BEST OF DOUG NOLAND

June 2, 2005

It is becoming more challenging for Mr. Greenspan to downplay the significance what has developed all throughout the nation’s "local" housing markets. And, right along with his fellow inflationists, the environment is forcing him into increasingly clever analytical nonsense. There is clearly a national Mortgage Finance Bubble and a Nationwide Housing Mania. As such, it is today disingenuous to split hairs on the moot issue of a "national housing Bubble."

Why on earth would anyone care to "arbitrage" home "prices between Portland, Maine and Portland, Oregon"? The easiest way to speculate on continued housing inflation is to buy the most expensive home one could possibly afford, or to buy as many of as possible. And there is ample evidence that this is being done in excess in communities throughout the country. And the rationalization that "one of the considerable barriers to achieving realized capital gains on the sale of a home is if you live there you have to move" ignores today’s reality that speculators can easily extract inflating "equity" with the help of their accommodating banker or mortgage broker.

Perhaps "nonsense" is too strong, so I will use "wishful thinking" to describe the very non-central banker-like comment that "People are reaching… which leads me to conclude that this big price surge is going to soon simmer down." That’s particularly poor Bubble analysis, Mr. Greenspan. With respect to housing inflation, mortgage rates are significantly below any notion of a "Neutral Rate." Expect the Mortgage Finance Bubble to continue to surprise and amaze.

And, back to nonsense rationalizing, Mr. Greenspan’s theorizing that desire for "our own special types of idiosyncratic homes" as a factor helping to explain housing inflation falls rather flat with respect to the 50% two-year California condominium price spike and the spectacular Miami condo mania. And history will not be kind to the view "that even if there are declines in prices, the significant run up to date has so increased equity in homes that only those who have purchased just before prices…go down are going to have problems." The confluence of atypical price spikes, enormous and unrelenting equity extraction, huge churning (originations likely surpassing $2.5 Trillion this year), and risky late-cycle borrowing terms assure the coming proliferation of underwater homeowners.