Housing and the Paradox of Credit Bubbles, Equity and Demand

[Crewleader]

March 29, 2010... by charles hugh smith

Credit bubbles must be reinflated to maintain owners' and lenders' solvency, but credit bubbles inflate prices to the point that there is no demand from qualified buyers and thus nothing to keep prices from falling further.

There is an unresolvable paradox at the heart of the government's desperate attempts to keep housing prices from falling any lower: the government must either reinflate housing values or at least maintain them at current levels, lest owners and lenders lose all their capital/collateral.

But keeping house prices artifically inflated to save owners and lenders who borrowed/lent during the bubble means that prices will remain unaffordable to qualified buyers (i.e. those who actually meet prudent lending standards, not government giveaway programs like the FHA 3% down payment, the $8,000 tax credit, etc.)

Without organic demand (demand from truly qualified buyers), then there is nothing to keep prices artifically high; over-supply and limited demand lead to lower prices.

To fully understand the paradox, we need to start with the fact that the U.S. economy depends on consumers borrowing ever-larger sums of money for its "growth." When borrowing ceases, the economy tanks.

http://www.oftwominds.com/blogmar10/paradox-of-credit03-10.html

[Warpy]

1. Talk about missing the elephant in the room!

"To fully understand the paradox, we need to start with the fact that the U.S. economy depends on consumers borrowing ever-larger sums of money for its "growth." When borrowing ceases, the economy tanks."

Well, that's certainly been true over the past 40 years, but that 40 years has been marked by declining wages in terms of buying power, wages that have been supplemented by credit cards and using one's paper profit on a house as a supply of cheaper credit to pay off the high interest cards periodically. That's what caused the crash, the fact that wealth is no longer being distributed downward to the people whose labor creates it.

Had the government not consistently lied about the CPI, had the poverty formula been adjusted to reflect stable food prices and increases in housing and health care, and had wages actually been indexed to the very real inflation we've all seen during so-called flat inflation times, the total collapse might not have happened. Far fewer people would have been far underwater through refinancing, at any rate.

Wages above poverty level are providing bare subsistence these days, and often not even that as basic foodstuffs are out of reach. Disposable income has had to come from easy credit and that is the problem, not the credit, itself.

[Crewleader]

2. agree with you Warpy...

this is the link for today's article....http://www.oftwominds.com/blog.html

and other articles to look up

[Warpy]

3. All those charts lead to the same conclusion

and that is that supporting prices without steeply raising wages is not going to work, no matter how lenient the borrowing terms are.