The price decline will continue to accelerate and then finally reach the terminal state with a crash of 10-15% in a month. Your curves will turn sharper and sharper. That is my forecast.
dotcommunist, if the economy is weak, the bust will probably last longer. If the economy is strong, maybe more areas can avoid the typical last few years of modest price declines.
I guess we will have to wait and see!
I picked LA as an example, but there are other examples of 5 to 7 year busts. I think the key here is that the next two years will probably see the worst of the price declines.
My local newspaper last week ran a story about a small business that sells home nick-knacks feeling the slowdown in the housing market.
A friend of mine who owns a luxury used car dealership has gone from selling 20-50 cars a month to selling 3.
Another friend who owns a retail/wholesale furniture business has been losing money for the past year, because sales have dropped to almost nothing.
So following a downturn in housing, we should see a cyclical slowdown in consumer spending (hitting the newsstands now), followed by rising unemployment (coming soon), then the word "recession" on the cover of Time magazine, perhaps asked as a question, "Are We in a Recession?"
And how did this impact the LA economy for the 6 years following the bust.
I love your blog but wish you would let us know more about your predictions for how this will play out and where you think the best investments are in this environment.
CR's sticky price theory is pretty much on target. In the Connecticut housing bust from 1989-1996 (which parallels the California bust of the same period)
Condo prices fell about 40%, and SFH fell 25%. Yes prices where 'sticky' to the downside in 1989 and 1990- falling about 10%- but they fell rapidly in 1991, 1992 and 1993. Price falls slowed in 1994, 1995 and 1996, before reaching bottom in late 1996, before a recovery begin in 1997.
"Don't you think the strong economy of the mid-late 90's truncated the CA decline then? "
I'm not CR, but... I think it did somewhat in Northern California. The SF Bay Area was bubbling along in '95-'96. We'd gotten over the defense cuts and base closures, and the whole Internet boom/bubble was beginning. Heady times...
Southern California took longer -- perhaps because aerospace and defense was much more a part of its economy.
Of course, in 2000-2002 the newly-diversified Southern Cal economy stayed strong, while the Internet/network-heavy Bay Area took it in the shorts.
Many people have been saying to just wait for the buyers on the sidelines to return and the market will improve. But what about the sellers sitting on the sidelines?
That's why I think this will linger for a while, just like last popping. Sellers will return when they think things are improving or they just give up holding a money pit, which in turn will keep supply high and prices flat to lower for several years.
Question is, will the majority of the price drops be nominal? Or will the monetary authorities make sure that the price of all other goods and services inflate to catch up somewhat to house prices?
Wasn't the economy in SoCal pretty depressed in the mid-90s from the cut-backs in aerospace?
The difference is that then, job losses whammed what were relatively high real estate prices. This time, extremely high real estate prices (and lending) imploded on themselves, and the economic downturn is going to start as an effect, though it will probably then cause an exacerbation of the housing downturn.
Basically, there is no parallel to this situation, though it's probably closer to the situation in 1929 than any more recent downturn. They had all sorts of highly leveraged investment trusts (read hedge funds), exotic mortgages, lots of margin buying of stocks, banks lending like drunken sailors...
Is there a graph that plots housing prices (some indicator, say median) with say median income ?
The reason is, saying that housing prices declined 39% in "real" terms is interesting, but not useful to buyers. It would be an "effective" drop if median income also rose keeping up with inflation. Then some one who waited to buy saw his/her income grow but house prices drop a bit or stay flat.
But if the median income also stayed flat - note IF - then house prices staying flat didn't help much.
What I am trying to say is, house prices falling in "real" terms is interesting for economists. For a buyer, the real question is how are they doing with respect to income.
I see real inflation. So I expect "real" prices to fall. But I don't see my income going up. I see income stagnation for many individuals. So I need "nominal" prices to drop. And drop a lot. The nominal prices are dropping - even here in my Bay Area. So there is hope. But a graph like that is more interesting to me.
CR,
Did most of the price reductions during the 90s bubble happen before or after the recession? What was the time offset between the recession and peak negative price change?
Cool!
By renting my house instead of buying it for the last year, I saved:
$42,973.82 (figure includes interest deduction and investment opportunity lost from rent paid versus interest paid, etc.)
And, instead of returning -4.5% on equity, I'm getting +5.1% returns on savings.
If prices drop 20% in 3 years, I will save a total of $280,443.21. (Figure includes interest deduction, anticipated rent increase of 3%/yr, etc).
How can anyone look at these figures and still consider buying now?
It does offer some perspective. The AAAs are materially lower than August 6. I view the ABX as a relative indicator of MBS valuations. It's a fair bet that all classes of MBS declined in value in the last week. I suspect we're getting close to principle losses.
What would be helpful are estimates of total MBS valuation losses.
There's a video on Bloomberg's web site where Robert Shiller says he thinks the Fed will (and should) lower rates by 50 bps. I guess his position is that this housing bust will otherwise be so severe that it will do serious damage to the entire economy.
I just don't get it. How do economists rationalize such a move when the dollar is collapsing? Doesn't the damage to people's savings count for anything?
This is a guy who pegged the housing boom as a mania long ago. I doubt he wants to save housing, per se. He must really think the ecoonomy is in for some pain.
There is a large and increasing amount of friction in this market- vacant units in some state of transition. These will come back onto the market well after the construction pipeline clears out, prolonging the pricing pressure.
Delusional sellers still holding out for 2005 prices, including upside down sellers and sellers in bankruptcy range (ie. no owner incentive to maximize sales price unless it results in non-bk
Houses in foreclosure process or bank owned awaiting sale (Countrywide has 9000 vacant homes and is increasing its inventory monthly)
Condos going into foreclosure when buyers walk away from deposits
Gotta love real estate. The cycles are long, but they're pretty damn obvious.
I bought my condo in LA in April 1998. I sold it in December 2006 for 3.9X what I paid for it. I remember the RE fall from 1989 to 1996 of about 40%. My prediction: the LA top was September 2005, the bottom will be reached between September 2009 and September 2010. Miami will take longer to bottom. Say between 2010 and 2011. Be patient.
Congrats to you house whisperer, my savings came to $78k.
As for what's likely to happen, us conservative, responsible, savings minded renters should ALL be taking noteson who'se being more irresponsible than the next guy about bailing out the scam artists who dug the hole we're in.
It's not very positive for our kids & grandkids that our Federal Reserve has CHOSEN to defend our ridiculously inflated GDP as a sacred line in the sand we should do all possible to not recross, instead of implementing sound fundamental policy to insure our economic future.
So much for free market economies, huh?
Did the 80s housing bust get as much press as this one?
I wonder, with the MSM channeling Calculated Risk, plus the sheer number of speculators... Perhaps the sellers will move sooner, voluntarily or otherwise, and prices will decline a lot faster than history would suggest.
I do not think the Fed will cut 25 bps tomorrow, because it would be a waste. I think they either go for more "shock and awe" or they conserve ammunition. Zero or 50; no idea which.
I just don't get it. How do economists rationalize such a move when the dollar is collapsing? Doesn't the damage to people's savings count for anything?
Income is more important than savings for most people... even those how are 'retired' since so much of their 'savings' are in income producing assets (stocks & such).
Income (and positive productive output) is MUCH more important for the economy as a whole than savings... You need both but income supports the values backing up most savings.
Combine the two and a decline in national income puts a huge hit on values for productive assets AND personal income - that effects something like 95% of people.
The only folks who get really hosed by a big rate cut & excess liquidity are those with strictly fixed income with little or no COLA.
The idea behind a cut is to keep money flowing (amount & velocity)... that amounts to 'income'.
If the fed thinks the income streams are in jeopardy they will throw the savers under the bus and not think a thing about it.
My opinion is that coming off a 3% GDP quarter we are not yet in jeopardy of seeing incomes zero out... talk to me when we have a couple months of serious job loss and lotsa negative corp earnings. Show me that (not just hints its maybe coming) and I'll sign up for the cuts too - ain't there yet.
To give an idea of the hypocrisy of the bulls - Kudlow was crowing today about how huge global stock market capitalization is and out of that same mouth comes an unending call for more rate cuts... at the same time we got $90 oil... wtf.
This whole thing is killing me as I close on a house tomorrow after selling the house we've been in for 9 years...BUT I keep telling myself that this is not an investment vehicle but a place to put my head and raise my kids. And frankly, we're moving as we've outgrown the old place. I keep telling my wife that I either the new place in 20 years on my feet or else in a box.
Ah well...
Oh yeah, a fixed 30 year note and one-third down. See? I actually pay attention to what I read.
=========================
...I think they either go for more "shock and awe" or they conserve ammunition. Zero or 50; no idea which.
Nemo
Yup, my take is they conserve ammunition, so nothing tomorrow. With the 15th Nov. accounting change deadline approaching, many SIV asset markdowns ( CDO and CDS ) expected to hit 50% by the end of Nov. which is an "event", this continual drop in the ABX's, they'll want to save the banks first - a .25% cut now with the risk of having to do .50% in 2 weeks ? That would be really toxic.
Farfetched ? I'm simply extrapolating from my view the Fed is Wall Street's b*tch.
I liken the construction of the housing mortgage bubble to the construction of the first "Death Star" Alan Greenspan is of course the Emperor. Wall street stands in for Grand Moff Tarkin, and the NAR is Darth Vader. All is well until Bear Stearns Skywalker fires a proton subprime torpedo down and open CDO shaft, and kaboom!
It is my belief that the Alt-a resets that peak in 2009 will have a very large effect on prices in California,and particularly the Bay Area.This is an unusual cycle to say the least,and the biggest difference i see in how it will play out is the use of exotic loan products and their resets...used to be you had a 30 or 15 year fixed...lose your job,lose your home.Now? resets on maxed out homes in a declining market for years to come,while the economy and dollar go down the tubes.
Not sure I buy your argument about favoring income over savings.
Seems like there are plenty of folks (probably heavily weighted towards folks who are retired or nearing retirement) that are invested conservatively and depend on fixed income like Social Security, CDs, pensions, etc... Typically the COLA are not adequate to cover true inflation.
In any case, propping up asset prices is just going to exacerbate income inequality. Like it's not bad enough already.
I understand you weren't necessarily arguing that it's the right thing to do. I'm just saying that I think it is very much the wrong thing to do.
CD,
Help, the graphs on my firefox browser overfill the screen. I assume that I have the wrong screen res. What do you assume to fill the screen?
Thanks
I'm still waiting for prices to become "unstuck" here in Silicon Valley cities like Palo Alto, Los Altos, Los Gatos, etc...
I'm counting on ARM resets and POA recasts doing the job in 2008-2010, perhaps with a little help from the recession.
I need a larger house than the one I'm renting, but finding a good SFH rental is tricky in this environment. Probably going to stay where we are until we buy in a couple/few years.
You just lost that 33%.
Ephraim | 10.30.07 - 8:02 pm |
No Ephraim, a loss is only realized when you SELL. I bought a piece of property outside of Boston in 1988 for 147,000. I watched as the last houseing boom went to bust and the house devalued to around 114,000. I had put the required 20% down at that time because, well...that was the way we did things.
Now that property, even after the recent declines, would sell for around $350,000. So Ephraim, exactly how much did I lose during that period of the last bust? Even if that place rolls back to 300k, how much will I have lost?
I think that due to the unprecedented nature of the runup the housing price downturn will be much swifter and more violent this time....but that's just me and I'm wrong just as often as anyone else.
I saw the Shiller clip and just could not believe he said that. The trouble is when the Fed cuts it is causing (already) flight from dollar assets and HIGHER long term rates in mortgages. THat in addition to that pesky inflation monster in the closet. Do Bernanke, Mishkin and co. really care that little about how history views them that they'll continue to bail out Wall St? I guess we'll find out tomorrow.
I'd say you lost a lot. You could have bought an income producing property or two along with your house at the bottom and doubled or tripled your gain of today.
Why does everyone keep saying that real estate busts are slow?
Shiller in his second edition of Irrational Exuberance noted that 40% of real estate busts are rapid. Japan's would be a case of that, and I believe the large Scandinavian one of the early 90s was as well.
Granted that our current bust is not declining rapidly, but you also have the unusual case of where the bust seems to be leading the downturn. There are other bubbles out there. Spain's may be worse then ours. If the housing market takes a steep dive this quarter (25%+ price drop), we will not remember it ten years from now as a slow decent.
