Tuesday, September 26, 2006

IMF Study

The International Monetary Fund did a study on previous housing busts, collapses that have occurred around the world. Dr. Kurt Richebacher notes that the IMF study showed the following reasons why housing collapses have severe consequences, and why housing busts are more serious than stock market busts.

House busts have a more negative impact than stock busts on the soundness of the banking system.

House busts, more than stocks collapses, spill over into other asset classes.

Most house busts have resulted from credit tightening, which in turn was generated with the purpose of bringing down inflation. The act of credit tightening increases the burden of real debt (mortgages). In credit tightening, the value of a house tends to decline in price, but unfortunately, the mortgage burden remains the same.

Richebacher points out that currently, housing has not been hit by credit tightening. The problem today is a matter of the puncturing of a bubble. The price of homes got out of sight on the upside, and too many homes were built. Previously, the Fed simply eased up on money and interest rates, and the housing mess was solved. But this time, home prices rose to bubble levels and far too many homes were built. This time a mere easing of credit is probably not going to solve the demise of the housing bubble.

I must say, however, that the stock market acts as though declining interest rates are going to solve the housing problem -- or at worst produce the longed-for "soft landing."

The Homebuilder ETF violently declined in mid-July. Since then the Homebuilder ETF has been rising, and at this point we can't tell if the rise is simply the normal correction of a severe decline -- or whether something more bullish is occurring.

Have we hit the bottom???


Blogger seamus said...

No, not even close. I wouldn't take short-term movements in stock prices as indications of larger economic trends.

11:32 AM  

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