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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: CalculatedRisk who wrote (39650)8/24/2005 10:29:20 PM
From: GST  Read Replies (3) of 110194
 
An outstanding observation on the current account - housing relationship. As far as I can tell, Mish seems to think that interest rates are set by housing demand, rather than the other way around with interest rates having a strong impact on setting housing prices. As you may know, I believe interest rates set housing prices more than the other way around. I also believe that the current account deficit is the key to the money that has been pouring into the housing sector, and this is where you can expect trouble to show up if it turns out that the mounting risks are not properly reflected in credit spreads, which I strongly believe is the case. A shift in the risk premium for mortgage credit would have a crushing effect on real estate leading to a cascading of defaults and increasing risk spreads -- a vicious circle of defaults-repricing-defaults-repricing, large enough to cause currency risk to come into play adding more risk to foreign sources of mortgage credit. Higher rates, a lower dollar, a slower economy causing imports to shrink, causing the supply of cheap capital flowing into the US to tighten significantly -- the slower the US economy, the higher the risks of spiralling credit costs.
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