Bigbuilder

Just How Terrible Is Housing as an Asset Class? Roubini Weighs In

The major points are correct:

1. Diminishing marginal utility. A family of 4 can live in 1,800 square feet OR in 3,600 square feet. They are NOT twice as well off in double the space.

2. Opportunity cost of capital. IF you live in 1,800 square feet and invest the difference ANYWHERE else, you will be richer in the long term. This is true for individuals and for the entire nation. We will miss the possible productivity increases that wiser investment would have created.

3. Over leveraged personal balance sheets are reflected, for a short time, in a strong consumer economy. BUT, leverage on the way down is a killer.

4. The nations under funded long term committments (e.g. social security and medicare) will "bust our chops" financially. Excessive debt at all levels AND capital tied up in media rooms and fancy kitchens will not pay for that.

5. Personally occupied housing is only an investment if you are exiting the housing game. When you die, your heirs will realize this "investment". Until then, you will merely shift the current value of your housing capital from one location to another, or from one form (i.e. owning) to another (i.e. renting).

6. The housing bubble will destroy neighborhoods and local governments and will inflict real costs (both dollars and quality of life destruction) far in excess of the "paper" loses on bad mortgages. The collateral consequence for national productivity and morale of the citizens is very negative.

Basically, there was no "free" market. Intervention by all levels of government to favor a specific behavior by consumers was done in order to create quick wealth for the campaign contributors of your elected officials. This mess will be an affliction for decades.

The Current Market Atmosphere: Easy Money Hard to Come by

There is simply no quick fix to the fact that we are VERY over levereged as a nation and as individuals. It will take years of savings to unwind and that saving effort will tap out the consumer and reflect the gross misapplication of capital into consumption (e.g. SUV's and lavish homes). Essentially we are in a marcoeconomic Chapter 11.

Those who sell investment products do so to generate income for themselves NOT to help their clients. All of Wall Street knew the last few years were based on lies, but they let it happen (with help from Republicans AND Democrats).

I think the future will be dark.

Calling a Housing Bottom

Look at the "big picture". Residential housing in the US is currently valued at about 22 Trillion. When this aggregate number is placed in comparison with other economic metrics such as GDP, and compared to the historical ratios, one finds that in order to revert to the mean, housing will need to "give up" about 5 to 6 Trillion in value.

This will put us in balance with historical ratios, never mind falling below them.

Housing will not hit bottom until that reversion to the mean takes place. Perhaps inflation will raise other nominal measures to return the balance, but it still is fundamentally true that we have squandered trillions of precious capital by placing it in "non productive" fixed long term investments. (E.g. granite counter tops; media rooms; extra bedrooms and baths, etc.). This capital "investment" will produce negative returns for quite a while (unless cash strapped owners of McMansions start taking in boarders!).

Years of heading in the wrong direction will not change overnight. This is a world calls blunder for the ages! You may die of old age waiting for a bottom in housing.

Did We Learn Anything Over the Past Two Years?

I have a really great Doctor. If you can't afford the operation, he will touch up your X-rays!

I understand he makes house calls to OFHEO.