There are two versions of real estate slumps. The 9 year and much worse 18 year variety. We are very close to the 18 year cycle (Fromm the 1990 downturn) right now.
I understand you weren't necessarily arguing that it's the right thing to do. I'm just saying that I think it is very much the wrong thing to do.
I'm saying a good environment for income is a good environment for 'productive assets'... To have that you need 'reasonably high' money supply & velocity.
In a truly contractionary/deflationary environment cutting rates will help improve money supply & velocity, increase incomes and therefore 'prop up' values of productive assets.
Notice though that incomes come first and asset value part comes last in that chain - the valuation is the result of incomes, not incomes the result of valuations.
So if we see a real contraction in money supply & velocity - usually reflected in declining if not negative GDP growth - then a cut makes sense and it would benefit us all. Even those on fixed incomes.
I mean even those fixed incomes come from income somewhere - even SS - as do the things they consume with that fixed income. There really are no savings anywhere, only promises to pay out out of current income a claim to current production.
My beef with the fed is that I don't see the contraction yet - hear the rhetoric saying it could come, even believe it will come myself - but I think part of the job of the fed is to be 100% data driven and the data doesn't tell me we are in negative GDP growth zone yet.
They need to wait until they see the whites of recession's eyes before firing rate cuts. That means they'll be a little late (we'll already be in recession)... but they will be far less likely to miss and will not have shot all their rounds prematurely.
When we are finally in contraction, sign me up for the cuts... But it will be to get money moving again to defend income & productive output. That is quite different than protecting speculative positions.
"Shiller in his second edition of Irrational Exuberance noted that 40% of real estate busts are rapid. Japan's would be a case of that, and I believe the large Scandinavian one of the early 90s was as well."
I googled up a few charts of Japaneses real estate prices... they declined from 1990 to 2005, and might have bottomed out then (too soon to be sure). That means the bust took at least 15 years.
That would make the Japaneses real estate collapse far slower than the ones referenced in this post, assuming it has finally bottomed out.
Now that property, even after the recent declines, would sell for around $350,000. So Ephraim, exactly how much did I lose during that period of the last bust? Even if that place rolls back to 300k, how much will I have lost?
Doncha yall just love clueless real estate koolade drinkers?
First thing, how about adding in your carrying costs including interest taxes and insurance and maintenance.... oops.... forgot bout that one dintcha?
Your measly down payment would have netted you upwards of 350k had you the brains to put it in the S&P but you didn't. Instead your out of pocket is well over 350k on a shack you claim is worth 350k for a spread of 700k.
Dryfly, there's a Fed Watch post over on Economist's View by economist Tim Duy that basically agrees with you on the lack of reason for a Fed Cut. He also sees no data supporting the economic contraction theory (outside of housing) for the Fed and sees plenty of reasons for them not to cut. He saw the 50 bps cut as them getting ahead of the curve and taking out an insurance policy against ill-liquidity. Tim thinks that now they'll wait for the supporting data for the next one. (He also does a hat tip to CR.)
". . .
A week later, Chicago Fed President Charles Evans reiterated the outlook:
Indeed, on balance, I would characterize the data we have received on the real economy since the last FOMC meeting as supporting our baseline forecast.
Such comments – that the economy is roughly in-line with the Fed’s forecast – are essentially ignored by commentators. Has anyone noticed that the data flow has steadily caused 3Q07 estimates of growth to be raised above 3%? Think about it – the Fed cut rates 50bp during a quarter in which growth topped 3%, just after a quarter with almost 4% growth.
The Fed is never that proactive. Never.
Yes, I know, forecasts for 4Q07 are low on the potential impact of the August market turmoil. But note that we have almost no data on the 4th quarter to assess the quality of those forecasts; largely some volatile data on consumer confidence and jobless claims. Moreover, the Fed expects weakness, and is trying to look through it to mid-2008. And the Fed already cut 50bp because they knew that they would not have any good data on which to assess the 4th quarter at their October meeting. Nor would they normally commit to policy with only a single month’s data. The month is not even over! That was the “risk management” portion of their decision to cut 50bp in September. How many rate cuts do you take as insurance?
And, on risk management, Fed Governor Frederick Mishkin, one of the architects of 50bp move, sees financial conditions improving:
''Market functioning has certainly not yet returned to normal,'' Mishkin said in a speech at a seminar commemorating the 1907 U.S. financial panic, which led to the Fed's creation. Still, Fed actions ''have helped improve conditions in several short-term funding markets and instill confidence in investors that liquidity would be available if needed,'' he said.
They did not expect conditions to return to normal overnight; they are simply looking for things to be moving in the right direction. And they are – notice that the ABX market is coming unglued again, as documented by Calculated Risk, but the impact on financial markets is considerably more muted than this summer.
. . ."
I'd say you lost a lot. You could have bought an income producing property or two along with your house at the bottom and doubled or tripled your gain of today.
lunatic fringe | 10.30.07 - 8:23 pm
That was income producing lunatic. A nice two family. And it's paid off so I just collect rent now and live in my own house that I bought for the princely sum of 107k in 1996 at the last bottom. Even after this is over 107k will not even buy you a parking space anywhere in MA. It did teach me a lot about real estate though, and I could see what was going to happen when things got crazy around here. People have short memories. I've held onto this just because...I'll probably sell it after this is all over. No rush, and it's purpose was always to help to buy the last place I will go before the box lol. I was a mere 25 when I bought it. So I think it has served that purpose well!
And time is on my side in both of these purchases.
"I'm saying a good environment for income is a good environment for 'productive assets'... To have that you need 'reasonably high' money supply & velocity."
Hogwash dry. The late 19th and early 20th century saw phenomenal growth with a bi-metal gold/silver standard. Further if you want to argue the Quantity theory of money M * Vt = Pt*Q (actually Austrians who play with this silly equation use the symbol of 3 horizontal lines and not an equal sign as Austrians tend to view this as an equivalence and not a mathematical equation). So anywho, if dM/dt > 0 and dVt/Dt > 0 then you have the accelerations multiplying each other, which in the grand scheeme of things is highly inflationary as on the other side of the equivalence the easiest thing to change is Pt. Hopefully you get the picture.
Further more false asset inflation due to money pumping cause mal-investments. Like lots of empty houses, Home Despots, Furniture stores, and unemployed Real Estate agents.
Finally low to negative savings means that the pool of funding for projects undertaken do not exist (trade deficit, the US needs a $billion or so input of foreign savings a day...etc)
"When we are finally in contraction, sign me up for the cuts... But it will be to get money moving again to defend income & productive output. That is quite different than protecting speculative positions."
Money always moves. Rate cuts encourage borrowing, not income. I do not see US corps increasing capacity for a long time, so rate cuts would simply continue the current idiocy of Americans eating their seed corn.
Do Bernanke, Mishkin and co. really care that little about how history views them that they'll continue to bail out Wall St?
Yes. They know that Greenspan (debt pusher) and Bush (deficit pusher) will be seen as history's biggest boobs.
They need to wait until they see the whites of recession's eyes before firing rate cuts. That means they'll be a little late (we'll already be in recession)... but they will be far less likely to miss and will not have shot all their rounds prematurely.
Bernanke has already shown he'll cut; and his praise of Friedman and declarations that the Depression wouldn't have existed with earlier rate cuts says that BSB is planning to cut, and cut hard. Until he can't anymore, dies, or is fired.
Taking things to the extreme... Do you think lowering interest rates all the way down to 1% again (or even less, hey let's go Japanese!) would actually be good for the economy?
Who really benefits from those low rates anyways? Banks, Hedge Funds and IBs who have access to large amounts of cheap money? And how good are they at directing the money to productive uses, just looking at recent history as an example? How did we end up with all these vacant houses anyways?
How does the system ever cleanse itself of inefficiencies and malinvestments ?
In NYC, where I live, almost every house that is for sale is a negative cash flow property. For example, if I buy an investment 6 family building in Queens for say $1,000,000 I will have to put down a $300,000 down payment (commercial property) and then every month throw in a few hundred dollars to cover expenses for as long as the eye can see.
This scenario is similar for non-commercial properties.
Moment of clarity for investors:
Why would I make that investment when I can invest that $300,000 in bonds and get 4-5% yield or stocks and get a 2-4% dividend yield?
When speculation dies, this realization knocks down house prices really quickly.
I hear house prices in South Florida are down 25% from the top. If you had kept your money in 5% CD's and not bought in 2005 your house prices are down %35. Not that sticky.
I don't see bottom until price/rent ratio's and income to debt ratio's comeback to earth. In my area 50K medium income with 500K medium housing price means a never ending wave of foreclosure and BK because the only way people can afford to buy would be some ARM or IO loan. Since a person or family making 50K a year does not have 100K in the bank for a 20% down payment. If the medium income is 50K then the medium home prices need to be closer to 150K. Of course those kind of numbers look so cheap that they appear far beyond reasonable expectations today.
"Your measly down payment would have netted you upwards of 350k had you the brains to put it in the S&P but you didn't" I have found It very tough to live inside the S&P. My wife is always bitching about the neighbors
CR, great work. Dryfly, I'm with you. All these emotional simpletons with their hypocritical morals create a prevailing bias that is self defeating for the economy as a whole.
The party is long since over. What good does it do to call the cops to complain now? Should been done in 2002 and 2003.
I have put up a few charts based on the "what do you want your payments to be" premise.
I have reverse engineered the expected home price over time using the conventional 30 year mortgage rate, an assumed 1.5% cost based on the price of the home (property taxes, insurance, and what not), and 50% of the average monthly earnings as reported by the BLS (assuming two people in a household could afford that) to fund it.
It might show that at least part of the housing bubble at least attempted to be rational, depending on how you look at it.
Of course, should interest rates rise at some point in the future the "what do you want your payments to be" model sinks (and burns) in a sea of icy pain. However, live for the moment and hope for the best!
How do you have "sticky prices" on the downside when you have so many homeowners (the banks) that don't want to own them?
I think comparisons to the late-80s/early-90s are off the mark because lending standards were dramatically tighter. This time you've got a ton of people with 0% down mortgages who have ZERO equity at the outset in their "investment". The real owners (soon-to-be the banks) aren't in the banking business to be landlords--as their REO portfolios get marked down, they're going to be puking these properties to the highest bidder.
The only thing that's going to be sticky in the minds of the people who financed this was how they got donkey punched (check urbandictionary.com) lending money on loose terms.
I think rate cuts favor debt more directly than income. Basically, we owe the rest of the world something like $13 trillion (I think it's a net $3 trillion), virtually all denominated in a currency we control. That's a big incentive to devalue the dollar.
The real beneficiaries of a rate cut are debtholders. Wage earners may see higher wages, in nominal dollars, but face rising prices. Savers are the big losers.
I just don't get it. How do economists rationalize such a move when the dollar is collapsing? Doesn't the damage to people's savings count for anything?
Anybody else interested in seeing a US housing price chart that adjusts for the dollar index?
Nice charts as always. But I wonder, isn't 50% of income a bit high? Or are you using net after taxes? I would never have 50% of gross as my monthly housing cost. IMHO
What's the difference between this housing bust and others, and how will that affect the recovery period?
Differences:
Globalization/Global economy
National debt
Personal debt
Population
Deficit spending
Off-budget spending
Energy costs
Declining dollar
Aging infrastructure
Loss of manufacturing base (pre-hamburger)
Stagnant wages (declining in real terms)
Misaccounting of unemployment statistics
Misaccounting of inflation statistics
The euro
The war
Illegal immigration
Offshoring of jobs
Stocks keep gaining in the face of it all.
There's never been anything like it, folks!
Here's my prediction: We're heading into a long overdue, downwards adjustment that will reflect the complexity of our economy in it's intractability and duration. The global economy cannot support the Americn middle class. This is going to get ugly(ier). There will be huge social ramifications, domestic and worldwide. Housing bubble bursts will be vague memories of better times.
We should be pulling out of the worst of it by 2020 - 2025. An entirely new iteraton of "America" will emerge.
The housing bubble burst is the canary in the coal mine.
The speed of home price declines depends on the structure of debt underlying those assets.
A large portion of credit intermediaries in this go-round depends on levering "hot" short term funding. Its unlikely this funding will stick around to find out if prices end up as sticky as in the past. The result will be self-fulfilling, fear begetting fear.
