21 June 2009

Expect Another US Real Estate Bubble Shortly

Robert Shiller explains in the Gulf Times why another real estate bubble is likely to be heading our way before long.
The kinds of expectations for real estate prices that have informed public thinking during the recent bubbles were often totally unrealistic. A few years ago Karl Case and I asked random home buyers in US cities undergoing bubbles how much they think the price of their home will rise each year on average over the next ten years. The median answer was sometimes 10% a year.

If one compounds that rate over 10 years, they were expecting an increase of a factor of 2.5, and, if one extrapolates, a 2000-fold increase over the course of a lifetime. Home prices cannot have shown such increases over long time periods, for then no one could afford a home.

The sobering truth is that the current world economic crisis was substantially caused by the collapse of speculative bubbles in real estate (and stock) markets – bubbles that were made possible by widespread misunderstandings of the factors influencing prices.

These misunderstandings have not been corrected, which means that the same kinds of speculative dislocations could recur. _GulfTimes_via_SimoleonSense
The US government for its part appears to be stoking the flames for another real estate bubble. The Obama - Geithner financial regulations are set to inflate Fannie Mae, Freedie Mac, and the Community Reinvestment Act back up to catastrophic proportions, just as occurred in the last days of the Clinton administration.
“Starting with the Community Reinvestment Act of 1977, that was given more teeth during the Clinton administration, Congress started intimidating banks and other financial institutions into making loans, so-called sub-prime loans, to high-risk homebuyers and businesses.

“The carrot offered was that these high-risk loans would be purchased by the government-sponsored enterprises Fannie Mae and Freddie Mac. Anyone with an ounce of brains would have known that this was a prescription for disaster but there was a congressional chorus of denial,” he added.

“The financial collapse of Fannie Mae and Freddie Mac is not a failure of the free market because lending institutions in a free market would not have taken on the high-risk loans,” said Williams. “They were forced to by the heavy hand of government.” _CNS
As Steve Sailer points out, the Obama administration is ratcheting up pressure on lending institutions to provide loans to unqualified borrowers. In fact, under Obama, such pressure is likely to be much higher than ever before. If affirmative action banking can solve problems created by affirmative action banking, then Obama's thinking is quite sound.

Expect a whole series of financial bubbles during the Obama reich, each somewhat more inflated than the previous one.

Bonus Link: Another look at why the Obama stimulus plan is rapidly inflating debt at the cost of future economic growth. It's what you get when you elect a clown to do a job that requires someone with more qualifications.

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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