It's important to note that goods and services price inflation without wage inflation should cause housing to decline in nominal terms. (As disposable income stays flat while the market basket excluding housing increases in price, the amount devoted to housing should decline.)
That is, provided goods and services inflation outstrip wage inflation, it should be impossible for housing prices to stay flat in nominal terms.
I would guess (unofficially) for Phoenix, the decline will last for FOUR years. Four Years from 2007-2011. Four mean, nasty, brutal, long excrutiating years.
Ready? I think I am, but most likely will still feel some pain as the money recedes out of here like the tides going out in the Bay of Fundy.
I note that it is a long ways down the inflation adjusted path to return to just below the 100 line. A long ways.
Inflation will take forever to bail us out at 3%- 13% would do it in three years;-}
Full Dismal time: the national economy will also suffer this malaise.
Is it any wonder that the fed is trying to inflate our currency to astronomical heights? Real prices may fall over the next few years, but if inflation keeps on the same trajectory, then nominal prices may stay flat or even increase. Yay housing!
Anyone who thinks we're going to see 2% inflation over the next few years needs to pull the blindfold off.
At the end of the housing correction, sentiment towards housing will be the worst it has ever been. This, along with the oversupply, and coming serious economic contraction coupled with rising living costs(food, energy, healthcare), sets the scene for real declines much lower than 100.
I estimate that we could see real prices at half of what they were in 1987. I think we could easily see 50% nominal declines over the next four years, combined with continued double digit inflation.
Just as the housing bubble was bullish to the extreme, it will overcorrect and sentiment will become bearish to the extreme.
Unfortunately for many eager speculators, the bottom will not lead to real price gains in many areas due to the shifting nature of resource supply constraints. Places like vegas, socal, and florida will experience false rebounds, only to be dragged down further, similar to the current situtation in the rust belt.
Areas that will rebound will be supported by real production of food, energy, and essential goods.
The key to the future is understanding exponential growth. First we are experiencing the limits of exponential growth of credit. Soon we will experience the limits of energy and food production, leading to the decline of the human population.
ISTM that since most houses are paid off over time, a homeowner is minimally concerned with REAL, as opposed to NOMINAL price declines. Unless you have an ARM, buying a house fixes one's house nominal payments. If one gets to pay back the loan in dollars with less purchasing power, all the better. If the dollars that one if paying the loan are worth 20% less and the house is worth 20% less, the only effect is upon the returns upon your downpayment or principal that you've already paid down.
I think your outlook (and almost everyobody else's) makes an assumption that may not be true, namely relatively low unemployment will continue.
If you factor in things like Citigroup cutting 45,000 jobs and the Mayor's Conference Report linked by a poster this a.m., you can see increases in unemployment coming. The Mayor's report has government job cuts written all over it.
With most state/local govt., they aren't allowed to run up big deficits, and they have nowhere during a recession except jobs to cut. They can't cut back social services, because those burdens are rising as the recession becomes reality. As I've written, each foreclosure increases social services/police burdens on govt.
As usual, you're a little too linear in thinking. If unemployment rate rises 2%, what does it do to housing prices?
"They can't cut back social services, because those burdens are rising as the recession becomes reality."
Just watch. Out here in California, the governator's "10 cut percent frum awl departments -- und no new taxes, neither" is just the beginning.
With the rising price of gasoline, there's increased load on public transit -- too bad that the state budget for mass trans was slashed this year. We'll see that sort of thing in social services until there are mass demonstrations, and not just in Sacramento.
Can somebody riddle me this: Why should we expect home prices to rise much in real terms?
This suggests one of two possible inferences from analyzing the Schiller index of real home prices:
Either the deflator they are using is wrong (i.e., the CPI isn't really appropriately capturing true inflation over the past 10 years or so such that the run up wasn't as great as the graph portrays)
or
There was a massive, massive speculative bubble in which people were buying and buying houses beyond their means and bidding up "real" prices to ridiculous heights
I guess what I'm saying is, just as Tanta suggested a couple of days ago that there are the 3 C's in lending (always have been, always will be), shouldn't the personal income to home purchase price ratio stay relatively stable over time such that housing prices should grow pretty much in line with income growth/inflation? In this sense then, adjusted for inflation, housing prices should remain more or less unchanged.
If that's the case, then in real terms, we would need to correct back down to about 100 (presuming the inflation deflator is correct), which peak to trough would represent something like a 40% correction when all is said and done.
Just a thought. Would love to hear what y'all think...
rich, A higher unemployment rate would impact the rate of change, but that isn't what this post is about. I'm trying to provide an overview of where we are - and different paths to the eventual price bottom.
With most state/local govt., they aren't allowed to run up big deficits, and they have nowhere during a recession except jobs to cut.
rich,
nah.. they'll just hide the costs in their pension programs like they've always done.
Also, I'm not sure what use it is to even trust government employment numbers.. the number used now has very little relationship to the number used 20 years ago.
So, how could one even begin to guess what the effect would be on housing prices..?
these graphs...and the ones below confirm that the Fed made a GIGANTIC BLUNDER by having rates so low and long around 2003. completely disgraceful....unless they are trying to screw their own citizens intentionally
Salomon - I think if you go back and check the data over the past 100 years or so, the relationship you suggest between housing and personal income doesn't entirely hold. Leading many people to think that "it's different this time."
"It's likely that the housing crash will accelerate within the next 90 days. And the Ben Bernanke Circus is visiting China, striving to maintain stability so I asked myself, what would I do to keep this house of cards together?
I'd want a 30-40% fall in the dollar. Franklin Roosevelt devalued the dollar by 40% during the Great Depression. Devaluing would cheat foreign interests out of several trillion dollars but it would soften the housing crash. I'd buffer the housing crash out over several years, aiming for a 3-4% fall in housing costs per year. Imported goods would cost more, consumers would scream, but a debt collapse would be worse, I think. China would scream but why would I care?"
Nov. 27 (Bloomberg) -- MBIA Inc., the largest bond insurer, is winding down its structured investment vehicle after failing to find buyers for the SIV's short-term debt since August, Chief Financial Officer Chuck Chaplin said.
MBIA has shrunk its Hudson Thames Capital SIV to about $400 million from $2 billion through asset sales to bondholders, Chaplin said. The Armonk, New York-based company has taken an ``impairment'' on its own $15.8 million equity stake, Chaplin told a conference hosted by Bank of America Corp. in New York today.
Ask yourself: How do you finance a discretionary war and tax cuts while crying, "Kill the Beast!" at Social Security without a long period of unprecedented low interest rates?
I'm almost convinced you're trying to start a big comment battle with your questions.. (just teasing)
First, you could spend all day reading arguments about the CPI and how it underestimates (or overestimates) inflation. For the record, I believe it underestimates inflation.
Also, wage inflation and CPI are very different, and don't get me started on what exactly is a "wage" (or disposable income or salary or whatever the hell some ass wants to call it).
These are all just numbers.. and we're guessing at what they mean.. you can't compare them over time since the numbers are calculated differently depending on whatever whim wins the day.
"if you go back and check the data over the past 100 years or so, the relationship you suggest between housing and personal income doesn't entirely hold."
MLM, you have a point if you go way, way back to when credit was nascent and people had to buy homes with cash. My guess is that you're probably right - the ratio of home prices to income was much lower than it is today. However, credit to purchase homes has been widely available since the beginning of the Case-Schiller index (1987). I'm not sure why the home price to income ratio should be much different today than it had been in 1987, ...unless the advent of adjustable-rate mortgages materially impacted the amount of debt that people can service. It could be the case, ...but it shouldn't change the ratio by a tremendous amount.
"The last slump lasted 97 months from peak to peak."
From everything I've been reading, looks like 97 months is optimistic. Bottom is years away. This is more like the Great Depression, but let's come up with a more original name for it. Depression, is like, depressing. Slump is too mild. Chasm? Abyss?
I'm waiting for them to tear down the McMansions and build multi-family homes on the sites. Then we'll know the insanity of American excess is truly over.
Well, I think it's about as low as it's going to go.
Why?
Because the ECB has its [rhymes with guts] in a wringer. They would dearly love to keep rates where they are, but the amount of blood in the streets gives them pause, shall we say.
Nope. The ECB is going to lower, and when it does, the dollar is going to pop back up.
You think the oil magnates bought a chunk of Citibank, because they thought the dollar was going to toilet?
Forget inflation and guesstimates. Take last years tax return data and run the numbers on what the average household could qualify for based on the old LTV, DTI ratios.
ok ben is going to China... they begin to unpeg the currency link more quickly because that is good apparently....prices rise...cpi goes up...mortgage rates go up because the stuff we buy in China goes up?
that does not make any sense
so all the stuff we buy from China affects our interest rates and the housing market??
Donna, The oil magnates might be interested in exerting more influence over the institutions where they intend to do more banking. Right now, most of their money is in Europe and they might be looking to diversify. In theory, that reduces risk.
I'm firmly in the deflation camp. The inflations-istas haven't managed to make me a believer like, "Nothing" (screen name) on the Ticker Forum board. She has been so spot on that its scary... I mean really scary.
First of all... no one here really understands what the "smart" money is doing. Second, I have yet to hear anyone make a rational, let alone accurate debate of what the FED can and can not control at the end of the day. Keep thinking inflation... SOLD TO YOU!
