What is he referring to below? Is this any index in particular?
Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years, he said
I find K Denniger the only person in touch with reality. CR, Roubini, Krugman etc are too optimistic, but get credit because their positions look pessimistic when compared with Kudlow and Cramer.
CR- You are mis-stating the Flow of Funds report. Real estate assets declined $ 67 billion in Q3, BUT total household assets actually rose something like $ 500 billion (I can't find the exact figure right now). In fact, total housefold assets are around $ 80 trillion, so RE is about 25 %, if I recall correctly.
Value? You keep using that word. I do not think it means what you think it means.
What houses have lost is estimated price. I know I'm preaching to the choir, but treating market capitalization as an asset is one of the things that caused this mess.
American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars worth of losses.
Well, of course.
Every bubble has always burst.
Either we get rid of our free markets using monster taxation, inflation, and regulation, or we suck it up and deal with the "losses".
Maybe people are too irresponsible to have free markets anymore?
What houses have lost is estimated price. I know I'm preaching to the choir, but treating market capitalization as an asset is one of the things that caused this mess.
Something that never existed is "going away" and everybody is panicking.
It's very odd to watch.
We're not only back in Kansas, but we never left to begin with and everybody's screaming about it.
As an ordinary homeowner, I find house values, or prices if you prefer, a bit nebulous. I can go on line and in about 1 min get an exact value for my stock portfolio. But how do I know the price of my house at any given moment? In a new development where all the houses are identical and one just like mine sold very recently, perhaps. But in an established neighbourhood where each house is different, how precisely can I know price at any given moment? Depending on my agent, the luck of which buyers come to look at it, etc., I don't think I could be more precise than a 5-10 % window. Only by putting it on the market and getting an offer can I really be sure. Thus, I have never based my behaviour on the price or value of my house. I bet I'm not alone in that either. So gauging the effect of price changes on people's behaviour is not that simple, IMO.
I see that every one is burning the late night oil. As far as the US suffering a Japan-style slump, I would have to argue that it will be worst. Japan has manufacturing and savings where the US has outsourced our manufacturing and our savings. I expect a much shorter time but a much hard landing.
backodabus,
are we talking about the marble countertops that increased in value, or the vertically stacked, 8 way directional glass water jets enclosed in glass and italian granite showers?
He talks about $3 trillion in losses as if that were real money. Economics is the study of the absurd and criminal monetary system. You might as well be an expert on the rantings of a lunatic.
I don't think we'll have a Japanese-style decline in properties. My understanding is things went down and then stagnated. In the U.S. this time around borrowers had ZERO skin in the game at the outset. I think that is the reason property values are plunging so quickly because lenders are forced to go through the foreclosure process sooner because borrowers are forced to throw in the towel.
I think this is going to be quick and violent at the beginning--if this were a roller coaster, I think we're at the crest of the first hill.
Kudlow and Cramer exist to sell stocks to true believers. The loss in housing values that we are facing will make some of the panics of the nineteenth century look good in comparison. We will survive, but never be the same.
It will become more and more acceptable to walk away from your home as time passes on. The more prices drop, the more people will do so. The more people do so, the more prices drop. The more prices drop, the tighter the lending criteria gets. The tighter the lending criteria gets, the more prices drop. The more prices drop, the less people will spend. The less people will spend, the less companies will hire. The less companies will hire, the worse the economy gets. The worse the economy gets, the less people spend. Round and round we go AGAIN! This time the spiral unwinds downward. We must unscrew what we already screwed!! What a ride is coming!
