A Stitch in Haste

One of the leading current debates among real-world economists these days is whether we are in a national housing bubble, a collection of local bubbles, or neither. The Wall Street Journal reports: (temporary free link)

The number of areas across the U.S. with real-estate booms grew nearly two-thirds last year to 55, the Federal Deposit Insurance Corp. said, warning that these booms may be followed by busts.
...
Adding recent data and analysis to a study released in February, FDIC economists Cynthia Angell and Norman Williams repeated their view that credit-market conditions may make current housing-market booms different than past ones, which have tended to taper off rather than bust.
...
"The notable expansion in the number of boom markets in 2004 suggests that national factors could be helping to drive home prices higher," the updated study says. "If national factors are coming more into play, then clearly the most important factors to look to would be the availability, price and terms of mortgage credit."

Okay, and how’s the price of credit these days?

In coming months, consumers can expect more of what they have seen for nearly a year -- a gradual increase in interest rates controlled by the Federal Reserve.

That was the message delivered by the Fed when on Tuesday policy-makers for the eighth time increased a key interest rate by a quarter-point, pushing the federal funds rate up to 3 percent.

That increase was immediately matched by a quarter-point increase in commercial banks' prime lending rate, the benchmark rate for millions of consumer and business loans, which moved up to 6 percent, the highest that rate has been since the fall of 2001.
...
Many analysts believe 30-year mortgage rates, which dropped for a fourth-consecutive week to 5.78 percent last week, will begin rising in the months ahead and will likely end the year around 6.5 percent, still low enough to likely keep sales of both new and existing homes near last year's record levels.

I don’t know where that last assertion comes from -- there’s quite a difference between 5.78% and 6.50%. But that’s just the near-term trend anyway; what’s the long-term outlook for credit markets?

The U.S. Treasury Department on Wednesday said it is considering whether to bring back the 30-year bond, saying it would announce its decision in August.
...
The long end of the Treasury curve sank on the news. By 11:45 a.m. EDT the 30-year bond was down 2 6/32, or nearly $22 for each $1,000 invested, at 111 11/32. The yield surged to 4.62%.

I hate the idea of insulting anyone’s intelligence, but here’s how it works: federal deficits mean increasing the federal debt. Increasing the federal debt means issuing more treasury securities. More bond supply equals lower bond prices, and lower bond prices mean higher interest rates. Sugar-coating and political spin aside, the government will almost certainly be bringing back the 30-year bond simply because it needs to borrow more to finance these disgraceful (and Republican) deficits, and needs more types of bonds to sell to accommodate that increased supply. Bottom line: Interest rates are almost certainly going to be rising significantly for a very long time to come. (Anyone remember the “crowding out” debate back in the 1980’s?)

We blog the dots -- you connect them.

Louis Rukeyser used to say that the only sure thing on Wall Street was that if you bet against the American economy, in the long run you would lose. I would rephrase that slightly: The American economy can never be beaten by an external competitive threat; it can only be corroded from within by reckless government policies, especially irresponsible fiscal policy.

I blogged previously that a collapse of the housing market could be one of the economic catalyzers of the coming libertarian-conservative schism within the Republican Party. Is a housing bust coming at all, and if so, is it coming soon? And will it be enough to get libertarian Republicans to turn to their conservative Republican counterparts and say "Enough!"?

We blog the dots -- you connect them.