Do you remember the days of bidding wars on houses: the days when desperate buyers wrote letters to the homeowners explaining why they were the best buyer for the seller’s home? Those days are back—at least in a few areas that have benefited the most from the Fed’s monetary largess.
New money created by the Fed does not enter the monetary system equally at all points. There is a new tech boom, fueled in part by consumer demand, but also fueled by funny money—created by the Fed—that is going into the stock market. Some of that new money as found its way into the housing market, at least in California.
Consider this recent Wall Street Journal story, “Can I Buy Your House, Pretty Please?:”
Rob and Julia Israch won a fierce bidding war for a three-bedroom townhouse in Mountain View, Calif., late last year even though their $750,000 offer—while $92,000 above the asking price—was topped by 11 rivals and was several thousand dollars below the highest bid.
The article explains that the Israchs gained the “privilege” of paying $92,000 above the asking price because they wrote the best letter to the seller. As I related this story to my wife, she wondered the same thing that I did: “Did these buyers already forget what happened to the housing market just a few short years ago?”
Probably they haven’t forgotten, but also it’s a safe bet that their understanding of economics is limited to what they read and hear in the news media. What they are reading and hearing is that Ben Bernanke has steered the economy away from an economic depression and that his policy of continued low interest rates will help the economy continued to grow albeit at a slower rate than normal. Given daily reminders of “conventional” wisdom and given their own lack of economic understanding, it’s no wonder that the Israchs and others believe that the housing market has returned to “normal”: rapidly rising housing prices (the same pattern experienced in the years before the housing crash).
Psychologists have observed that human beings often manifest a normalcy bias. Simply put, we tend to underestimate the odds of a disaster and the effects of a disaster. Often when danger is coming, there are warnings; but we don’t recognize them or we misinterpret them.
During the horrific Indian Ocean tsunami of 2004, many perished because there were no man-made early warning systems in place; and most people had no understanding of the warning signals that nature was providing. Yet some understood:
One of the few coastal areas to evacuate ahead of the tsunami was on the Indonesian island of Simeulue, very close to the epicentre. Island folklore recounted an earthquake and tsunami in 1907, and the islanders fled to inland hills after the initial shaking yet before the tsunami struck. On Maikhao beach in northern Phuket, Thailand, a 10-year-old British tourist named Tilly Smith had studied tsunami in geography at school and recognized the warning signs of the receding ocean and frothing bubbles. She and her parents warned others on the beach, which was evacuated safely. John Chroston, a biology teacher from Scotland, also recognized the signs at Kamala Bay north of Phuket, taking a busload of vacationers and locals to safety on higher ground.
Incredibly, due to a lack of understanding, after the first wave of the tsunami hit, some returned to the beach only to perish as the second wave came onshore. They perished despite the fact that they could see that something was not normal. As the first wave receded, the ocean receded abnormally far. All was not well, yet, they did not understand nature’s clear signal.
Those poor innocent souls didn’t know what was to hit them; their lack of understanding doomed them. I can’t help but wonder about the fate of those who are bidding up home prices again. They are ignoring the warnings in current economic signals and from not so distant history.
Just as the ocean does not normally recede so far as it did after the first tsunami wave hit, normal markets do not keep interest rates so low for so long a time. The next wave of the economic tsunami is building, and its destruction will likely be large. I am sickened by the thought of those who will be harmed, but I’m also sickened by the thought that once again they will demand that we bail them out.
If you watch this tsunami video, as the second wave builds, a voice calls out in alarm, “It’s coming again”—a metaphorical warning to those who think that Ben Bernanke and President Obama are benignly controlling the economy.