Thursday, October 05, 2006

About Time They Figured That Out

Sorry for the lack of posts for the last few days, but I've been unusually busy and there have anyway been relatively few important news items (And no, I do not consider a few pervert e-mails from some pervert Congressman to some teen age boys to be "important").

One thing interesting I did find was that two "bullish" commentators, John Tamny and Alan Reynolds, finally figured out that there is a downside to rising prices and an upside of falling prices: namely that rising prices makes would-be home buyers poorer and falling prices makes them richer, all other things being equal.

How convenient that they just so happened to figure it out when prices seems to be declining.

"But", some of my readers may think, aren't bearish commentators like me making the opposite mistake of now highlighting the downside to falling prices now that prices are falling.

No, there is a difference actually. It is not the case that if prices first rise sharply and then fall back that it's the same as if prices had stayed flat all the time. The reason for this is that during the period of rising prices debt is created as home buyers need to borrow more to buy a home and as existing home owners borrow more using the "home equity" created by rising prices. When prices then fall back, the "home equity" disappears, but not the loans they spawned.

2 Comments:

Blogger Alan Reynolds said...

In my January 2005 column "Housing Bubble Babble" I asked,
"Why is even the slightest rollback of asking prices on homes supposed to be such an ominous threat?" I said the alleged "wealth effect [from lower prices] results from single-entry bookkeeping -- looking only at sellers and ignoring buyers. The wealth of young couples mainly consists of their future earnings, or "human capital." High house prices reduce that wealth for first-time homebuyers by as much as they raise financial wealth for sellers." That is no different from what I am writing now. It's about time Stefan figured it out.

10:14 PM  
Anonymous John Tamny said...

Steffan:

I welcome you go to go through my archives and you'll see that going back to early '05 I was the first commentator to note how rising home prices were merely a function of a weakening dollar.

To say I just figured this out is laughable, and completely untrue. And to say I've been bullish when I was the first person from the "right" to say the "sizzling" Bush economy was a myth is to totally mischaracterize my thinking.

You're right, I don't agree that we should be on a specie monetarist gold standard along the lines of so many Von Miseans. It not only is unworkable, but it would send us into a major recession. A price-rule is just fine with, allowing for what we both agree would involved us relying on the fallible people who staff central banks.

Still, before making these grand statements, you ought to at least read what I've been writing.

JET

9:30 PM  

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