That’s It

by Bill Bonner
by Bill Bonner

Well, that's it. It's now official. The bubble in real estate is almost at its end.

How do we know? Alan Greenspan says so.

"Greenspan says housing boom is nearly over," explains a headline in the NY Times.

"Experts warn debt may threaten economy," adds the Washington Post.

My, my...officialdom is becoming rather gloomy.

"Whenever the government tells you to do something," says our friend Pierre, "It's generally a good idea to do the opposite."

Now, the government and the experts are telling us to be careful. Does that mean it's time to be reckless?

Having brought the cauldron to a bubbly boil, officials come out like missionaries at a cannibal picnic. They toss in an ice cube or two, hoping to drop the temperature a bit before they are thrown into the pot.

"History has not dealt kindly with the aftermath of protracted periods of low risk premiums," Greenspan said last week. "Such an increase in market value is too often viewed by market participants as structural and permanent."

He was referring to house prices. Investors dance around the fire, convinced that high house-prices are not only here to stay, but that further price appreciation is practically guaranteed.

Our old friend, Scott Burns, tells us that house price gains have added $4 trillion to the nation's "wealth" since 2002. We put the word, wealth, in quotation marks because we wish to remind readers that house price gains add nothing – not a penny – to the nation's real wealth. Still, on the balance sheets of American households $4 trillion was added during the last three years.

"Compared with the median values of the last 50 years, these are big shifts. Viewed statistically, values are at extremes. The median value of houses as a percent of net worth was 26.8 percent. That's 2.6 standard deviations from the current 36.3 percent value....

"The bottom line: Collectively, we're heavily mortgaged in a period of extreme prices."

Mr. Greenspan is probably a little embarrassed... and worried. The party has gotten disgracefully out of control. And the invitations all bear the Fed chairman's name! What's worse, if things don't work out the way the savages hope, they're likely to turn on the Fed chief himself.

Markets make opinions, not economists. The Fed chairman's below-market lending rates helped create the hot property bubble. His obscure and chilly words are not likely to lower temperatures among the savages. For that, it will take the cold shock of a real bear market.

August 31, 2005

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21^st Century.

Copyright © 2005 Bill Bonner

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