We have “Easy Al” Greenspan to thank for a new generation of reporters and economists as blissfully ignorant of the basic principles of economics as he was. Recall that during Greenspan’s tenure as Fed Chairman, he repeatedly referred to inflated property values as “wealth,” thereby encouraging millions of homeowners to spend up a storm with home-equity lucre that had fallen from the sky. We all know how that turned out. And now it’s threatening to happen all over again as 3% mortgages, courtesy of the Fed and of tax laws skewed pathologically toward housing “investment,” lift millions of underwater-property owners at least temporarily from the muck. So whom did Wall Street Journal report Conor Dougherty seek out for a quote on this happy turn of events? One Sam Khater, an apparent disciple of the Greenspan School of Free Lunch. Khater, who works for a firm called CoreLogic, showed himself to be Greenspan’s kinda guy – i.e., an economic slut – with this paean to consumerism: “Home equity is the biggest source of wealth,” he averred, “so if equity is increasing, that has a very large effect on household spending and consumer psychology.”
Khaner is unfortunately not alone in his belief that home values inflated by the central bank’s monetary wilding spree constitute wealth, nor that the highest purpose of such “wealth” is to buy furniture, appliances, automobiles and other big-ticket items on credit. Khaner’s economically destructive ideas would undoubtedly find support from the likes of Paul Krugman, Nobel prize-winning disgrace to the already dismal science. Krugman would have us believe Americans are not doing their patriotic duty if they fail to convert every dime of inflated property values into consumer goods. This pernicious idea reigns supreme in the thinking, not only of every economist, but among editorialists who are either too stupid, or too lazy, to depart from the conventional narrative.
Re-Fi Boom’s Downside
WSJ reporter Dougherty mentions gratuitously that “some” newly-above-water households are still too close to break-even to loosen up financially. What he and other reporters have completely missed, however, is that the supposedly healthy trend of refinancing at today’s super-low rates has soaked up a huge portion of Americans’ savings. That’s because, in order to do the re-fi, buyers have to bring enough cash to the deal to lift their equity stake to 20%. This means household savings that would otherwise have been available for investment in productive assets has instead gone into housing. As long as most Americans, economists and politicians continue to regard residential real estate as the best investment of them all, this country will never extricate itself from the economic mire. To make matters even worse, if and when the brazen stimulus prop beneath the housing market fails, real estate valuations – i.e., the bulk of America’s supposed savings – could disappear overnight. This is not a mere possibility, in our estimation, but a likelihood. We continue to predict a relapse in the housing market that will reduce property values by an additional 35% on top of the 33% losses that have already occurred . If we were to cite one reason for our certitude about this, it is the surreal boom in property prices in New York City, where $100+ million penthouses are under construction; and in the Bay Area, where housing prices have risen far above the threshold of affordability for nearly all workers.
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less, more, none at all?
what do you call the Q’s then?