How are Americans going to pay the mortgages at 33%-50% of their incomes on bubble-level mortgage amounts if the labor/wage situation doesn't improve? And how can that happen unless we export more? If they can't pay their mortgages, and savings is so low, how can we avoid systemic bank problems because of foreclosures?
How does the math to the "soft landing" work out in terms of timing and flow? Is the key to the soft landing scenario argument that a weakening dollar increases exports, then jobs, reduces the CAD, etc? The problem is there are no indications the US is getting more competitive, only less.
Have we gotten ourselves into an lose-lose scenario where a strong dollar risks wage stagnation and a continuing weakening of our manufacturing base due to lack of global competiveness, but a substantially weaker dollar leads to inflation, interest rate increases, a housing bubble burst, possible banking crises, etc.?
So I guess I just don't understand, how does the soft landing actually work?
If anybody wants to see the boom and bust cycle that our economy is gonna face, study the Phoenix, AZ real estate market over the last 40 years. When the bubble pops, it takes 7-8 years to claw back to a normal enviornment, and as RE is 30% of the economy, the whole city gets hamered as well.
Kash concluded:
"...after spending a week thinking hard about the plausibility of the soft landing scenario, I just dont find it believable. No, I think Im back to my original opinion here: the USs CA simply will not adjust without significant price changes: higher interest rates, lower asset prices, and a weaker dollar. Due to the nature of international financial speculation, I fear that it will be impossible for such price changes to take place gradually. So those price changes will not happen gradually, but instead will happen quickly. And rather painfully, I fear."
Alec, I've lived in California for a long time, so I've seen a couple of busts too (maybe not as dramatic as Phoenix). I expect it will take a number of years to work out.
I think the model for the next bust will be Houston & Denver early 1980s... not Cali or AZ busts. It was the worst I'd heard of anywhere except for the Depression. I was a chem engineer at the time and a number of my buddies were caught up in it. Very ugly.
What made it so ugly was the simultaneous decline in residential & commercial valuations that then resulted in job loss like you wouldn't believe.
People cite the fact it was the energy sector that killed RE back then... well that might be the initiator in that the energy sector provided the seed money for the boom but not a huge number of jobs... energy is capital not labor intensive.
The jobs in those towns were mostly service & RE like now... and a lot of easy money was pumped in from S&Ls just like now... Driving a lot of speculation just like now... When the loose money disappeared the whole thing caved and very quickly.
I think Houston is a good example because we are repeating so many similar trends... most importantly the lax lending standards.
You will read today that the bubble will only stop when interest rates hit this percentage or that percentage... some number much higher than now where it is 'obvious' people can't afford the prices... I don't buy it anymore. I think we are WAY beyond what people can afford and they still keep buying.
In Houston high interest rates didn't slow the boom one bit... it was only when the S&Ls started feeling pressure from foreclosure losses & congressional scrutiny that forced them to tighten lending standards (and in some cases close up entirely) that finally put a nail in the coffin.
I think there are just as many greater fools now as in Houston in the 80s that will sign the papers at any rate if they are allowed to do it... "Just give me those keys!". I think this thing will run out when the lending standards are tightened and not much until then. I think we will see tightening start this winter but not much sooner. AG was hinting to Congress something must be done about the GSE portfolios just this last month... ya like Congress is going to pull the trigger for you AG...
Look for a 2005-2006-2007... redux of the 80s disaster in Houston... only on a national scale.
Don't worry, people are starting to use their IRA's to pay for things they need.
I wonder if there are draw down #'s for IRA's? The middle class is in a classic squeeze play and they are happily buying their way right into another economic class.
The other thing that can pop the bubble is the background chatter, when the media reports folks flipping houses and making killings then that fuels the bubble, when they change to neutral that slows it down, then they change to report of academic concerns that slows a bit more, then the talk of the victims and fallout starts the popping as folks start to crowd the exits.
With todays 24hour media, the effect should be much stronger.
As an aside, I was doing garage sale shopping and the folks holding it started talking about the RE bubble pop.
Remember the good old fear and greed balance of markets. Interest rates do not matter if the profit is expected to exceed them. Note the word expected. Average Joe may only do figures based on gross profit before closing costs or ignore the monthly payments to be made,
If aren't drinking the Kool Aid, you've taken a step back ... and you're asking why everybody else is drinking the Kool Aid. I'm mean, it's kinda strange ... A bunch of people drinking Kool Aid in some field in South America. Why Kool Aid? Why not water? And why is it being offered in some ritual-like fashion? You have a healthy skepticism and instinct for self-preservation.
Also, the Kool Aid Man might come smashing through your living room wall, and that would be costly to fix.
I just don't get it.
How are Americans going to pay the mortgages at 33%-50% of their incomes on bubble-level mortgage amounts if the labor/wage situation doesn't improve? And how can that happen unless we export more? If they can't pay their mortgages, and savings is so low, how can we avoid systemic bank problems because of foreclosures?
