Nostradoofus

This is so far reported only in Spanish-language media.  Several hours ago, VW shut its Puebla, Mexico assembly line for the Bora (not sold in the US) because of the Iceland volcano.  This is VW’s best-selling car and its largest plant (Puebla also makes most A4-based VWs sold in the Americas, including Golf, Jetta and New Beetle).

The shutdown is typical of just-in-time manufacturing systems;  break the supply chain, and final assembly runs out of parts within hours or days.  Obviously some critical component (probably lightweight and high value, such as electronic control systems) was being shipped from Germany by air.

Transnational interdependencies are bad news for the economic cost of natural disasters, but perhaps good news for geopolitical stability:  transnational just-in-time manufacturing decreases the likelihood of war by increasing its cost to all parties.

War then becomes unlikely unless at least one participant has no economic interdependencies.  For example, the US could invade Iraq in part because so few in the West had economic interests there.

How do you end conflict in the Middle East?  Install dozens of large, domestically owned, export-driven, just-in-time manufacturing plants in Iran, Iraq and Syria.  This would appear to deliver more stability than sanctions, bombing or occupation, because vested interests on all sides would then fight to preserve them.

CalculatedRisk already said this in December 2009, but he buried the lead, so a lot of people likely missed it:  for the foreseeable future, house prices are far more likely to fall than rise, because mortgage rates are rising, personal income is flat, and subsidies are falling.

Homes, unlike other kinds of real estate, are historically priced not by their earning power, but as a more-or-less fixed percentage of personal income.  That is, homeowners take on the mortgage they can afford, which is a relatively stable percentage of income.

During the bubble, that relationship got out of whack, but has since been mostly restored (it’s still higher than the historical average, but not much).  This has led the Wall Street Journal and others to argue that houses are now cheap.

But that makes an extrapolation error.  Today’s affordability depends upon today’s interest rates, income and homeowner subsidies.  If these change, then prices will eventually change with them.

If you believe home prices will rise in the next few years, then you must believe one or more of the following must occur to make mortgage payments more affordable:

1. Mortgage rates will fall.
2. Personal income will rise.
3. Subsidies (mortgage deduction, homebuyer credit) will be expanded.

None of these is realistic;  in fact, all three are moving in the opposite direction. Homes are becoming less affordable. Right now. The odds of an abrupt reversal are remote.

Thus, in aggregate, house prices will probably stagnate or decline for the foreseeable future.  There will be regional exceptions, but this is the overall picture for housing in the United States.

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