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Rates effect On Real Estate Debate.

As long as interest rates stay low, say the pundits, there is no risk to the
housing market; people will continue to borrow, spend and flip. The only reason
the housing market hasn't collapsed already, as James Grant explained, is that
borrowers can't default; their lenders won't let them. Every time they have
trouble making payments, there is a new offer to refinance on easier
terms...and even 'take out' a little more equity. Thus, the real estate bubble
is expected to continue to expand until interest rates rise.
Not so, said Peter Warburton, author of "Debt and Delusion," yesterday. "There
is something big coming," he prophesized. "It is the destruction of the economy
at low rates. This is going to be the big surprise, that the economy will go
into a prolonged slump even at very low nominal interest rates."
As people borrow more and more money, carrying the weight of debt wears them
out. Low rates permit more borrowing...but each additional unit of debt - like
another beach house or another mistress - must be serviced. Eventually, you are
unable to keep at it.
Total debt is around $36 trillion - about 300% of GDP.
"Usually, the upper limit of debt is about three times GDP," Warburton
explained. "But there are always special circumstances. It's impossible to say
when the end will come." The weight of interest on the debt we can estimate
ourselves. At 5% interest, the carrying cost would be $1.8 trillion per year -
more than 10% of GDP. The end must be coming soon...
Taleb did not bring it up, but emotions are mean reverting. Otherwise, there
would be no use for the modifiers "over" or "under." Yes, you can count on
people to overdo it. But not always in the same way. Today, they over-react to
terrorism and greed. Tomorrow, they will shrug their shoulders at
subway bombers...and run from stocks and houses as though they were about to
blow up.

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