Barry Ritholtz has a piece on housing that ends with a reference to a Wall Street Jounal article dealing with Governor Kohn's speech last week. We discussed this speech in an earlier post. While Barry and I disagree on the state of housing, he is a great read and tells it like it is. You should check out his stuff.

Getting back to the article, the author asserts that the remarks indicate the "Fed has work to do beyond controlling inflation." I don't quite read the speech that way.

Could Mr. Kohn perhaps be acknowledging that the spiraling cost of housing is in itself inflationary? Could he be broaching that idea? We're all trained to look for inflation in the price of things we buy. A pound of coffee, a flat screen TV, clothing. By all those measure we're living in nirvana.

But what if what once was inflation imbedded in consumer goods is now inflation in financial assets, one of which is real estate. That type of inflation just feels different, maybe because we all like it when our nextdoor neighbor sells her house for a mountain of cash. Yeehaw, my place is nicer than that dump, I'm a genius! We don't quite look at that type of situation as inflationary.

But it is and can actually be more pernicious because it affects behavior that has lasting implications for our economy. How much money have we poured into housing over the last 5 years? I'm not going to dig up the figure now but know it's staggering. But remember, housing is for the most part a nonproductive asset. It doesn't, in and of itself, generate wealth. So we've foresaken a whole host of potentially wealth creating capital investments for the quick buck of a hot real estate market. While this is completely rational under the circumstances, that being Fed induced artificially low interest rates, it doesn't mean it helps us longer term. We might be paying this piper for quite some time.

I commented in an earlier piece that this isn't your parents real estate market. Well, this might not be your parents inflation either. Let's see what comes of it.