Nope. The ECB is going to lower, and when it does, the dollar is going to pop back up.
arbogast
Arbogast,
I would like to see this proposed correlation between CB interest rate differentials and FX rates. Where do you get it from? It may make sense intuitively, but does not reflect reality. It never existed between the Deutschmark and the US$, nor does it now between the EURO and the US$. I wonder how this urban myth continues to spook this blog. If it is just repeated often enough, it is believed.
A question regarding where the homebuyers are going to come from...
In addition to the tightened credit requirements, those who have been foreclosed or lost their home through short sales will be both financially and psychologically disqualified from buying soon again.
How many current non-homeowners are available to fill the void?
" The last slump lasted 97 months from peak to peak. "
peak to peak of 8 years is typical - part of that cycle is a run up. . . are we 2 years in to the decline yet? Will it be faster?
Networks were leading with "largest historical drop in Case Shiller index" of course the index is only 20 years old. We had the largest war ever - if you only look at the last 20 years - I get all my history from my teenager.
After market close news on ML downgrade. Does someone have another spare $7.5 billion?
S&P Equity Research Downgrades Merrill Lynch (MER) to Sell
11-27-2007 03:24:33 PM
More Downgrades
S&P Equity Research Downgrades Mission West Properties (MSW) to Sell
S&P Equity Research Downgrades HouseValues (SOLD) to Strong Sell
S&P Equity Research Downgrades Morgan Stanley (MS) to Sell
S&P Equity Research Downgrades Merrill Lynch (MER) to Sell
S&P Equity Research Downgrades Smithfield Foods (SFD) to Hold
S&P Equity Research downgrades Merrill Lynch (NYSE: MER) from Hold to Sell.
S&P analyst, M. Albrecht, says, "We believe further deterioration in the mortgage securities market has put further downward pressure on the value of ABS CDOs on the balance sheet at MER. Remaining net exposure to these products at the end of Q3 was more than $21 billion, and we expect additional write-downs in the range of 25%-30% of these assets in Q4. We are reducing our Q4 and '07 EPS estimates by $3.06 to losses of $1.82 and $0.17, respectively, and lower our '08 EPS estimate by $0.98 to $7.62. We are cutting our 12-month target price by $20 to $48, 1.3X projected book value, a discount to peers."
Merrill Lynch & Co., Inc. is a holding company that provides investment, financing, insurance and related services to individuals and institutions on a global basis through its broker, dealer, banking, insurance and other financial services subsidiaries.
After market close news on ML downgrade. Does someone have another spare $7.5 billion?
S&P Equity Research Downgrades Merrill Lynch (MER) to Sell
11-27-2007 03:24:33 PM
More Downgrades
S&P Equity Research Downgrades Mission West Properties (MSW) to Sell
S&P Equity Research Downgrades HouseValues (SOLD) to Strong Sell
S&P Equity Research Downgrades Morgan Stanley (MS) to Sell
S&P Equity Research Downgrades Merrill Lynch (MER) to Sell
S&P Equity Research Downgrades Smithfield Foods (SFD) to Hold
S&P Equity Research downgrades Merrill Lynch (NYSE: MER) from Hold to Sell.
S&P analyst, M. Albrecht, says, "We believe further deterioration in the mortgage securities market has put further downward pressure on the value of ABS CDOs on the balance sheet at MER. Remaining net exposure to these products at the end of Q3 was more than $21 billion, and we expect additional write-downs in the range of 25%-30% of these assets in Q4. We are reducing our Q4 and '07 EPS estimates by $3.06 to losses of $1.82 and $0.17, respectively, and lower our '08 EPS estimate by $0.98 to $7.62. We are cutting our 12-month target price by $20 to $48, 1.3X projected book value, a discount to peers."
Merrill Lynch & Co., Inc. is a holding company that provides investment, financing, insurance and related services to individuals and institutions on a global basis through its broker, dealer, banking, insurance and other financial services subsidiaries.
The credit-ratings agency said the ratings cut is due to Target's plan to use debt to help finance its repurchase of up to $10 billion of shares by Feb. 2009. Moody's also called Target's free cash flow "thin," given the discount retailer's sizable capital spending for store expansion and its growing credit card operations.
MPSA - The free market is going to handle this like a big boy... don't worry. There is little the FED can do at this point. We have reached the end game for debt merchants.
First of all... no one here really understands what the "smart" money is doing.
Dustdevil
I can see that insiders buy stocks like mad. This has historically always been followed by strong bull markets. You could have seen how insiders bailed out in droves (is this correctly spelled?) before the market meltdown in 2000, correctly predicting the bear market. So what is it that we don't get here?
Dust,
The fed can reflate at will.
All it takes is someone to sell it some more tbonds and bills. They buy, and make blips that count as money.
Simply put, we live in a world of fiat. The government has been spending like it is going out of style. Did anyone notice this fact? It usually means we have inflation. Why is there no shortage of funds on the federal level? Because we borrow more. The Fed conveniently monetizes this stuff as money, allowing us to spend it again as pocket change. The only thing we are arguing about is the price levels of a couple of assets. Are we selling fewer tbonds and tbills? Nope. Is there a huge supply that could be monetized tomorrow? Yup.
Do you believe the CPI is really just under 3% this year?
I don't.
Do I believe that the fiscal insanity will get worse?
I do.
Now, arguing that the falling house prices are leading to huge amounts of deflation in the USA is patently foolish. In 1927-9 food prices on the farm started collapsing. Grain prices collapsed and exports also collapsed. Now that was deflationary. Business in general collapsed from 1928-1930. Do we have this collapse throughout the country?
No.
What we have here is the hangover from truly easy money generated by Wall Street lending long and borrowing short. Now they have had the underlying asset prices collapse, they panic and take huge losses as they all try to sell at the same time.
Mistaking an asset price crash for deflation is easy, but mistaking the power of fiat currency to be inflated is sort of foolish. So we aren't going to be building and flipping houses at a furious rate, next bubble please! There is more money being made day by day through fiscal printing.
This will not end until we Volcker our economy, years from now.
BTW thanks for this post whic is really enlightening for me. I just love your posts on past RE cycles and how this one may play out, based upon past correlations.
This is particularly important for us in the PHX or Northern Arizona markets. As far as I know, Phoenix has never seen such a huge run up as in 2005, whereas California and New York had similar run-ups in the 1980s. That's why we have to look at how things played out in Cali/NY to infer to our markets in AZ. I pay a lot of attention to the Antelope Valley in Southern California as both a reference from the 1990s bust and a canary in the coalmine for PHX in the current bust: as goes Antelope Valley, so goes PHX. We may indeed see a 25% decline in real terms here.
From: Expired
.....
-- Freddie Mac halved its dividend and unveiled plans to sell $6 billion of preferred stock to bolster the mortgage investor's finances in anticipation of more losses, the company said Tuesday.
ADVERTISEMENT
Freddie Mac, which was chartered by Congress to buy home loans from mortgage lenders, will sell $6 billion of a special class of stock.
The money raised through this sale will be used to buttress the company's balance sheet "in light of actual and anticipated losses," Freddie said in a statement.
The company's board also declared a dividend of 25 cents for the fourth quarter, compared with a dividend of 50 cents in the third quarter. The company said it needed to slash the dividend to hold on to enough cash to maintain its financial flexibility and satisfy regulators.
.......
Rich, Low unemployment will continue. China has finally starting to increase salaries in their labor force -- thereby creating new consumers and these consumers will import from us. Also, foreigners are starting to come to the US from Europe and Canada to consume due to our lower dollar -- I heard it is becoming a problem for Canadian stores. Also, higher level US employees have overleveraged and will find that have to keep working. A few years back employers were crying that retiring baby boomers would deplete their workforces, but that has changed due to self inflicted debt and the fact that lower level jobs went to China freeing up labor for the baby boom years. I expect a strong US export businesses -- due to the weak US dollar and low US labor costs and the newly minted Chinese consumer.
Futhermore, Citigroup needs to get salaries down as does the entire financial community. Today's GDP has a huge financial component, but that didn't exist in 1997, when the financial industry was small. Ten years of strong growth in the financial industry caused inflated salaries in financial jobs but I don't expect it to last and layoffs are a start.
Social services will not be eliminated, they will be privatized and government pain will be the right atmosphere to accomplish that. Also, don't bet that the government hasn't profited greatly by the situation that led to the housing rise and decline. It is naive to imagine that they didn't know what was coming. I think it will help not hurt the governemnt because it will solve the social security problem that was looming and no longer is.
Dust,
The fed doesn't really care about asset markets. It cares about business functioning and employing folks. It cares about the "inflation" rate, and how to manage it without scaring the rubes. Asset markets are a pimple on the ass that needs some periodic goosing to keep flowing.
They could care less what the market level is today, as long as there is a market. They provide liquidity, not profits. The only thing they ultimately care about is that people don't panic and stop trading and start hoarding dollars or gold or whatnot.
Money must flow. What concerns them about the housing market is the disruption, not the decline in prices. As long as the decline is orderly, and the markets continue to function they could care less.
Don't mistake what Wall Street thinks the Fed cares about, with what the Fed really does care about.
Also, foreigners are starting to come to the US from Europe and Canada to consume due to our lower dollar -- I heard it is becoming a problem for Canadian stores.
Alternate, I think that the effect of this on our large-scale economy will be marginal at best. It is true that some border towns and perhaps NY/LA/Miami will benefit from foreigners coming here to buy, but realistically, is it worth it to spend $1000 flying to NY to save $500? How much stuff can you smuggle past customs? Not much on an airplane.
