How the new global economy is the wild card in sustaining the housing markets

I was somewhat surprised to see very thoughtful comments on Monday's piece The Fed's housing market objectives... all three seem to understand that the US economy and housing market has to be managed within the context of the global economy and other countries' housing markets... it's refreshing to see such thinking because the real estate community is so local, local and local and sometimes doesn't see the bigger economic picture that is driving their markets.

Friend Dave G. at LakePlace offered up a comment:

Is it possible that a lot of the subprimers (like a big %) were actually spending a lot of money (credit cards, equity lines, etc..) over the past several years, playing a very important roll in the grander economic scheme?

Also, #1 & #2 comments were excellent.

Question for commenter #2:

"So, we will continue to see cheap money in the months or maybe even years ahead."

How do you see it ending in the coming months or years? Good or bad?

I do not want to be one of those economic doomers, but I have to tell you...I am a consumer and my gut does not feel the same way it did 5 years ago.

While studying this credit crunch over the summer, I've been thinking more like an economist. The subprimers and a significant portion of the population have been leveraging themselves up... how many of them will start defaulting? As a "zero sum" economist (ok, I do know economists don't believe in zero-sum because transaction costs must be covered), it doesn't matter - assets will just transfer and that's that. If you look at how global wealth is becoming more evenly distributed and the ease of cross-border transactions, the asset transfers - particularly with overseas investment funding, could sustain the markets. In the old non-global economy days, bubbles burst and prices pulled into a death spiral because both the buyers and the sellers would have been US subprimers and nothing would move. It's not happening as much this time, except in certain locations like Sacramento where no new buyers from outside the subprime ranks have stepped up to buy... why? because no one wants to live in the Central Valley except people who live in the Central Valley already.

If the fundamental economic precepts on the housing market were true in 1997, why won't housing prices adjust back to similar levels in 2007, a drop of, say, 30% or so, as all the bubble bloggers warn? Simply, US housing is not a self contained market any more. Subprime CDOs hidden in European and Asian hedge funds is evidence.

This is the slight miscalculation of the bubblers, and perhaps, even the Fed. The public and the Fed are still too US economy - centric. Commenter #2 can prognosticate that cheap money will continue its run because the global markets are showing that they don't really want a cheap dollar and runaway inflation in the world's most important market... the world's bourses seem to be working in coordination to make sure the US economy and markets are stable, otherwise the dollar, housing, the markets... all would be spiraling downward - and we have plenty of bears and gloomsayers making these predictions daily.

Admittedly, there are a lot of risks out there and it doesn't look pretty... but in 1997, Alan Greenspan and the Fed were, relatively speaking, most instrumental in steering the global economy because the US economy was calling a lot of the shots. Remember, there was a global economic crisis starting with crashes in Thailand, Argentina and Korea in 1998... would those crashes be more tempered today? An unqualified yes. In 2007, the globe is learning how to sustain a global economy, and it helps to have the US economic engine humming for the globe's sake. But the US economy is no longer in the driver's seat with respect to how global economic decisions are made.

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  • 10/18/2007 12:22 PM Lola Audu wrote:
    The impact of the global economy is something that you don't hear about much particularly on the local real estate level. I appreciate your analysis and I think it reflects accurately the actions that were taken by several countries in the wake of the mortgage meltdowns experienced in the US markets. This reality also introduces greater uncertainty into the US real estate market because it is increasingly subject to a much wider range of variables.
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  • 10/22/2007 1:22 PM wrote:
    Some good points Pat but the main reason for real estate run-up was ease of financing because the streets / worlds belief was the asset "real estate" and US economy was secure. The reality is the price run up was primarily due to "stated income" loans not subprime. Borrowers / lenders were allowed to state whatever income they needed to qualify. The world / street will not purchase these again anytime soon. This brings us back to econ 101 supply / demand. Demand is based on ability to buy which is directly related to mortgage financing (most people don't pay cash) and their incomes.

    As we return back to "traditional" mortgage qualifying, prices must drop to the point where the "demand" (i.e. ability for people to finance) and home prices / income meet. Using traditional qualifying guidelines in many important areas that is 100K’s apart. (i.e. median income in CA = 64K – source: and CA median home price = $588,970 source Traditional qualifying guidelines with say 5% down (still 30K) would require income of about 12K a month. There is a 80K a year difference between ability to purchase (incomes) and prices. Therefore demand will stay down and supply will continue to build.

    So unless the events around the world some how raises the average incomes of Americans demand will stay soft and supply will build.
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    1. 10/23/2007 1:39 PM Pat Kitano wrote:
      True enough... in a vacuum where the borders of California are sealed, many people would have to give up their houses eventually because they just can't afford the debt service. However, California is a kind of promised land and will attract those rich enough to eventually purchase the excess inventory. It happens in all the major metropolises - London, Shanghai, Moscow, etc.

      That said, supply/inventory will hopefully narrow as housing starts plummet over the next couple of years (and they will, investors are shying away from new developments... the dearth of building will be as remarkable as the excess building was three years ago). The real statistic that needs to be shown is the increasing American population vis-a-vis the increase in housing. It will eventually even out.

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