A rising tide, as the saying goes, may lift all ships, but just the reverse is also true.
To continue the analogy, we're talking about houseboats, bond boats and consumer boats. All three for some time enjoyed the support of low or falling interest rates. It's hardly a secret that Mr. Greenspan and his band of merry central bankers for a long time kept interest rates lower than a former president's morals. During a heat wave, cool refreshing sea breezes may prove calming, but low interest rates provided what we call the buoyancy effect. And buoyancy matters. Yet like those wonderful sea winds it can't last forever.
In cardiology there is something called Starling's Law. It has to do with fibers in cardiac muscle. Simply stated, it says the greater the stretch, the greater the contraction. And when it comes to cardiac output, contraction matters. And bond and housing and consumer debt have been stretched pretty far for a while, though to many, like in politics, that is a matter of opinion. Nor should it soothe you when apologists claim homeowners' equity ought to be plopped into the consumer savings equation, lessening their debt burden.
There are always apologists around, card-flashing members of the minimizing crowd. Our response: it's a semi-free country; believe whomever you want. Just remember that during the equity bubble a similar argument proved to be about as false as a set of boutique-bought eyelashes. During the Internet-bubble years equities became surrogate savings accounts for millions. Scores of Americans were planning on retiring next week.
The ultimate implication for saving is retirement. Now we're seeing signs that suggest real estate has replaced stocks as the savings vehicle of choice for retirement. The obverse side of rising home prices is the falling purchasing power of the U.S. dollar. Are homebuyers with their rising appreciation really any wealthier or are they really a lot poorer given the dollar's anemic historical performance? In case you have been absent or suffering from a bad case of somnambulism it's take a lot more dollars today to buy a house, any house.
Back in the 1920s equities reportedly reached a new plateau. Trouble was that august pronouncement that echoed from the economic mountaintop and rattled in the monetary dell did so just weeks before stocks plunged over a cliff and into one of the longest, greatest bear markets in history. Some argue that mortgage rates will have to hit seven percent to put a crimp in the housing binge. Maybe. On the other hand, just maybe the party's been so lavish that it won't take much to end the reverie. Recall Starling's Law.
With interest rates on the rise, 12 Federal Reserve fund hikes so far with more apparently in the wings, those hordes who finally figured out it was cheaper to buy than to rent will at some point become rarer than a vending machine selling sweets at a middle school. We like sweets and schools and vending machines as well as the next guy. What we don't like is debt or what they call in the United Kingdom, gearing, in other words, leverage, especially when it gets abused. And right now gearing appears to be the consumer debt and housing market's middle name.
Recall all those one-year and two-year variable loans amortized over 30 years. Some buyers took them out to qualify, others to speculate. Sooner or later the cost of refinancing those puppies looms large, like in the next 18 months when reportedly $1 trillion worth is due to be reconfigured, many of them in the sub-prime market. And here the term reconfigured is fungible with up as in more costly to carry. In many cases speculators will find themselves upside down perhaps for the first time because rents will fail to cover mortgage payments. Slowing or actual declining appreciation will only add to their burden.
Then along comes Ben Bernanke, Fed chairman designate. A few days before his selection for that job by President Bush, the new chairman-to-be informs Congress that there is "no housing bubble." Where Greenspan sees "froth," Benanke espies clear sailing. One argument has it that the so-called "housing bubble" is too well known, too well followed to burst, a kind of contrarian indicator itself. Perhaps. So here is an interesting thought. How much real estate Bernanke owns aside from the usual family dwelling is moot. But big time property moguls like Tom Barrack among others appear to be heading for the egress sign. And that should tell you all you really need to know about houseboats and buoyancy.