One of the more interesting aspects was a comment by a reader, see below:
slidewatcher Says:
December 28th, 2007 at 4:00 pm
I think the important point is that these loans were made in significant volumes in 2006 and 2007 and are being ignored in the discussions about the upcoming reset waves. Most people made the minimum payment on these because they had no hope of paying the fully amortizing payment (or in many cases, even the interest only payment). Because of this they are really more completely dependent on a refinance than even the ARM loans. The upcoming default wave is not being tracked because there is no scheduled reset deadline, but make no mistake, most of these loans are steadily proceeding to that 110 -115% max limit and a mandatory fully amortizing payment on a loan balance equal to 110 - 115% of the original loan balance. With values flat or falling refinance will be no option (nor will a bailout be available since they designed to exceed a 100% LTV on the original value). These loans will in most cases move directly to forecosure since they are designed to be refinanceable only if values increase significantly during the pay option period (by at least 20%).
It seems there are more holes in the dyke than imagined!
But how much has the lenders and investors lost? How much of the 11 trillion dollars that was loaned will be repaid? the fantasy paper values of the homeowner seems to be the only measure of value that is discussed.
"The more prices drop, the less people will spend."
And the evidence for this is?
Look, I challenge anyone here to tell me the price of your house to within +/- $ 10,000. I bet few, if any, can (I know I can't). If a stock I own has a big up day, I might come home and tell my spouse "We're going out to dinner tonight". But did anyone in 2004 come home and say "Our house is up $ 1,000 this week, let's go out". I know I never did.
So, the effect of house price declines on spending may not be quite so simple to assess.
the fantasy paper values of the homeowner seems to be the only measure of value that is discussed.
Do you really need more? Those "fantasy paper values" have been the fuel of our economy these past six years. The party of the century is over; now comes the mother of all hangovers.
Plenty of downside surprise remains. A local paper had interviews with local economists, none of them foresaw a recession in the near future. Talk about walking with a bag over the head.
Talking about direct real-estate losses misses all that was built on the back of the home mortgage.
Direct real estate losses $3T+. Damage to the rest of the world economy at least 10 times greater than that from all of the "funny money" innovation and the gearing associated with it--where do you think the "wealth explosion" came from?.
Laugh now, say I'm crazy, but that's my story and I'm sticking to it.
Add in personal, municipal, state and national bankruptcy, feedback loops, currency crisis, blowback, political instability, oil crisis, climate change and it WILL be a long time before we can relax again.
How does that compare to this estimate of $2.6 trillion for Ca alone:
WASHINGTON (MarketWatch) -- Home buyers with the very best credit are still having a difficult time getting mortgages in California, raising concerns that the real estate market in the nation's most populous state could fall much further, sending home values spiraling lower and toppling the state's economy into recession.
The drop in home values could cost the typical homeowner as much as $200,000 in lost wealth, for a total hit of $2.6 trillion statewide.
"We could see rapid price declines," said Dean Baker, an economist with the Center for Economic and Policy Research, who's been warning about the housing bubble for years. "These are huge numbers," he said. "Consumption will fall off."
If the "wealth effect" preceded the housing bubble then it isn't due to house prices. Stock prices, yes, because it's easy to know exactly how much your portfolio is worth. Much harder with a house.
Let me introduce you to something. It's called a "home equity line of credit". A guy named greenspan, who will be in jail soon if there is any justice in this universe, which there isn't, wrote some stuff about it a while back.
You may find reading about this thing useful when deciding on the impact of housing value declines on consumer spending.
Well there's some happy "news" to start the year. Thanks we think or (: ! Based on your stuff and others it seems to me we've got three levels of problem.
Level 1: a slowmotion slowdown subject to accelerating Housing and Credit shocks that are still being under-estimated (btw Floyd Norris started talking about it).
Level 2: the credit crisis is going to ebolasize to other asset classes making the problem much worse.
Level 3: (hat tip Paul Kasriel) consumers, firms and banks are extraordinarily vulnerable because they're all over-leveraged, under-funded and playing with fire. If this tips it could get really...really bad. Run don't walk to the Northern Trust site and read his latest outlook and Econtrarian reports. The latter especially needs to be factored in your thinking. ( Economic Research - Northern Trust )
And pardon but FWIW just spent much of the weekend updating my own inventory of high-frequency data and found no encouraging news and much bad, from the obvious here (New Home Sales) to capex spending but especially Kariel's monetary base indicators. Really not good: http://tinyurl.com/2tb9qg
The source of the perceived wealth does not matter. People that feel wealthier spend more, period. The opposite is true, too.
