Saturday, September 03, 2005

Katrina and The Housing Bubble.

What effect will Katrina have on The Housing Bubble? I have thought about it for a few days and I have some ideas. The first question is will the Fed stop raising interest rates to see what effect Katrina will have on the economy/GDP. If they have a pause, this will surely prolong the onset to price deflation. My wife suggests that it could actually increase prices in uneffected areas, because of a 9/11 type flight to tangible assets by people seeking "safety". I tend to believe that this is possible in the short term. But unlike 2001, we are much more leveraged and broke. The ability to further leverage and spend is limited, though probably not exhausted yet. Another question one must ask is if Katrina will be enough to put the country into recession. I don't know the answer to that question, but if it does, it would be terrible for the housing market, as overly indebted individuals lose their jobs and thus their ability to maintain solvency. I have read estimates of 0.5-1.5 % decrease in GDP projections. We will see. Another factor one must look closely at is commodity prices. As oil sits around 70 dpb, it has to start having some bite on the spending habbits of joe six pack at some point. And with the winter season not far away, heating oil prices will hurt the balance sheet. My understanding is that N.O. was a major hub for importing of other commodities such as sugar and coffee. This can only further increase commodity prices and hence can lead to inflationary pressures that will force the Fed's hand regarding interest rate policy. Lumber: You have to be long lumber because of all the rebuilding that will have to take place. Although, if there is a concominant decrease in building elsewhere, this will probably be a wash. As always, we will have to wait and see how this unfolds.


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