Throw a rock down Wall Street, and you will hit an economist with a bearish outlook which, come to think of it, might be a good use for a rock. The status and prospects for U.S. residential construction are keeping the practitioners of the Dismal Science in a dyspeptic state of mind.
This view is not shared in these precincts. Yes, there are some overextended homeowners whose spending habits will be curtailed if they have to stop using their house as a piggybank, but since when was that the intended purpose of a residence? Did our cave-dwelling progenitors take out second mortgages or home-equity lines of credit? I rest my case.
And, of course, various lenders will discover what every thumb-breaking loan shark has known for years, and that is you should never issue a no-documentation loan. Our friends on the docks and in the pool halls must wonder what they teach at the nation's universities these days.
The very word "credit" derives from the Latin word "belief," and even the most dimwitted thug understands that inviting people to lie to you in order to obtain funds is not a belief-enhancing behavior. Nor is issuing option ARMs and other negative-amortization loans that can increase the risky behavior of borrowers with the passage of time. If there is any justice in this world, these lenders will lose money on account of their own stupidity.
But will any of these necessarily plunge everyone else in the macroeconomic abyss? Methinks not. Too many homeowners have operated under the illusion their abode was an investment first and a consumed service second. They lost sight of some simple realities; for e.g., holding costs such as property taxes increase with nominal price, and that while land can acquire a scarcity value, the structure itself must depreciate over time, and most importantly, the replacement cost for one inflated house is another inflated house. Unless a homeowner downsizes or moves to a lower-cost region, housing-price appreciation best is seen as the illusion of wealth, not the creation of wealth.
Metals More Gains Ahead for Gold 11/10/2006 7:54 AM EST There are some bullish signs in the sector, so here's how you can play it.
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Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.
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