Also there is the little matter of border crossing being a hassel. Especially coming from Mexico.
I will say though that having recently been up in Buffalo, the mall parking lots were packed with Ontario license plates. I guess my counter argument is that is a special case, I don't see how the heck a Walmart in Fayetteville, Arkansas or Phoenix is going to get in on this action.
alternate reality, I had a client a few years ago in the mutual fund industry. I was amazed how bloated the middle management was there. It was similar to an old bank...everyone's a VP or Sr. VP....in meetings all day for basic administrative issues. No wonder they have to charge sales loads.
NEW YORK, Nov 27 (Reuters) - Freddie Mac (FRE.N: Quote, Profile, Research), the second biggest provider of money for U.S. home loans, on Tuesday said it cut its dividend by half and will sell $6 billion of preferred stock to buoy capital levels.
The McLean, Virginia-based company's board on Monday approved a quarterly common stock dividend of 25 cents per share, a 50 percent drop from the previous quarter "as part of the company's previously stated strategy of managing to its 30 percent mandatory capital surplus, it said in a statement.
Allen - That is the whole problem with the inflationist line of thought. You put WAY to much credence into what the FED actually is and does. They are nothing more than a debt merchant like the rest of the IB's on Wall St.
Employment and Inflation data right now are worthless numbers. Everyone knows they are cooked. Furthermore, Employment is a LAGGING indicator.
I understand that they don't care about Equities. They do lend to banks that care about equities, however. They also have to be paid back, they can't create money out of the thin air. ITS JUST NOT POSSIBLE.
The velocity of money, the availability of credit, the flight to safety. The EFF and the FFT... It all points to deflation.
Debt Held by the Public 11/26/07:
$5,119,722,549,448.12
Debt Held by the Public 11/27/06:
$4,919,859,952,221.69
Increase of $199,862,597,228.43
Yielding a 4% growth rate in just one year.
The Fed from 2001-2006 increased the money supply by 6% per year.
Inflation is a fact of life. We have issued over $3 trillion in debt since 9/11- without a whimper.
Deflation is totally dead as a concept, and will shortly be demonstrated by our friends holding huge dollar denominated assets, as they leave us for anything usable.
Someday this war's gonna end...Say it loud, say it proud: I LIKE GUNS AND BUTTER, I LIKE GUNS AND BUTTER!!!
Brian Wesbury & Co. put out a research paper today (with a lot of interesting charts) about the outlook for residential construction over the next few years.
I think it's pretty fair and you guys might find it interesting, even though his team can be too optimistic at times. To give you an idea, they're predicting that new home inventories probably won't return to historical averages for three years, although they say it could be faster depending on how far starts drop.
"Have you ever seen this graph at Paper Economy--overlaying Case-Shiller data for this downturn over the '80s-'90s bust?
The author does not mean to imply this slump will replay the last one--just to provide some perspective.
The last slump lasted 97 months from peak to peak.
We ain't see nothing yet."
Now, I will admit to being a college drop out, but I think I stayed long enough to get those chart reading skills down pat. Now unless my eyes deceive me, that chart shows a peak to trough decline of 8%, and it shows our current peak to trough decline at 6%. Again, forgive me if my math is incorrect, but it seems to me that if this decline mirrors the last decline then we would have already felt about 75% of pain in terms of price level, though it will be another couple of years before prices turn up.
Another interesting chart that we seem to have forgotten is the sub-prime reset chart. As I recall the peak month for resets is occurring as we type. Six months from now and the dollar value of resets per month will be down by about 40%. Twelve months from now the whole sub-prime reset thing will be negligible though prime and alt-a resets will pick up in the years thereafter. To my thinking, this means that we should about now be at the peak rate of mortgage non-performance due to resets. If people are looking at these default rates and extrapolating, they may well overestimate the cumulative default rate going forward, which in turn would mean that a stab at the ABX indexes may be in order...
Central,
I'm not sure of the macro-economics, but there were plenty of foreign shoppers (mostly UK) in NYC and DC last season. A UK friend comes over with bags stuffed with old towels and ratty clothes, throws them away, buys new clothes, takes the tags off, washes and wrinkles them, then stuffs the bags back up to approximately the same weight. He drops thousands...then again he's supposed to be on business, so he doesn't have to pay the fares.
Here's what I'm saying: Based on static data, the Mayors are projecting California will lose $4 billion in revenue in 2008 resulting from the mortgage crisis. But you can't lose $4 billion in state revenues without cutting jobs. I you cut jobs, you no longer have static data. You have a feedback loop.
We had a positive feedback loop on the way up (housing - taxes - jobs - housing), and this produced the record appreciation. Now, we will have a negative feedback loop on the way down. Bubble markets are bubble markets, in part, because of the feedback loop.
Cote, Thanks for the link to your adjustments. If your deflator is correct, then we would/should have somewhere in the neighborhood of 25% in real terms to correct...
I can see that insiders buy stocks like mad. This has historically always been followed by strong bull markets. You could have seen how insiders bailed out in droves (is this correctly spelled?) before the market meltdown in 2000, correctly predicting the bear market. So what is it that we don't get here?
O-Joe
Not according to Mark Hulbert! I pinged him about that when he was waxing eloquent about how the insiders know best recently and he sent back an email saying that the insiders were buying prior to the 2000 collapse. And were dead wrong.
"Inflate out of the current problem" assumes that Japan continues to finance our consumer orgy... I will buy someone an Ice cold pepsi if they can tell me how that will continue?
Nov. 27 (Bloomberg) -- Wells Fargo & Co., the second-largest U.S. mortgage lender, will take a $1.4 billion pretax charge in the fourth quarter because of increased losses on home equity loans.
Interesting thesis, though my understanding is that much of the default experienced occurs in advance fo the reset...most recent loans, natch. Also, the scale of resets for the alt-a and jumbo market, along with neg-am IO caps being hit will keep the party going for far too long I am afraid.
One thing is different between the bust of 2001 and this one, at least on the surface.
It seems that most of the losses were born by retail investors, angel investors, startups, etc.
In this case you have the oldest and wisest of the institutions, such as IB's, Freddi/Fanni, WM, Citi, HSBC, lossing billions and billions, not investing in some new thing called the internet, but doing one of the oldest transactions in financial history: home loans.
Question: How can these institions and their managers still maintain the reputation as the "smart money"?
Cote, Thanks for the link to your adjustments. If your deflator is correct, then we would/should have somewhere in the neighborhood of 25% in real terms to correct...
That's assuming this is only a reversion to mean correction and some other things most people aren't even ready to consider. Technology is fast sneaking up on housing like it has already for transport and communications. Stick built on poured concrete drywall and stucco may be the Yugos and dial-ups of the next paradigm. has anyone seen the micro cementbots that extrude low density ferroconcrete houses in 2 inch thick layers over a two day period with almost no labor?
Off topic and not sure if it was posted.
U.S. Senator Charles Schumer urged the regulator of the Federal Home Loan Bank system to probe cash advances to the largest U.S. mortgage lender.
Schumer said he was alarmed by the volume of advances the system's Atlanta bank has made to Countrywide considering ``the rapid deterioration'' in the credit quality of some of the Calabasas, California-based company's mortgages. Schumer expressed his concerns in a letter sent today to Federal Housing Finance Board Chairman Ronald Rosenfeld.
The Atlanta bank has made $51.1 billion in advances to Countrywide as of Sept. 30, representing 37 percent of the bank's total outstanding advances, Schumer wrote, citing U.S. Securities and Exchange Commission filings.
I think the smart money knew what was going to happen but had no choice.
Either do what everyone else was doing and die later, or stop altogether and die immediately.
Like a lemming in the middle of all the others, in a massive stampede toward the cliff's edge. The lone lemming can stop and refuse to go no further as all the others trample over his dead body. Or he can keep moving and hope that A: everyone is right and he is wrong, or B: that the pile of dead bodies on the ground before him will cushion his fall.
This is where you hope some wrangler will crack the whip and move the direction of the crowd away from the cliff. In this case you had Greenspan behind the crowd, forcing them toward the precipice, repeatedly firing a starter pistol screaming Yeee Haaa forward Hoooooo!
Rich, specifically tell us which jobs California should cut.
Where is the fat? The whole "gov't is full of waste and abuse" is a crock...there is no more gov't waste than in the private sector.
Do you want to cut highway maintenance employees or engineers? Schoolteachers? Special ed (what if your kid needs it? I bet you'd feel differently in this case)? Police? Fire? Environmental protection? Toll booth collectors? Public hospitals? Where is the fat? The UC? Sure, let's weaken that system - it isn't important to our economy, right? Who needs educated workers, anyway?
Lunatic Fringe... thats cool. The reality is that he has a lot of really smart posters. Posters that actually have skin in the game. Who do you go with????
Now unless my eyes deceive me, that chart shows a peak to trough decline of 8%
Um, CSI is already showing peak to trough declines of nearly that, or more than that, depending on the market. And we are only fifteen months into a decline that lasted fifty-four months last time.
The graphs of house prices over time are not apples to apples. I would like to point out that the average house in 1987 was smaller than the average house in 2007. They are building them bigger these days, partly because of lifestyle changes in the population. Many people spend more time at home, work from home, and entertain at home more than 20 years ago. Maybe this is because the population is aging or because of the drinking & driving laws, or still increasing sub/urbanization. But in any case a typical home in 1987 is not exactly equal to a home in 2007... not in square feet anyhow.
