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Like all of us, I keep thinking about the economy, wondering if things will get worse before they get better, and if so, how much worse. Also wondering about various conflicting bits of economic data. I know from talking with controllers at the company where I work that manufacturing has gone into a recession, even if the general economy has not. Also keep seeing the news about more job cuts and see the unemployment data continually creeping up. Yet, consumer spending keeps ticking along like there was nothing wrong. Which makes me wonder: "who the heck is doing all this spending, and where are they getting the money"?

One reason I keep thinking about the economy is because Syncspouse and I are hoping to buy a house within the next 12-18 months (correction: I am thinking about it, syncspouse figures that this means she doesn't have to think about it. Not that I'm bitter, mind you...) I've already created a spreadsheet to calculate how much house we can qualify for given our income, savings, debt, etc. Just for fun I've checked the classifieds, and quicklly discovered that there are plenty of homes available; all we have to do is win the lottery and double our income. Great.

These lines of thought converged today. First, read an article in the Journal from a few weeks ago, saying how many people these days are doing cash-out refis and spending the "windfall". Then, as part of my research for that spreadsheet I'm doing, came across and downloaded the "Home Price Index" data from Freddie Mac: ( for the page, and if you want the actual data, which is a 1MB excel file.) Did some sorts on growth by MSA, and my eyes bugged out.

I knew California housing, especially in the Bay area, had been skyrocketing up in price, but didn't realize it was this bad. Here's the top 15 MSA's in price appreciation over the last year (that is, from 1q00 to 1q01), with data for annualized appreciation over the last 5 years as well:

last yr last 5 yrs
2 SAN JOSE CA PMSA 22.96% 15.52%
3 SANTA ROSA CA PMSA 22.10% 11.35%
4 SALINAS CA MSA 21.78% 10.88%
5 OAKLAND CA PMSA 21.42% 11.61%
6 MODESTO CA MSA 21.00% 5.44%
7 STOCKTON-LODI CA MSA 20.71% 7.24%
9 SAN FRANCISCO CA PMSA 19.08% 13.22%
11 SACRAMENTO CA PMSA 17.42% 6.36%
12 YOLO CA PMSA 17.10% 5.93%
13 AUSTIN-SAN MARCOS TX MSA 16.35% 7.86%
15 NASHUA NH PMSA 15.74% 8.66%

28.5%!?! increases in Santa Cruz? 23% in San Jose, and generally 20% plus over the past year anywhere within shouting distance of San Francisco? (heck, 17.5% in Sacramento? Geez, everything in Nocal went up. My great-aunt's old place near Willits probably increased in value 18% last year).

And the 5 year averages are just as insane. Fifteen and half percent per year for the last five in San jose, thirteen and a quarter in San Fran. Ridiculous. We're talking about houses here, not shares of Microsoft; unless everyone in the free world who has substantial cash has decided they want to move to the Bay Area, this isn't going to last. If you draw a graph of housing price in San Fran, it looks eerily like the Nasdaq up to March 2000.

Last time Bay area housing was like this was in 1q 1990. According to the Freddie Mac data, prices then dropped until 1995, and didn't get back to break even until 1997 when the rocket ride back up had begun.

So I get to thinking. Americans already have an insanely low savings rate, yet there are (apprently) people leveraging themselves even more using arguably overpriced assets as collateral. And (AFAIK) unlike the 80's, loans are increasingly sold to other institutions. This disperses risk throughout the system so a collapse in one area won't devastate the regional banks, but will be a (hopefully) minor hit throughout the national system.

But, this also means that the system can be stretched further before signs of trouble really show up. It's like having one great big rubber band instead of twenty smaller ones. Used to be a few rubber bands would break and you knew there was a problem. Now you've got one big band.

Also, haven't found the data on this yet (anyone know where it might be) but it seems a lot more people are buying houses with a lot less down than ten years ago.

So, in fifty words or less: Aren't housing prices in many parts of the country insane? Is a lot of consumer spending now being driven by more borrowing against homes? And what's gonna happen when the money from those refis runs out and/or the housing market starts drying up? How worried should we be?

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