The relevant question to ask is this: "what level of mortgage credit will be available in 2008?" If the answer is, "roughly the same as 1H2007," then indeed, prices will be sticky.
If the answer is, "about 30-40% less," then expect a white-knuckle descent.
This debate is really about conditional probabilities. What is the probability of a 25% decline given a 10% (national) decline. In 1991, low. In 2008, high.
50% of just one person's income, so for a 2 person household where both work that's 25% (gross, before taxes).
It's just a ballpark estimate of course. In any event, it wouldn't change the shape of the charts, but would simply alter the dollar scale on the left.
This should not be used to predict current prices, but simply show how we might have gotten to this point simply by looking at interest rates (which of course ignores a lot of other useful data, like too much building, prices rising faster than rents, prices rising faster than costs, speculation, and so on).
Yes there are continuing downturns to 2000 when the data stops. But about half the loss was all in one year. That could easily be argued as a "sudden" drop. In fact the data is a little worrisome in that the housing data on p34 shows a very slight dip in the first year, and then falls off a cliff: about were we are now: looking over the cliff.
CR, nice charts; illuminating, and your conclusion would be spot on if all other factors today were the same as they were in the early/mid '90s.
But, we face a wild unwinding of all-time high household debt-to-income levels, now at low real interest rates. Folks are having problems making payments today, and right around the corner are an avalanche of resets and higher real interest rates (with the return of the risk premium).
Folks are cutting back on consumption to service horrendously high debt levels. This mess resolves only when 'asset holders' (pension funds, investors, bondholders) wake up and realize that the assets that they hold are worth only a fraction of their value. That realization will take years, and will force hoarding/saving, lower consumption, and lower incomes. Real estate prices (real) will begin moving north no sooner than 7-10 years from now.
I concur. We are just now seeing foreclosures and other bad housing data reach all time highs. What happens when they move off the historical charts. I suspect, at least partially for reasons you site that they will. I think the big problem will be when a major bank, IB, or major financial institution goes teats up. And that time bomb might be tied to the M-bLECh Super-Sewer. This toilet is something to watch closely...IMHO.
It's just a ballpark estimate of course. In any event, it wouldn't change the shape of the charts, but would simply alter the dollar scale on the left."
Sorry I should read more carefully. I understood it to be an estimate...I'm single so I see 50% on housing and gag.
Methinks you are partially correct, but have not factored in the inflation the fed will induce (forget stagflation...ain't gonna happen again) that will rescue the debtors and get things hopping about 2009 - 2010 for another zoom forward in all industries, even real estate. After all, we now know how to handle inflation, don't we? And another wee bit would be most helpful just now. Look for it. Borrow all you can in the next year to buy hard assets, and pay it off with cheap money after 2010.
thanks, that will make me sleep better tonight. Kinda like sleeping my garage would make me feel better knowing that the garage was air tight and my car would be running all night.
thanks, that will make me sleep better tonight. Kinda like sleeping my garage would make me feel better knowing that the garage was air tight and my car would be running all night.
If dark humor sarcasm was an ice cream flavor I'd be topping it with a cherry and calling it ready to eat right now, lol.
"Borrow all you can in the next year to buy hard assets, and pay it off with cheap money after 2010.
swampfella "
I've been maintaining that failures of debt granting institutions, combined with the inability of consumers to keep gobbling debt will make this strategy fail miserably. The Fed cannot force people to take on more debt, only tempt them. Therein lies the problem.
When we are finally in contraction, sign me up for the cuts... But it will be to get money moving again to defend income & productive output. That is quite different than protecting speculative positions.
Dryfly,
How does cutting rates defend income and productive output? (I assume you mean real income.)
It seems to me that if we were to enter a recession, it would be because we were not able to make productive use of capital borrowed at prevailing rates.
In other words, the emergence of recession would suggest to me that resources and credit were not being used in a productive or competent manner with respect to longer-term wealth creation. Afterall, in recent years real interest rates haven't been especially high, so why are interest rates even relevant to "income & productive output"?
It seems to me there's a deeper issue here behind the recession threat. If so, it may be counterproductive or outright dangerous to address this with unproven or superficial means.
"ac
t seems to me there's a deeper issue here behind the recession threat. If so, it may be counterproductive or outright dangerous to address this with unproven or superficial means."
Like I said:
"I'm saying a good environment for income is a good environment for 'productive assets'... To have that you need 'reasonably high' money supply & velocity."
Hogwash dry. The late 19th and early 20th century saw phenomenal growth with a bi-metal gold/silver standard. Further if you want to argue the Quantity theory of money M * Vt = Pt*Q (actually Austrians who play with this silly equation use the symbol of 3 horizontal lines and not an equal sign as Austrians tend to view this as an equivalence and not a mathematical equation). So anywho, if dM/dt > 0 and dVt/Dt > 0 then you have the accelerations multiplying each other, which in the grand scheeme of things is highly inflationary as on the other side of the equivalence the easiest thing to change is Pt. Hopefully you get the picture.
Further more false asset inflation due to money pumping cause mal-investments. Like lots of empty houses, Home Despots, Furniture stores, and unemployed Real Estate agents.
Finally low to negative savings means that the pool of funding for projects undertaken do not exist (trade deficit, the US needs a $billion or so input of foreign savings a day...etc)
"When we are finally in contraction, sign me up for the cuts... But it will be to get money moving again to defend income & productive output. That is quite different than protecting speculative positions."
Money always moves. Rate cuts encourage borrowing, not income. I do not see US corps increasing capacity for a long time, so rate cuts would simply continue the current idiocy of Americans eating their seed corn.
Further more false asset inflation due to money pumping cause mal-investments.
Misean, I am not an "Austrian' nor am I completely confident in the Keynesian explanations. I look at fiat as a practical 'utility' and if it 'works' I'm happy.
For example I've never liked the 'mal-investment' meme. I get your point about the 'empty houses' but in my mind that doesn't say it is a 'mal-investment' or 'over consumption'... Placing the 'mal' & 'over' in front is personal opinion.
Likewise I don't trust all the Keynesian math. It's not that I don't get the math - its just that I come from an empirical science/engineering background and want to see causal relationships proven via experiment. I took a number of classes in econ in college and had that tiff with the prof's over and over.
But that doesn't mean the current system can't work. We don't know squat about the mind or neurochemistry but we still think.
I don't worry about either economic ''school so long as the economic environment 'works'. A well managed money supply is part of a favorable environment.
So increasing money supply in a weak investment/productive environment or cutting back when its too hot isn't a terrible thing so long as its a well managed process and not done purely to manipulate or 'wag the dog'. I don't believe that has to be the case - it can happen but it doesn't have to happen.
One thing for sure - I do NOT like the idea of gov't sanctioned 'metal based money'... Its not that I don't see value in metal, its that I prefer gov't staying out of metal markets as much as possible. And I love the idea of fiat.
The best of all situations is where metals are 'independent' in a completely 'artificial' fiat system. If gov't takes metal 'in-house' then you have all the same manipulations you have with fiat except now the gov't controls the metals too - or attempts to with resultant opportunity for abuse.
The real power of fiat in today's system is you can virtually opt out of fiat by buying metal, having direct ownership of productive assets like land, or owning OTHER fiat rather than your native variety when you sense the powers are manipulating yours against your better interests.
Going nearly 'cashless' is the best check and balance against the fiat system running amok. I think BB is learning this lesson the hard way. If there is a way we might copy Japan - this is it.
And if gov'ts screw up their fiat enough they too will have to go back to buying metals & commodities to improve their 'full faith & credit' claim.
But that still doesn't require a return to 'gold standard'... just an occasional 'back up' if they screw up.
And buying gold could be the ultimate way to fight 'deflation'... print money to put in circulation by buying gold. If that isn't inflationary I don't know what is. What irony THAT would be.
And that's not all bad. In my mind it is far preferable to some artificial metal standard. Let the damned stuff float too.
As for fiat induced inflation & the calculus - I accept there will be some inflation over time... it's like 'friction' or 'entropy' or 'electrical resistance'... Its real world 'waste' that can't be avoided but it can be managed GIVEN GOOD POLICY. Too much friction and the wheels melt off.
In my view fiat is only useful as a measure of instantaneous transactions in real time (especially consumption) and should not be taken as a store of wealth in & of itself. The productive assets & metal it buys NOW is its only store of wealth over time not the money.
There needs to be enough fiat out-n-about to efficiently facilitate transactions but not so much or so little that it wags the dog.
In summary my bitch is with the current management of this 'utility'... not that the utility exists or that it isn't perfect.
Taking things to the extreme... Do you think lowering interest rates all the way down to 1% again (or even less, hey let's go Japanese!) would actually be good for the economy?
Short - that really depends. Given enough deflation and maybe you need NEGATIVE rates. Helicopter money for real.
The thing is the fed - the managers of our money, the WORLDS money... or was the worlds money anyway - needs to match the supply of this 'utility' to the estimated demand. Its like all management problems - its approximate & requires data of semi-intangibles & good judgment.
If the wheels are really falling off - 30s depression like - then 1% might be reasonable. Personally I think AG over did it by A LOT back in 2001... we didn't need 1% and we certainly didn't need it for as long as we got it.
Would we have had a more severe 'recession' in 2001? For sure.
Would a cut have been justified? Probably some.
But remember monetary stimulus is only one kind of stimulus... there is fiscal stimulus too. We were heading to war and had a tax cut besides. That's a lot of gas. I think 1% was way too much on top of that. History will judge.
And given our deficits now I don't see how the fed can cut. I think they run the risk of blowing the lid off if they do.
Dry,
"Further more false asset inflation due to money pumping cause mal-investments.
Misean, I am not an "Austrian' nor am I completely confident in the Keynesian explanations. I look at fiat as a practical 'utility' and if it 'works' I'm happy.
For example I've never liked the 'mal-investment' meme. I get your point about the 'empty houses' but in my mind that doesn't say it is a 'mal-investment'"
Then what is it? A proper investment? A logical investment? A wierd investment that just kinda happened like when I banged this chick and she kinda got preggers?
I also have a degree in mechanical engineering. I don't see what's unclear about mal-investment. Market signals due to pricing and credit availability called resources into use that were unpreductive, long term. Even though the resources consumed could not pay for the long term costs. Sounds like a mal-investment to me.
Dry Next:
"But that doesn't mean the current system can't work. We don't know squat about the mind or neurochemistry but we still think."
So what, it is easy to track mal-investments. And...come on...You knew there was a housing bubble ages ago. Do we really need to understand the human brain to see this.
In other words, the emergence of recession would suggest to me that resources and credit were not being used in a productive or competent manner with respect to longer-term wealth creation. - ac
I don't know.
What I do know is that people make 'income' on every transaction. Your buy is my pay check. More transaction smeans more income.
As money supply contracts fewer transactions occur due to slow money velocity ('hoarding') and so less output & 'income'...
On a personal micro-level its a good idea to cut back on transactions going into hard times but on a macro level it collapses the whole system even faster. It turns into a deflationary 'death spiral' if taken to the extreme.
Pump money out there and that reverses it... then you have more money chasing the same amount of stuff & capacity and transactions increase in number and size and so does income. Generally a good thing.
The question is do we have more or less 'stuff' - real wealth if you will - after an increase in money supply? I don't know the answer to that.
I'd say if the money supply is added in a time of contraction then 'yes' we probably do have more output due to increases in labor & capital utilization... But if added in a time of near complete utilization then I'd say 'no'... then it ends up in price inflation.
I think we are closer to the latter condition than the former even considering the housing bust. That might change but right now I think BB is nutz to cut right now.
"One thing for sure - I do NOT like the idea of gov't sanctioned 'metal based money'... Its not that I don't see value in metal, its that I prefer gov't staying out of metal markets as much as possible. And I love the idea of fiat.
The best of all situations is where metals are 'independent' in a completely 'artificial' fiat system. If gov't takes metal 'in-house' then you have all the same manipulations you have with fiat except now the gov't controls the metals too - or attempts to with resultant opportunity for abuse."
Oh lord...fiat is infinite, metal is finite. The Gov't isn't the only probelm it is those that influence gov't policy as well. Lock 'em down and they can't engage in shennannigans....Fiat allows these manipulations.
"As money supply contracts fewer transactions occur due to slow money velocity ('hoarding') and so less output & 'income'... "
No it does NOT. It means that prices simply fall. Thus your money is worth more. What is wrong with that????
