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[Getting Graphic] Genius On A Napkin: Housing Boom Phase Diagrams

February 27, 2006 | 12:05 am |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related graphic(s).

Click here for full post [Rutledge Blog]

Enlarge graphic

Source: Rutledge Blog

Although I consider myself geek-like, the chart Dr. Rutledge provides is a bit over my head but his explanation is clear. (make a mental note – consider changing this post to [Getting Text])

Dr. Rutledge’s post was written in the spring of 2005 and the comments he makes are very relevant today.

A drop in interest rates will make a permanent increase in housing prices but, over time, the growing housing stock will mitigate some of the price and construction pressure, which means the initial burst of activity, and possibly of price, are likely to moderate somewhat over time. To an information theorist, the initial spike in price is a way of amplifying the initial information signal that housing is now scarce in order to get everybody’s attention so they get out their hammers and build more houses.

So interest-rate induced housing inflation is largely a one-time event. It is not property inflation. It is not a housing bubble.

Housing inflation, as opposed to one-time increases in home prices, happens when there is a continuous increase in demand caused, for example, by systematically inflationary monetary policy. We do not have that today.

Housing bubbles pop when a sudden reversal of interest rates, or a sudden reduction in the availability of mortgage financing, causes a sudden, one-time, drop in demand. I don’t think that is going to happen either. Inflation today is likely to remain low for some time.


[Getting Graphic] Housing In The Circle Of Economics

February 27, 2006 | 12:03 am |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s). This week we have a two for one…

In this post from last summer The US Trade Deficit is Unsustainable [Axis of Logic] Bud Conrad shows how dependent the US housing market and US government deficit spending is on re-investment by foreigners. This is consistent with the negative savings rate. Americans are spending more than they make but this activity is expected to reverse as the housing market eases as consumers reign in spending and begin saving.

The following charts show the role of housing in the economic cycle.

A basic view of the economy as show by Axis of Logic: _Households earn the wages they spend on the goods and services from businesses._

Source: Axis of Logic

The next chart adds that _consumers spend a portion purchasing foreign goods. The foreigners then recycle the dollars they collect from this trade into the US government debt by buying Treasuries and into Agency debt of Government Sponsored Enterprises like Fannie Mae, which then provide money for housing._

Source: Axis of Logic

Albeit simplified, these charts help demonstrate that:

Foreigners have funded our housing boom and provided enough credit that the growing federal deficits have not driven interest rates up.


[Getting Graphic] Bay Area Change In Home Prices

February 21, 2006 | 12:01 am |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Click here for full graphic []



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