Class, repeat after me, SoCal affordability is Abysmal
Chuck Ponzi February 27th, 2006
If you haven’t gotten the notice, L.A. housing is the least affordable housing market for the 6th consecutive quarter, the Daily News Reports.
The reason for the affordability issue?
Rising interest rates, while still low by historical standards, also helped drive down affordability, the association said.
I think we all got the memo on that one. Although, there are some who are doubting whether interest rates will ever rise again. They have been so low for so long; maybe this is just the way the 21st century works?
I wouldn’t bet on it.
A good bet would be in with the term “Debt Monetization“. Readers would do good by reading up on this oft misunderstood Federal Government/ Federal Reserve relationship.
Essentially, the government buys its own bonds by printing money. Under normal circumstances, this causes inflation. Does anyone question why the M3 is being discontinued?
Bill Fleckstein stomps all over this topic in a write up about inflation. His question is valid: If there’s no inflation, why do we fight it?
This brings us full circle back to housing. Interest rates (which are very low anyay) are helping to keep the credit and housing bubbles intact. If Bernanke wishes to give a soft-landing, he can only through inflation. If our assets are inflated, the only thing left is our income. This would have a double benefit of additional income tax for the federal government on top of easing us into pricier housing; helping to restore a more balanced budget. However, because much of the entitlements are based on inflation indexed amounts, we are really going to burn out our printing presses trying to get out of this one.
What’s interesting is in fact, the denial of inflation as a problem. January’s CPI was +.7% (annualized to about 9%), and the bond market rallied. Are people really willing to lend money at 4.5% just to lose another 4.5% per year? Bill has a theory:
Folks have done so well with their homes’ appreciation and all the money-printing that, while prices are up, they’ve chosen to ignore inflation, as it’s been “good” to them. Thus, rising prices do not bother them.
My opinion? I think this has more to do with debt monetization and foreign funds holding down the cost of borrowing US dollars; creating a kind of rickety scaffolding upon which to build housing wealth. One trip-up and it all comes tumbling down on interest rates. I also believe that interest rates (especially to consumers) can move much faster than is generally believed by the masses. Could we have a 2% increase in prime in a matter of a week? You bet. Any loss of confidence (especially with respect to inflation) could cause mass exodous from US dollar denominated bonds. The problem with this scenario is that the rest of the world is more or less built on the US economy. We are the buyer of last resort. When we don’t buy… noone else will have the money to do much else.
This leads us to Southern California affordability. Only 2.3% of the homes are affordable to the median income household. Our writer at the daily news has a grasp on this when the story closes with the line from Leslie Appleton-Young:
“Most homeowners could not afford to buy their homes today if they had to,” she
said.
So it is. Welcome to the American Dream.
I disagree with Contrarian Chronicles on this one. While it is possible that inflation could occur, Bernanke has always said that job growth is the primary concern and that this must be continued through the effort to make the dollar strong. I do see him trying to stop inflationary pressures. Look at how little inflation we have considering the enormous influx of easy money in the past three years. If you guys don’t remember inflation in the 70’s, prices were being changed weekly or more. That is real inflation. I look for downward pressure on wages continuing as America seeks to be competitive with other economies. Add to this union busting and outsourcing and you have downward, deflationary pressures. So, I believe, though it could be otherwise, that short term rates will continue to rise, and arms will adjust, and Bernanke will clean up the mess of the housing bubble bursting just as Greenspan cleaned up the dot com bust. However, where the next bubble is formed is anybody’s guess.
when you have china pegging yuan artificially low, walmart squeezing last peeny out of manufacturers, labor in china and india at a fraction of the cost, you will low inflation, infact cost of good produced is going down.
also inflation is how you measure it? if as Contrarian Chronicles says, any rise in the price of an item is counter acted by replacing it with an item of lower cost, inflation will never go up.
As it is Food and energy are taken out!. because gas cannot be replaced by anything else, neither is milk!
Gary Anderson,
Well said. It’s easy to debate either side of this. While Bernanke is an unknown quantity now, I think pretty much whatever he does will surprise someone.
I am hoping for a simply asset deflation personally, but it’s not clear since he has made his intentions clear that he tries to mop up afterwards.
BTW, I’m not sure that with our RE-centric economy that you can protect “jobs” with higher interest rates. In fact, lower interest rates would increase damage the dollar (which needs to be hurt to keep jobs here). It would have the double-whammy of bringing us off of the debt-induced home binge of the last decade.