Morning all, bit of light reading from the DR....after the excitement of Richmond's win last night. The Tiges have turned the corner! Eat 'em alive boys...... Enjoy the weekend, Carl. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Excerpt from "The Daily Reckoning". Dateline April 30th, 2004
Yesterday, we had to stop and admire the wonderfulness of it all.
Consumer confidence is rising; but isn't it already at hallucination levels? The housing market is said to be 'heating up'; but isn't it already past the combustion point?
And rising real estate prices are broadly thought - even by the Fed Chairman himself - to be creating wealth that householders can spend.
Today, we are still ogling the marvel of these things. Investors Intelligence tells us that investment advisors are about as bullish as they've ever been... with twice as many expecting higher stock prices as expect lower ones.
Stocks sold off yesterday; it was announced that the economy rose 4.1% - but less than expected.
And "Today" reports that the 30-year mortgage rate has risen above 6%.
This last item reminds us to take a second look at real estate. On both sides of the Atlantic, residential housing has become a minor obsession. Buyers and sellers flimflam themselves and each other - all convinced they are getting rich; because prices are rising!
But if rising house prices alone could make people better off, why doesn't some enterprising politician seize the opportunity? Richard Nixon showed the way. He decided what a mother should pay for milk and what GM should pay for steel. Why not simply double house prices? Henceforth, every price will be multiplied by 2. Even today's presidential contenders could do the math.
On the surface, the idea is absurd. But when you dig into it, you find that it is absurd all the way down.
Imagine a simpler nation with just two families and two houses. The working members of the families make shoes and sell them to another nation.
If each house were worth $50,000, each homeowner might be able to able to borrow, say, $40,000 against his house, from a friendly banker in a foreign country. Taking out the equity, they might use the money to buy things from abroad or take a trip around the world.
But, of course, each has to pay interest on the money... and at the end of the day... both have $40,000 less equity in their houses.
But imagine that the houses rise in price to $250,000. Now, each homeowner has a borrowing potential of, say, $200,000. If they borrow the money, the two would owe a total of $400,000...rather than $100,000. And they would still have to pay it back. One way or another, the nation's net wealth would have been reduced by $400,000 (assuming they squandered the money).
But, no, you say. They now have much more valuable houses. They have merely taken out the 'excess' equity... leaving them with the same $50,000 equity each had before. If they sold the houses, they would come out even.
Aha, dear reader, we were ready for you. Alas, no.
Who could they sell to, but to each other? Imagine that they do so. They give each other $250,000. They pay off the $200,000 mortgages. Each has $50,000 left... not including the $250,000 it cost them to buy a new house! The end result that each is out-of-pocket exactly the amount he borrowed and spent. What a surprise; things work out just the way you'd expect!
At least, you and I would expect it. The Fed chairman, more knave than fool, pretends not to notice.
