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Another Bubble For The Popping [halifaxcapital/Paul Milne]

3/26/01 8:24 pm HOUSE BEAUTIFUL -- OR IS IT? by Grant's Investor Staff 07:00 AM 03|26|2001

Rising home prices and falling mortgage rates have converged to make residential real estate a more attractive asset than it's been since the late 1970s. But there are ominous signs that yet another bubble is about to burst.

Even as the stock market continues to deflate, another credit-inflated asset bubble, housing, is drawing attention. Paul Kasriel, head of economic research at Northern Trust Co., writes:

"In the four quarters ended 2000, home prices increased by 8.1%. This is the largest four-quarter appreciation rate since 1987.

Owner-occupied housing is now more highly leveraged than at any other time in the post-World War II period. So long as the Fed aids and abets the creation of credit, which it is doing mightily now, the housing asset bubble can continue to inflate. But when, not if, the day comes that the Fed no longer has the policy latitude to create more and more credit -- due to rising inflation that the markets no longer will ignore and/or a depreciating dollar -- a chart of housing prices will start to look like a recent Nasdaq price chart. I wonder what Fannie's price chart will look like when the real estate bubble is burst?"

the Mortgage Bankers Association of America suggests that the real estate bubble may be bursting already. Adding grist to the mill, Greg Jensen and Kent Peterson, of Bridgewater Associates, observe that "the number of homeowners delinquent on their mortgages increased to 4.54% during the fourth quarter. The fourth-quarter increase in delinquencies was the third consecutive quarterly rise. After falling 71 basis points from the first quarter of 1998 through the first quarter of 2000, the delinquency rate over the past three quarters has risen by 82 basis points. This is the highest delinquency rate since the '92 recession, and this recession is only beginning."

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Again, all of this is the result of EASY CREDIT. The easy credit first found its way into equities. Now it is showing up in real estate. Same thing happend in Japan ten years ago. When easy credit is around, plenty of people want to buy homes or refinance. That means that there is inflation, asset inflation. Too many people chasing finite supply of homes making a seller's marke,t driving up prices.

At the end of every credit cycle, the cash spigot gets turned off as soon as non-performing assets and malinvestmetns start raising their ugly heads. But people still have/want to sell their homes.

There will be little lending going on. It will become a buyers market and the prices will crash. One more facet to the unfolding reverse wealth effect.

Just ONE MORE debt induced bubble to pop.

http://clubs.yahoo.com/clubs/marketthoughts?s

-- Anonymous, March 27, 2001