To reiterate, most of the liquefied equity is being used to adjust debt and asset portfolios, as we would expect utility maximizing households to do. What are all the charts from these recent posts telling us about households?
What these charts are indicating?
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First and foremost, household balance sheet are in good shape and we should not observe any pressure to reduce consumption from rising debt levels. Two, the housing “bubble” seems to be a correction and adjustment to the realization that we live in an era of low and stable inflation. Three, that households have increased their net holding of real estate. The last point is the one most relevant to the aim of this thread and that is to predict developments in the US economy.
Given the above charts it is quite evident that the typical household is making direct investments in real estate, either through the purchase of second homes or through improving the size and quality of their primary residence. That is where the majority of US domestic savings reside. What has occurred is that households have indicated their desire for owning relatively bigger and better homes. Thus, they have made direct investments, either through purchase, or existing home improvement. Now, what is important for this thread is the possibility that these actions have led to entrepreneurial error or a misallocation of resources. That, as should be evident, is not possible, as that is equivalent to saying that households are misallocating resources by choosing one brand of soap of another. Tastes may change later and thus the price of particular brand may adjust as well, but when one assumes that individuals are mistaken in their desire for one soap or another, or one size of house or another, or in their willingness to pay for a product, then that line of thinking leads directly to socialism.
To sum up: households have used their savings directly in the production of housing and, therefore, are acting as entrepreneurs by responding to their own demand. BTW, none of what has been observed in the housing market is, or need be, fueled by additional central bank liquidity, and in fact, is (in part) a result of an adjustment to the systematic multi-decade reduction in excess liquidity.
Thus, for the most part this thread sees very little chance of a housing meltdown. However, it is evident from the charts that house prices are probably fully adjusted to low inflation and the real estate holding demands of households. Consequently, we should expect to see the end of near double digit annual increases in aggregate home prices. And thus, any further or ongoing speculative activity in housing predicated on the assumption of double digit price appreciation would seem to be prone to loss. |