I get up easily every morning knowing I'm not only prepared for what's coming, but that I'll likely profit greatly from it. In the end the country will be better for it, too.
Anyway, if everything is that bad, why do you guys get out of bed in the morning?
Aheadofthecurve
To avoid losing money and perhaps to make money shorting ! And nope, we didn't cause it - if they'd only listened to me, to Austrian economists, to Minsky, to CR and Tanta and so on and so forth - but they didn't and here we are. Might as make money out of it.
off topic: concerning the yen. Came across an article on Bloomberg that the Autralian and NZ dollars had their biggest annual gain in four years. Mentioned the australian dollar was at a 23 year high. I gotta think that these being two of the favorite destinations for the yen carry trade that the carry trade is getting to be a riskier and riskier bet. Not to mention the increased volatility and deleveraging we're starting to see in the markets.
You live in Albany, so I'm guessing you're (at least somehwat) tethered to reality. Let me assure you that from where I sit - Bay Area California - reality has departed the room a long long time ago.
EVERYONE here obsesses about what his house is worth. Zillow is a religion, or at least a minor deity. HELOC appraisals are a sacrament, as is the MEW that allows the "temple" to be transformed for the greater glory of the Real Estate God.
Just an anecdote - my three year old boy is just starting to read, and he can recognize by various brand name the types of porta potties in front of all the houses being renovated. "Look Daddy - a United dirty potty!" "Look, that's a National potty!" He knows more brand names here than I do.... There have got to be 20 houses being renovated (with obligatory porta potties in the yard) within a three block radius (maybe 10-15% of the houses?) AT ANY GIVEN TIME over the last 4 years.
I can't remember where I saw the stat - someone here I'm sure has the exact figure - but mortgage debt went from $5T or so in 1999-2000 to approx $11T in 2007, and I'm sure it's still climbing. The notional value of residential real estate in the US over this period went from approx $10-11T to $21-25T (carious estimates I've seen) at the bubble peak 2005/06.
My rough guess - the coming bust will "wipe out" $5-7T of phantom bubble wealth, which will return us to trend as adjusted for the significant improvements in the housing stock. Approx $1T will be eaten by lenders and investors; the other $4-6T will be absorbed by FBs and homeowners who own their homes outright. All just guesses. If I'm wrong, my guess is I'm too optimistic, and total losses will be greater.
Why do we assume this is $20T in real valkue. On an opertaing basis, total value is nowhere near this. Therefore it makes sense to normalize the number based on historical gropwth rates of 6% and use that as the actual value, not some backward looking estimate. kind of like talking about bank balance sheets. the sad part is cuonsumers have yet to realize there assets are massivily overstates. Doesn't help when your cost of living escalates in double digits - oh the devlaution story continues
Despite the title of the article, I'd be surprised if Shiller actually used the phase "plunge into recession" at anytime during that interview. The journalistic standards at the Times are tragically low these days.
Actually, the value of a stock portfolio is rather mythical too. If I try to sell my miniscule holdings, no problem. If Buffet or Gates takes it in to their heads to sell, or hords of small potatoes investers like me decide all at once your so-called value quickly evaporates. Buffet and Gates are smart enuf to know they are elephants, and act accordingly. If the lemmings start to stampede, we have a different situation.
You mention that you can look up the VALUE of your stock portfolio in a minute. You can look up the market price in a minute. It's the value only if you are selling at that moment.
Since the average recession lasts about 11 months - being off by 2 years is kind of a problem. Bottom line - do your own research - reach your own conclusions - manage your investments and financial life taking into account your personal situation - and ignore most so-called experts. I am neither a perma-bull - nor a perma-bear. I just know that both of the latter get it wrong a lot of the time (the perma-bears more than the perma-bulls since bear markets tend to be shorter than bull markets - doesn't mean you can't lose a whole lot of money in bear markets).