Salomon - there are some bears on this board who will tell you, when it suits them, that the CPI does not capture the true inflation picture. However they will never, ever discount any of the house price increases further due to supposedly increased inflation - when they see that ramp up - the CPI number becomes rock solid!!!
Jim a - exactly correct - with a fixed 30 year mortgage, and 3% inflation your last payment is well less than 50% as valuable as your first. Hell, if you spend 33% of your after tax income on yor house payment, and get 3% raises for the first 10 years, your raises are equal to your house payment. The fixed 30 year mortgage is powerful, and we have 3.9% nominal wage growth these days. Give it 5 years and your mortgage is 20% smaller.
"However they will never, ever discount any of the house price increases further due to supposedly increased inflation - when they see that ramp up - the CPI number becomes rock solid!!"
Huh? I'm very big on saying CPI and Deflator are too small. I am also very big on using higher numbers on any asset, rising or falling. It's very important to ring out inflation as best as possible to get an accurate view.
I'm truly puzzled as to the meaning of the statement however.
You're funny Anon... Show me where? Otherwise its; SOLD TO YOU!
"In the absence of collateral and, hence, in the absence of money creation, there's a perceived shortage of money. And, with a shortage of money, banks hoard whatever money they can get their hands on. Each bank eyes other banks warily. Banks will still lend to each other, but only at penalty rates. As a result, interbank rates remain well above official interest rates in the US, UK and eurozone (it's also why banks are now offering higher deposit rates your bank needs your money.)"
snip
Basically, any asset that looks a bit like money has become very attractive. Ten-year government bonds aren't entirely like money try buying your café latte with one of those but they're a lot closer to money than equities, which ultimately give you exposure to only one company at a time.
M-F.
The Case-Schiller index doesn't look at average house prices. It looks at repeat sales of the same house. The increase in median or average prices is much greater than shown by the index because of the improvement in quality and size of the average house.
Misean - Well Sorry to lump you in with some selective bears - LOL. It woould be nice to see some as many comments saying "Hey inflation is understated, so maybe the graph doesn't have so far to fall" as we say which say "Inflation is understated which means the Average American has seen huge declines in standard of living" . I think the ratio of comments like those is more like 1 to 100 around here. Funny.
And Winston is right the Case-Schiller index looks at repeat house sales - sorry about that - I guess I was on a rant about median home prices which is up sharply over time also.
I think the inflation adjusted graph is misleading because in 1987 mortgage rates were between 9 and 11% - then along came the 1990 recession. Some of the ramp up was due to low rates and some was due to easy credit expanding the pool of buyers. Once the excess inventory is bought up, I still wouldn't expect 1987 levels unless rates are in the 1987 range of 9-11%.
Well I would argue that WAGES are a better for indexing house prices than the CPI. What matters is people's ability to pay, not how much TVs Rutabegas and a suit costs. If wages rise faster than housing, people just tend to buy bigger houses.
"California is not going to let little children sleep on the streets, even in a recession."
Too late. They already do.
Trust me. I used to work at a school for homeless kids. Of course the parents of said kids were mainly dopers, not the sort to complain to their assemblyman. Easy to ignore. But the kids were kids, and they were on the street. I remember looking in the mouth of five-year-old to check his teeth. The horror, the horror...
What you're saying Rich is once the problem is widespread they won't allow kids to sleep on the streets. Well, they'll do it as long as they can get away with it. And when they can't, they'll snatch the money from someone equally deserving, but even less powerless or with even less voice in the halls of gov't.
Going back to the discussion of whether house prices should rise in line with inflation or nominal income growth over the long term, I think that it is reasonable to expect that people may (all other things being equal) want to dedicate roughly a fixed proportion of their income to their shelter. This would imply that average house prices would rise in line with average income growth, and therefore somewhat higher than inflation - perhaps of the order of 1.5-2.0% per year.
However, you would also expect them to want more for their money, and so there is no particular reason to think that a repeat purchase sales index should rise in real terms, and perhaps you would even expect prices to decline in a similar way to other manufactured goods (albeit at a slower rate, to allow for the proportion of the house price which reflects the land price) as more efficient manufacturing practices are introduced.
Even repeat sales indexes probably overstate house price inflation, as virtually all old houses will have experienced significant upgrades (over and above proper running maintenance) during their lifetime. How much would a single-glazed house in upper NY with a toilet in the yard and no foundations sell for? Not much more than the value of the land, I would guess... Of course people (at least here in the UK) like to go on about these fantastic old houses that are much better quality than modern ones, but they're the ones we see - the rest got knocked down...
Anonymous "and so there is no particular reason to think that a repeat purchase sales index should rise in real terms" There is definitely a reason that at least some old houses would rise in real terms...
The reason is location. If you think of your typical American city, the new building occurs around the edges. The homes closer to the center of the city are older, but have shorter commutes, and some people are willing to pay for the shorter commutes and "mautre " neighborhoods.
Also, many of the older houses have nicer lots than the newer houses which are crammed together a little more these days.
So there are definite reasons aside from upgrades that old houses could rise in real terms.
MF, Perhaps in a fast growing city, and many US cities have been fast growing, then highly central lots may gain an extra premium as the city sprawl expands, but that doesn't apply to the majority of houses. Most resale houses covered by Case Shiller are in standard suburbia, not in Manhattan. And plenty of the most exclusive zip codes of today were once new-builds on the edge of the city, which had qualities to offer that city center houses didn't have (think proximity to beaches, mountains, larger lots, etc.). I don't entirely disagree with your argument, but I think that it's one that gets taken too far without much real data to back it up.
It's important to note that goods and services price inflation without wage inflation should cause housing to decline in nominal terms. (As disposable income stays flat while the market basket excluding housing increases in price, the amount devoted to housing should decline.)
That is, provided goods and services inflation outstrip wage inflation, it should be impossible for housing prices to stay flat in nominal terms.
I would guess (unofficially) for Phoenix, the decline will last for FOUR years. Four Years from 2007-2011. Four mean, nasty, brutal, long excrutiating years.
Ready? I think I am, but most likely will still feel some pain as the money recedes out of here like the tides going out in the Bay of Fundy.
I note that it is a long ways down the inflation adjusted path to return to just below the 100 line. A long ways.
Inflation will take forever to bail us out at 3%- 13% would do it in three years;-}
Full Dismal time: the national economy will also suffer this malaise.
I can hardly wait.
Someday this war's gonna end...
Is it any wonder that the fed is trying to inflate our currency to astronomical heights? Real prices may fall over the next few years, but if inflation keeps on the same trajectory, then nominal prices may stay flat or even increase. Yay housing!
Anyone who thinks we're going to see 2% inflation over the next few years needs to pull the blindfold off.
The subprime timeline from pimco
Timeline
At the end of the housing correction, sentiment towards housing will be the worst it has ever been. This, along with the oversupply, and coming serious economic contraction coupled with rising living costs(food, energy, healthcare), sets the scene for real declines much lower than 100.
I estimate that we could see real prices at half of what they were in 1987. I think we could easily see 50% nominal declines over the next four years, combined with continued double digit inflation.
Just as the housing bubble was bullish to the extreme, it will overcorrect and sentiment will become bearish to the extreme.
Unfortunately for many eager speculators, the bottom will not lead to real price gains in many areas due to the shifting nature of resource supply constraints. Places like vegas, socal, and florida will experience false rebounds, only to be dragged down further, similar to the current situtation in the rust belt.
Areas that will rebound will be supported by real production of food, energy, and essential goods.
The key to the future is understanding exponential growth. First we are experiencing the limits of exponential growth of credit. Soon we will experience the limits of energy and food production, leading to the decline of the human population.
ISTM that since most houses are paid off over time, a homeowner is minimally concerned with REAL, as opposed to NOMINAL price declines. Unless you have an ARM, buying a house fixes one's house nominal payments. If one gets to pay back the loan in dollars with less purchasing power, all the better. If the dollars that one if paying the loan are worth 20% less and the house is worth 20% less, the only effect is upon the returns upon your downpayment or principal that you've already paid down.
CR,
I think your outlook (and almost everyobody else's) makes an assumption that may not be true, namely relatively low unemployment will continue.
If you factor in things like Citigroup cutting 45,000 jobs and the Mayor's Conference Report linked by a poster this a.m., you can see increases in unemployment coming. The Mayor's report has government job cuts written all over it.
With most state/local govt., they aren't allowed to run up big deficits, and they have nowhere during a recession except jobs to cut. They can't cut back social services, because those burdens are rising as the recession becomes reality. As I've written, each foreclosure increases social services/police burdens on govt.
As usual, you're a little too linear in thinking. If unemployment rate rises 2%, what does it do to housing prices?
"They can't cut back social services, because those burdens are rising as the recession becomes reality."
Just watch. Out here in California, the governator's "10 cut percent frum awl departments -- und no new taxes, neither" is just the beginning.
With the rising price of gasoline, there's increased load on public transit -- too bad that the state budget for mass trans was slashed this year. We'll see that sort of thing in social services until there are mass demonstrations, and not just in Sacramento.
Can somebody riddle me this: Why should we expect home prices to rise much in real terms?
