Sorry Ben, this isn’t Friedman’s world anymore

Ben Stein is crying out to Alan Greenspan not to raise interest rates too fast. I think I know why.

Mr. Stein claims the “the real pressure on prices has come from increases in the cost of oil and natural gas.” That is not entirely true. Just as big a pressure on most Americans’ cost of living has come from skyrocketing housing prices. Now some folks say “well you don’t HAVE to buy.” And they are correct. In fact, in most major markets it is actually cheaper (after taxes) to rent right now. Rents have simply not kept up with purchase prices. Unfortunately, you can’t just look at the top-line personal P&L.

What we have is a continually higher leveraged American public. And those interest costs are not included in the CPI. “But rates are so low.” It doesn’t matter if you ignore your balance sheet. The fact is, buying an overpriced home at a low interest rate is actually worse for you than buying a home at a deflated price in a high rate environment. Broadly brushed, your payment is the same, but your balance sheet looks much worse – you owe more. Herd mentality took over long ago, and herding always turns out the same way. Bad. Adjusted for inflation, housing prices in major markets have skyrocketed. In the last three or four years, the trend is nearly straight up.

These types of moves never last. Read Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds if you don’t believe it. Despite all the pundits being wrong for the last few years, some highly inflated housing markets are now seeing housing economics favoring the buyers.  I think Ben knows this, as well as the impact it may have on an economy where everyone seems to be a real estate agent or a mortgage broker nowadays. I hope his pleadings don’t go unanswered, even if they are for the wrong reasons.

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