Is the Housing Tail Wagging the Market Dog?

Who do you believe? Ben Stein argues that the current fears of subprime meltdown are being blown completely out of proportion by hedge funds and other short-term arbitrageurs who benefit from the pricing inefficiencies present in volatile markets.

On the other hand American Home Finance just filed for bankruptcy and is set up for rescue by this man, Wilbur Ross. That would certainly point to real subprime melt-down.

Me? I think I am somewhere in the middle. Even if Mr. Stein is correct, and the total market disruption is just 1%, the housing slowdown is real, 1% is a big chunk, and, more importantly, it is the last of a long line of indicators that the economy is rocky. First there were the consumer price index numbers last year. Those went back up when the housing market proved to be better than it was thought to be. Then there were the disappointing job growth numbers (around 140K instead of the regular 200+K), again bouyed by better-than-expected (not be confused with "good") housing and consumer price numbers. Now, the last saving grace of the economy for the average American - his home - is on the blocks. Yeah, I think that these hedge funds are encouraging the volatility, but I also think that we have:

1. Artificial unemployment numbers. More people are taking two + jobs. The unemployment % is the number of jobs vs. the number of Americans, not the number of working Americans vs. the total population.
2. Lower real salaries. Household income is rising because of the additional income source, but that means that people can't make do on a single 40/wk job. Ergo, real earnings are down.
3. A housing slump. The numbers in big cities with high prices are actually stable. The prices that were inflated have already deflated and are holding steady. It's the suburbs, exurbs, and developments that are taking the hit and, given the numbers of homes in production, they will continue to suffer for another few years.
4. Higher energy costs. I don't think fuel is THAT much more expensive, but $3 is $3.
5. Trade Deficit. This last item is both a boon and a bane. It is bad for America to spend more than it earns abroad. That said, the trade deficit has and will continue to weaken the dollar, making our exports more valuable. Take those vacations now folks.

I promise future posts will go back to cool nic-nacs.