Krugman, Real Estate, and Black Tuesday

Krugman:

Meanwhile, the U.S. economy has become deeply dependent on the housing bubble. The economic recovery since 2001 has been disappointing in many ways, but it wouldn’t have happened at all without soaring spending on residential construction, plus a surge in consumer spending largely based on mortgage refinancing. Did I mention that the personal savings rate has fallen to zero?

Now we’re starting to hear a hissing sound, as the air begins to leak out of the bubble. And everyone – not just those who own Zoned Zone real estate – should be worried.

And why was there refinancing? Because the fed loosened the tap. People who locked in at or around 5% are sitting pretty right now, especially if they didn’t overencumber their equity. True, many just spent it, but that’s not a bad thing.

As for the personal savings rate falling to zero, does that include the equity that people are building in their homes? I’m 90% sure it doesn’t. Even if this bubble does hiss away, that portion of your monthly payment that goes into equity is really savings, and housing’s fluctuations are scarcely less violent than the stock market, where Wall Street is supposed to channel a good portion of our savings.

I’m not a common man, I don’t pretend to be. I’m also not an economist. But I think there is some wisdom in this move by the herd. “Savings” in the strict CD/bond/money market sense has been a bad bet in the last 10 years since there is so much lost opportunity on stocks and real estate. Why stash money in a savings account and get the 1% or so you’re getting now?

And there’s something else about a house: even if you’re mortgage is worth more than your place, as long as you can afford the payments, you can live in it. That’s something that would take an awful lot of bank books or stock certificates to do.

And, by the way, this should keep the Fed from hiking rates again. Yeah, sure, you want to “cool off” the economy (i.e. keep workers from becoming uppity) at a time like this, but doing so here is different since what Krugman says is true: we need this real estate market. It would do more than cool it off.

Tomorrow might be the black tuesday of real estate, especially if they hike the rates up more than just the one quarter. Expect stocks to take a shit too.