Good News and Bad News: Inflation in the Housing Markets

The news is both good and bad, depending on how you look at it.

As to the good news, the Dow rose 114 points yesterday and long bonds have been going down. They may be looking ahead to growth and prosperity… or just to inflation. We don’t know. Yields on long-dated Treasury bonds, for example, have been going up (which is what happens when prices go down). Curiously, or perhaps tellingly, they have been rising even as the Fed lowers short-term rates.

The feds are trying to keep the party going, of course, by refilling the punch bowl as fast as they can. The U.S. money supply is increasing about five times faster than the economy itself. Even this breakneck speed is merely trotting compared to money growth in some places. In Russia and China, for example, money supply growth is said to be multiples of the U.S. rate.

Our hypothesis is that this inflation will affect commodity, gold and consumer prices more than it boosts prices for stocks and property. We don’t know how the party will end, in other words. But if it just poops out into deflation, the big losers are going to be stock and property holders. Prices will collapse. On the other hand, if it burns out with higher and higher inflation rates, we judge it most likely that the highest prices will be realized in the oil, gold and commodity markets… not in the stock market. That is why we think gold is a better bet than stocks.

Yesterday, gold hit $948. It will probably go to $1,000 soon. And then to $2,000.

The U.S. dollar weakened further, yesterday, hitting an all-time low against the euro at $1.49/euro. A couple of years ago, we predicted that the buck would sink to $1.50/euro. With less than a penny to go, it’s probably time to think again. Stay tuned.

In the meantime, oil also hit a new record high yesterday – closing at $100.88.

All of this may be considered “good” news – in the sense that it signals a growing inflation threat… and maybe even a growing world economy.

The bad news is that inflation raises consumer prices – at the very time when U.S. consumers have less to spend.

Most of yesterday’s ‘bad’ news came from the U.S. property sector . But even there all the latest headlines were not depressing. It turns out that much of the United States is actually experiencing rising housing prices. Trouble is, it’s not the part that people live in.

Leading the nation is West Virginia, believe it or not, where house prices went up 19% last year. Even so, the median house in the mountain state sold for only $116,000. Robert Shiller, who is an expert on housing price trends, says the “back country cities” just never got into the “bubble picture.” They’re still good buys.

Markets and Money readers might want to consider a trade: sell California, buy West Virginia. We like West Virginia, and can imagine ourselves living happily there. But most people find it a bit backward and depressing. Here in London, prices are so high that $116,000 would barely buy a parking space. Even a tiny row house in London… with only two bedrooms… and barely 1,200 square feet of space… in a modest part of town, well away from the center, is on offer for $1.7 million. People here can’t imagine being able to buy a whole house for $116,000. Then again, they’ve never been to West Virginia.

But in the rest of the nation, the housing picture is not so pretty.

“Foreclosures up 90% as mortgages reset,” says a Bloomberg headline. The Case-Shiller Index revealed that the housing crisis is deepening. In the last quarter of ’07, prices of existing single-family houses fell 5.4%… up from a decline of barely 1% in the first quarter. Year to year, prices fell 8.9% in the fourth quarter of ’07… speeding up to 9.1% in the month of December.

California does everything to excess – even a housing decline. In the Golden State, house sales fell 29.8% in January (from the preceding year), with prices down 21.9%.

A government housing index, meanwhile, puts prices nationwide down at the steepest rate in 17 years.

“Housing in freefall until credit loosens,” summarizes the International Herald Tribune .

Naturally, this puts consumers in a bad mood. Consumer confidence is at a five-year low… and headed down.

Housing is the average man’s major asset. When it goes down, he takes it hard.

*** Americans have only three major sources of wealth, we pointed out yesterday. The “wealthy” have stocks – often in pension plans. The average fellow has a house – often heavily burdened with mortgage debt. And they all have the value of their own time.

When housing prices go down, it hits Americans’ #1 source of wealth. They’ve got about $20 trillion worth of houses. If house prices went down 9% last year, it represents a loss of ‘implied’ wealth of $1.8 trillion. We say ‘implied’ because the wealth was largely phony in the first place. A house is a house. It provides service, but it doesn’t provide any more service if it is quoted at $500,000 than if it is quoted at $300,000. Same roof. Same air-conditioning. Same everything. Except, when it is said to be worth more, two noxious things result. First, the homeowner can “take out” some of the equity and feel like he is still ahead of the game. He doesn’t worry about it when prices are rising; when the loan comes due, he can always take out a little more. Gradually, he gets deeper and deeper into debt. And then, inevitably, his house goes down in price and he’s in trouble.

The other awful consequence is that the cost of owning the house goes up. As the house becomes more “valuable,” typically the costs of property taxes, insurance and upkeep mount. Thus, the net value, or net service, an owner gets from his house actually goes down. He has the same roof over his head, but it costs him more.

That is the trouble with inflation – even inflation in the housing markets. Ceteris paribus, inflation reduces the real value of both assets and time. Most Americans no longer have much in the way of assets. The big, post-Reagan boom, 1982-2007, discouraged saving. If people had equity in their houses, they tended to spend it. And the real value of stocks has gone down over the last decade. That leaves the nation of capitalists dependent on its own labour. The average man in American has no capital to work with… he only has his hands and his brain, such as it is.

Most Americans have to work; they depend on their earnings to live. Without the income from their labour, they’d be destitute in a matter of weeks.

But inflation reduces the value of wages. The gold-linked dollar was never a perfectly stable currency. It went up and down. But the dollar of 1930 was still worth about as much as the dollar from Washington’s era. Then, the link with gold was weakened; between ‘ 30 and ‘ 71, the greenback lost about 70% of its value. After 1971, there was no link to gold at all and the dollar fell even faster. If a dollar was worth 100 cents in 1930, by 1971 it was worth only 30 cents… and by 2007… only about 5 cents.

The decline of the dollar, along with the competition from low-cost Asian labourers, is why Americans have had no real wage increases in 30 years. For every gain they make, the dollar goes down in value to offset it. In the last 6 years alone, the dollar has lost 36% of its value – as measured against other currencies. Shops in New York are beginning to take euros, reports the Washington Post.

Of course, inflation can be useful. Asian wages are rising about 10% per year. U.S. wages are falling. Americans will never consent to pay cuts in order to make their own labour competitive with Asians. Inflation will make the cuts for them.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

2 Comments on "Good News and Bad News: Inflation in the Housing Markets"

Notify of
Sort by:   newest | oldest | most voted

A question,

if the devaluation of the dollar is causing inflation in the stockmarket, does this mean that as the dollar continues to slide the stockmarket will continue to rise, when priced in dollars?

i.e. there won’t be any sudden catastrophic fall?



Yes, cetarus paribus. But stock prices are determined by much more than just the value of the dollar (economic outlook, interest rates, volatility, earnings, etc…) so it is hard to say whether the net effect of everything put together will put them up or down.

But if you were to price the stock market in terms of gold (real money), it is actually going down over the past several years.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to