Contrarian view to the housing bubble

[qcomer]

Hi,

I think most of us understand that there is actually a liquidity or money supply or credit bubble rather than a housing bubble to be exact. A friend of mine believes that renting money (owning house) is better than renting housing (owning money) right now since he is very bearish on the US dollar (money). As per him, since this is essentially a dollar/money bubble, it doesn’t make sense to keep accumulating more of that money or dollar. This is also the reason why he thinks prices of assets he owns (house) will not come down but the price of asset that I own (dollar) will come down to compensate for it. What doyou guys think?

[qcomer]

Also, if this is essentially a credit bubble, there are 2 ways for the US Govt to get out of that increased liquidity bubble.

1) Keep increasing interest rates and tighten money supply irrespective of the economy until the resulting increase in savings brings back the equilibrium in liquidity. This will help the “savers” like most of us but will kill the commodity bubble (housing, metals, etc). This option, however, maybe somewhat unpopular.

2) Naturally, the second way is that since there is a lot more greenback out there, its value should come down. So Govt doesn’t increase rates further and instead chooses to cut rates back and let the dollar decline. This will also boost US exports, help reduce the huge trade deficit and reduce our foreign debt automatically. However, this will be very bad for savers like most of us with most of their savings invested in CDs, MMs or other dollar denominated securities. It will boost people owning hard assets like homes and may well save housing from a hard landing.

Consequently, if you tend to believe that point # 2 is more likely of the two scenarios to happen then what are the strategies or backup plans for such scenario, if it happens? Shouldn’t we have some backup plan for scenario # 2 or is it a very unrealistic scenario? Gold and PMs seem to be over valued due to lot of speculation right now. So where to put money then? Foregin Currency ETFs or Foreign Currency CDs by EverBank or buy Treasuries of countries like Canda? Or put money in Global Bonds Funds? What percentage should be invested in foreign currencies? Please comment as I would love to hear what more senior and experienced members on this board think who have actually seen previous recessions or bubbles.

[FormerOwner]

I’ve still got a lot to learn about macro-economics BUT wouldn’t #2 end up increasing long-term mortgage rates anyway since bond holders would require higher interest rates for holding dollar-denominated notes? Long term bond rates drive long term mortage rates as far as I know. That would still kill the housing market by driving up monthly mortgage payments. Any thoughts?

[Bugs]

It’s a two-headed coin, and for the fools it doesn’t much make any difference which side comes up. The problem with the devaluated dollar scenario is that everyone will get hurt by it, even those who were not so foolish as to let themselves get overextended. An outright price correction is much more fair because it zeroes in on the weak.

[powayseller]

Why does your friend think there is a higher probability of depreciation in the US$, than in housing? Does he believe housing prices will stay flat?

Why do you have to put your money in US$, when you could buy stocks, euros, Canadian $, yen, gold, oil, precious metals?

I also believe the dollar will depreciate, and would like to diversify, but I don’t know if it will, or by how much. However, housing prices are falling. That is a fact. Your friend seems to be missing something?

[Author]

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