It means Pt declines. Why is it that people who understand that Gov't removal of day to day donsumables from the inflation index understand that this is cooking the books, but don't understand that those prices falling is a good thing? Further you seem to think that decreasing M decreases Vt???? Why? Consumables need to be replaced. I cannot get to work without eating or buying fuel. I can get to work without an iPhone or a plasm.
Gah...I'm growing tired. and running on 5 threads.
I might think housing was stupid investment. But that's my choice. i see lotsa stupid investments that I might call 'mal-investments' that the market seems loves.
And it might love it today and hate it tomorrow. That's why I hate the term so much. If it loves it today and hates it tomorrow what made the difference?
My point is the best way to allow markets to work is via a well managed fiat. The thing to remember is that we are free at anytime to dump the fiat and buy something 'real'.
If I was a hard core Austrian - I'd want a constitutional amendment requiring fiat and having the ownership of gold on the same constitutional footing as weapons and the second amendment.
But that's just me.
And I'm not even saying you can't learn something useful from modern Keynesian economics... I think you can. I did. But then I also learned something from quantum chemistry... but I never used it as a chemical engineer.
"I'd want a constitutional amendment requiring fiat and having the ownership of gold on the same constitutional footing as weapons and the second amendment."
Go read it. Gold and Silver are REQUIRED by the Constitution as money. We need no amendment. Fiat is worth what it has always been...zero.
"And I'm not even saying you can't learn something useful from modern Keynesian economics... I think you can. "
I think you can too. Exactly what NOT to do.
Cheers,
P.S. Bed time, but thanks for the debate dry, I enjoyed it. Hopefully it made some think, and if so, that's a huge positive in this Dumborat vs. Rebooblikud environment we are fed daily in the media in this country.
No it does NOT. It means that prices simply fall. Thus your money is worth more. What is wrong with that????
If all you do is hold money its great. If you take out debt to build a factory you are ruined. When the factories close folks are laid off AND production stops. So folks neither have money nor adequate supply of goods.
Eventually 'price signals' reconnect and the shortages trigger price increases and the factory reopens and the labor is rehired.
But there is one helluva lag and a lot of pain. Sometimes the pain is so ugly there is revolution & more ruin.
The thing that always amazed me about the Austrians is they understand the 'irrational & emotional' part of human economic decision making so darned well when the market is functioning but fail to account for the irrational & emotional during the bust. Folks are not going to freeze in the dark waiting for the price signals to connect.
Anyway trying to dampen that cycle is a noble cause... and a good thing if they can pull it off. But as you know, if they over-damp that's not so good.
Good management is needed & I'm not sure we've gotten that in a while - at least a decade.
I'm also closing on a house tomorrow. In my case, I decided to put the minimal down (5%), and stick the remaining 15% into gold and treasuries. The money is so cheap, it really doesn't make sense to use a bigger downpayment.
Plus, if things really do fall apart, a mortgage may be the least of my worries. I may need access to that money.
If we get wage inflation (my expectation), then it'll all be ok anyway. I think that's the real reason behind the FFR cuts: we're not going to get wage growth naturally due to globalization, but we can produce it artificially.
mish had a piece up today titled, "Pent up supply". Clever title. That's the exact opposite of what the NAR has been trying to sell to their clients. Who would you be inclined to believe?
"If all you do is hold money its great. If you take out debt to build a factory you are ruined. When the factories close folks are laid off AND production stops. So folks neither have money nor adequate supply of goods."
Who can do that? That's the point, can't be done. In a stable money environment the interest on debt for production is MANAGED by ensuring that profits exceed interest on borrowed REAL capital. So interest on cap is 3%, profits are 5% and prices are falling as volume increases. Give a read of Ford Motor Company in the early 20th.
Dryfly, I think there was an explanation of Keynesian economic theory (by Krugman?) similar to your view on income and value/real wealth. It explained that recession fighting by lowering the interest rates and pumping up the money supply helped restore the velocity of money and income. As I recall Keynes noted that economic downturns were usually vicious cycles where society became more and more cautious and hoarded money not because of demand tanking. This happened just when investment was needed, putting good workers out of jobs for no good reason (which was contrary to the more common moralistic "purging over investment" views of the time) and shuttering production.
Its interesting to think of money as a dynamic flow/circulation system. Appeals to the engineer in me. Thanks.
I don't think this was it, but I'll poke around and see if I can find it again.
As I recall Keynes noted that economic downturns were usually vicious cycles where society became more and more cautious and hoarded money not because of demand tanking. This happened just when investment was needed, putting good workers out of jobs for no good reason"
this of course is impossible. If investment is needed then SAVINGS will be high and borrowers will be plentifull. What that idiot Keynes is saying is that savings is low, so interest rates are high, mal-investments are high, and no one wants to expand existing production. That idiot Keynes' solution was to artificially lower interest rates to force savers to disgourge their hard earned money to enable expansion of industry at the cost of savers.
I'm too tired to pull a good link for false savings...so I'll bid you all adieu.
Who can do that? That's the point, can't be done. In a stable money environment the interest on debt for production is MANAGED by ensuring that profits exceed interest on borrowed REAL capital. So interest on cap is 3%, profits are 5% and prices are falling as volume increases. Give a read of Ford Motor Company in the early 20th.
The auto industry is a very interesting case. What you described was true during fairly stable moderate growth times but not when money supply is surging or collapsing. And credit funcions as as surrogate for money even with currencies based on metals.
When I got my masters my adviser wrote his doctoral thesis on 'turnarounds' based on this period. Sobering.
There were something like 600 auto manufacturers circa 1910 in the US alone - they were squeezed out one by one (or 10 at a time).
A lot of these failures was due to natural selection and warranted but during the late 20s and early thirties it was brutal - much of the industry collapse then was due to the rapid contraction in money supply. These companies had capital & debt tied to 1920s conditions and prices then found themselves post-crash price levels. There was no way they could price anything. Even some of the best companies failed.
They laid off and cut back like crazy. My grandfather had a job with the railroad and kept his job but took a 90% pay cut. Needless to say they lost their home and everything else even though had very little debt going into the depression. A little debt is a lot of debt when you are making one tenth as before.
Now fast forward to the 70s. We all know the lessons that generation learned from the depression - cut whenever there was a 'slow down'... well those links to Arty Burns tells us what happens with that (I had a money market account that paid me 18% a year circa 1980... my first pay increase that year was 22% over an eight month period... so on).
Inflation, deflation - money supply really matters and since we do have a fiat system and will continue to have one we better get people in there that know how to manage the real problems and not over adjust.
I think the guys in there now - AG then BB - like to over adjust. AG for sure, BB we'll see.
"As money supply contracts fewer transactions occur due to slow money velocity ('hoarding') and so less output & 'income'... "
No it does NOT. It means that prices simply fall. Thus your money is worth more. What is wrong with that????
How can we be thinking this is an American world? It ain't. Let's get real. This time, the velocity is slowing and the prices are going up.
The reason is that the "other" nation-states, with the economic resources they control, are bidding for the same goods.
Price is going UP. PG and Colgate both announced price rises of 3 to 12%. The UK food & fuel prices rose 10% YOY. The agric commod's here are rising over 10%/yr.
We are in the equivalent of 1922 or early 1923 Germany. Those buying hard assets are winning. RE is uniquely positioned this time not to rise; but internationally purchased commodities are going up, big time, for USD holders.
Too bad, unlike other capitals, house and land are not globalized, and liquidity associated with them can not cross-boundary.
Globalization---> lower long term interest and translocation of middle class wealth overseas and loss of producing assets ---> pent up liquidity find its place in some artificially inflated investment scheme.
If every foreigner is allowed freely to buy house in united states, the housing problem will not exist.
Go read it. Gold and Silver are REQUIRED by the Constitution as money.
Go read it yourself:
"No state shall... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts".
(only mention of gold or silver in Constitution).
(powers of Federal Government) "To coin Money, regulate the Value thereof, and of foreign Coin".
I think the intent of the above should be self-evident.
If every foreigner is allowed freely to buy house in united states, the housing problem will not exist.
Hello? Hello?
Can you name me one state in the US where foreigners are not allowed to buy housing?
In fact Nevada and Florida, two epicenters of the current bust, saw a lot of foreign purchases during the runup. You don't even have to set foot in the US to buy RE.
The money is so cheap, it really doesn't make sense to use a bigger downpayment.
The problem with that is respect... as currency (USD for most of these discussions) looses respect, people don't want it or don't think it is a desirable commodity.
So then what.. EUR ? GLD ? CHF ?
Try going down to the courthouse and record a quit-claim deed where the transaction was paid for with 100K EUR or 250-oz GLD.
To get out of this mess (real or imagined) we need to restore respect in the USD... and that begins in Washington (like it or not). Its time to send a new management team inside the beltway.
Cutting rates won't help because of mal-investment. What is mal-investment? Things like Home Depot: run into a ground by an idiot CEO who then gets over 200 million dollars as a parting gift. Or, any of the countless recent examples of large layoffs, closing of US facilities, etc. so some high-paid executives can make a few more bucks. That, and the obvious one - building countless, worthless houses in the middle of nowhere that sell for 6+ times the income for the area (if there is ANY income in the area.)
Those are obvious mal-investments, and as long as short-sighted greed is the order for the day, lowering rates will do nothing but encourage more greed, more leverage, more speculation, more toxic loans and shadowy funds, etc. You won't get any REAL economic growth - new production plants, new middle-class jobs, and so on. Nope, just more ways for the rich to grow richer.
Wage inflation: Won't happen. We are competing now with nearly lawless 3rd world nations where people are basically slaves, live in shacks, eat whatever they can catch, and the pollution is dumped straight into the river. From a strictly cost basis, which is the only way that greedy executives look at things, it doesn't make sense to bring jobs back here to the US until we also live like that.
eek
Some great "info-porn" as Barry at TBP calls it... Good stuff.... (Don't know if he coined the phrase)
CR,
Don't you think the strong economy of the mid-late 90's truncated the CA decline then?
Also, as the present unprecedented debt bubble bursts, don't you think that the effects will be greater than the early 90's slowdown on a recovery?
Maybe more like the 30's than the 90's?
CR,
The price decline will continue to accelerate and then finally reach the terminal state with a crash of 10-15% in a month. Your curves will turn sharper and sharper. That is my forecast.
off topic, what time does fed announce tomorrow?
dotcommunist, if the economy is weak, the bust will probably last longer. If the economy is strong, maybe more areas can avoid the typical last few years of modest price declines.
I guess we will have to wait and see!
I picked LA as an example, but there are other examples of 5 to 7 year busts. I think the key here is that the next two years will probably see the worst of the price declines.
Best Wishes.
Notes from the trenches -
My local newspaper last week ran a story about a small business that sells home nick-knacks feeling the slowdown in the housing market.
A friend of mine who owns a luxury used car dealership has gone from selling 20-50 cars a month to selling 3.
Another friend who owns a retail/wholesale furniture business has been losing money for the past year, because sales have dropped to almost nothing.
So following a downturn in housing, we should see a cyclical slowdown in consumer spending (hitting the newsstands now), followed by rising unemployment (coming soon), then the word "recession" on the cover of Time magazine, perhaps asked as a question, "Are We in a Recession?"
cd, FOMC announces at 2:15 PM ET.
Best Wishes.
CR is saying it's not-so-different this time... For once, we should hope so
Thanks CR..
CR,
Excellent post, per usual. Thanks.
And how did this impact the LA economy for the 6 years following the bust.
I love your blog but wish you would let us know more about your predictions for how this will play out and where you think the best investments are in this environment.
Gary Shilling says treasury bonds. Do you agree?
CR,
Thanks for this post. It puts the typical price declines in a RE bust into perspective and helps timing.
O-Joe
CR's sticky price theory is pretty much on target. In the Connecticut housing bust from 1989-1996 (which parallels the California bust of the same period)
Condo prices fell about 40%, and SFH fell 25%. Yes prices where 'sticky' to the downside in 1989 and 1990- falling about 10%- but they fell rapidly in 1991, 1992 and 1993. Price falls slowed in 1994, 1995 and 1996, before reaching bottom in late 1996, before a recovery begin in 1997.
