There are several problems with this analysis.
(1) The alleged housing bubble.
There is no housing bubble. There are more people living in America and jobs are becoming more and more concentrated in a handful of states and urban centers.
Then how do you explain the run-up of housing prices in remote areas, where there are no jobs, like Idaho, or the Central Valley in California?
There may be regions not effected by the Bubble, bit it's there, it's huge, and to deny it is insane. We had the SAME denials happening before and during the .com collapse.
"Therefore, in many housing markets prices have gone up considerably - this is not a bubble, it is a natural outcome of the law of supply and demand."
Not true. New housing is going up EVERYWHERE to support the "buy a home regardless of the risk" mania that's been happening. Vast tracts in Arizona are being built up with new McMansions (where there are no jobs).
"In my town, housing prices have gone up 50% in the past two years. This is due to a combination of two factors that are being replicated over much of the country: (a) my town is conveniently located within an hour of NYC by train, bus, ferry and highway, (b) zoning laws limit the amount of land in my town that can still be developed."
That's your town, it's anectdotal and not relevant to the national market or the issues at hand here. The problem is not supply and demand, as much as it's that ANYONE, literally anyone can get a loan right now, under extremely risky terms (no down, interest only, negative amoritization), and the frenzy to flip houses in the rising market brought in the speculators, who drove prices through the roof.
"Demand has grown and supply has remained relatively static."
In YOUR area. Look at the rest of the country, and the amount of new construction, lots demolsihed and rebuilt with 2 houses in the place of one, massive condo development in places like Florida and California. The mantra that's been thrown around of "They're not making any more land" is damning in the face of the amount of new housing available on the market, as developers have gotten restrictions eased and zoning changed. The same thing happened in the RE boom in CA in the late 80's - they built EVERYWHERE, and back then claimed a housing shortage, too.
Inventories have been rising slowly over the last few months. Read the facts. Some areas are still riding a price rise, but many markets slowing, and inventory is rising.
"This leads me to point
(2) America's savings rate is berated as low compared to high-savings countries like Japan.
However, most of Japanese savings are held in postal accounts - the US equivalent of passbook savings accounts. They pay minimal interest and are about the least profitable investment imaginable."
Irrelevant to the atter at hand - and ironically, teh Japanese housing market is a good example of what could happen here.
"A very large number of Japanese and European people rent all their lives and never own a home."
And that applies to us, how?
"In contrast Americans save their money in their homes, which are a good and profitable investment with a higher return than passbook savings accounts."
In the past, sure, equity in housing was king. But now, with refi's and the new "creative" lending, houses are ATMs, and people have been spending their equity on paying bills, buying plasma TVs and SUVs, and buying speculative housing, to flip it a year later. I have 3 relatives who spent ALL their equity in their houses, because they believe in a year or two, their property will be worth twice as much or more - what they failed to see, is the markets have peaked, and now with the Fed raising rates, all those creative loan packages are going to start hurting people badly.
"Yes, there are plenty of Americans who save nothing in a bank or in a home and live off maxed-out credit cards and from paycheck to paycheck. These peopel are not the majority and there are plenty of them in every developed country, not just the US."
I would say the opposite - I'd say that they represent the majority right now in a big way. Everyone, and I mean everyone from CEOs to $10 an hour Walmart employees are trying to play the RE game, and are still buying into the insane markets, expecting huge returns two years from now. RE agents and the reps of that industry have been helping these people to get into the game with inane blather about RE NEVER losing value, and that prices will continue to rise, and "Get in now, or be shut out forever!"
I'm saying we're facing a bigger bailout by the feds 5-10 years from now that will make the S&L bailout look like chump change.
I'm thankful that I saw the light of day this year and refused to be led to the slaughter with everyone else, and signed my soul onto a no-interest loan for a $200K house, but paying 600K. I have decent savings, pay less than 1/3 of my salary in rent, save the rest, and I'm betting your statements will be proven drastically and horribly wrong over the next year. A LOT of people are going to get hurt, but you keep claiming there's no bubble. That kind of talk really helped teh .com burst, did'nt it?
(1) On the alleged parallels to the dotcom collapse: the dotcom collapse was quite different, since the assets in question during the dotcom bubble were shares in companies with nebulous business plans, not ownership of hard, usable assets like homes.
(2) Rising inventories: inventories are rising but so is the population.
While I agree that many people misread the demand curve and believe that a 600K house bought today will be an 850K house next year, this does not mean that the 600K will slump to 300K. Housing demand may grow more slowly, but the amount of people who already want houses will not diminish significantly.
(3) There is a difference between people who speculate on real estate with little or no money down and people who save money by building up equity in high-quality real estate.
While there is a large and vocal minority of real estate speculators, the majority of Americans own their investment real estate for residential or rental purposes and not to flip in the market.
(4) You say that there is overbuilding in FL, CA, etc. - but the fact is, the structure of the job market is changing.
10 years ago a McMansion 75 minutes from Phoenix would be considered ridiculous. Now it may be a valuable home for a wealthy commuter.
I will also add re: the FL, TX, AZ, NC, SC, GA markets that more and more seniors have the money to buy retirement homes and condos in these states. There are employment, immigration and internal migration factors that are creating structural changes in the housing market.
Bottom line: judicious investment in home equity is a sounder savings strategy than a passbook account and will continue to be so. There will be dislocations in the housing market in certain areas, naturally. But the dotcom analogy is quite stretched.
Do you really mean 'rent'? I call my mortgage payment 'rent' just from habit, but I would say rent is a waste of money compared to a mortgage payment.
Agree with every thing you say. 70% of Americans live paycheck to paycheck.- Scary
Also, I think I read 35-40% of all homes sold now are purchased by people as 2nd homes or investment properties (flipping). Even scarier
Great counter analysis. There are other indicators these people are missing including orders for new construction material and drops in transportation markets. I don't think the meltdown will be catastrophic though. Yes alot of foolish people will get burned because they are riding the debt cycle and don't see the cliff ahead.