In the real world, the most important task facing each of us right now is that of grasping that the absurd abundance of energy and resources that Americans enjoyed in the second half of the 20th century was anything but normal. A cascade of fortuitous events handed the American people of that period a huge surplus of energy and resources, orders of magnitude greater than any comparable example in history. Of course we squandered most of it, and picked up habits of extravagance and waste that will have to be unlearnt painfully as the last of the surplus fades away. To accept that task, though, is to abandon habits of thought and action that have pervaded American culture throughout living memory. The habits of thrift and self-discipline that our forebears learned in the school of hard necessity—“use it up, wear it out, make it do, or do without”—drowned in the flood of mostly unearned wealth that saturated American society during this nation’s age of empire, and every detail of contemporary American culture militates against a return to those sane but unwelcome standards.
To my mind, unless economic activity increases and real wages start to rise, the housing market is bound to crash in due course, and the banks with it. Such rises in house prices are simply not sustainable in a flat economy with falling real wages. Encouraging house price rises under such circumstances is unbelievably stupid economic policy.
On the insanity of the 2000s housing market
On Friday, I wrote about the New Home Sales Report that disappointed many investors. That, coupled with today’s poor Durable Goods report, likely means the Fed is going to have to rethink the size of the potential taper. On another note, these two datapoints have to be bullish for Yellen’s prospects to be named next Chairman over Summers, no?
No matter, looking into historical Housing Starts and Supply data, it is pretty clear just how insane things got though the 2000s.
In today’s housing market, we’ve seen steadily rising prices across the board, which is great news for the homeowners who found themselves underwater post-crisis. Much of that can be attributed to the lack of supply.
However, between 2000 and 2006, the supply was at roughly the same level it is today, which is to say, rather tight. But look how many starts there were! I don’t have the demographic numbers right in front of me, but no way household formation was coming anywhere near that close.
So I suppose the main bullet point here is, how did most folks not see this coming?