Sunday, September 30, 2012

Megan McArdle: I'm Stuck in a Bubble and I Don't Know Why

There are three parts of the country where house prices are at the early stage of a major upside break: New York City, California and Washington D.C.

I recently reported that Los Angeles only has a 2 month supply of housing inventory based on current sales rates. In California, it's all about the Bernanke money that is flowing into Silicon Valley that is now moving north and south of the area. In NYC its Bernanke bankster money and foreigners with Bernanke printed dollars and in D.C. it's Bernanke propping up the government Treasury market.

Here's Megan McArdle explaining, with a bit of confusion, what's going on in D.C. (my bold):
A couple of years ago, when we bought our house, I was convinced that we had probably already lost money. We put in our offer immediately after the expiration of the first-time homebuyer's tax credit, which in DC had triggered bidding wars that upped prices by far more than the $8,000 the tax credit was worth.

We weren't particularly worried about this, mind you; we planned on being in the house for long enough that we expected it simply wouldn't matter. But we didn't have any illusions that the huose would be, say, part of our retirement savings.

So far, I have been proven spectacularly wrong in this assessment. Renovated homes on our block are selling for more than 150% of what we paid for our (less renovated home); even wrecks are going at a substantial premium. We're glad to think that our house is worth more, of course, but we're also mystified. It seems to me that there remains a distinctly bubbly mentality in the city, which you can a bit of in this comment thread on a local blog. People seem to have a hidden assumption that every house in the District will eventually be crowding $1 million in value.

This doesn't seem possible to me. Ultimately, home prices have to have some relationship to incomes. And at a traditional salary-to-value ration of two or three times income, I don't see where the money would come from to push everyone's house into the $800,000 range. (Nor, needless to say, would it be a good thing for soceity if this happened).
Only a beltarian with a faulty memory would fail to understand the connection between government spending (a significant part of which stays in D.C. to "administer" the spending) and Fed printing money (particularly to boost the Treasury market). The faulty memory is McArdle's apparent lack of recalling that in the last housing bubble, incomes and other metrics have little to do with asset price climbs. If the Fed is pushing money out there, the assets will climb.

For the record, here's U.S. government outlays. It's a lot of spending that is controlled in D.C.:

And, of course, here's Ben's masterful work:

Like I said, only a beltarian would fail to understand this data and put two and two together to realize why housing prices are climbing in the D.C. area.


  1. ". . . in the last housing bubble, incomes and other metrics have little to do with asset price climbs. If the Fed is pushing money out there, the assets will climb." I appreciate the way that you've been explaining recently differences in prices based on Fed money printing and differences based on supply and demand.

  2. Hi Bob,

    Just a question on the graphs you use. Most people use nominal graphs, yet over long time periods I think this very often distorts the real picture. Wouldn't it be better to mostly use logarithmic charts that show the change in percentage terms? Especially like the Federal outlays graph?


  3. Skylien:

    Logarithmic charting would be the misleading choice because it would obfuscate the impact that dollar devaluation has had on federal outlays.

  4. @ Tim

    I think it would be right to use a log chart. A doubling of the outlays in 1920 would not be recognizable on this chart. Yet a doubling would have the same impact in 1920 as it has now. So for my point of view the normal chart is misleading. Look at the 30s and 40s. It looks like there happened quite nothing, not even WW2 was a big deal... That is just not true. Spending increased massively during WW2.

  5. Doug Noland writes M2 narrow "money" supply increased $13.8bn to a record $10.138 TN. Narrow money has expanded 7.1% annualized year-to-date and was up 6.9% from a year ago

  6. And then I thought they finally managed to get their management methods together. Now I'm thinking it might pop another housing bubble.