"Don't you think the strong economy of the mid-late 90's truncated the CA decline then? "
I'm not CR, but... I think it did somewhat in Northern California. The SF Bay Area was bubbling along in '95-'96. We'd gotten over the defense cuts and base closures, and the whole Internet boom/bubble was beginning. Heady times...
Southern California took longer -- perhaps because aerospace and defense was much more a part of its economy.
Of course, in 2000-2002 the newly-diversified Southern Cal economy stayed strong, while the Internet/network-heavy Bay Area took it in the shorts.
As always great info.
But what about financing? (how big this boom was versus the last ones)
Wouldnt the credit contraction hit prices harder this time than any time before?
Many people have been saying to just wait for the buyers on the sidelines to return and the market will improve. But what about the sellers sitting on the sidelines?
That's why I think this will linger for a while, just like last popping. Sellers will return when they think things are improving or they just give up holding a money pit, which in turn will keep supply high and prices flat to lower for several years.
Question is, will the majority of the price drops be nominal? Or will the monetary authorities make sure that the price of all other goods and services inflate to catch up somewhat to house prices?
Wasn't the economy in SoCal pretty depressed in the mid-90s from the cut-backs in aerospace?
The difference is that then, job losses whammed what were relatively high real estate prices. This time, extremely high real estate prices (and lending) imploded on themselves, and the economic downturn is going to start as an effect, though it will probably then cause an exacerbation of the housing downturn.
Basically, there is no parallel to this situation, though it's probably closer to the situation in 1929 than any more recent downturn. They had all sorts of highly leveraged investment trusts (read hedge funds), exotic mortgages, lots of margin buying of stocks, banks lending like drunken sailors...
Thanks, CR, just wanted to sprinkle some gloom on your boundless optimism.
Nice post.
Is there a graph that plots housing prices (some indicator, say median) with say median income ?
The reason is, saying that housing prices declined 39% in "real" terms is interesting, but not useful to buyers. It would be an "effective" drop if median income also rose keeping up with inflation. Then some one who waited to buy saw his/her income grow but house prices drop a bit or stay flat.
But if the median income also stayed flat - note IF - then house prices staying flat didn't help much.
What I am trying to say is, house prices falling in "real" terms is interesting for economists. For a buyer, the real question is how are they doing with respect to income.
I see real inflation. So I expect "real" prices to fall. But I don't see my income going up. I see income stagnation for many individuals. So I need "nominal" prices to drop. And drop a lot. The nominal prices are dropping - even here in my Bay Area. So there is hope. But a graph like that is more interesting to me.
Any pointer is appreciated. Thanks in advance.
CR,
Did most of the price reductions during the 90s bubble happen before or after the recession? What was the time offset between the recession and peak negative price change?
Thank you.
That was me at 7:04PM
OT - FOMC announcement time, etc.
Bloomberg Economic calendar link
Good link to bookmark for most of your data announcement needs...
Cool!
By renting my house instead of buying it for the last year, I saved:
$42,973.82 (figure includes interest deduction and investment opportunity lost from rent paid versus interest paid, etc.)
And, instead of returning -4.5% on equity, I'm getting +5.1% returns on savings.
If prices drop 20% in 3 years, I will save a total of $280,443.21. (Figure includes interest deduction, anticipated rent increase of 3%/yr, etc).
How can anyone look at these figures and still consider buying now?
Alea | Page not found
It does offer some perspective. The AAAs are materially lower than August 6. I view the ABX as a relative indicator of MBS valuations. It's a fair bet that all classes of MBS declined in value in the last week. I suspect we're getting close to principle losses.
What would be helpful are estimates of total MBS valuation losses.
http://theroxylandr.wordpress.co...2007/10/29/bbb/
There's a video on Bloomberg's web site where Robert Shiller says he thinks the Fed will (and should) lower rates by 50 bps. I guess his position is that this housing bust will otherwise be so severe that it will do serious damage to the entire economy.
I just don't get it. How do economists rationalize such a move when the dollar is collapsing? Doesn't the damage to people's savings count for anything?
This is a guy who pegged the housing boom as a mania long ago. I doubt he wants to save housing, per se. He must really think the ecoonomy is in for some pain.
There is a large and increasing amount of friction in this market- vacant units in some state of transition. These will come back onto the market well after the construction pipeline clears out, prolonging the pricing pressure.
Gotta love real estate. The cycles are long, but they're pretty damn obvious.
Cleveland Rocks.
I bought my condo in LA in April 1998. I sold it in December 2006 for 3.9X what I paid for it. I remember the RE fall from 1989 to 1996 of about 40%. My prediction: the LA top was September 2005, the bottom will be reached between September 2009 and September 2010. Miami will take longer to bottom. Say between 2010 and 2011. Be patient.
Congrats to you house whisperer, my savings came to $78k.
As for what's likely to happen, us conservative, responsible, savings minded renters should ALL be taking noteson who'se being more irresponsible than the next guy about bailing out the scam artists who dug the hole we're in.
It's not very positive for our kids & grandkids that our Federal Reserve has CHOSEN to defend our ridiculously inflated GDP as a sacred line in the sand we should do all possible to not recross, instead of implementing sound fundamental policy to insure our economic future.
So much for free market economies, huh?
Did the 80s housing bust get as much press as this one?
I wonder, with the MSM channeling Calculated Risk, plus the sheer number of speculators... Perhaps the sellers will move sooner, voluntarily or otherwise, and prices will decline a lot faster than history would suggest.
I do not think the Fed will cut 25 bps tomorrow, because it would be a waste. I think they either go for more "shock and awe" or they conserve ammunition. Zero or 50; no idea which.
I predict 2 years from now as the bottom when housing assets will begin in earnest to shift from weak hands to strong hands.
I just don't get it. How do economists rationalize such a move when the dollar is collapsing? Doesn't the damage to people's savings count for anything?
Income is more important than savings for most people... even those how are 'retired' since so much of their 'savings' are in income producing assets (stocks & such).
Income (and positive productive output) is MUCH more important for the economy as a whole than savings... You need both but income supports the values backing up most savings.
Combine the two and a decline in national income puts a huge hit on values for productive assets AND personal income - that effects something like 95% of people.
The only folks who get really hosed by a big rate cut & excess liquidity are those with strictly fixed income with little or no COLA.
The idea behind a cut is to keep money flowing (amount & velocity)... that amounts to 'income'.
If the fed thinks the income streams are in jeopardy they will throw the savers under the bus and not think a thing about it.
My opinion is that coming off a 3% GDP quarter we are not yet in jeopardy of seeing incomes zero out... talk to me when we have a couple months of serious job loss and lotsa negative corp earnings. Show me that (not just hints its maybe coming) and I'll sign up for the cuts too - ain't there yet.
To give an idea of the hypocrisy of the bulls - Kudlow was crowing today about how huge global stock market capitalization is and out of that same mouth comes an unending call for more rate cuts... at the same time we got $90 oil... wtf.
This whole thing is killing me as I close on a house tomorrow after selling the house we've been in for 9 years...BUT I keep telling myself that this is not an investment vehicle but a place to put my head and raise my kids. And frankly, we're moving as we've outgrown the old place. I keep telling my wife that I either the new place in 20 years on my feet or else in a box.
Ah well...
Oh yeah, a fixed 30 year note and one-third down. See? I actually pay attention to what I read.
=========================
...I think they either go for more "shock and awe" or they conserve ammunition. Zero or 50; no idea which.
Nemo
Yup, my take is they conserve ammunition, so nothing tomorrow. With the 15th Nov. accounting change deadline approaching, many SIV asset markdowns ( CDO and CDS ) expected to hit 50% by the end of Nov. which is an "event", this continual drop in the ABX's, they'll want to save the banks first - a .25% cut now with the risk of having to do .50% in 2 weeks ? That would be really toxic.
Farfetched ? I'm simply extrapolating from my view the Fed is Wall Street's b*tch.
-K
I liken the construction of the housing mortgage bubble to the construction of the first "Death Star" Alan Greenspan is of course the Emperor. Wall street stands in for Grand Moff Tarkin, and the NAR is Darth Vader. All is well until Bear Stearns Skywalker fires a proton subprime torpedo down and open CDO shaft, and kaboom!
Economic Disconnect: Its Quiet, Too Quiet!
"I'm simply extrapolating from my view the Fed is Wall Street's b*tch."
Yeah, no point doing a big rate move when it's not even an options expiration day.
It is my belief that the Alt-a resets that peak in 2009 will have a very large effect on prices in California,and particularly the Bay Area.This is an unusual cycle to say the least,and the biggest difference i see in how it will play out is the use of exotic loan products and their resets...used to be you had a 30 or 15 year fixed...lose your job,lose your home.Now? resets on maxed out homes in a declining market for years to come,while the economy and dollar go down the tubes.
"Oh yeah, a fixed 30 year note and one-third down. See? I actually pay attention to what I read."
You just lost that 33%.
Ephraim don't be a blog b*tch.
dryfly,
Not sure I buy your argument about favoring income over savings.
Seems like there are plenty of folks (probably heavily weighted towards folks who are retired or nearing retirement) that are invested conservatively and depend on fixed income like Social Security, CDs, pensions, etc... Typically the COLA are not adequate to cover true inflation.
In any case, propping up asset prices is just going to exacerbate income inequality. Like it's not bad enough already.
I understand you weren't necessarily arguing that it's the right thing to do. I'm just saying that I think it is very much the wrong thing to do.
CD,
Help, the graphs on my firefox browser overfill the screen. I assume that I have the wrong screen res. What do you assume to fill the screen?
Thanks
I'm still waiting for prices to become "unstuck" here in Silicon Valley cities like Palo Alto, Los Altos, Los Gatos, etc...
I'm counting on ARM resets and POA recasts doing the job in 2008-2010, perhaps with a little help from the recession.
I need a larger house than the one I'm renting, but finding a good SFH rental is tricky in this environment. Probably going to stay where we are until we buy in a couple/few years.
You just lost that 33%.
Ephraim | 10.30.07 - 8:02 pm |
No Ephraim, a loss is only realized when you SELL. I bought a piece of property outside of Boston in 1988 for 147,000. I watched as the last houseing boom went to bust and the house devalued to around 114,000. I had put the required 20% down at that time because, well...that was the way we did things.
Now that property, even after the recent declines, would sell for around $350,000. So Ephraim, exactly how much did I lose during that period of the last bust? Even if that place rolls back to 300k, how much will I have lost?
Timing in life is everything.
I think that due to the unprecedented nature of the runup the housing price downturn will be much swifter and more violent this time....but that's just me and I'm wrong just as often as anyone else.
I saw the Shiller clip and just could not believe he said that. The trouble is when the Fed cuts it is causing (already) flight from dollar assets and HIGHER long term rates in mortgages. THat in addition to that pesky inflation monster in the closet. Do Bernanke, Mishkin and co. really care that little about how history views them that they'll continue to bail out Wall St? I guess we'll find out tomorrow.
Timing in life is everything.
I'd say you lost a lot. You could have bought an income producing property or two along with your house at the bottom and doubled or tripled your gain of today.
Why does everyone keep saying that real estate busts are slow?
Shiller in his second edition of Irrational Exuberance noted that 40% of real estate busts are rapid. Japan's would be a case of that, and I believe the large Scandinavian one of the early 90s was as well.
Granted that our current bust is not declining rapidly, but you also have the unusual case of where the bust seems to be leading the downturn. There are other bubbles out there. Spain's may be worse then ours. If the housing market takes a steep dive this quarter (25%+ price drop), we will not remember it ten years from now as a slow decent.
There are two versions of real estate slumps. The 9 year and much worse 18 year variety. We are very close to the 18 year cycle (Fromm the 1990 downturn) right now.
Stuck in BA:
You asked for median income to be included.
The bubble buster has that info for many metros, if you can get over the annoying ads.
Here is LA's. You have to click through the 4 pages of each metros for the report.
TheBubbleBuster.com - Real Estate Market Forecast and Trends. Local Price Valuations.
I understand you weren't necessarily arguing that it's the right thing to do. I'm just saying that I think it is very much the wrong thing to do.
I'm saying a good environment for income is a good environment for 'productive assets'... To have that you need 'reasonably high' money supply & velocity.
In a truly contractionary/deflationary environment cutting rates will help improve money supply & velocity, increase incomes and therefore 'prop up' values of productive assets.
Notice though that incomes come first and asset value part comes last in that chain - the valuation is the result of incomes, not incomes the result of valuations.
