Tuesday, May 03, 2005

Two booms begat four, and four begat more, and pretty soon the place was covered in little boomlets as thick as kudzu.
The number of areas across the United States with real estate booms grew nearly two-thirds last year to 55, the Federal Deposit Insurance Corp. said, warning that these booms may be followed by busts.

The boom areas represent 15 percent of the 362 metropolitan areas the Office of Federal Housing Enterprise Oversight analyzes, the highest proportion of boom markets in 30 years of price data and more than twice the peak of the late-1980s booms.

Boom areas were defined as having inflation-adjusted prices at the end of 2004 that were up 30 percent or more in three years.

Adding recent data and analysis to a study released in February, FDIC economists Cynthia Angell and Norman Williams repeated their view that credit market conditions may make current housing market booms different than past ones, which have tended to taper off rather than bust.

"To the extent that credit conditions are driving home price trends, the implication would be that a reversal in mortgage market conditions � where interest rates rise and lenders tighten their standards � could contribute to the end of the housing boom," they say.
All the more reason to believe that the Fed may be very near the end of its tightening phase. For all the talk of inflation in the US economy today, note that annual PCE inflation is running at a tepid 2.4% -- and the six-month annualized rate is just 3.0%. Only total lack of perspective or sheer insanity (aka ideological commitment to "sound money" at all costs) would cause anyone to think an inflation rate below 5% was "high". Of course, housing price inflation is through the roof, but since this has for five years now been the flying buttress of the US economy, there is no way that Alan Greenspan is going to play Solomon as his final act.

As long as the Europeans and the Japanese are committed to cheap money, the US will draw capital to itself quite comfortably with fed funds rates of 3.0%-3.5%. Continued Japanese stagnation and European malaise promise the continuation of a nice interest rate gap between the US and these markets -- and thus the little boomlets continue to breed like rabbits.

In his commentary yesterday, Stephen Roach agreed that the end of the Fed's interest rate hikes was most likely nigh. The likely vent for global imbalances, thus, comes down to the dollar.
If US real interest rates don�t rise, rebalancing should swing to the currency axis and push the greenback sharply lower. Such are the perils of the post-bubble trap.
But this assumes that the world will stop financing the US deficits. With the interest rate gap and the booming US property market, why not keep buying American? The contradictions are indeed mounting, but I don't see them reaching the boiling point this year.

30% home inflation rates aren't just for Las Vegas anymore! I'm comin' up so you better get this party started . . .


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