Eden Hill Journal

Comments, dreams, stories, and rantings from a middle-aged native of Maine living on a shoestring and a prayer in the woods of Maine. My portion of the family farm is to be known as Eden Hill Farm just because I want to call it that and because that's the closest thing to the truth that I could come up with. If you enjoy what I write, email me or make a comment. If you enjoy Eden Hill, come visit.

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Location: Maine, United States

Wednesday, November 26, 2008

Housing Inflation

Here's a prescient article from 2006, just as the housing bubble was bursting. This isn't too far off from what I've been thinking, that somehow the inflation calculations weren't taking into consideration the rising cost of owning a home. This article certainly explains that clearly enough.
But imagine where the economy might be right now if the housing bubble had been factored into the inflation rate over the past ten or twenty years, especially over the past eight years of the Bush administration. During the Bush years we were seeing low rates of inflation being driven up mainly by the rising cost of energy - and here again there must be some way that this rising cost of energy is masked over by inflation calculations. Meanwhile housing costs were skyrocketing, being driven up by the demand side of the supply/demand curve which was being driven up by historically low interest rates. People buying houses weren't paying much attention to the actual cost of the houses they were buying. They were paying attention to the monthly payments. It wasn't can I afford a $250,000 home, it was can I afford the payment and with record low interest rates, the answer was yes.
So under this demand-side pressure, house prices rose sharply during the Bush years. But because Washington in its wisdom has elected not to factor housing costs into the inflation rate, we all perceived that inflation was low, insignificant, nothing to concern ourselves about. And by we, I am including the investors who were making all this inflationary mortgage money available in the first place. We did not exercise the caution in lending that we would have exercised had we known the real inflation rate. Again, read that article to see what I mean by that. It was the perception of inflation that dried up the mortgage credit market.
Had that perception been there all along, investors would never have made low interest mortgage money available in the first place. There wouldn't have been the inflationary demand for housing at any cost that created the housing bubble. There wouldn't have been a housing bubble at all and our economy might be strong right now instead of stumbling drunk into the ditch.
But instead, here we are still trying to ignore the fact that the actual price of houses has anything at all to do with inflation. Here we are again trying to re-ignite the fire that inflated the balloon in the first place, easy credit. Here we are still stuck in the Reagan mentality that we have inflation by the tail because of free trade. Here we are, Democrat and Republican alike, wondering when this train wreck will be back on the tracks.
Maybe when we all begin to wrap our heads around the concept of housing inflation, inflation in the cost of buying and owning a house, maybe then we can lay a foundation for a new economy. But I don't see that happening any time soon, do you?
And for those of you who still argue that housing costs shouldn't be factored into inflation because house prices never fall since houses are an investment from which you always get a return, it should soon become clear to you that this is delusional reasoning. Calculating inflation in such a way that it masks the real increases in the daily, weekly, monthly, and yearly cost of living might help politicians stay in office, but it is crippling the economy. There is absolutely nothing wrong with keeping housing costs down. This trend to drive housing prices up as high as they can stand to go to get a better return on investment is not a good thing. It is a bad thing. It's time we began to understand that fact again. We need to avoid conditions that encourage house prices to rise. We need to remove speculation from the calculation of a house's worth and get back to the real value again. Real value is the value of property right now, as it is being used right now. Speculation over what the value would be if this or that were to happen has become so normal that we now base property taxes on the speculative value of property instead of its real value. The housing bubble was fueled by speculation about the future value of property. The sale prices of homes were based not on anything real, but by speculation of future value. Now we are in a race to the finish to discover what the real value actually is of all this inflated property.
But have no fear, Chris Dodd is here. If there's any way in the world to keep that from happening, he's on the case.
Change we can believe in doesn't have white hair, have you noticed that?

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