Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why U.S. Housing Market Has Stalled — And Why Everything Else Will Follow

Housing-Market / US Housing Apr 28, 2014 - 10:02 AM GMT

By: John_Rubino

Housing-Market

It’s not easy being a mainstream economist. You spend your life building models that become your professional identity. And when those models fail to describe and predict reality, you’re left wondering about the meaning of it all.

The latest case in point is US housing. Keynesian economic models say that if you lower mortgage rates you get more houses bought, sold and built. A nice, simple piece of cause and effect. But today’s mortgage rates are at levels that would have incited a buying frenzy a generation ago, employment is rising — and home sales, home building and mortgage originations are all flat-lining.


Zero Hedge and Automatic Earth recently posted good discussions of the current state of the housing market. See:

Economists Stunned By Housing Fade

US Housing is Down For the Count

Both articles conclude that housing is weak and getting weaker. But the real question is what this means for the rest of the economy. Is housing a discrete sector dealing with its own supply/demand issues, or is it a sign of things to come for consumer spending, government tax revenues, and business investment?

The argument for the latter scenario is based on the idea that newly-created currency pouring into the financial system pumps up asset prices, which convinces people that they’re rich enough to indulge in new cars, new clothes and nice vacations — and more stocks, bonds and houses.

But this “wealth effect” only works when the amount of debt in the system is low enough for new paper profits to change behavior. If people already carry too much debt, then they don’t feel comfortable borrowing even at historically low interest rates, and inflated asset prices become harder and harder to support. Either they stall or start moving lower, which shifts the wealth effect into reverse and sucks the air out of the economy.

The reason that so many economists didn’t see housing rolling over and don’t think it will affect the rest of the system in any event is that most Keynesian models don’t pay attention to society’s balance sheet. A given amount of new debt is supposed to increase “aggregate demand” by the same amount whether the government and consumers are debt-free or buried under a mountain of obligations taken on in years past. That’s a false assumption of course. Liabilities matter, and the fact that debt levels, especially student loans, are hitting records probably explains why housing isn’t behaving according to script.

The other fuel for a wealth effect-driven boom is the stock market. Here again, a nice pop has coincided with a big jump in debt, in this case margin debt, which investors incur when they borrow against stocks to buy more stocks. Late last year margin debt hit a new record and since then has gone even higher. Now it’s at levels that, based on history, imply less bang for each new borrowed dollar. Going forward it will be harder for investors to generate big returns by borrowing money and buying more equities. Taking profits will begin to seem more and more prudent, until sellers swamp buyers and the markets correct.

Click here for a great explanation of why pretty much every stock market valuation measure is now flashing either yellow or red, from John Hussman.

Assuming that equities plateau or start falling, what does that do mean for government’s strategy of using asset bubbles to pump up the consumer economy? Probably it derails it. The question is when.

Hussman notes that periods of extreme overvaluation like today are good indicators of low average stock market returns over the next decade, but not necessarily great trading signals. Stocks might get more overvalued before they stop. But that would raise the risk of a crash, which would have an even more serious impact on investor psyches. So either way, this year or next, the wealth effect will become the poverty effect, and asset owners will become asset sellers.

By John Rubino

dollarcollapse.com

Copyright 2014 © John Rubino - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in