As if there isn't enough to be scared about - housing prices are skyrocketing

the ballooning of housing prices is not a heavily-watched story in the media but it may have some of the most dire implications of anything that's going on...

[T]he median price for sales of existing homes, which does not factor in newly built ones, rose to $206,000 last month, up 15.1 percent over the last year and breaking the $200,000 level for the first time.

even that sounds relatively mild until you start taking a regional look...

(more)

Prices have jumped most sharply over the last year in the West - up 21 percent in April from a year earlier, compared with an increase of 14 percent in the calendar year 2004.

now, hold on to your hats as we take a micro look at reno, nevada... my son and his wife purchased a home in april, 2003, for $198K... one month ago, it was appraised at $285K, an $87K appreciation in one year... in percentage points, that's a whopping 43% increase...

my big worry is that housing is driving a good deal of the economy... when i look at the incredible pace of housing development (as i did yesterday from the air over reno, phoenix and denver and then again driving through denver and colorado springs), i think of all the related jobs that development is fueling... then i start to think about how closely interrelated mortgage interest rates are to u.s. foreign policy and the financial activities of other countries... (again from the washington post...)

Mortgage rates are closely tied to the market for long-term government bonds, which are benefiting from purchases by foreign governments, particularly in Asia, that continue to buy Treasury bonds, as well as from investors looking for a haven from risky corporate securities.

that leads me to treasury snow's recent pressure on china to revalue its currency...

Earlier this week, the US Treasury said that China was in danger of being censured for manipulating its currency and called on it to move "without delay" to loosen restrictions on the yuan.

which in turn leads to thinking about what might be the reverberations in the u.s. if it does...

The rest of the world finances the economic and financial policy of the Bush administration. Central banks and private investors buy dollar bonds and fill the holes in the US budget and in the balance of trade. Europe and Japan assumed this role for a long time. Recently Washington has become dependent on the Chinese. The US faces a dilemma in relation to Peking. The Yuan would be 40 percent more expensive with abandonment of the dollar bond. A “market-just” Yuan price would raise the price of imports from China and relieve the US trade balance. However Peking insists on a cheap Yuan to counter the risk of recession and devaluation of its own dollar assets. The Bush administration refuses to repair its budget.

then i start thinking about what would happen if (maybe when is a better word) the real estate bubble bursts...

[T]he growing gap between house prices and almost everything else - rents, incomes, population growth - is the surest sign of trouble.

and here's how it would all come down...

To stabilize the value of the dollar at the present level, the US needs a daily currency inflow of $1.8 billion. If credit worthiness is scratched, the dollar is no longer only “a problem for others.” The anticipation of future losses can trigger a chain reaction. The interests have a key function. First foreign investors demand higher yields for their readiness to acquire or hold dollars and US bonds. The greater the risk of a loss in value, the higher is the expected bonus in the form of higher interests. However higher interests put pressure on readiness for investment and consumption, above all in the US where much more is bought on credit than in other parts of the world. For example, the real estate market could collapse that profited for a long time from historically unique low interests.

then i start thinking about my son and his wife living in a house that is suddenly worth less than they owe on it... that's not a train of thought that is conducive to a good night's sleep...

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