but crater the US government since it couldn't afford to pay the interest on the treasuries it needs to issue to fund itself. And the fed now has toxic waste on its balance sheet that the market doesn't want back thanks very much.
If they pull it off, then yes keep those guys in for as long as possible, they're geniuses with magic powers.
there are many ways, increasing interest rate is the last step. allowing the banks to repay the tarp for one, stop printing the money/continue to give out bailouts is a huge step, etc...
If house goes up in price, they have more money. It's really that simple. This assumes the majority of the gdp are home owners, which they are (or were).
Two points.
1) They do not have more money. The only time a rise in general market prices results in you having more money is if you sell your house during that time. Otherwise, you just have a paper gain that is meaningless to your ability to spend money: it generates zero cashflow (negative cashflow, actually, unless you rent it out profitably). It does mean something about your ability to go into debt (HELOC, etc), but that's point #2
2) High home prices mean all future generations have less money to spend because they are locked into crushing debt the minute they purchase a house. They will not have as much money to spend and as the "winners", or those that sold into the bubble, sell and move on, they will leave behind a class of people far less able to sustain a similar level of consumption. If the current generation does not cash out, and instead decides to go further into debt (HELOC for those granite countertops!), they put themselves in a similar situation.
The result is that high home prices are only good for short periods of time. If they last indefinitely, then the result is a crash in consumer spending as more and more capital is tied up in servicing mortgage debt. They're also only good for those who choose to cash out by selling, which is a much smaller percentage of the GDP than the total homeowner rates. Those that cash out via loans end up in foreclosure when the inevitable correction occurs.
Inflated house prices are bad for the long run because they skew the market in unsustainable ways. The result is inevitably a crash.
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