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The Fed sees bubbles -- and keeps them secret
moneycentral.msn.com ^ | 3/14/2005 | Bill Fleckenstein

Posted on 03/14/2005 9:33:12 AM PST by Destro

The Fed sees bubbles -- and keeps them secret

In public, the Federal Reserve says there's no housing bubble. But the Fed also said there was no stock market bubble in 1999. Behind closed doors, the governors knew there was.

By Bill Fleckenstein

Our Fed chairman has argued (most recently last October, in a speech to America’s Community Bankers Annual Convention) that for a variety of reasons, real estate cannot experience a bubble. Yet anyone with a pulse can see wild speculation taking place all around them.

At the height of the stock-market bubble in the first quarter of 2000, it was becoming progressively more difficult for me to adequately describe (in my daily column) the market action. So, in an attempt to capture the mood of the day, I began to share stories of insane behavior that were being e-mailed to me by regular readers. I dubbed this series "The Mania Chronicles," and you'll find excerpts from it in Chapter 3 of the Archives section of my Web site. (Readers of the Contrarian Chronicles can access the site for the next week by using the password/username: mania/mania.)

The kind of maniacal behavior that we saw then toward stocks and which we are seeing now in real estate tends to come at the end of a speculative mania. It is almost always coincident with rising supply, which helps to satiate the inflated demand.

As I have pointed out, the true danger in the real-estate bubble is that folks are often speculating with more than 100% leverage. When it all ends (and though we don't have a timeline for exactly when that will be), the banking system and other financial entities will be left with the bad assets, which will severely impact the economy.

(Excerpt) Read more at moneycentral.msn.com ...


TOPICS: Business/Economy; Editorial; Government; News/Current Events
KEYWORDS: realestatebubble; thefed
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To: RockinRight

LOL - The problem is so few live in fly over country - which is why its flown over!


21 posted on 03/14/2005 10:03:07 AM PST by Destro (Know your enemy! Help fight Islamic terrorism by visiting johnathangaltfilms.com and jihadwatch.org)
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To: RobRoy
They will eventually sell if you bring the price down far enough. But that puts tremendous pressure on the rest of the market. Also, if you have to sell below your mortgage amount you are screwed there too.
22 posted on 03/14/2005 10:04:34 AM PST by OneTimeLurker
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To: Destro

40% of all new mortgages are adjustable rate mortgages. The pin that breaks this housing bubble may very well be the rising interest rates that are to come. Thus far, the Fed has steadfastly refused to raise interest rates to reasonable levels. With 50% of American government debt being held by foreigners and with the dollar on a slide that shows no sign of ending, this policy cannot last forever.

It's coming.


23 posted on 03/14/2005 10:06:29 AM PST by Old_Mil
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To: Old_Mil
"40% of all new mortgages are adjustable rate mortgages. "

I did not know that. My dad viewed adjustable rate mortgages with disdain - remembering the 70s?

24 posted on 03/14/2005 10:09:34 AM PST by Destro (Know your enemy! Help fight Islamic terrorism by visiting johnathangaltfilms.com and jihadwatch.org)
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To: OneTimeLurker

How exactly do you sell a house for less than you owe on it?


25 posted on 03/14/2005 10:12:20 AM PST by RobRoy (Child support and maintenence (alimony) are what we used to call indentured slavery)
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To: John Jorsett

Bottom line: people will always need a place to live. Conversely, people don't always NEED to buy internet stocks. So comparing the internet stock market bubble to a (speculative) housing bubble is apples/oranges.

If Fleckstein did his research, he'd see that naysayers like him were lamenting the "disasterous" housing bubbles of the 50's and 60's as well, saying stuff like: "the economy can't sustain the cost of a house going over $5,000."


26 posted on 03/14/2005 10:13:46 AM PST by sfrepub
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To: RobRoy
How exactly do you sell a house for less than you owe on it?

By taking a serious bath on it.

27 posted on 03/14/2005 10:13:55 AM PST by dirtboy (Drooling moron since 1998...)
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To: RobRoy

"How exactly do you sell a house for less than you owe on it?"

You have to come up with equity to sell. That being said, the CC company's debt is behind the mortgage, as the mortgage is secured and the CC is unsecured. So if there is really no equity in the house I guess you probably wouldn't have to sell.

If you are totally insolvent, this bankruptcy bill probably wouldn't effect you. If you are trying to restructure and get things back in order it will be far more difficult.


28 posted on 03/14/2005 10:16:39 AM PST by OneTimeLurker
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To: Huck
Gspan tried to talk the markets down with his comment but apart from a 1-2 day effect, the markets did exactly the opposite, and began their insane runup to Y2K with only minor corrections along the way.
29 posted on 03/14/2005 10:17:59 AM PST by Attention Surplus Disorder (You get more with a gun and a smile than just a smile itself!)
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To: Destro
My dad viewed adjustable rate mortgages with disdain - remembering the 70s?