This suggests one of two possible inferences from analyzing the Schiller index of real home prices:
or
I guess what I'm saying is, just as Tanta suggested a couple of days ago that there are the 3 C's in lending (always have been, always will be), shouldn't the personal income to home purchase price ratio stay relatively stable over time such that housing prices should grow pretty much in line with income growth/inflation? In this sense then, adjusted for inflation, housing prices should remain more or less unchanged.
If that's the case, then in real terms, we would need to correct back down to about 100 (presuming the inflation deflator is correct), which peak to trough would represent something like a 40% correction when all is said and done.
Just a thought. Would love to hear what y'all think...
rich, A higher unemployment rate would impact the rate of change, but that isn't what this post is about. I'm trying to provide an overview of where we are - and different paths to the eventual price bottom.
Best to all.
With most state/local govt., they aren't allowed to run up big deficits, and they have nowhere during a recession except jobs to cut.
rich,
nah.. they'll just hide the costs in their pension programs like they've always done.
Also, I'm not sure what use it is to even trust government employment numbers.. the number used now has very little relationship to the number used 20 years ago.
So, how could one even begin to guess what the effect would be on housing prices..?
..oh, well.. of course, other than the obvious effect of making price declines worse.
Have you ever seen this graph at Paper Economy--overlaying Case-Shiller data for this downturn over the '80s-'90s bust?
http://bp1.blogger.com/_ym8Q9yxUg34/R0xIk4iAETI/AAAAAAAABWQ/uOzvpDSqHjk/s1600-h/csi0907thennowpeak.JPG
The author does not mean to imply this slump will replay the last one--just to provide some perspective.
The last slump lasted 97 months from peak to peak.
We ain't see nothing yet.
these graphs...and the ones below confirm that the Fed made a GIGANTIC BLUNDER by having rates so low and long around 2003. completely disgraceful....unless they are trying to screw their own citizens intentionally
Salomon - I think if you go back and check the data over the past 100 years or so, the relationship you suggest between housing and personal income doesn't entirely hold. Leading many people to think that "it's different this time."
we are facing poverty times and the only source of money will be ... in housing again. The RE market will be spin dry.
Markel - and I think that chart is nominal dollars. I'd bet inflation was running 3-4% a year.
My prediction about the Federal Reserve from {checking my watch} eleven months ago -
http://www.realmeme.com/roller/page/realmeme/?entry=bernanke_circus
"It's likely that the housing crash will accelerate within the next 90 days. And the Ben Bernanke Circus is visiting China, striving to maintain stability so I asked myself, what would I do to keep this house of cards together?
I'd want a 30-40% fall in the dollar. Franklin Roosevelt devalued the dollar by 40% during the Great Depression. Devaluing would cheat foreign interests out of several trillion dollars but it would soften the housing crash. I'd buffer the housing crash out over several years, aiming for a 3-4% fall in housing costs per year. Imported goods would cost more, consumers would scream, but a debt collapse would be worse, I think. China would scream but why would I care?"
MBIA Collapses its Hudson Thames SIV, Takes Writedown (Update1)
By Lindsay Fortado
By Christine Richard and Neil Unmack
Nov. 27 (Bloomberg) -- MBIA Inc., the largest bond insurer, is winding down its structured investment vehicle after failing to find buyers for the SIV's short-term debt since August, Chief Financial Officer Chuck Chaplin said.
MBIA has shrunk its Hudson Thames Capital SIV to about $400 million from $2 billion through asset sales to bondholders, Chaplin said. The Armonk, New York-based company has taken an ``impairment'' on its own $15.8 million equity stake, Chaplin told a conference hosted by Bank of America Corp. in New York today.
[snip]
I'd like to get a CR comment on that overlay Markel posted.
Looks grim indeed. Lama, I imagine you are right, but even so . . . pretty ugly.
Ah, Anonymous, you silly boy/girl!
You silly, silly creature.
Ask yourself: How do you finance a discretionary war and tax cuts while crying, "Kill the Beast!" at Social Security without a long period of unprecedented low interest rates?
julie- The RE market will be spin dry.
I like that. Something like, the home ATM is now entering the spin dry cycle.
Salomon,
I'm almost convinced you're trying to start a big comment battle with your questions.. (just teasing)
First, you could spend all day reading arguments about the CPI and how it underestimates (or overestimates) inflation. For the record, I believe it underestimates inflation.
Also, wage inflation and CPI are very different, and don't get me started on what exactly is a "wage" (or disposable income or salary or whatever the hell some ass wants to call it).
These are all just numbers.. and we're guessing at what they mean.. you can't compare them over time since the numbers are calculated differently depending on whatever whim wins the day.
The last slump lasted 97 months from peak to peak.
We ain't see nothing yet
In other words, the Feds have to get more aggressive at creating inflation and devaluing the dollar.
I do believe you've got it, old chum!
Americans are going to come out of this with less disposable income, an increased desire to save, and no automatic teller beside the front door.
Inflation?
I don't think so.
What was the inflation rate in Japan when interest rates were zero?
"if you go back and check the data over the past 100 years or so, the relationship you suggest between housing and personal income doesn't entirely hold."
MLM, you have a point if you go way, way back to when credit was nascent and people had to buy homes with cash. My guess is that you're probably right - the ratio of home prices to income was much lower than it is today. However, credit to purchase homes has been widely available since the beginning of the Case-Schiller index (1987). I'm not sure why the home price to income ratio should be much different today than it had been in 1987, ...unless the advent of adjustable-rate mortgages materially impacted the amount of debt that people can service. It could be the case, ...but it shouldn't change the ratio by a tremendous amount.
"The last slump lasted 97 months from peak to peak."
From everything I've been reading, looks like 97 months is optimistic. Bottom is years away. This is more like the Great Depression, but let's come up with a more original name for it. Depression, is like, depressing. Slump is too mild. Chasm? Abyss?
I'm waiting for them to tear down the McMansions and build multi-family homes on the sites. Then we'll know the insanity of American excess is truly over.
And the dollar?
Well, I think it's about as low as it's going to go.
Why?
Because the ECB has its [rhymes with guts] in a wringer. They would dearly love to keep rates where they are, but the amount of blood in the streets gives them pause, shall we say.
Nope. The ECB is going to lower, and when it does, the dollar is going to pop back up.
You think the oil magnates bought a chunk of Citibank, because they thought the dollar was going to toilet?
Forget inflation and guesstimates. Take last years tax return data and run the numbers on what the average household could qualify for based on the old LTV, DTI ratios.
"You think the oil magnates bought a chunk of Citibank, because they thought the dollar was going to toilet?"
Yes. What else are they going to do with the money but buy up American companies? Dollars are becoming worthless everywhere but here.
"I'm almost convinced you're trying to start a big comment battle with your questions.. (just teasing)"
Damn Eli, you caught me. I'll just shut up now!
ok ben is going to China... they begin to unpeg the currency link more quickly because that is good apparently....prices rise...cpi goes up...mortgage rates go up because the stuff we buy in China goes up?
that does not make any sense
so all the stuff we buy from China affects our interest rates and the housing market??
something seriously wrong
Donna, The oil magnates might be interested in exerting more influence over the institutions where they intend to do more banking. Right now, most of their money is in Europe and they might be looking to diversify. In theory, that reduces risk.
I can hardly wait.
Someday this war's gonna end...
AllenM | 11.27.07 - 3:38 pm
Someday this war's gonna start . . .
I'm so glad we had our alternating day run up so the big boys could short the market.
I'm firmly in the deflation camp. The inflations-istas haven't managed to make me a believer like, "Nothing" (screen name) on the Ticker Forum board. She has been so spot on that its scary... I mean really scary.
First of all... no one here really understands what the "smart" money is doing. Second, I have yet to hear anyone make a rational, let alone accurate debate of what the FED can and can not control at the end of the day. Keep thinking inflation... SOLD TO YOU!
Nope. The ECB is going to lower, and when it does, the dollar is going to pop back up.
arbogast
Arbogast,
I would like to see this proposed correlation between CB interest rate differentials and FX rates. Where do you get it from? It may make sense intuitively, but does not reflect reality. It never existed between the Deutschmark and the US$, nor does it now between the EURO and the US$. I wonder how this urban myth continues to spook this blog. If it is just repeated often enough, it is believed.
Nontheless, it's nothing but an urban legend.
O-Joe
O-Joe,
You ever figure out how what's going on with ABCP works for the bullish case?
California is not going to let little children sleep on the streets, even in a recession.
California has little control over what it spends on Medi-Cal, welfare, prisons, pensions or rehabilitative services.
Where California can cut is in the administrative layers of useless govt. bodies. It's the FAT that will be cut, and the fat is a bureaucrat.
A question regarding where the homebuyers are going to come from...
In addition to the tightened credit requirements, those who have been foreclosed or lost their home through short sales will be both financially and psychologically disqualified from buying soon again.
How many current non-homeowners are available to fill the void?
" The last slump lasted 97 months from peak to peak. "
peak to peak of 8 years is typical - part of that cycle is a run up. . . are we 2 years in to the decline yet? Will it be faster?
Networks were leading with "largest historical drop in Case Shiller index" of course the index is only 20 years old. We had the largest war ever - if you only look at the last 20 years - I get all my history from my teenager.
After market close news on ML downgrade. Does someone have another spare $7.5 billion?
