Commentary

The credit bubble blew up in ‘05

Sales of new homes fell 2.8 percent from December’s levels, and the median price of an American castle dipped to $215,000, which amounts to a 15 percent decline from year ago levels. I am actually tired of writing about the continuing dismal saga that is this nation’s housing market.

I wrote a rather long-winded essay in 2005 called “Living in a House of Borrowed Gold” that centered on the then nascent, yet blossoming lending abuses and reckless investment in the American real estate market. This, in my opinion at the time, had all of the markings of an asset bubble. All the ingredients were there: easy credit, low interest rates, little or no regulatory oversight, and most importantly, a mob psychology that at its core believed: “It’s different this time, real estate prices will never fall.”

What people failed to notice was the link between home prices and income levels and overall inflation. Since the end of World War II, the prices paid by Americans for their homes increased in line with wages earned and the rate of inflation.

It seems as if the market peaked in early 2006, and air has been hissing out of it ever since. Even after steep price declines nationally, and outright decimation in some of the frothiest markets, homes are still very expensive relative to income.

I was actually astonished by the extent of abuse of credit by both lenders and borrowers (remember, it takes two to tango). And, it turns out that the real estate bubble actually masked a much larger credit bubble that now includes credit card debt, as well as auto and student loans.

In short, we, as a nation, soaked for far too long in the muddy waters of easy money. The cleansing process that lies ahead will be long and quite abrasive. The important thing to remember, especially in the silly season of a presidential election, is that a thorough cleansing is necessary in order to repair the damage and set ourselves on the right track again.

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© 2008 Splendid Marbles.