Andrew Laperriere, in the recent Weekly Standard, argued that we are in a housing bubble. He also refers to the recent dot.com “bubble.” I dispute both.
Start backwards with the so called dot.com “bubble.” There wasn’t one. The NASDAQ went up dramatically for a year and lost ground for a year to return to the same level two years previously. That is not a bubble. Moreover the stock market measures that are published were reflecting an underlying economic reality which itself had disappeared. That is the point I want to make about the potential so called housing bubble.
The dot.com stock rise was due....
The dot.com stock rise was due to a rapid growth in Internet business
and an equally rapid disappearance of that same business. What
happened, an we saw it clearly here in San Francisco, was that one
million businesses realized that they needed a website, just as they
needed business cards and promotional fliers.
One million businesses paid roughly $25,000 each of have a website created. That accounted for $25 billion in new Internet business and several times that amount in multiplier money. After one million businesses got their websites, they didn’t need to spend any more.
We are now in an Internet environment where HTML is inadequate, many business (not one million) websites need to be interactive. Interactive websites cost more, take longer to construct and have high maintenance costs. The current Internet market growth will be slower to rise and last much longer than the earlier version.
So what is happening in housing? Laperriere gives all the technical indicators that the housing boom is about to collapse and the indicators are accurate and frightening….as long as you don’t look at the underlying forces driving the housing boom.
The housing boom arises from three sources, at least. Three that I can see.
First, starting in the late 1990s Congress gave us a capital gains
exemption on housing of $250,000 for a single person and double that
for a couple. That has been a major driving force in moving money into
housing and boosting Home Depot and related home improvements. The
capital gains tax benefit has many years to play out, tens of $billions
worth a year.
Second, the U.S. trade deficit has been large and drives foreign money into the American capital market. There is no other place in the world that is as desirable a place to invest as the U.S. The foreign money has driven interest rates down to the point where housing is the relatively best investment. The cheap foreign capital looks stable.
Third, the baby boomers have been creating and living in a productivity
boom which has generated more wealth in fifteen years than we created in
the previous thirty years. They continue to earn this money and spend
it. There has been no let up. The more consumer goods they buy, the
more housing space they need. The middle of the baby boom cohort is
age 50...they have another decade to spend at the current high rate.
There may be some other factors fueling the housing boom. I haven’t figured them out yet.