S&P Equity Research Downgrades Merrill Lynch (MER) to Sell
11-27-2007 03:24:33 PM
More Downgrades
S&P Equity Research Downgrades Mission West Properties (MSW) to Sell
S&P Equity Research Downgrades HouseValues (SOLD) to Strong Sell
S&P Equity Research Downgrades Morgan Stanley (MS) to Sell
S&P Equity Research Downgrades Merrill Lynch (MER) to Sell
S&P Equity Research Downgrades Smithfield Foods (SFD) to Hold
S&P Equity Research downgrades Merrill Lynch (NYSE: MER) from Hold to Sell.
S&P analyst, M. Albrecht, says, "We believe further deterioration in the mortgage securities market has put further downward pressure on the value of ABS CDOs on the balance sheet at MER. Remaining net exposure to these products at the end of Q3 was more than $21 billion, and we expect additional write-downs in the range of 25%-30% of these assets in Q4. We are reducing our Q4 and '07 EPS estimates by $3.06 to losses of $1.82 and $0.17, respectively, and lower our '08 EPS estimate by $0.98 to $7.62. We are cutting our 12-month target price by $20 to $48, 1.3X projected book value, a discount to peers."
Merrill Lynch & Co., Inc. is a holding company that provides investment, financing, insurance and related services to individuals and institutions on a global basis through its broker, dealer, banking, insurance and other financial services subsidiaries.
After market close news on ML downgrade. Does someone have another spare $7.5 billion?
S&P Equity Research Downgrades Merrill Lynch (MER) to Sell
11-27-2007 03:24:33 PM
More Downgrades
S&P Equity Research Downgrades Mission West Properties (MSW) to Sell
S&P Equity Research Downgrades HouseValues (SOLD) to Strong Sell
S&P Equity Research Downgrades Morgan Stanley (MS) to Sell
S&P Equity Research Downgrades Merrill Lynch (MER) to Sell
S&P Equity Research Downgrades Smithfield Foods (SFD) to Hold
S&P Equity Research downgrades Merrill Lynch (NYSE: MER) from Hold to Sell.
S&P analyst, M. Albrecht, says, "We believe further deterioration in the mortgage securities market has put further downward pressure on the value of ABS CDOs on the balance sheet at MER. Remaining net exposure to these products at the end of Q3 was more than $21 billion, and we expect additional write-downs in the range of 25%-30% of these assets in Q4. We are reducing our Q4 and '07 EPS estimates by $3.06 to losses of $1.82 and $0.17, respectively, and lower our '08 EPS estimate by $0.98 to $7.62. We are cutting our 12-month target price by $20 to $48, 1.3X projected book value, a discount to peers."
Merrill Lynch & Co., Inc. is a holding company that provides investment, financing, insurance and related services to individuals and institutions on a global basis through its broker, dealer, banking, insurance and other financial services subsidiaries.
we could have used some FAT bureaucrats going over Moodys, S&P, CFC, C, and all the banks...
probably would have stopped this mess.
But I thought the free market was the best at everything?
head explodes
Some of the buybacks are taking a hit as well.
Target's long-term debt downgraded at Moody's
Target's long-term debt downgraded at Moody's - MarketWatch
The credit-ratings agency said the ratings cut is due to Target's plan to use debt to help finance its repurchase of up to $10 billion of shares by Feb. 2009. Moody's also called Target's free cash flow "thin," given the discount retailer's sizable capital spending for store expansion and its growing credit card operations.
MPSA - The free market is going to handle this like a big boy... don't worry. There is little the FED can do at this point. We have reached the end game for debt merchants.
Inflation? LOL... Sold to YOU!
First of all... no one here really understands what the "smart" money is doing.
Dustdevil
I can see that insiders buy stocks like mad. This has historically always been followed by strong bull markets. You could have seen how insiders bailed out in droves (is this correctly spelled?) before the market meltdown in 2000, correctly predicting the bear market. So what is it that we don't get here?
O-Joe
Dust,
The fed can reflate at will.
All it takes is someone to sell it some more tbonds and bills. They buy, and make blips that count as money.
Simply put, we live in a world of fiat. The government has been spending like it is going out of style. Did anyone notice this fact? It usually means we have inflation. Why is there no shortage of funds on the federal level? Because we borrow more. The Fed conveniently monetizes this stuff as money, allowing us to spend it again as pocket change. The only thing we are arguing about is the price levels of a couple of assets. Are we selling fewer tbonds and tbills? Nope. Is there a huge supply that could be monetized tomorrow? Yup.
Do you believe the CPI is really just under 3% this year?
I don't.
Do I believe that the fiscal insanity will get worse?
I do.
Now, arguing that the falling house prices are leading to huge amounts of deflation in the USA is patently foolish. In 1927-9 food prices on the farm started collapsing. Grain prices collapsed and exports also collapsed. Now that was deflationary. Business in general collapsed from 1928-1930. Do we have this collapse throughout the country?
No.
What we have here is the hangover from truly easy money generated by Wall Street lending long and borrowing short. Now they have had the underlying asset prices collapse, they panic and take huge losses as they all try to sell at the same time.
Mistaking an asset price crash for deflation is easy, but mistaking the power of fiat currency to be inflated is sort of foolish. So we aren't going to be building and flipping houses at a furious rate, next bubble please! There is more money being made day by day through fiscal printing.
This will not end until we Volcker our economy, years from now.
Someday this war's gonna end....
O-joe says: "I can see that insiders buy stocks like mad... So what is it that we don't get here?"
Ummm, just about all of it. lol
I very roughly adjusted Shiller's graph for SGS inflation and hedonics in September here.
rc,
Do you have a link?
thanks
"The fed can reflate at will.
All it takes is someone to sell it some more tbonds and bills. They buy, and make blips that count as money."
This is patently wrong. Go to the ticker and see for yourself. You can't fight the tape. The FED has no more control than you or I at this point.
CR,
BTW thanks for this post whic is really enlightening for me. I just love your posts on past RE cycles and how this one may play out, based upon past correlations.
This is particularly important for us in the PHX or Northern Arizona markets. As far as I know, Phoenix has never seen such a huge run up as in 2005, whereas California and New York had similar run-ups in the 1980s. That's why we have to look at how things played out in Cali/NY to infer to our markets in AZ. I pay a lot of attention to the Antelope Valley in Southern California as both a reference from the 1990s bust and a canary in the coalmine for PHX in the current bust: as goes Antelope Valley, so goes PHX. We may indeed see a 25% decline in real terms here.
O-Joe
From:
Expired
.....
-- Freddie Mac halved its dividend and unveiled plans to sell $6 billion of preferred stock to bolster the mortgage investor's finances in anticipation of more losses, the company said Tuesday.
ADVERTISEMENT
Freddie Mac, which was chartered by Congress to buy home loans from mortgage lenders, will sell $6 billion of a special class of stock.
The money raised through this sale will be used to buttress the company's balance sheet "in light of actual and anticipated losses," Freddie said in a statement.
The company's board also declared a dividend of 25 cents for the fourth quarter, compared with a dividend of 50 cents in the third quarter. The company said it needed to slash the dividend to hold on to enough cash to maintain its financial flexibility and satisfy regulators.
.......
-K
Rich, Low unemployment will continue. China has finally starting to increase salaries in their labor force -- thereby creating new consumers and these consumers will import from us. Also, foreigners are starting to come to the US from Europe and Canada to consume due to our lower dollar -- I heard it is becoming a problem for Canadian stores. Also, higher level US employees have overleveraged and will find that have to keep working. A few years back employers were crying that retiring baby boomers would deplete their workforces, but that has changed due to self inflicted debt and the fact that lower level jobs went to China freeing up labor for the baby boom years. I expect a strong US export businesses -- due to the weak US dollar and low US labor costs and the newly minted Chinese consumer.
Futhermore, Citigroup needs to get salaries down as does the entire financial community. Today's GDP has a huge financial component, but that didn't exist in 1997, when the financial industry was small. Ten years of strong growth in the financial industry caused inflated salaries in financial jobs but I don't expect it to last and layoffs are a start.
Social services will not be eliminated, they will be privatized and government pain will be the right atmosphere to accomplish that. Also, don't bet that the government hasn't profited greatly by the situation that led to the housing rise and decline. It is naive to imagine that they didn't know what was coming. I think it will help not hurt the governemnt because it will solve the social security problem that was looming and no longer is.
Allen take a look at the repo action. Fed adds net $4.5B 1 day TOMO 11/26/2007
Average EFF since last FOMC 4.4995%
FFT is a hold+
$34.750B expires tomorrow
Ummm, just about all of it. lol
Dustdevil
OK, I won't feed the trolls any more.
O-Joe
More talk going around about Arab money continuing to ramp the S&P Futures overnight and buy BIX/BKX equity positions.
The C bond deal was made public as a cover.
Arabs pump futures and funds sell on pops? retail gets hoovered in on a daily basis...blood everywhere
Dust,
The fed doesn't really care about asset markets. It cares about business functioning and employing folks. It cares about the "inflation" rate, and how to manage it without scaring the rubes. Asset markets are a pimple on the ass that needs some periodic goosing to keep flowing.
They could care less what the market level is today, as long as there is a market. They provide liquidity, not profits. The only thing they ultimately care about is that people don't panic and stop trading and start hoarding dollars or gold or whatnot.
Money must flow. What concerns them about the housing market is the disruption, not the decline in prices. As long as the decline is orderly, and the markets continue to function they could care less.
Don't mistake what Wall Street thinks the Fed cares about, with what the Fed really does care about.
Someday this war's gonna end...
Thanks O Joe,
That's what I thought.
