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Housing boom or housing doom?
Analyst attempts to burst anti-bubble findings
Friday, July 09, 2004
Inman News 
The bubble battle continues.
In response to a study by two Federal Reserve Bank of New York
economists that concluded there is little evidence to support a national
home-price bubble, another economic analyst charges that this pair could
be making "the greatest forecasting error since Irving Fisher declared in
1929, just prior to the stock market crash, that stock prices looked to be
at a permanently high plateau."
Raymond Sabat, editor and publisher of EconomicBriefing.com, critiques the analysis, "Are Home
Prices the Next 'Bubble,'" by economists Jonathan McCarthy and Richard W.
Peach.
Sabat contends that the Federal Reserve's lowering of interest rates
"sets the stage for major price inflation down the road," which, in turn,
"forces the Fed to begin to fight price inflation by raising interest
rates, which will ultimately lead to the bursting of the housing
bubble."
He adds, "It is thus that we also disagree with McCarthy and Peach when
they argue that the Federal Reserve is only likely to raise interest rates
during a period of strong economic growth."
In their study, McCarthy and Peach state, "We believe that higher
interest rates would not necessarily lead to a large decline in
equilibrium home prices. In the current environment, rising rates probably
would result from stronger employment and income growth. Therefore, while
the contribution from user costs would be negative, the economic-strength
contribution would counteract it."
Sabat, whose Web site lists Fed Chairman Alan Greenspan as an
"overrated economist," states that the Federal Reserve is in the early
stages of recognizing an inflationary environment. "Thus the stage is set
for the Fed to slowdown new liquidity entering the economy and to start
raising interest rates," he said in his analysis.
The best web templates providers online who offer high quality web Templates HTML web templates for both novice and experienced users. Build your own website with a professional web template. It is more important to watch the growth in money supply than it is to
monitor the Fed Funds rate, he added. "It is when this growth in money
supply begins to slow in earnest to under 5 percent, as the Fed slowly
begins to raise rates, that you will see the real estate bubble begin to
burst and then cascade downward. At this point, it is not exactly clear
how high the Fed will have to raise the Fed Funds rate to bring money
growth to under 5 percent, but rest assured they will."
He concludes that many Americans are "entrapped" in the housing bubble
and, "When the inflation fight gets serious, housing prices will begin to
fall, causing great hardship for many." | 