How does the math to the "soft landing" work out in terms of timing and flow? Is the key to the soft landing scenario argument that a weakening dollar increases exports, then jobs, reduces the CAD, etc? The problem is there are no indications the US is getting more competitive, only less.
Have we gotten ourselves into an lose-lose scenario where a strong dollar risks wage stagnation and a continuing weakening of our manufacturing base due to lack of global competiveness, but a substantially weaker dollar leads to inflation, interest rate increases, a housing bubble burst, possible banking crises, etc.?
So I guess I just don't understand, how does the soft landing actually work?
If anybody wants to see the boom and bust cycle that our economy is gonna face, study the Phoenix, AZ real estate market over the last 40 years. When the bubble pops, it takes 7-8 years to claw back to a normal enviornment, and as RE is 30% of the economy, the whole city gets hamered as well.
John, I'm doubtful we can achieve a soft landing. Here are a couple of posts by Kash (Econ Prof) at Angry Bear in sequence:
A Tale of Two Landings: Part I
Evaluating the Soft Landing Scenario
Kash concluded:
"...after spending a week thinking hard about the plausibility of the soft landing scenario, I just dont find it believable. No, I think Im back to my original opinion here: the USs CA simply will not adjust without significant price changes: higher interest rates, lower asset prices, and a weaker dollar. Due to the nature of international financial speculation, I fear that it will be impossible for such price changes to take place gradually. So those price changes will not happen gradually, but instead will happen quickly. And rather painfully, I fear."
Best Regards!
Alec, I've lived in California for a long time, so I've seen a couple of busts too (maybe not as dramatic as Phoenix). I expect it will take a number of years to work out.
Best Wishes!
I think the model for the next bust will be Houston & Denver early 1980s... not Cali or AZ busts. It was the worst I'd heard of anywhere except for the Depression. I was a chem engineer at the time and a number of my buddies were caught up in it. Very ugly.
What made it so ugly was the simultaneous decline in residential & commercial valuations that then resulted in job loss like you wouldn't believe.
People cite the fact it was the energy sector that killed RE back then... well that might be the initiator in that the energy sector provided the seed money for the boom but not a huge number of jobs... energy is capital not labor intensive.
The jobs in those towns were mostly service & RE like now... and a lot of easy money was pumped in from S&Ls just like now... Driving a lot of speculation just like now... When the loose money disappeared the whole thing caved and very quickly.
I think Houston is a good example because we are repeating so many similar trends... most importantly the lax lending standards.
You will read today that the bubble will only stop when interest rates hit this percentage or that percentage... some number much higher than now where it is 'obvious' people can't afford the prices... I don't buy it anymore. I think we are WAY beyond what people can afford and they still keep buying.
In Houston high interest rates didn't slow the boom one bit... it was only when the S&Ls started feeling pressure from foreclosure losses & congressional scrutiny that forced them to tighten lending standards (and in some cases close up entirely) that finally put a nail in the coffin.
I think there are just as many greater fools now as in Houston in the 80s that will sign the papers at any rate if they are allowed to do it... "Just give me those keys!". I think this thing will run out when the lending standards are tightened and not much until then. I think we will see tightening start this winter but not much sooner. AG was hinting to Congress something must be done about the GSE portfolios just this last month... ya like Congress is going to pull the trigger for you AG...
Look for a 2005-2006-2007... redux of the 80s disaster in Houston... only on a national scale.
Don't worry, people are starting to use their IRA's to pay for things they need.
I wonder if there are draw down #'s for IRA's? The middle class is in a classic squeeze play and they are happily buying their way right into another economic class.
JohnHar - good post. Obviously, you're not drinking the Kool-Aid.
A general question here:
Does an economy with a low percentage of manufacturing jobs suffer less job loss in a recession?
Pardon me but what does the Kool-aid mean?
The other thing that can pop the bubble is the background chatter, when the media reports folks flipping houses and making killings then that fuels the bubble, when they change to neutral that slows it down, then they change to report of academic concerns that slows a bit more, then the talk of the victims and fallout starts the popping as folks start to crowd the exits.
With todays 24hour media, the effect should be much stronger.
As an aside, I was doing garage sale shopping and the folks holding it started talking about the RE bubble pop.
Remember the good old fear and greed balance of markets. Interest rates do not matter if the profit is expected to exceed them. Note the word expected. Average Joe may only do figures based on gross profit before closing costs or ignore the monthly payments to be made,
Kool-aid refers to the poison kook aid that jim jones followers took upon his orders.
Take a look at Re: "That's when he drank the Kool-Aid"
So what does this mean to the bubble?
Yoda,
Very inquisitive, you are!
If aren't drinking the Kool Aid, you've taken a step back ... and you're asking why everybody else is drinking the Kool Aid. I'm mean, it's kinda strange ... A bunch of people drinking Kool Aid in some field in South America. Why Kool Aid? Why not water? And why is it being offered in some ritual-like fashion? You have a healthy skepticism and instinct for self-preservation.
Also, the Kool Aid Man might come smashing through your living room wall, and that would be costly to fix.