The bubble battle continues.

In response to a study by two Federal Reserve Bank of New York economists that concluded there is little evidence to support a national home-price bubble, another economic analyst charges that this pair could be making “the greatest forecasting error since Irving Fisher declared in 1929, just prior to the stock market crash, that stock prices looked to be at a permanently high plateau.”

Raymond Sabat, editor and publisher of EconomicBriefing.com, critiques the analysis, “Are Home Prices the Next ‘Bubble,'” by economists Jonathan McCarthy and Richard W. Peach.

Sabat contends that the Federal Reserve’s lowering of interest rates “sets the stage for major price inflation down the road,” which, in turn, “forces the Fed to begin to fight price inflation by raising interest rates, which will ultimately lead to the bursting of the housing bubble.”

He adds, “It is thus that we also disagree with McCarthy and Peach when they argue that the Federal Reserve is only likely to raise interest rates during a period of strong economic growth.”

In their study, McCarthy and Peach state, “We believe that higher interest rates would not necessarily lead to a large decline in equilibrium home prices. In the current environment, rising rates probably would result from stronger employment and income growth. Therefore, while the contribution from user costs would be negative, the economic-strength contribution would counteract it.”

Sabat, whose Web site lists Fed Chairman Alan Greenspan as an “overrated economist,” states that the Federal Reserve is in the early stages of recognizing an inflationary environment. “Thus the stage is set for the Fed to slowdown new liquidity entering the economy and to start raising interest rates,” he said in his analysis.

It is more important to watch the growth in money supply than it is to monitor the Fed Funds rate, he added. “It is when this growth in money supply begins to slow in earnest to under 5 percent, as the Fed slowly begins to raise rates, that you will see the real estate bubble begin to burst and then cascade downward. At this point, it is not exactly clear how high the Fed will have to raise the Fed Funds rate to bring money growth to under 5 percent, but rest assured they will.”

He concludes that many Americans are “entrapped” in the housing bubble and, “When the inflation fight gets serious, housing prices will begin to fall, causing great hardship for many.”

***

Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.

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