So if we see a real contraction in money supply & velocity - usually reflected in declining if not negative GDP growth - then a cut makes sense and it would benefit us all. Even those on fixed incomes.
I mean even those fixed incomes come from income somewhere - even SS - as do the things they consume with that fixed income. There really are no savings anywhere, only promises to pay out out of current income a claim to current production.
My beef with the fed is that I don't see the contraction yet - hear the rhetoric saying it could come, even believe it will come myself - but I think part of the job of the fed is to be 100% data driven and the data doesn't tell me we are in negative GDP growth zone yet.
They need to wait until they see the whites of recession's eyes before firing rate cuts. That means they'll be a little late (we'll already be in recession)... but they will be far less likely to miss and will not have shot all their rounds prematurely.
When we are finally in contraction, sign me up for the cuts... But it will be to get money moving again to defend income & productive output. That is quite different than protecting speculative positions.
JMHO.
"Shiller in his second edition of Irrational Exuberance noted that 40% of real estate busts are rapid. Japan's would be a case of that, and I believe the large Scandinavian one of the early 90s was as well."
I googled up a few charts of Japaneses real estate prices... they declined from 1990 to 2005, and might have bottomed out then (too soon to be sure). That means the bust took at least 15 years.
That would make the Japaneses real estate collapse far slower than the ones referenced in this post, assuming it has finally bottomed out.
Now that property, even after the recent declines, would sell for around $350,000. So Ephraim, exactly how much did I lose during that period of the last bust? Even if that place rolls back to 300k, how much will I have lost?
Doncha yall just love clueless real estate koolade drinkers?
First thing, how about adding in your carrying costs including interest taxes and insurance and maintenance.... oops.... forgot bout that one dintcha?
Your measly down payment would have netted you upwards of 350k had you the brains to put it in the S&P but you didn't. Instead your out of pocket is well over 350k on a shack you claim is worth 350k for a spread of 700k.
You go girl.
Even if that place rolls back to 300k, how much will I have lost?
Inflation adjusted break even is 259,070, add Prop taxes, insurance, and maintenace and tell us let us know what you come up with.
CPI Inflation Calculator
Dryfly, there's a Fed Watch post over on Economist's View by economist Tim Duy that basically agrees with you on the lack of reason for a Fed Cut. He also sees no data supporting the economic contraction theory (outside of housing) for the Fed and sees plenty of reasons for them not to cut. He saw the 50 bps cut as them getting ahead of the curve and taking out an insurance policy against ill-liquidity. Tim thinks that now they'll wait for the supporting data for the next one. (He also does a hat tip to CR.)
Economist's View: Fed Watch: And So It Begins
". . .
A week later, Chicago Fed President Charles Evans reiterated the outlook:
Indeed, on balance, I would characterize the data we have received on the real economy since the last FOMC meeting as supporting our baseline forecast.
Such comments – that the economy is roughly in-line with the Fed’s forecast – are essentially ignored by commentators. Has anyone noticed that the data flow has steadily caused 3Q07 estimates of growth to be raised above 3%? Think about it – the Fed cut rates 50bp during a quarter in which growth topped 3%, just after a quarter with almost 4% growth.
The Fed is never that proactive. Never.
Yes, I know, forecasts for 4Q07 are low on the potential impact of the August market turmoil. But note that we have almost no data on the 4th quarter to assess the quality of those forecasts; largely some volatile data on consumer confidence and jobless claims. Moreover, the Fed expects weakness, and is trying to look through it to mid-2008. And the Fed already cut 50bp because they knew that they would not have any good data on which to assess the 4th quarter at their October meeting. Nor would they normally commit to policy with only a single month’s data. The month is not even over! That was the “risk management” portion of their decision to cut 50bp in September. How many rate cuts do you take as insurance?
And, on risk management, Fed Governor Frederick Mishkin, one of the architects of 50bp move, sees financial conditions improving:
''Market functioning has certainly not yet returned to normal,'' Mishkin said in a speech at a seminar commemorating the 1907 U.S. financial panic, which led to the Fed's creation. Still, Fed actions ''have helped improve conditions in several short-term funding markets and instill confidence in investors that liquidity would be available if needed,'' he said.
They did not expect conditions to return to normal overnight; they are simply looking for things to be moving in the right direction. And they are – notice that the ABX market is coming unglued again, as documented by Calculated Risk, but the impact on financial markets is considerably more muted than this summer.
. . ."
I'd say you lost a lot. You could have bought an income producing property or two along with your house at the bottom and doubled or tripled your gain of today.
lunatic fringe | 10.30.07 - 8:23 pm
That was income producing lunatic. A nice two family. And it's paid off so I just collect rent now and live in my own house that I bought for the princely sum of 107k in 1996 at the last bottom. Even after this is over 107k will not even buy you a parking space anywhere in MA. It did teach me a lot about real estate though, and I could see what was going to happen when things got crazy around here. People have short memories. I've held onto this just because...I'll probably sell it after this is all over. No rush, and it's purpose was always to help to buy the last place I will go before the box lol. I was a mere 25 when I bought it. So I think it has served that purpose well!
And time is on my side in both of these purchases.
"I'm saying a good environment for income is a good environment for 'productive assets'... To have that you need 'reasonably high' money supply & velocity."
Hogwash dry. The late 19th and early 20th century saw phenomenal growth with a bi-metal gold/silver standard. Further if you want to argue the Quantity theory of money M * Vt = Pt*Q (actually Austrians who play with this silly equation use the symbol of 3 horizontal lines and not an equal sign as Austrians tend to view this as an equivalence and not a mathematical equation). So anywho, if dM/dt > 0 and dVt/Dt > 0 then you have the accelerations multiplying each other, which in the grand scheeme of things is highly inflationary as on the other side of the equivalence the easiest thing to change is Pt. Hopefully you get the picture.
Further more false asset inflation due to money pumping cause mal-investments. Like lots of empty houses, Home Despots, Furniture stores, and unemployed Real Estate agents.
Finally low to negative savings means that the pool of funding for projects undertaken do not exist (trade deficit, the US needs a $billion or so input of foreign savings a day...etc)
"When we are finally in contraction, sign me up for the cuts... But it will be to get money moving again to defend income & productive output. That is quite different than protecting speculative positions."
Money always moves. Rate cuts encourage borrowing, not income. I do not see US corps increasing capacity for a long time, so rate cuts would simply continue the current idiocy of Americans eating their seed corn.
JMHO
Cheers,
Do Bernanke, Mishkin and co. really care that little about how history views them that they'll continue to bail out Wall St?
Yes. They know that Greenspan (debt pusher) and Bush (deficit pusher) will be seen as history's biggest boobs.
They need to wait until they see the whites of recession's eyes before firing rate cuts. That means they'll be a little late (we'll already be in recession)... but they will be far less likely to miss and will not have shot all their rounds prematurely.
Bernanke has already shown he'll cut; and his praise of Friedman and declarations that the Depression wouldn't have existed with earlier rate cuts says that BSB is planning to cut, and cut hard. Until he can't anymore, dies, or is fired.
dryfly,
Taking things to the extreme... Do you think lowering interest rates all the way down to 1% again (or even less, hey let's go Japanese!) would actually be good for the economy?
Who really benefits from those low rates anyways? Banks, Hedge Funds and IBs who have access to large amounts of cheap money? And how good are they at directing the money to productive uses, just looking at recent history as an example? How did we end up with all these vacant houses anyways?
How does the system ever cleanse itself of inefficiencies and malinvestments ?
In NYC, where I live, almost every house that is for sale is a negative cash flow property. For example, if I buy an investment 6 family building in Queens for say $1,000,000 I will have to put down a $300,000 down payment (commercial property) and then every month throw in a few hundred dollars to cover expenses for as long as the eye can see.
This scenario is similar for non-commercial properties.
Moment of clarity for investors:
Why would I make that investment when I can invest that $300,000 in bonds and get 4-5% yield or stocks and get a 2-4% dividend yield?
When speculation dies, this realization knocks down house prices really quickly.
I hear house prices in South Florida are down 25% from the top. If you had kept your money in 5% CD's and not bought in 2005 your house prices are down %35. Not that sticky.
I don't see bottom until price/rent ratio's and income to debt ratio's comeback to earth. In my area 50K medium income with 500K medium housing price means a never ending wave of foreclosure and BK because the only way people can afford to buy would be some ARM or IO loan. Since a person or family making 50K a year does not have 100K in the bank for a 20% down payment. If the medium income is 50K then the medium home prices need to be closer to 150K. Of course those kind of numbers look so cheap that they appear far beyond reasonable expectations today.
"Your measly down payment would have netted you upwards of 350k had you the brains to put it in the S&P but you didn't" I have found It very tough to live inside the S&P. My wife is always bitching about the neighbors
CR, great work. Dryfly, I'm with you. All these emotional simpletons with their hypocritical morals create a prevailing bias that is self defeating for the economy as a whole.
The party is long since over. What good does it do to call the cops to complain now? Should been done in 2002 and 2003.
I have put up a few charts based on the "what do you want your payments to be" premise.
I have reverse engineered the expected home price over time using the conventional 30 year mortgage rate, an assumed 1.5% cost based on the price of the home (property taxes, insurance, and what not), and 50% of the average monthly earnings as reported by the BLS (assuming two people in a household could afford that) to fund it.
It might show that at least part of the housing bubble at least attempted to be rational, depending on how you look at it.
Of course, should interest rates rise at some point in the future the "what do you want your payments to be" model sinks (and burns) in a sea of icy pain. However, live for the moment and hope for the best!
REBear, most of the price declines in the '90s came after the recession ended.
BTW, the number of foreclosures rose as the price fell - with foreclosure activity peaking in '96 with the economy in pretty good shape.
Best to all.
How do you have "sticky prices" on the downside when you have so many homeowners (the banks) that don't want to own them?
I think comparisons to the late-80s/early-90s are off the mark because lending standards were dramatically tighter. This time you've got a ton of people with 0% down mortgages who have ZERO equity at the outset in their "investment". The real owners (soon-to-be the banks) aren't in the banking business to be landlords--as their REO portfolios get marked down, they're going to be puking these properties to the highest bidder.
The only thing that's going to be sticky in the minds of the people who financed this was how they got donkey punched (check urbandictionary.com) lending money on loose terms.
CR,
I'd be interested to get your thoughts on this 'forecast' of HPA, which was treated as sacrosanct on the CFC call last Friday. (see page 18).
http://about.countrywide.com/presentations/docs/3Q07%20Earnings%20slides%20-%20FINAL%2010-26-2007.pdf
Sticky Prices...wasn't that a Rolling Stones album?
dryfly,
I think rate cuts favor debt more directly than income. Basically, we owe the rest of the world something like $13 trillion (I think it's a net $3 trillion), virtually all denominated in a currency we control. That's a big incentive to devalue the dollar.
The real beneficiaries of a rate cut are debtholders. Wage earners may see higher wages, in nominal dollars, but face rising prices. Savers are the big losers.
I just don't get it. How do economists rationalize such a move when the dollar is collapsing? Doesn't the damage to people's savings count for anything?
Anybody else interested in seeing a US housing price chart that adjusts for the dollar index?
Perhaps only interesting to economists...
Stag,
Nice charts as always. But I wonder, isn't 50% of income a bit high? Or are you using net after taxes? I would never have 50% of gross as my monthly housing cost. IMHO
Cheers,
Anybody else interested in seeing a US housing price chart that adjusts for the dollar index?
Perhaps only interesting to economists...
ecoshift
Me. I regularly look at nasdaq, dow and s&p in other currencies, as well as gold...but I'm being redundant.
Cheers,
What's the difference between this housing bust and others, and how will that affect the recovery period?
Differences:
Globalization/Global economy
National debt
Personal debt
Population
Deficit spending
Off-budget spending
Energy costs
Declining dollar
Aging infrastructure
Loss of manufacturing base (pre-hamburger)
Stagnant wages (declining in real terms)
Misaccounting of unemployment statistics
Misaccounting of inflation statistics
The euro
The war
Illegal immigration
Offshoring of jobs
Stocks keep gaining in the face of it all.
There's never been anything like it, folks!
Here's my prediction: We're heading into a long overdue, downwards adjustment that will reflect the complexity of our economy in it's intractability and duration. The global economy cannot support the Americn middle class. This is going to get ugly(ier). There will be huge social ramifications, domestic and worldwide. Housing bubble bursts will be vague memories of better times.
