Housing Bubble Wrapped in Credit Bubble

CBSNews is reporting on the "Housing Bubble Trouble", but behind the "Housing Bubble" title the underlying issues point toward consumer debt and the storm to come.

"Roughly a quarter of the jobs created since the 2001 recession have been in construction, real estate, and mortgage finance. Even more important, consumers have withdrawn $2.5 trillion in equity from their homes during this time, spending as much as half of it and thus making a huge contribution to the growth the U.S. economy has enjoyed in recent years (consumer spending accounts for two-thirds of GDP). "

"Yet the concerns about unsustainable growth in consumer debt and home prices are not easily dismissed. A weakening housing market could transform what has been a virtuous cycle into a vicious one"

"If economic analysts on the right ignore this risk, they may be blindsided by a weaker economy. They will also be unprepared to answer those on the left who will blame tax cuts for what could be a painful unwinding of a credit bubble that, in fact, was fueled by a loose monetary policy from 2002 to 2004. "

"While the evidence of a housing bubble is overwhelming, it isn't definitive. But what isn't debatable is that one cannot forever spend more money than one earns — yet this is exactly what consumers have been doing. For the past five years, Americans have spent more than they have earned — last year, the net borrowing amounted to 3.7 percent of GDP, or over $500 billion. The high level of spending compared with disposable income is also in uncharted territory. "

No intention is made to make this a political thing.

Continuation of "Don't Buy Stuff You Can't Afford....."

SNL did a skit awhile back that was based around a "new consumer credit program". Doug Wakefield takes a poke at continuing where the skit left off....

"While satire can be useful in pointing out the folly of America's unprecedented borrowing and spending binge, the remedy will likely be so harsh that it precludes humor. Yet, the aspect of the effects of this credit phenomenon on the average American has long concerned me. So, with your permission, I will continue the story of the couple above, whom I'll call Bob and Sally Smith, in my own admittedly dour way. If you are fortunate enough to be reading this article with no credit problems, you still have been, and will be, affected by this historic, reckless expansion of credit. Beyond the effects of inflation, and the probability of deflation, the consequences of our profligacy will not play out in a vacuum and will not be nearly as hygienic as an academic discussion of this problem."

"Concerned that this massive amount of debt is starting to look like a ponzi scheme, where people take on more debt to pay for their existing debt (or debt payments), the Smith's decide to explore the financial state of our country a little more. Sally finds out that, since April of 2005, as a nation, the U.S. has not experienced one month where we actually saved money. She also notices that while the U.S. savings rate had been declining since the early 1980s, it's only gone into negative territory over the last year."

"If you have grown comfortable in the warm embrace of bullish rhetoric, I would strongly encourage you to do some homework. If you took a hit in 2000 to 2002, then you'll want to take some time and do a search on what your current "experts" were saying at that time. If their rhetoric was continuously bullish over the last ten years, you aren't getting advice; you are being sold. Ignorance is bliss, until it's not."