Just drove back home from Phoenix to San Diego tonight. I was struck by the mad housing building being over, some developments just sitting obviously half-done or just models sitting with nothing built around them. And some commercial real estate sites just built, some stores open, nothing at all around them in the ass end of nowhere.
Commercial real estate bust is very obviously next - these commercial sites in the middle of nothing were just weird.
And lots and lots and lots of land for sale.....
And they STILL have the damned cows cooped up in feed lots instead of roaming the ranges, and wonder why they are now having brush fires in the deserts. It's just dumb.... and grain fed beef is bad for you anyway and causes e coli breakouts.
Satchel - Where in the Bay Area are you? I talk with some people in the Palo Alto area (from design blogs). They're renovating places they've owned for quite a while - and they seem to be doing ok. A lot of the same is going on where I live. So what's the problem with people renovating/improving their houses?
Just a wild guess Robyn, (doer of own research and mo), you any relation to Sebastian?
Does this: I am neither a perma-bull - nor a perma-bear.
mean that CR is a perma-bear, unlike your flexible self who, owing to self-researching an all, neva gets it wrong...not under the current tag at any rate? Since the average recession lasts about 11 months - being off by 2 years is kind of a problem. I would say you are a kind of a narcissistic problem...who might get it right one of these days.
Wally, that's because housing is the only the most obvious symptom of a bursting global credit/debt/currency bubble. It's also the straw that breaks the camel's back.
Just a thought. Please dismiss it if it has no utility.
Goodwins law states:
As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches one.
Thankfully, invoking Goodwins law is rarely required on this blog.
However, I will submit that we need a dose of something to address our recent troll infestation. May I suggest Robyns law:
During an online anonymous discussion, the more a contributor references her personal qualifications, the probability of her being a troll approaches one.
(If someone has already created such a law elsewhere, please correct me. I just havent found an applicable corollary to Goodwins law.)
For example, if the question before the anonymous online discussion is, Will larger numbers of upside-down homeowners mail in the keys this cycle?, I could respond No, John and Jane ARM are rational economic actors as well as highly moral beings, and I could list the following as support for my statement:
I am a Harvard educated lawyer
I have friends highly placed at Goldman Sachs and the Fed
I founded Harvard, as I am 512 years old and, in fact, immortal
I created heaven and earth, and just as I said to Abraham, Kill me a son, I am also communicating with you via haloscan
As I continued listing my qualifications, accomplishments, acquaintances, snippets from my curriculum vitae, and personal anecdotes about my spouse, one of you vigilant readers could simply write, Robyns law, MTHood.
This would remind everyone (in few words) that since this discussion is anonymous, my law degree and deity are not verifiable, and even if they were, they dont trump facts, data, links, cool graphs and logic.
Perhaps then the discussion could return to reasoned discourse and sharing of views.
Yes, Dont feed the trolls is the first, best method. But for those of us who just find it hard to keep silent, perhaps the option of raising a quick Robyns law objection will prevent us from multi-paragraph digressions.
Conjure and I were sitting in a church sanctuary about fourteen years ago, talking with an old friend of ours, a priest, now long dead.
We were talking about reality and perceptions of reality. Our friend said, "After hearing so many confessions from government officials, I've come to the conclusion that governments' ability to operate is nothing short of a miracle."
A sly chuckle for your "ebolasize" imagery. Should see a lot of corporate shenanigans over the next 3-4 weeks as managements determine how to spin their 4th quarter earning reports. The more damage is unearthed in the banking sector the more I scratch my head about what the Fed and the Treasury have been doing over the last 3-4 years. These problems did not pop up overnight.
Would we be very afraid if we knew the answer to the question "what did Greenspan/Bernanke & Paulson know, and when did they know it?" Stephen Roach at MorganStanley was the first person I remember talking with authority about the inevitable adjustment, but it was so currency-centric.