We should be pulling out of the worst of it by 2020 - 2025. An entirely new iteraton of "America" will emerge.
The housing bubble burst is the canary in the coal mine.
I swear to god: I'm an optimist.
Sheesh.
Marcus Aurelius
Pretty much how I see it.
Cheers,
The speed of home price declines depends on the structure of debt underlying those assets.
A large portion of credit intermediaries in this go-round depends on levering "hot" short term funding. Its unlikely this funding will stick around to find out if prices end up as sticky as in the past. The result will be self-fulfilling, fear begetting fear.
The relevant question to ask is this: "what level of mortgage credit will be available in 2008?" If the answer is, "roughly the same as 1H2007," then indeed, prices will be sticky.
If the answer is, "about 30-40% less," then expect a white-knuckle descent.
This debate is really about conditional probabilities. What is the probability of a 25% decline given a 10% (national) decline. In 1991, low. In 2008, high.
Misean,
50% of just one person's income, so for a 2 person household where both work that's 25% (gross, before taxes).
It's just a ballpark estimate of course. In any event, it wouldn't change the shape of the charts, but would simply alter the dollar scale on the left.
This should not be used to predict current prices, but simply show how we might have gotten to this point simply by looking at interest rates (which of course ignores a lot of other useful data, like too much building, prices rising faster than rents, prices rising faster than costs, speculation, and so on).
"That means the bust [Japan's]took at least 15 years"
Yes, although in real terms, I suspect some of those down years are actually flat in "real" terms.
Look at the following study(p34 and 35 in particular:
http://tinyurl.com/2dca9r
Yes there are continuing downturns to 2000 when the data stops. But about half the loss was all in one year. That could easily be argued as a "sudden" drop. In fact the data is a little worrisome in that the housing data on p34 shows a very slight dip in the first year, and then falls off a cliff: about were we are now: looking over the cliff.
CR, nice charts; illuminating, and your conclusion would be spot on if all other factors today were the same as they were in the early/mid '90s.
But, we face a wild unwinding of all-time high household debt-to-income levels, now at low real interest rates. Folks are having problems making payments today, and right around the corner are an avalanche of resets and higher real interest rates (with the return of the risk premium).
Folks are cutting back on consumption to service horrendously high debt levels. This mess resolves only when 'asset holders' (pension funds, investors, bondholders) wake up and realize that the assets that they hold are worth only a fraction of their value. That realization will take years, and will force hoarding/saving, lower consumption, and lower incomes. Real estate prices (real) will begin moving north no sooner than 7-10 years from now.
Really, the sky is falling.
Marcus,
Stagflationary Marcus is not taken yet. Might want to think about it, lol.
(In other words, I mostly agree with you!)
high energy prices are dragging all the other consumer prices up. that may add more stickiness to housing prices.
David Pearson
I concur. We are just now seeing foreclosures and other bad housing data reach all time highs. What happens when they move off the historical charts. I suspect, at least partially for reasons you site that they will. I think the big problem will be when a major bank, IB, or major financial institution goes teats up. And that time bomb might be tied to the M-bLECh Super-Sewer. This toilet is something to watch closely...IMHO.
Cheers,
I 'second' MA's thoughts.
Marcus Aurelius
Pretty much how I see it, too. Thanks for the words. All the economic signals are nasty for the U.S. economy and people.
Stay short and you will be rewarded.
"Stagflationary Mark
It's just a ballpark estimate of course. In any event, it wouldn't change the shape of the charts, but would simply alter the dollar scale on the left."
Sorry I should read more carefully. I understood it to be an estimate...I'm single so I see 50% on housing and gag.
Cheers,
More affordability stats from Housing Tracker
. They only have current, though, far as I can tell.
Methinks you are partially correct, but have not factored in the inflation the fed will induce (forget stagflation...ain't gonna happen again) that will rescue the debtors and get things hopping about 2009 - 2010 for another zoom forward in all industries, even real estate. After all, we now know how to handle inflation, don't we? And another wee bit would be most helpful just now. Look for it. Borrow all you can in the next year to buy hard assets, and pay it off with cheap money after 2010.
pd130,
thanks, that will make me sleep better tonight. Kinda like sleeping my garage would make me feel better knowing that the garage was air tight and my car would be running all night.
Cheers,
thanks, that will make me sleep better tonight. Kinda like sleeping my garage would make me feel better knowing that the garage was air tight and my car would be running all night.
If dark humor sarcasm was an ice cream flavor I'd be topping it with a cherry and calling it ready to eat right now, lol.
"Borrow all you can in the next year to buy hard assets, and pay it off with cheap money after 2010.
swampfella "
I've been maintaining that failures of debt granting institutions, combined with the inability of consumers to keep gobbling debt will make this strategy fail miserably. The Fed cannot force people to take on more debt, only tempt them. Therein lies the problem.
Cheers,
When we are finally in contraction, sign me up for the cuts... But it will be to get money moving again to defend income & productive output. That is quite different than protecting speculative positions.
Dryfly,
How does cutting rates defend income and productive output? (I assume you mean real income.)
It seems to me that if we were to enter a recession, it would be because we were not able to make productive use of capital borrowed at prevailing rates.
In other words, the emergence of recession would suggest to me that resources and credit were not being used in a productive or competent manner with respect to longer-term wealth creation. Afterall, in recent years real interest rates haven't been especially high, so why are interest rates even relevant to "income & productive output"?
It seems to me there's a deeper issue here behind the recession threat. If so, it may be counterproductive or outright dangerous to address this with unproven or superficial means.
"ac
t seems to me there's a deeper issue here behind the recession threat. If so, it may be counterproductive or outright dangerous to address this with unproven or superficial means."
Like I said:
"I'm saying a good environment for income is a good environment for 'productive assets'... To have that you need 'reasonably high' money supply & velocity."
Hogwash dry. The late 19th and early 20th century saw phenomenal growth with a bi-metal gold/silver standard. Further if you want to argue the Quantity theory of money M * Vt = Pt*Q (actually Austrians who play with this silly equation use the symbol of 3 horizontal lines and not an equal sign as Austrians tend to view this as an equivalence and not a mathematical equation). So anywho, if dM/dt > 0 and dVt/Dt > 0 then you have the accelerations multiplying each other, which in the grand scheeme of things is highly inflationary as on the other side of the equivalence the easiest thing to change is Pt. Hopefully you get the picture.
Further more false asset inflation due to money pumping cause mal-investments. Like lots of empty houses, Home Despots, Furniture stores, and unemployed Real Estate agents.
Finally low to negative savings means that the pool of funding for projects undertaken do not exist (trade deficit, the US needs a $billion or so input of foreign savings a day...etc)
"When we are finally in contraction, sign me up for the cuts... But it will be to get money moving again to defend income & productive output. That is quite different than protecting speculative positions."
Money always moves. Rate cuts encourage borrowing, not income. I do not see US corps increasing capacity for a long time, so rate cuts would simply continue the current idiocy of Americans eating their seed corn.
JMHO
Cheers,
Further more false asset inflation due to money pumping cause mal-investments.
Misean, I am not an "Austrian' nor am I completely confident in the Keynesian explanations. I look at fiat as a practical 'utility' and if it 'works' I'm happy.
For example I've never liked the 'mal-investment' meme. I get your point about the 'empty houses' but in my mind that doesn't say it is a 'mal-investment' or 'over consumption'... Placing the 'mal' & 'over' in front is personal opinion.
Likewise I don't trust all the Keynesian math. It's not that I don't get the math - its just that I come from an empirical science/engineering background and want to see causal relationships proven via experiment. I took a number of classes in econ in college and had that tiff with the prof's over and over.
But that doesn't mean the current system can't work. We don't know squat about the mind or neurochemistry but we still think.
I don't worry about either economic ''school so long as the economic environment 'works'. A well managed money supply is part of a favorable environment.
So increasing money supply in a weak investment/productive environment or cutting back when its too hot isn't a terrible thing so long as its a well managed process and not done purely to manipulate or 'wag the dog'. I don't believe that has to be the case - it can happen but it doesn't have to happen.
Continued...
One thing for sure - I do NOT like the idea of gov't sanctioned 'metal based money'... Its not that I don't see value in metal, its that I prefer gov't staying out of metal markets as much as possible. And I love the idea of fiat.
The best of all situations is where metals are 'independent' in a completely 'artificial' fiat system. If gov't takes metal 'in-house' then you have all the same manipulations you have with fiat except now the gov't controls the metals too - or attempts to with resultant opportunity for abuse.
The real power of fiat in today's system is you can virtually opt out of fiat by buying metal, having direct ownership of productive assets like land, or owning OTHER fiat rather than your native variety when you sense the powers are manipulating yours against your better interests.
Going nearly 'cashless' is the best check and balance against the fiat system running amok. I think BB is learning this lesson the hard way. If there is a way we might copy Japan - this is it.
And if gov'ts screw up their fiat enough they too will have to go back to buying metals & commodities to improve their 'full faith & credit' claim.
But that still doesn't require a return to 'gold standard'... just an occasional 'back up' if they screw up.
And buying gold could be the ultimate way to fight 'deflation'... print money to put in circulation by buying gold. If that isn't inflationary I don't know what is. What irony THAT would be.
And that's not all bad. In my mind it is far preferable to some artificial metal standard. Let the damned stuff float too.
As for fiat induced inflation & the calculus - I accept there will be some inflation over time... it's like 'friction' or 'entropy' or 'electrical resistance'... Its real world 'waste' that can't be avoided but it can be managed GIVEN GOOD POLICY. Too much friction and the wheels melt off.
In my view fiat is only useful as a measure of instantaneous transactions in real time (especially consumption) and should not be taken as a store of wealth in & of itself. The productive assets & metal it buys NOW is its only store of wealth over time not the money.
There needs to be enough fiat out-n-about to efficiently facilitate transactions but not so much or so little that it wags the dog.
In summary my bitch is with the current management of this 'utility'... not that the utility exists or that it isn't perfect.
Thank you CR, I have learned so much since coming to your blog. Because of you I really feel that I am much smerter like a genus or something now.
Taking things to the extreme... Do you think lowering interest rates all the way down to 1% again (or even less, hey let's go Japanese!) would actually be good for the economy?
Short - that really depends. Given enough deflation and maybe you need NEGATIVE rates. Helicopter money for real.
The thing is the fed - the managers of our money, the WORLDS money... or was the worlds money anyway - needs to match the supply of this 'utility' to the estimated demand. Its like all management problems - its approximate & requires data of semi-intangibles & good judgment.
If the wheels are really falling off - 30s depression like - then 1% might be reasonable. Personally I think AG over did it by A LOT back in 2001... we didn't need 1% and we certainly didn't need it for as long as we got it.
Would we have had a more severe 'recession' in 2001? For sure.
Would a cut have been justified? Probably some.
But remember monetary stimulus is only one kind of stimulus... there is fiscal stimulus too. We were heading to war and had a tax cut besides. That's a lot of gas. I think 1% was way too much on top of that. History will judge.
And given our deficits now I don't see how the fed can cut. I think they run the risk of blowing the lid off if they do.
Yeah, no point doing a big rate move when it's not even an options expiration day.
albrt | 10.30.07 - 7:57 pm |
Hilarious!!
Those Wall Street Bit%#$s killed my hedges that day...
Dry,
"Further more false asset inflation due to money pumping cause mal-investments.
Misean, I am not an "Austrian' nor am I completely confident in the Keynesian explanations. I look at fiat as a practical 'utility' and if it 'works' I'm happy.
For example I've never liked the 'mal-investment' meme. I get your point about the 'empty houses' but in my mind that doesn't say it is a 'mal-investment'"
Then what is it? A proper investment? A logical investment? A wierd investment that just kinda happened like when I banged this chick and she kinda got preggers?
I also have a degree in mechanical engineering. I don't see what's unclear about mal-investment. Market signals due to pricing and credit availability called resources into use that were unpreductive, long term. Even though the resources consumed could not pay for the long term costs. Sounds like a mal-investment to me.
Cheers,
Dry Next:
"But that doesn't mean the current system can't work. We don't know squat about the mind or neurochemistry but we still think."
So what, it is easy to track mal-investments. And...come on...You knew there was a housing bubble ages ago. Do we really need to understand the human brain to see this.
