Why the Housing Bubble is Bad

The housing bubble is bad for many reasons. According to the recently released Housing Bubble Fact Sheet (pdf) from the Center for Economic Policy Research (CEPR), probably the worst reason is:

The collapse of the housing bubble will throw the economy into a recession, and quite likely a severe recession.

Another reason that the housing bubble is bad, one that you don't often hear about, is that it has given an entire generation of young adults a wholly distorted view of how the world works, and as a result, they are largely unprepared for adversity.

These young adults, roughly between the ages of 20 and 40, have known little other than prosperity in their lives. Having come of age during the early eighties or later, they have lived their entire adult lives with no major wars and no major economic crises.

They have become conditioned to accept debt as a necessary and beneficial part of their lives and many appear to be fearless in the amount of risk they take on in pursuit of making easy money.

Depending on their age, they have witnessed the Reagan Revolution, the fall of the Soviet Empire, a small housing boom, then a small war and a small recession. This was followed by the greatest stock market boom in history, which was then followed by a much smaller recession, terrorist attacks, another war, and then the greatest housing boom in history.

It is as if every time something bad happens, somehow, things not only work themselves out, but they end up better than ever before. How is this possible?

It is as if we have discovered some sort of perpetual prosperity machine.

Well, fiat money, fractional reserve banking, and deficit spending can appear to be a perpetual prosperity machine, but history shows that a system such as this would be better described as a debt bomb.

The Older Generations Know

Much of the growing volume of editorials and letters to the editor from older generations express concern for where the most recent boom - today's housing boom - has taken us. There is a growing sense among the older crowd that things just aren't right - too much debt, too many lost manufacturing jobs, too many Wal-Marts, too many SUVs, and prices that are too high for necessities such as energy and health care.

At the same time many of the twenty and thirty-somethings in the world are buying and selling investment property or figuring out some other way to spend their home equity, many with the mistaken belief that nothing bad will happen. And, if it does, someone will come in and fix it for them.

After all, everyone else is doing it!

Having missed out on the stock market bubble a few years back, many in the younger crowd are able to participate in the housing boom and have huge profits to show for their efforts. Instead of quitting college to start a software company, today some quit college to flip condos. Many are probably trying to figure out where the next bubble will be so they can get in sooner next time.

Why waste time in school studying law or medicine when all you have to do is catch the next wave?

The older generation knows that life does not normally work this way, but today's young adults, in the midst of what some have called the greatest financial bubble in history, have no frame of reference. Maybe they've read about the Great Depression, or the World Wars, or Vietnam, or the 70s recession and stagflation, but they have no first hand experience with adversity.

Many young people have become conditioned to believe that somehow they are special in this world. While this belief may have been shaken just a few years back with the stock market crash and terrorist attacks, these events didn't affect most people directly in a big way, and the recent housing boom has served to reinforce the idea that things will get fixed, and then turn out better than before.

In large part due to recent monetary policy, lending standards, and fiscal policy, many of today's young adults have come to believe that their experience in the world is typical, when in fact it is quite atypical. And, one of the most atypical aspects of the world today is the housing bubble.