Thursday, May 05, 2005

More housing bubble

Angry Bear notes that construction spending is higher as the housing bubble continues. But of course housing spending is higher, the demand for owning houses continues to grow (as evidences in higher prices) and the natural response to increased demand is increased supply. Until prices begin to flatten and fall, construction will continue to expand.

The common wisdom is that rising interest rates will choke off the bubble. But bubbles, and their popping, are very unpredictable -- what caused the sudden cooling in the UK?

Update Of course I don't think anyone could have predicted that the interest rate decreases after the tech bubble popping in 2000 would have resulted in the housing bubble of '05. This argument (that the US is becoming more specialized in housing) is wrong in that the US is such a diversified economy that the current housing boom has effectively no impact on the make-up of the economy, but correct in that this seems to be where all the extra money is going. The big macro question right now is "where is inflation?"

I don't think that relying on export/import for growth in the US makes any sense -- the American economy is far too closed (only 10% of GDP comes from trade) and its trading partners (Canada and Mexico) are too correlated and integrated with the American economy to really be any kind of growth engine.


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