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EScroogeJr (< 20)

Why housing bears are wrong (Part 7)



December 24, 2007 – Comments (4)

This part will be really simple and will not require a lengthy explanation, but it's an important piece of the puzzle. The United States is a country that exists in an economic equilibrium with other regions of the world. Every year it accepts hundreds of thousands of legal immigrants, hundreds of thousands of illegal immigrants, and is visited by tens of thousans of foreign investors seeking a reliable home for their capital. The purchasing power of these individuals is proportional to house prices in their native countries. And the price gap between the US and the rest of the world has never been narrower. Until recently, Americans could look down on Eastern Europeans, Middle Easterners and Latin Americans because the net worth was so disproportionate. However, most of that advantage was artificial because after you adjusted for purchasing power parity, the real wages were more or less comparable. It is only when you brought housing equity into consideration that an American tourist would become an object of envy to the locals who did not know how to inflate property values by mortgage financing, so to them a humble owner of a manufactured house in the Arizona desert looked like a Rotschield, a man who could buy every one of them twenty times over. But since then, foreign countries have discovered the secret of America's wealth. It's hardly surprising, because the secret was never hidden to begin with. It consisted of three simple parts: ban construction, introduce mortgages, and print money. So after decades of languishing in America's shadow and feeling poor, these "emerging economies" finally learned this simple trick and inflated their own housing bubbles. In addition, the commodities boom coupled with America's trade deficit have largely eliminated the exchange rate handicap, and for the first time in history, the property value gap has begun to close. Ten years ago, an immigrant would sell his house in his native country and arrive in America with the dollar equivalent of one year's rent. Today, such an immigrant will arrive with the dollar equivalent of a 40% down payment on a home in a most frothy American market. He will be a second-time, trade-up buyer by the American standards. Also, the composition of the immigrant population will never be the same as it used to be. The supply of fools abroad who believe in the American dream and look forward to starting from skratch and earning a house by hard work has dried up. You can thank globalization, the internet, and the increasingly uniform housing experience in their own countries. Today's immigrant knows full well that the social elevators are now shut down and that without a workable plan to buy a house, he has no business leaving his country for America. Those who arrive today know exactly what living accomodation they are going to buy and how they are going to afford it. So the future demand will essentially equal the number of immigrant households. And the same process that is increasing the purchasing power of immigrants also increases the purchasing power of foreigners who look at houses as an investment. The price gap has closed, but America still offers political stability that other countries are lacking. Nobody is going to commit all the money to any one country, but why not diversify a little bit into the American real estate, which lookes more safe and less frothy on a relative scale? And one other thing: in the past, many Americans used to settle abroad upon retirement. No longer. Given today's property values and exchange rates, it doesn't make economic sense. So expect the retirees to stay with us and to make their contribution to the demand rather than supply.

And then there's the political thing. Can you let some other country have more net worth per capita than you do? Of course not. So as the rest of the world is replicating our zoning regulations, our 30-year, zero down payment mortgages, our mortgage interest deductions and, of course, our wonderful printing presses, politicians in Washington, DC become increasingly desperate to usher in the next cycle of the housing bubble. They would try anyway, but seeing the other bubbles catch up with our bubble, they will try even harder.

Reason #7. Bears don't understand that the housing bubble has by now become global.



4 Comments – Post Your Own

#1) On December 24, 2007 at 4:14 AM, abitare (29.58) wrote:

It sounds like you have no idea what you are talking about.

"So the future demand will essentially equal the number of immigrant households."

Moronic. Most immigrants rent. They have no credit score, social security, proof of income, bank acounts, Work visas, many work for cash....

"American real estate, which lookes more safe and less frothy on a relative scale?"


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#2) On December 24, 2007 at 4:24 AM, saunafool (< 20) wrote:

First, I would suggest that the bears understand fully that this is a more or less global bubble. Check out any of the housing bear blogs and you will find stories from Australia, Spain, Mexico (checked out Condos in Cabo lately?), U.K., Ireland, Eastern Europe, Moscow, Mumbai, and many other places. I am a bear and I fully understand that cheap credit drove prices way beyond incomes all over the world.

Second, how does the fact that the bubble is global mean that the bears are wrong? If it is a global bubble, then the easy credit that has existed globally could very well dry up globally.

Isn't the drying up of credit the reason that the Fed keeps injecting tens of billions into the system (and the ECB as well), trying to keep the bubble afloat? If it doesn't work in the U.S. (where it sure looks like it isn't working), if it didn't work in Japan for the past 15 years (remember ZIRP?), why do you think it will work on a global scale?

All this easy credit has planted the seeds of inflation. The same globalization that you talk about has run its course in finding the lowest cost producers of consumer goods. Raw material costs are all rising rapidly, and eventually (no matter how badly the Fed tries to beat up the numbers otherwise), those price increases are showing up in finished goods. The Chinese cannot make cheap plastic chairs when plastic is no longer cheap.

So, inflation will find its way into the inflation numbers, interest rates have to rise, and until wages rise and/or housing prices return to a normally affordable price to income ratio, the housing market is toast.

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#3) On December 24, 2007 at 7:58 AM, floridabuilder2 (97.64) wrote:

 I read the economist and although they have commented on global housing prices for a long time, they were showing the increase of housing prices around the world and as you and sauna point out it was a global bubble....

 it will be interesting if the bulls can ride the santa rally to good gains over the next month... i for one am not sitting on the sidelines or short... i will ride on santa's sleigh too since the technicals switched to bullish last week.... ho ho ho

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#4) On December 24, 2007 at 3:34 PM, hall9999 (91.25) wrote:

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