I'm one of those who believes that a real estate downturn is coming. It's just a matter of when.
Here's an excerpt from one of Paul Kasriel's articles in Grant's Investor. grantsinvestor.com (a fee site, but 30 day free trial available)
QUOTE
The mortgage markets have
become so "efficient" and competitive that households can
very easily "monetize" the equity in their houses. Perhaps that
is why homeowners' equity as a percent of the value of their
houses has, in recent years, fallen to its lowest level in the
postwar period. Easy credit terms on asset-based loans lead
to escalating asset prices. Leverage is terrific when asset
prices are rising. But it's oppressive when credit terms
tighten and asset prices start to fall.
Have you noticed the increased frequency of financial market
crises since the mid 1980s? Mexico/the oil patch/Continental
Bank, the U.S. stock market, banks and S&Ls, Mexico again,
Asia, Russia, Brazil, Long-Term Capital Management, the U.S.
stock market again, Turkey, Argentina. What's the trigger for
the next financial market crisis? The bursting of the housing
market bubble? And have you noticed what the palliative for
these crises has been? The Fed cuts interest rates, which
encourages the creation of even more credit. That's why the
leverage ratio in the U.S. economy is the highest it has been in
the post-World War II period -- maybe even the highest in
the post-World War I period.
Deflation is anathema to debtors (like George Costanza, I've
been waiting a long time to use that word). Inflation is music
to debtors' ears. . . . There are more voters who are debtors
than who are creditors. As a result, expect increased political
pressure for the Fed to keep inflating . . . it's politically
correct now to inflate.
UNQUOTE |
