Bricks and Mortar

17 June 2009



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Housing Bounces Back, but It's a Long Way from Fixed

The economic problems of the US stem from two sources, financial stupidity and housing idiocy. There is some good news statistically of late, but the truth is, housing can't be the basis of an economy because it doesn't actually generate any income. Housing prices rise due to inflation not due to any economic growth. Nevertheless, construction of new homes jumped 17% in May to an annual rate of 532,000, according to the Commerce Department. That was up from the record low of 454,000 homes in April. Applications for new home permits also rose 4% to an annual rate of 518,000 units. The US has seen the bottom, but it is a long way from being healthy again.

For reasons that don't make any sense, the stock and the mortgage markets have begun to worry about inflation. These concerns will do more harm than good for the economy, as deflation remains the biggest problem. The cost of a mortgage is rising, and the value of houses continues to fall. Yet the Fed and other central banks are all atwitter over inflation that doesn't exist, and the markets are following, or perhaps leading, policy.

The fact is that rising or falling house prices have very little to do with the health of the economy. Instead, banging metal and writing code make jobs and money. The folly of creating money out of home equity loans based on a paper doubling of housing values doesn't work. At the end of the day, someone has to do something or make something that others want.

Nevertheless, the house remains the biggest investment most Americans make. There is no way to get the economy back on its feet if mortgages remain underwater. Too much has been invested wrongly in real estate that must be unwound. So the country is stuck with the current mess, and the new starts are the beginning of a turn around.

The chairman of the National Association of Homebuilders, Joe Robson, has summed the situation up nicely in saying, ?The outlook for home sales has improved somewhat in recent months, due largely to implementation of the first-time home buyer tax credit and gains in housing affordability, including expiration of the tax credit at the end of November; a recent upturn in interest rates; and especially the continuing lack of credit for housing production loans." More trouble lies ahead, but the worst may be over.

© Copyright 2009 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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