Today’s Wall Street Journal Warning

Today’s Wall Street Journal article that warns about the housing bubble is called House of Cards? If Rates Don't Kill the Boom, What Will?

The housing bubble doesn’t have to wait for high mortgage rates to make it burst. The flattening yield curve must be contributing to fears that banks will turn off the cheap money spigot soon. A flat yield curve presents problems for banks because it is harder for them to make money on loans. Consider how a bank makes money. It borrows money from depositors at 1% and loans the money out for a longer term at 5%, making a profit of 4%. If the yield curve flattens, it must pay depositors a rate of 2%, but still can only loan out at a rate of 5%, which reduces its profit to 3%. Here is a link, but it requires a subscription

Here is the WSJ article link and an excerpt below.

[Most players think a spike in long-term interest rates will be the bad guy, pushing 30-year mortgage rates out of the Garden of Eden and pricing would-be home-buyers out of the market. But what if long-term rates don't rise? They've shown a stubborn unwillingness to budge in the past few years, despite robust economic growth and the Federal Reserve's campaign to tighten credit.

In fact, housing can fall even if long-term rates don't rise. Lehman Brothers chief economist Ethan Harris thinks the more likely scenario is that some minor event will spook speculators, leading to a "contagion effect" that chases them from all of the hot markets. "The history of speculative bubbles is that often they collapse for what appear to be minor causes," he says.]