Your dad is a wise man. Honestly, I don't think I'd even consider an ARM with interest rates at 10%,12%, or 14%. You can always refinance a fixed rate mortgage if rates fall enough to make it worth your while to do so. On the other hand, if you're holding an ARM you have no hedge against rising rates.

ARM's are simply ways for banks to protect their profit margins - and for people to buy houses they can't afford and shouldn't be buying in the first place.
30 posted on 03/14/2005 10:19:51 AM PST by Old_Mil
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To: dirtboy

I bought a walk-up co-op unit in Yonkers NY last year for $48,500, I have put about $7,500 in improvements since. The same type unit closed last week for $140,000. My unit could go for about $165,000. Anyone who says there is no bubble is crazy. The only problem is that the record levels of immigration keep the demand through the roof, no pun intended.

It is simply impossible for young people starting out to even consider home ownership without a huge hand from the parents or moving far away.

Its a shame. Although flyover country may be sane and rational, most of the people in this country live in or near big cities where the prices are insane and irrational.


31 posted on 03/14/2005 10:21:38 AM PST by chris1 ("Make the other guy die for his country" - George S. Patton Jr.)
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To: Destro
In public, the Federal Reserve says there's no housing bubble.

There are 2 relatively new factors that make real estate more valuable that in was in say 1997. Congress passed a law allowing you to exclude $500,000 in capital gains(for a joint return, $250,000 for a single filer) on your house if you lived in it at least 2 of the last 5 years. Congress also eliminated the rollover requirement.

Also, extremely low mortgage rates have allowed people to borrow say, $250,000 at 6% for the same monthly payment as a $204,000 mortgage at 8%. The largest increases in prices have occurred in those bluest of locations where zoning restrictions and excessive regulations have restricted new supply.

32 posted on 03/14/2005 10:21:38 AM PST by Toddsterpatriot (Protectionism is economic ignorance!)
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To: dirtboy

But you don't own the house. The bank does. They have to approve the sale.


33 posted on 03/14/2005 10:22:36 AM PST by RobRoy (Child support and maintenence (alimony) are what we used to call indentured slavery)
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To: RobRoy
But you don't own the house. The bank does. They have to approve the sale.

Well, if the choice is between a sale at market price or a sheriff's sale because the homeowner has to move, I can guess which decision the bank will make.

34 posted on 03/14/2005 10:24:51 AM PST by dirtboy (Drooling moron since 1998...)
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To: Old_Mil
and for people to buy houses they can't afford and shouldn't be buying in the first place.

I think you touched on it - people are buying houses that are priced beyond their means (even though the house is not worth the price) because of easy credit. The artificialy low rates thus subvert the market - or something like that...

35 posted on 03/14/2005 10:24:58 AM PST by Destro (Know your enemy! Help fight Islamic terrorism by visiting johnathangaltfilms.com and jihadwatch.org)
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To: dirtboy

Depends on the price. But I will say this, either in large quantities in a community is going to have an inpact on prices - and banks.

And what if the bank decides to just hang on to all those homes and rent them out? I'm just wildly speculating here, of course.


36 posted on 03/14/2005 10:29:41 AM PST by RobRoy (Child support and maintenence (alimony) are what we used to call indentured slavery)
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To: RobRoy
I was wondering myself if the bankruptcy changes are being handled as a "must get done" before the bubble bursts.

I don't know.... it's just as likely to have the opposite effect.

Note how housing sales have risen to even higher levels as rates have begun to rise? It's likely to be a bunch of people trying to "buy now before it's too late and rates go up!"... this MAY sap demand significantly later on (essentially compressing buying on the front-end of a rising rate cycle).

The bankruptcy legislation COULD do something similar as hundreds of thousands of people who were trying to fight off going bankrupt give up "before it's too late".

37 posted on 03/14/2005 10:29:42 AM PST by IMRight
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To: sfrepub

I recall housing prices dropping 30% in Northern Jersey (where I lived) after the last real estate run up. In other places, prices may just flatten, but you can have a bubble. People are speculating on houses in my area now, getting 2nd homes and leveraging assets to move up. A real estate bubble can be real...


38 posted on 03/14/2005 10:32:33 AM PST by Axolotl
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To: Toddsterpatriot

Good post...monthly payments are everything. If rates go up, people can't afford as much of a house. The impact is greater on the upper end for statisical reasons (fewer buyers in the higher end moving down).


39 posted on 03/14/2005 10:37:15 AM PST by Axolotl
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To: Axolotl; sfrepub
I recall housing prices dropping 30% in Northern Jersey (where I lived) after the last real estate run up.

There's no question that there CAN be regional real estate bubbles. But it's almost impossible on a national level (for the reasons sfrepub cited and more). Areas like the DC suburbs, much of California, etc cannot maintain the growth rate they've been seeing, but the numbers haven't been so out of whack nationally.

It's supply and demand. And unlike stocks, the demand for housing CANNOT go to "zero", it can hardly decrease at all... especially since they are "durable", but not eternal.

40 posted on 03/14/2005 10:37:49 AM PST by IMRight
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