Goldman Sachs:
Why Housing Still Holds the Key to US Monetary Policy
What the Fed Will Do About it (Hint: Ease to 3% by mid-2008)
Replay Numbers: 800-332-6854
Conference Entry Code: 4890513
Best to all.
Also, foreigners are starting to come to the US from Europe and Canada to consume due to our lower dollar -- I heard it is becoming a problem for Canadian stores.
Alternate, I think that the effect of this on our large-scale economy will be marginal at best. It is true that some border towns and perhaps NY/LA/Miami will benefit from foreigners coming here to buy, but realistically, is it worth it to spend $1000 flying to NY to save $500? How much stuff can you smuggle past customs? Not much on an airplane.
Also there is the little matter of border crossing being a hassel. Especially coming from Mexico.
I will say though that having recently been up in Buffalo, the mall parking lots were packed with Ontario license plates. I guess my counter argument is that is a special case, I don't see how the heck a Walmart in Fayetteville, Arkansas or Phoenix is going to get in on this action.
alternate reality, I had a client a few years ago in the mutual fund industry. I was amazed how bloated the middle management was there. It was similar to an old bank...everyone's a VP or Sr. VP....in meetings all day for basic administrative issues. No wonder they have to charge sales loads.
Dubai exports all of its crude oil production, which is averaging about 240000 b/d
at a recent weighted avg px of 90 or so, that's only 22 mil a day.
or about 8 billion in one year.
AD is growing like a vine, up,up,up...
where is all the money coming from?
NEW YORK, Nov 27 (Reuters) - Freddie Mac (FRE.N: Quote, Profile, Research), the second biggest provider of money for U.S. home loans, on Tuesday said it cut its dividend by half and will sell $6 billion of preferred stock to buoy capital levels.
The McLean, Virginia-based company's board on Monday approved a quarterly common stock dividend of 25 cents per share, a 50 percent drop from the previous quarter "as part of the company's previously stated strategy of managing to its 30 percent mandatory capital surplus, it said in a statement.
Allen - That is the whole problem with the inflationist line of thought. You put WAY to much credence into what the FED actually is and does. They are nothing more than a debt merchant like the rest of the IB's on Wall St.
Employment and Inflation data right now are worthless numbers. Everyone knows they are cooked. Furthermore, Employment is a LAGGING indicator.
I understand that they don't care about Equities. They do lend to banks that care about equities, however. They also have to be paid back, they can't create money out of the thin air. ITS JUST NOT POSSIBLE.
The velocity of money, the availability of credit, the flight to safety. The EFF and the FFT... It all points to deflation.
Go read the ticker and get back to me:
The Market Ticker
Do you have a link?
The word here is the link. Just click on the word. The discussion is at: Exurban Nation: Square Feet and Hedonics
Dust,
you can't qoute denninger and get any respect around here.
Debt Held by the Public 11/26/07:
$5,119,722,549,448.12
Debt Held by the Public 11/27/06:
$4,919,859,952,221.69
Increase of $199,862,597,228.43
Yielding a 4% growth rate in just one year.
The Fed from 2001-2006 increased the money supply by 6% per year.
Inflation is a fact of life. We have issued over $3 trillion in debt since 9/11- without a whimper.
Deflation is totally dead as a concept, and will shortly be demonstrated by our friends holding huge dollar denominated assets, as they leave us for anything usable.
Someday this war's gonna end...Say it loud, say it proud: I LIKE GUNS AND BUTTER, I LIKE GUNS AND BUTTER!!!
Here is the ML downgrade link.
StreetInsider.com - S&P Equity Research Downgrades Merrill Lynch (MER) to Sell
Brian Wesbury & Co. put out a research paper today (with a lot of interesting charts) about the outlook for residential construction over the next few years.
I think it's pretty fair and you guys might find it interesting, even though his team can be too optimistic at times. To give you an idea, they're predicting that new home inventories probably won't return to historical averages for three years, although they say it could be faster depending on how far starts drop.
Link
(pdf)
So the fed is in the process of lowering rates that started a little while ago. Hints at 3% or so by mid 2008.
So how low and how long this time?
Drop them again to 1% again in a couple of years?
"Have you ever seen this graph at Paper Economy--overlaying Case-Shiller data for this downturn over the '80s-'90s bust?
The author does not mean to imply this slump will replay the last one--just to provide some perspective.
The last slump lasted 97 months from peak to peak.
We ain't see nothing yet."
Now, I will admit to being a college drop out, but I think I stayed long enough to get those chart reading skills down pat. Now unless my eyes deceive me, that chart shows a peak to trough decline of 8%, and it shows our current peak to trough decline at 6%. Again, forgive me if my math is incorrect, but it seems to me that if this decline mirrors the last decline then we would have already felt about 75% of pain in terms of price level, though it will be another couple of years before prices turn up.
Another interesting chart that we seem to have forgotten is the sub-prime reset chart. As I recall the peak month for resets is occurring as we type. Six months from now and the dollar value of resets per month will be down by about 40%. Twelve months from now the whole sub-prime reset thing will be negligible though prime and alt-a resets will pick up in the years thereafter. To my thinking, this means that we should about now be at the peak rate of mortgage non-performance due to resets. If people are looking at these default rates and extrapolating, they may well overestimate the cumulative default rate going forward, which in turn would mean that a stab at the ABX indexes may be in order...
Central,
I'm not sure of the macro-economics, but there were plenty of foreign shoppers (mostly UK) in NYC and DC last season. A UK friend comes over with bags stuffed with old towels and ratty clothes, throws them away, buys new clothes, takes the tags off, washes and wrinkles them, then stuffs the bags back up to approximately the same weight. He drops thousands...then again he's supposed to be on business, so he doesn't have to pay the fares.
CR,
I understand where you are coming from. But take a look at the Mayor's report that Kettle linked this a.m.
The page cannot be found pr...port_112707.pdf
Here's what I'm saying: Based on static data, the Mayors are projecting California will lose $4 billion in revenue in 2008 resulting from the mortgage crisis. But you can't lose $4 billion in state revenues without cutting jobs. I you cut jobs, you no longer have static data. You have a feedback loop.
We had a positive feedback loop on the way up (housing - taxes - jobs - housing), and this produced the record appreciation. Now, we will have a negative feedback loop on the way down. Bubble markets are bubble markets, in part, because of the feedback loop.
Which bank is going to be able to lend money when the rates hit 3%? I would like names... so I can then show you their balance sheet as of today.
Who is going to service these loans, if j6p can't service his/her loans right now?
Without wage inflation, how would anyone of these over-leveraged Americans be able to pay the nut on more debt load?
If China is imploding under current price controls and commodity shortages... who is going to manufacture all of the lead based toys?
Please one of you has to be able to answer these...
Cote, Thanks for the link to your adjustments. If your deflator is correct, then we would/should have somewhere in the neighborhood of 25% in real terms to correct...
--
Wells Fargo to take $1.4B CHARGE in Q4. Reported on Boob-berg.
Jas
I can see that insiders buy stocks like mad. This has historically always been followed by strong bull markets. You could have seen how insiders bailed out in droves (is this correctly spelled?) before the market meltdown in 2000, correctly predicting the bear market. So what is it that we don't get here?
O-Joe
Not according to Mark Hulbert! I pinged him about that when he was waxing eloquent about how the insiders know best recently and he sent back an email saying that the insiders were buying prior to the 2000 collapse. And were dead wrong.
"Inflate out of the current problem" assumes that Japan continues to finance our consumer orgy... I will buy someone an Ice cold pepsi if they can tell me how that will continue?
Wells Fargo Plans $1.4 Billion Charge for Bad Home Equity Loans
By Lindsay Fortado
By David Mildenberg
Nov. 27 (Bloomberg) -- Wells Fargo & Co., the second-largest U.S. mortgage lender, will take a $1.4 billion pretax charge in the fourth quarter because of increased losses on home equity loans.
[snip]
DustDevil,
Are you kidding? China is exploding:
China's new concern: Exploding phones - The New York Times
Chinese Tires Blamed for Fatal Van Accident
Disney Store Recalls Children's Footed Pajamas Due to Burn Hazard
Lama - LOL!!!!! They are going down so hard and at such an amazing pace that I literally have to prop my eyes open to catch all of it.
david,
Interesting thesis, though my understanding is that much of the default experienced occurs in advance fo the reset...most recent loans, natch. Also, the scale of resets for the alt-a and jumbo market, along with neg-am IO caps being hit will keep the party going for far too long I am afraid.
One thing is different between the bust of 2001 and this one, at least on the surface.
It seems that most of the losses were born by retail investors, angel investors, startups, etc.
In this case you have the oldest and wisest of the institutions, such as IB's, Freddi/Fanni, WM, Citi, HSBC, lossing billions and billions, not investing in some new thing called the internet, but doing one of the oldest transactions in financial history: home loans.
Question: How can these institions and their managers still maintain the reputation as the "smart money"?
Firstly, aren't we in uncharted terr
Cote, Thanks for the link to your adjustments. If your deflator is correct, then we would/should have somewhere in the neighborhood of 25% in real terms to correct...
That's assuming this is only a reversion to mean correction and some other things most people aren't even ready to consider. Technology is fast sneaking up on housing like it has already for transport and communications. Stick built on poured concrete drywall and stucco may be the Yugos and dial-ups of the next paradigm. has anyone seen the micro cementbots that extrude low density ferroconcrete houses in 2 inch thick layers over a two day period with almost no labor?
