I tried posting this elsewhere but I think I failed. It speaks to why this time is different
Of course it is a bubble!
During the discussion of bubble or no bubble, people tend to cite history and argue that we have seen housing correction in the past and never has there been anything like the crash currently forecasted for California housing. But this crash is not the product of nature, but the product of 9/11
Remember back in late 2000 and early 2001, how the dot com bubble had burst and the stock market began a significant slide. It was not coming back, and then 9/11 struck and the market began to crash. The only thing the United States could do to counter the looming financial disaster was to inject liquidity into the market place. I don’t think the Federal Reserve intended the real estate market to move so quickly, but it was a conscious decision to combat a financial panic after 9/11. Why else would an economy based on growing under employment create a trillion dollars in new wealth?
Like all attempts to control the economy by the fed, this one had un- intended consequences. Housing almost doubling in value was un-intended, but OK as long as it did not get too far out of control. The early increases in housing values must have been read as a positive result by the fed. It allowed people to borrow against their houses and raised consumer sales across the board. As it developed in late 2002 and through 2003, the federal reserve must have been delighted that they were able to stave off the financial disaster from 9/11 and create trillions of dollars in real estate value all at the same time. The stock markets were not only stabilized, but growing with gusto. People speculated with two and three houses, serially refinanced their own home and took full advantage of the liquidity injected by the artificially low interest rates.
But housing grew into the proverbial 200-pound guerilla. Housing had superheated, and interest rates were almost as low as they could go. Lenders had fully embraced the easy money and created financial instrument meant for investors that were being used by mom and pop to buy more house than they could afford. Housing had almost doubled in value by the end of 2005, most of the new debt was “special instruments” – arms, interest only, negative amortization and even more exotic loans. It was time to rein in the monster. Predictably, the fed thought they could fix it by simply un-raising interest rates, and that is where the pop is going to come from. The wide spread between short term and long term interest rates is narrowing.
Unlike when they lowered rates, there is now a lot of special financing out in the market place, and it will begin to have un- intended consequences in a few months. Rates will continue to rise, they must to continue to sell US debt to foreign investors. The dollar has been falling against all major currencies, and “they” will not continue to lose money on US government debt. This will start a rapid move out of real estate. The creative financing will accelerate the move out of real estate, and the bubble pops. This is already too long, or I would continue on why the bubble bursting in real estate is not going to cause a financial crash.