|
May 27, 2005
Long Treasury rates stayed in a 4.00-4.09% band, and mortgage rates grudgingly acknowledged the improvement, dipping just below 5.625%.
Economic data played no role. 1st quarter GDP was revised upward to 3.5%, as anticipated, confirming that an apparent early-spring slowdown was a mirage.
All week long, the financial markets were dominated not by data, but by chatter. The loudest: housing, housing, housing, bubble, bubble, toil and TROUBLE!
Mr. Greenspan turned up the eye-of-newt volume: "We don't perceive that there is a national bubble, but it's hard not to see... that there are a lot of local bubbles."
Oh, really. This from the man who as late as 2000 refused to use the words "bubble" and "stock market" in the same sentence, except to say that a bubble could only be detected in retrospect? That markets must be trusted? That the Fed should not attempt to intervene, and instead should wait, repairing any damage from a blown bubble after detonation? That same guy, who wouldn't snip margin loans?
Yeah, that guy. He has aged visibly; his exceedingly precise use of language departing. Perhaps he didn't quite mean what he said. In all this housing shouting, there is a terrible problem with terminology. A real bubble is price-bloat followed by a crash; not a mere "correction" (a 10% drop in price is the limit for that euphemism), not a "retracement" (a one-third decline), but an honest-to-Pete crash. Authentic bubbles: the Nasdaq is still 60% below its bubble top; the Nikkei fell eighty percent from its 1989 peak at 38,134, and today still languishes 70% below.
Are several local housing markets over-extended? Sure. Are some current rates of appreciation "unsustainable?" Of course. No market for anything can compound at 20% per year for long. But, are home prices poised for the 33%-plus decline required to class as a bubble? Not even the Chairman thinks so, pointing to losses ahead only for late-comers to the party. Housing is NOT in a bubble; in places it is overdone and due to correct, painfully for some, but not free-fall.
A useful housing discussion (which you could not find this week in the popular financial press) would ask, by what natural means might hot housing markets cool off? If normal, cyclical brakes are unlikely, who might intervene and how?
Natural slowdowns tend to follow economic slowdowns, local or national, and not much else. It is possible that San Diego will wake one morning to a Sherwood Forest of "For Sale" signs and no takers at too-high prices. Possible, but we have no predictive tools to measure the moment (honestly, neither does Mr. Greenspan have tools to measure housing "unsustainability" -- suspicions and trends, but no laws).
The Chairman used one key code word in reference to housing: "froth." Only once before in my lifetime has a Fed Chairman used the F-word with malice aforethought: Paul Volcker in 1979. Froth to a Fed Chairman is fire to Smokey. Much as the Chairman might like to stamp it out, he has no effective options. A year's worth of hikes in the overnight cost of money from 1% to 3%, more coming, and mortgage rates are lower now than when he started. If he jacks rates enough to cool the hot housing markets, he will freeze solid the ordinary majority, and the economy.
The jawbone won't work -- bubble-shouting didn't slow the stock market, and won't slow California or Florida. There is an evident regulatory offensive underway, as several warnings have gone out to banks to tighten up loan terms, but the modern supply of mortgage credit comes from buyers of mortgage-backed securities. On-the-street mortgage hawkers like me will make any loan the Street will buy, and the Street will buy anything it wants, no matter what bank regulators have to say.
I think the excess heat in housing will have to dissipate of its own accord. Further, some well-intended attempt at interception could make the cool-off more dangerous than it need be.
|