Off topic and not sure if it was posted.
U.S. Senator Charles Schumer urged the regulator of the Federal Home Loan Bank system to probe cash advances to the largest U.S. mortgage lender.
Schumer said he was alarmed by the volume of advances the system's Atlanta bank has made to Countrywide considering ``the rapid deterioration'' in the credit quality of some of the Calabasas, California-based company's mortgages. Schumer expressed his concerns in a letter sent today to Federal Housing Finance Board Chairman Ronald Rosenfeld.
The Atlanta bank has made $51.1 billion in advances to Countrywide as of Sept. 30, representing 37 percent of the bank's total outstanding advances, Schumer wrote, citing U.S. Securities and Exchange Commission filings.
Countrywide Falls as Schumer Seeks Probe of Advances (Update2) - Bloomberg.com
I'll answer my own question.
I think the smart money knew what was going to happen but had no choice.
Either do what everyone else was doing and die later, or stop altogether and die immediately.
Like a lemming in the middle of all the others, in a massive stampede toward the cliff's edge. The lone lemming can stop and refuse to go no further as all the others trample over his dead body. Or he can keep moving and hope that A: everyone is right and he is wrong, or B: that the pile of dead bodies on the ground before him will cushion his fall.
This is where you hope some wrangler will crack the whip and move the direction of the crowd away from the cliff. In this case you had Greenspan behind the crowd, forcing them toward the precipice, repeatedly firing a starter pistol screaming Yeee Haaa forward Hoooooo!
Wells Fargo joins the confessional:
Wells Fargo Plans $1.4 Billion Charge for Bad Home Equity Loans
Dust,
you can't quote denninger and get any respect around here.
You're kidding, right?
Rich, specifically tell us which jobs California should cut.
Where is the fat? The whole "gov't is full of waste and abuse" is a crock...there is no more gov't waste than in the private sector.
Do you want to cut highway maintenance employees or engineers? Schoolteachers? Special ed (what if your kid needs it? I bet you'd feel differently in this case)? Police? Fire? Environmental protection? Toll booth collectors? Public hospitals? Where is the fat? The UC? Sure, let's weaken that system - it isn't important to our economy, right? Who needs educated workers, anyway?
Lunatic Fringe... thats cool. The reality is that he has a lot of really smart posters. Posters that actually have skin in the game. Who do you go with????
Are you in the inflation camp? SOLD TO YOU!
Now unless my eyes deceive me, that chart shows a peak to trough decline of 8%
Um, CSI is already showing peak to trough declines of nearly that, or more than that, depending on the market. And we are only fifteen months into a decline that lasted fifty-four months last time.
Dustdevil,
I also heard that Chinese condoms can cause you to have twins.
(Sorry CR, I know this is a family blog)
The graphs of house prices over time are not apples to apples. I would like to point out that the average house in 1987 was smaller than the average house in 2007. They are building them bigger these days, partly because of lifestyle changes in the population. Many people spend more time at home, work from home, and entertain at home more than 20 years ago. Maybe this is because the population is aging or because of the drinking & driving laws, or still increasing sub/urbanization. But in any case a typical home in 1987 is not exactly equal to a home in 2007... not in square feet anyhow.
Salomon - there are some bears on this board who will tell you, when it suits them, that the CPI does not capture the true inflation picture. However they will never, ever discount any of the house price increases further due to supposedly increased inflation - when they see that ramp up - the CPI number becomes rock solid!!!
Jim a - exactly correct - with a fixed 30 year mortgage, and 3% inflation your last payment is well less than 50% as valuable as your first. Hell, if you spend 33% of your after tax income on yor house payment, and get 3% raises for the first 10 years, your raises are equal to your house payment. The fixed 30 year mortgage is powerful, and we have 3.9% nominal wage growth these days. Give it 5 years and your mortgage is 20% smaller.
I think I'll flip a coin to decide who is more ate up O-Joe or Dustdevil
Your both wrong.
M-F,
Super Colander Tin Foil Hat wearer here.
"However they will never, ever discount any of the house price increases further due to supposedly increased inflation - when they see that ramp up - the CPI number becomes rock solid!!"
Huh? I'm very big on saying CPI and Deflator are too small. I am also very big on using higher numbers on any asset, rising or falling. It's very important to ring out inflation as best as possible to get an accurate view.
I'm truly puzzled as to the meaning of the statement however.
Sorry if this is posted. I've been at the dentist having a fun time.
Bloomberg - Bank CDO Losses May Reach $77 Billion, JP Morgan Says (and how is Goldman doing today?)
Bank CDO Losses May Reach $77 Billion, JPMorgan Says (Update1) - Bloomberg.com
You're funny Anon... Show me where? Otherwise its; SOLD TO YOU!
"In the absence of collateral and, hence, in the absence of money creation, there's a perceived shortage of money. And, with a shortage of money, banks hoard whatever money they can get their hands on. Each bank eyes other banks warily. Banks will still lend to each other, but only at penalty rates. As a result, interbank rates remain well above official interest rates in the US, UK and eurozone (it's also why banks are now offering higher deposit rates your bank needs your money.)"
snip
Basically, any asset that looks a bit like money has become very attractive. Ten-year government bonds aren't entirely like money try buying your café latte with one of those but they're a lot closer to money than equities, which ultimately give you exposure to only one company at a time.
From: Stephen King: When banking is in crisis, no one wants to be parted from their cash -
Business Comment, Business - The Independent
M-F.
The Case-Schiller index doesn't look at average house prices. It looks at repeat sales of the same house. The increase in median or average prices is much greater than shown by the index because of the improvement in quality and size of the average house.
Dust,
You got me wrong. I love Karl and what he's accomplished. I was actually showing my disbelief at what another poster wrote.
and I do have a lot of skin in the game.
Misean - Well Sorry to lump you in with some selective bears - LOL. It woould be nice to see some as many comments saying "Hey inflation is understated, so maybe the graph doesn't have so far to fall" as we say which say "Inflation is understated which means the Average American has seen huge declines in standard of living" . I think the ratio of comments like those is more like 1 to 100 around here. Funny.
And Winston is right the Case-Schiller index looks at repeat house sales - sorry about that - I guess I was on a rant about median home prices which is up sharply over time also.
I think the inflation adjusted graph is misleading because in 1987 mortgage rates were between 9 and 11% - then along came the 1990 recession. Some of the ramp up was due to low rates and some was due to easy credit expanding the pool of buyers. Once the excess inventory is bought up, I still wouldn't expect 1987 levels unless rates are in the 1987 range of 9-11%.
Well I would argue that WAGES are a better for indexing house prices than the CPI. What matters is people's ability to pay, not how much TVs Rutabegas and a suit costs. If wages rise faster than housing, people just tend to buy bigger houses.
"California is not going to let little children sleep on the streets, even in a recession."
Too late. They already do.
Trust me. I used to work at a school for homeless kids. Of course the parents of said kids were mainly dopers, not the sort to complain to their assemblyman. Easy to ignore. But the kids were kids, and they were on the street. I remember looking in the mouth of five-year-old to check his teeth. The horror, the horror...
What you're saying Rich is once the problem is widespread they won't allow kids to sleep on the streets. Well, they'll do it as long as they can get away with it. And when they can't, they'll snatch the money from someone equally deserving, but even less powerless or with even less voice in the halls of gov't.
Going back to the discussion of whether house prices should rise in line with inflation or nominal income growth over the long term, I think that it is reasonable to expect that people may (all other things being equal) want to dedicate roughly a fixed proportion of their income to their shelter. This would imply that average house prices would rise in line with average income growth, and therefore somewhat higher than inflation - perhaps of the order of 1.5-2.0% per year.
However, you would also expect them to want more for their money, and so there is no particular reason to think that a repeat purchase sales index should rise in real terms, and perhaps you would even expect prices to decline in a similar way to other manufactured goods (albeit at a slower rate, to allow for the proportion of the house price which reflects the land price) as more efficient manufacturing practices are introduced.
Even repeat sales indexes probably overstate house price inflation, as virtually all old houses will have experienced significant upgrades (over and above proper running maintenance) during their lifetime. How much would a single-glazed house in upper NY with a toilet in the yard and no foundations sell for? Not much more than the value of the land, I would guess... Of course people (at least here in the UK) like to go on about these fantastic old houses that are much better quality than modern ones, but they're the ones we see - the rest got knocked down...
Anonymous "and so there is no particular reason to think that a repeat purchase sales index should rise in real terms" There is definitely a reason that at least some old houses would rise in real terms...
The reason is location. If you think of your typical American city, the new building occurs around the edges. The homes closer to the center of the city are older, but have shorter commutes, and some people are willing to pay for the shorter commutes and "mautre " neighborhoods.
Also, many of the older houses have nicer lots than the newer houses which are crammed together a little more these days.
So there are definite reasons aside from upgrades that old houses could rise in real terms.
MF, Perhaps in a fast growing city, and many US cities have been fast growing, then highly central lots may gain an extra premium as the city sprawl expands, but that doesn't apply to the majority of houses. Most resale houses covered by Case Shiller are in standard suburbia, not in Manhattan. And plenty of the most exclusive zip codes of today were once new-builds on the edge of the city, which had qualities to offer that city center houses didn't have (think proximity to beaches, mountains, larger lots, etc.). I don't entirely disagree with your argument, but I think that it's one that gets taken too far without much real data to back it up.