The houses the saved the world
I started going to open houses a few weekends ago. In San Francisco it is almost a masochistic sport to check out (and marvel) at real estate prices. When you're surrounded by water on many sides there's a limited inventory. That, and local politics, which seem to be totally anti-development and anti-homeownership, and you have a bubble. OK, most people don't call it that but it sure feels artificial and I was delighted to find the Economist cover story on why:
In this economic recovery, however, homes have done much more than shelter people from wind and rain. They have helped to shelter the whole world economy from deep recession.
...House prices cannot continue rising at their current pace [9% this past year!]. A sudden reversal in prices would harm the recovery, but the news on that is good: a sudden reversal is unlikely unless interest rates were to rise sharply. With little evidence of increasing inflationary pressures, rates are likely to be raised slowly. If so, prices are more likely to flatten off rather than collapse. But to maintain the current pace of growth in spending, consumers will need to pile up ever bigger debts. If mortgages remain cheap in relation to income, consumers will be tempted to maintain their borrowing. But homebuyers may be underestimating the true cost of doing so. Interest rates are low only because inflation is low; real interest costs remain quite high. Initial mortgage payments are lower, but borrowers can no longer rely on inflation to erode future payments. This burden of debt could therefore squeeze future consumer spending. That need not tip America back into recession, but it does suggest a weaker recovery over the next couple of years than many expect. Mortgage refinancing has allowed consumers to maintain their spending despite rising unemployment. But such spending has literally been borrowed from the future.
The lesson which consumers—and also many over-sanguine economists—have to learn is that spending cannot outpace income for ever. House prices have saved America and the world from a deep downturn, but they do not remove the need for consumers to take care over their balance sheets. Homes are only as sound as their foundations.