no third solution

Blogging about liberty, anarchy, economics and politics

Bursting Mortgage Bubbles

September 6th, 2006

I previously published a series of posts on the Housing Bubble and the fate of Serial Refinancers who have been, in my opinion, fueling the boom in real estate. The effects are noticed in Michigan. First there was the boom of the late 1990s and early 2000s, where we grew accustomed to double-digit property appreciation, set in motion by loads of easy credit on questionable terms. The inevitable results are predictable. Today, in the tri-county, Metro-Detroit area, listings are up 30% from a year ago, however, sales are down 15% or so. More listings. Fewer sales?

Under conditions where prices are free to rise & fall in accordance with supply & demand, the increased number of listings in Michigan would be met, other things being equal, with a general reduction in the prices of houses being sold. But there’s no bargaining room left because of the massive credit squeeze and rising interest rates. Homeowners can’t sell because the market values the property less than the Note due.

Recently, the boom-turned-bust in the real-estate market has caught the attention of Financial Times (article), via Mises.org and Austrian Economists:

“The biggest world investment boom in history, which we have been going through for the past decade, is becoming a bust, most notably in the US housing market.”

Over the last decade or so, many billions of dollars have been loaned out to purchasers, investors and real-estate speculators. The interest rates have been historically low, which has certainly enabled and encouraged the borrowing. But yet, this is a period in which personal savings are abysmal, at best. The investment boom coupled with the decline in the savings rate is characteristic of Austrian business cycle theory, and the situation reeks of interest rate manipulation.

What has the Fed done for you lately?

no third solution

Blogging about liberty, anarchy, economics and politics