I'm not trying to be harsh...
Cheers,
In other words, the emergence of recession would suggest to me that resources and credit were not being used in a productive or competent manner with respect to longer-term wealth creation. - ac
I don't know.
What I do know is that people make 'income' on every transaction. Your buy is my pay check. More transaction smeans more income.
As money supply contracts fewer transactions occur due to slow money velocity ('hoarding') and so less output & 'income'...
On a personal micro-level its a good idea to cut back on transactions going into hard times but on a macro level it collapses the whole system even faster. It turns into a deflationary 'death spiral' if taken to the extreme.
Pump money out there and that reverses it... then you have more money chasing the same amount of stuff & capacity and transactions increase in number and size and so does income. Generally a good thing.
The question is do we have more or less 'stuff' - real wealth if you will - after an increase in money supply? I don't know the answer to that.
I'd say if the money supply is added in a time of contraction then 'yes' we probably do have more output due to increases in labor & capital utilization... But if added in a time of near complete utilization then I'd say 'no'... then it ends up in price inflation.
I think we are closer to the latter condition than the former even considering the housing bust. That might change but right now I think BB is nutz to cut right now.
dry,
"One thing for sure - I do NOT like the idea of gov't sanctioned 'metal based money'... Its not that I don't see value in metal, its that I prefer gov't staying out of metal markets as much as possible. And I love the idea of fiat.
The best of all situations is where metals are 'independent' in a completely 'artificial' fiat system. If gov't takes metal 'in-house' then you have all the same manipulations you have with fiat except now the gov't controls the metals too - or attempts to with resultant opportunity for abuse."
Oh lord...fiat is infinite, metal is finite. The Gov't isn't the only probelm it is those that influence gov't policy as well. Lock 'em down and they can't engage in shennannigans....Fiat allows these manipulations.
Cheers,
dry,
"As money supply contracts fewer transactions occur due to slow money velocity ('hoarding') and so less output & 'income'... "
No it does NOT. It means that prices simply fall. Thus your money is worth more. What is wrong with that????
It means Pt declines. Why is it that people who understand that Gov't removal of day to day donsumables from the inflation index understand that this is cooking the books, but don't understand that those prices falling is a good thing? Further you seem to think that decreasing M decreases Vt???? Why? Consumables need to be replaced. I cannot get to work without eating or buying fuel. I can get to work without an iPhone or a plasm.
Gah...I'm growing tired. and running on 5 threads.
Cheers,
I'm not trying to be harsh...
I know. Me either.
I might think housing was stupid investment. But that's my choice. i see lotsa stupid investments that I might call 'mal-investments' that the market seems loves.
And it might love it today and hate it tomorrow. That's why I hate the term so much. If it loves it today and hates it tomorrow what made the difference?
My point is the best way to allow markets to work is via a well managed fiat. The thing to remember is that we are free at anytime to dump the fiat and buy something 'real'.
If I was a hard core Austrian - I'd want a constitutional amendment requiring fiat and having the ownership of gold on the same constitutional footing as weapons and the second amendment.
But that's just me.
And I'm not even saying you can't learn something useful from modern Keynesian economics... I think you can. I did. But then I also learned something from quantum chemistry... but I never used it as a chemical engineer.
Dry,
"I'd want a constitutional amendment requiring fiat and having the ownership of gold on the same constitutional footing as weapons and the second amendment."
Go read it. Gold and Silver are REQUIRED by the Constitution as money. We need no amendment. Fiat is worth what it has always been...zero.
Cheers,
Dry,
"And I'm not even saying you can't learn something useful from modern Keynesian economics... I think you can. "
I think you can too. Exactly what NOT to do.
Cheers,
P.S. Bed time, but thanks for the debate dry, I enjoyed it. Hopefully it made some think, and if so, that's a huge positive in this Dumborat vs. Rebooblikud environment we are fed daily in the media in this country.
Tin Foil Hat Tip to Dry.
No it does NOT. It means that prices simply fall. Thus your money is worth more. What is wrong with that????
If all you do is hold money its great. If you take out debt to build a factory you are ruined. When the factories close folks are laid off AND production stops. So folks neither have money nor adequate supply of goods.
Eventually 'price signals' reconnect and the shortages trigger price increases and the factory reopens and the labor is rehired.
But there is one helluva lag and a lot of pain. Sometimes the pain is so ugly there is revolution & more ruin.
The thing that always amazed me about the Austrians is they understand the 'irrational & emotional' part of human economic decision making so darned well when the market is functioning but fail to account for the irrational & emotional during the bust. Folks are not going to freeze in the dark waiting for the price signals to connect.
Anyway trying to dampen that cycle is a noble cause... and a good thing if they can pull it off. But as you know, if they over-damp that's not so good.
Good management is needed & I'm not sure we've gotten that in a while - at least a decade.
Oh, sure thing, Misean. And, uh, maybe sleep in the house tonight, um-kay?;>
Tin Foil Hat Tip to Dry.
Misean | 10.31.07 - 12:07 am | #
Same to you.
Hmm,
I'm also closing on a house tomorrow. In my case, I decided to put the minimal down (5%), and stick the remaining 15% into gold and treasuries. The money is so cheap, it really doesn't make sense to use a bigger downpayment.
Plus, if things really do fall apart, a mortgage may be the least of my worries. I may need access to that money.
If we get wage inflation (my expectation), then it'll all be ok anyway. I think that's the real reason behind the FFR cuts: we're not going to get wage growth naturally due to globalization, but we can produce it artificially.
mish had a piece up today titled, "Pent up supply". Clever title. That's the exact opposite of what the NAR has been trying to sell to their clients. Who would you be inclined to believe?
Dry?
"If all you do is hold money its great. If you take out debt to build a factory you are ruined. When the factories close folks are laid off AND production stops. So folks neither have money nor adequate supply of goods."
Who can do that? That's the point, can't be done. In a stable money environment the interest on debt for production is MANAGED by ensuring that profits exceed interest on borrowed REAL capital. So interest on cap is 3%, profits are 5% and prices are falling as volume increases. Give a read of Ford Motor Company in the early 20th.
Cheers,
"Oh, sure thing, Misean. And, uh, maybe sleep in the house tonight, um-kay?;>
pd130 "
Man, I can't get away from this blog. Yeah...gonna sleep in the bed tonight. Don't feel like turning purple yet...
Cheers,
Dryfly, I think there was an explanation of Keynesian economic theory (by Krugman?) similar to your view on income and value/real wealth. It explained that recession fighting by lowering the interest rates and pumping up the money supply helped restore the velocity of money and income. As I recall Keynes noted that economic downturns were usually vicious cycles where society became more and more cautious and hoarded money not because of demand tanking. This happened just when investment was needed, putting good workers out of jobs for no good reason (which was contrary to the more common moralistic "purging over investment" views of the time) and shuttering production.
Its interesting to think of money as a dynamic flow/circulation system. Appeals to the engineer in me. Thanks.
I don't think this was it, but I'll poke around and see if I can find it again.
Economist's View: Paul Krugman's Introduction to Keynes' General Theory
"Andrew
As I recall Keynes noted that economic downturns were usually vicious cycles where society became more and more cautious and hoarded money not because of demand tanking. This happened just when investment was needed, putting good workers out of jobs for no good reason"
this of course is impossible. If investment is needed then SAVINGS will be high and borrowers will be plentifull. What that idiot Keynes is saying is that savings is low, so interest rates are high, mal-investments are high, and no one wants to expand existing production. That idiot Keynes' solution was to artificially lower interest rates to force savers to disgourge their hard earned money to enable expansion of industry at the cost of savers.
I'm too tired to pull a good link for false savings...so I'll bid you all adieu.
Cheers,
Who can do that? That's the point, can't be done. In a stable money environment the interest on debt for production is MANAGED by ensuring that profits exceed interest on borrowed REAL capital. So interest on cap is 3%, profits are 5% and prices are falling as volume increases. Give a read of Ford Motor Company in the early 20th.
The auto industry is a very interesting case. What you described was true during fairly stable moderate growth times but not when money supply is surging or collapsing. And credit funcions as as surrogate for money even with currencies based on metals.
When I got my masters my adviser wrote his doctoral thesis on 'turnarounds' based on this period. Sobering.
There were something like 600 auto manufacturers circa 1910 in the US alone - they were squeezed out one by one (or 10 at a time).
A lot of these failures was due to natural selection and warranted but during the late 20s and early thirties it was brutal - much of the industry collapse then was due to the rapid contraction in money supply. These companies had capital & debt tied to 1920s conditions and prices then found themselves post-crash price levels. There was no way they could price anything. Even some of the best companies failed.
They laid off and cut back like crazy. My grandfather had a job with the railroad and kept his job but took a 90% pay cut. Needless to say they lost their home and everything else even though had very little debt going into the depression. A little debt is a lot of debt when you are making one tenth as before.
Now fast forward to the 70s. We all know the lessons that generation learned from the depression - cut whenever there was a 'slow down'... well those links to Arty Burns tells us what happens with that (I had a money market account that paid me 18% a year circa 1980... my first pay increase that year was 22% over an eight month period... so on).
Inflation, deflation - money supply really matters and since we do have a fiat system and will continue to have one we better get people in there that know how to manage the real problems and not over adjust.
I think the guys in there now - AG then BB - like to over adjust. AG for sure, BB we'll see.
"As money supply contracts fewer transactions occur due to slow money velocity ('hoarding') and so less output & 'income'... "
No it does NOT. It means that prices simply fall. Thus your money is worth more. What is wrong with that????
How can we be thinking this is an American world? It ain't. Let's get real. This time, the velocity is slowing and the prices are going up.
The reason is that the "other" nation-states, with the economic resources they control, are bidding for the same goods.
Price is going UP. PG and Colgate both announced price rises of 3 to 12%. The UK food & fuel prices rose 10% YOY. The agric commod's here are rising over 10%/yr.
We are in the equivalent of 1922 or early 1923 Germany. Those buying hard assets are winning. RE is uniquely positioned this time not to rise; but internationally purchased commodities are going up, big time, for USD holders.
Anytime you think it might have been Krugman but come up empty at Thoma's, check the Unofficial Krugman Archive. (PK himself said so.)
Too bad, unlike other capitals, house and land are not globalized, and liquidity associated with them can not cross-boundary.
Globalization---> lower long term interest and translocation of middle class wealth overseas and loss of producing assets ---> pent up liquidity find its place in some artificially inflated investment scheme.
If every foreigner is allowed freely to buy house in united states, the housing problem will not exist.
Go read it. Gold and Silver are REQUIRED by the Constitution as money.
Go read it yourself:
"No state shall... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts".
(only mention of gold or silver in Constitution).
(powers of Federal Government) "To coin Money, regulate the Value thereof, and of foreign Coin".
I think the intent of the above should be self-evident.
If every foreigner is allowed freely to buy house in united states, the housing problem will not exist.
Hello? Hello?
Can you name me one state in the US where foreigners are not allowed to buy housing?
In fact Nevada and Florida, two epicenters of the current bust, saw a lot of foreign purchases during the runup. You don't even have to set foot in the US to buy RE.
Many analysts are attempting to predict this housing bust cycle without including money supply and/or currency data.
The 1990's LA bust was more pronounced because the Federal Reserve and banking system did not have to bend as much.
There is a lot more pressure for to inflate our way out this time around because this is a national issue.
The money is so cheap, it really doesn't make sense to use a bigger downpayment.
The problem with that is respect... as currency (USD for most of these discussions) looses respect, people don't want it or don't think it is a desirable commodity.
So then what.. EUR ? GLD ? CHF ?
Try going down to the courthouse and record a quit-claim deed where the transaction was paid for with 100K EUR or 250-oz GLD.
To get out of this mess (real or imagined) we need to restore respect in the USD... and that begins in Washington (like it or not). Its time to send a new management team inside the beltway.
A few points:
Those are obvious mal-investments, and as long as short-sighted greed is the order for the day, lowering rates will do nothing but encourage more greed, more leverage, more speculation, more toxic loans and shadowy funds, etc. You won't get any REAL economic growth - new production plants, new middle-class jobs, and so on. Nope, just more ways for the rich to grow richer.
Pondering The Mess:
Wage inflation can easily happen. We've already been in wage-deflation for the past 20 years. People will eventually get tired of it.