Who’s not buying into the hype about the housing market improving? This guy.

Driving to pick up some lunch I was informed by WITF, my local NPR affiliate, that the housing market is continuing to recover.

Mike Patton’s recent Forbes.com article, “The U.S. Housing Market: Home Improvement Is Real” makes the argument as well.

With everyone telling us that the housing sector of the economy is recovering,  why would anyone doubt it? After all, these are professional economists.

My doubt stems from my understanding of Austrian Economics, and the theory it puts forth regarding boom and bust cycles. In a nutshell, the theory states that booms and busts are caused by artificially easy credit.  See “Austrian Business Cycle Theory: A Brief Explanation“.

Patton starts out by stating what I would consider to be a proper diagnosis of the 08 housing crash.

“…this all important [housing] market became so overbought that a bubble developed…”

How would overbuying occur? Hmm. Austrians would tell us that when banks lend at artificially low interest rates, more borrowing occurs and that in turn leads to more spending. Duh, right? Easy credit inevitably leads to this “overbought” state that Patton refers to. This is pretty much in line with the Austrians view that easy credit creates the boom and bust cycle. The artificial rates distort the signals business men/women rely on to decide whether to increase production or increase capital. It would seem that Patton is agreeing in a round about way.

Not so fast. Just a few sentences later Patton drops this bomb, “The housing market benefits when banks lend.” Then later, “Thanks to the Fed, interest rates have remained artificially low.” How exactly does Mr. Patton believe the  market comes to find itself in a state of being “overbought” if not from low interest rates and increased bank lending.  He never explains. The reader is expected to simply believe that the cause of and alleged solution to market downturns are one and the same – increase borrowing and spending.

It’s uncanny how similar an expanding bubble and Mr. Patton’s recovery look?

Nowhere does Mike mention that the Fed has been buying $40 Billion in  mortgage backed securities every month. Even the Fed admits, this can’t go on forever and when it stops…POP!


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