Update from my peeps in DC: slight softness inside the beltway, nothing to worry about, it is different there.
I think the financial variation of the Godwin's Law substitutes Enron for Nazis.
If the lemmings start to stampede, we have a different situation.
True, but since so much of the wealth is tied up in mutual funds, I think the dynamic would be a little different than a straight up panic. It'd still be a hell of a mess, but it wouldn't just be x million people tossing in SL MKT orders.
The thing about housing values, consumer spending, and MEW is that values didn't even have to decline to have a huge impact. With all the people stripping out equity, all that needed to happen was for prices to not go up and that would have seriously impacted MEW. Having the values decline just make a bad situation worse.
The theme for this bubble wasn't that prices never go down, it was that prices always go up by stupidly large amounts.
tj&bear/hhbh - thanks guys. Much appreciated. Takes a bit of work but...gad what if those charts are spot on ?
CR made a point in an earlier post about how long he & Tanta have been calling the current mess. Those charts broaden out across everything I thought of and then Kariel got into the act.
Now that's scary that is. (hat tip - Larry the Cable Guy)
p.s. - of course given all my bets are leveraged down on a personal basis real soon now would be good, as Jerry Pournelle used to say .
... US futures markets had priced in further declines in house prices in the short term, with contracts on the S&P Shiller index pointing to decreases of up to 14 per cent.
Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years, he said.
If I buy a house for $200K and it goes up (based on comps) to $600K and then declines to $400K in a credit contraction, have I lost $200K or gained $200K? The same holds true for equities.
The answer of course is timing - if one bought at $550K, then they are underwater actual money - not wealth illusion.
Buy low, sell high - works every time. The trick of course is to know the difference.
Dang it guys. Please don't feed the trolls. Please. Please. Please. It wrecks the comments section.
Aheadofthecurve, you must run with a different crowd than the one I knew in the Capitol Region.
The people I knew were very giddy about and focused on their RE gains when I lived there (Troy) in 04/05, and, from what I hear from them over the past couple of years, still are.
They weren't consuming as conspiculously as out here on the West Coast (understatement!) and not as HELOC nutty, but they definitely "felt richer".
Maybe it's a difference between buying a while back , when houses were still considered to be homes and buying during the run up, when houses became investments. Most of the people I'm thinking about bought during the run-up. And they were definitely paying attention to prices and taking emotional cues from that.
Anyway, I'm praying for a return to the days when houses were bought as homes. This has been one sick episode.
CR has already shown that if Shilling's predictions come to pass then all homeowner equity will effectively disappear. Soooo... reconsider the question when the home has had the mortgage jacked up to the $600K.
As they say, "Debt is real, but equity is a matter of opinion".
I'm on the west side of San Francisco - a nice area with homes ranging from about $1.25MM - $2.50MM (that covers about +- 1SD around the mean I'd guess).
The renovation around here is (just a guess) 25% flippers, 25% new owners and 50% longtime owners spending their house through MEW. Nothing wrong with any of it per se, but I am just surmising that most view their renovations as "investments" rather than consumption items. The price signals generated by the housing bubble have induced a "can't lose" mentality - in my view ther is a lot of misallocation of resources going on and malinvestment generally. But, for those who just want to improve their standard of living, no problem with that, but it's funny that all of a sudden (over the last 4-5 years) so many suddenly decided that it was time to improce their standard of living, don't you think?
Just anecdotal, but my wife and I know someone who has spent about $250K (so far) renovating their modest 3/2. Now they're complaining that they can't afford to send their young daughter to private or Catholic school, and so they are entrusting her to the maniacs that run the SF Unified Schoiol District. Now that's malinvestment....
New York, December 26, 2007 Data through October 2007, released today by Standard & Poors for its S&P/Case-Shiller® Home Price Indices, the leading measure of U.S. home prices, show broadbased declines in the prices of existing single family homes across the United States
No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim, says Robert J. Shiller, Chief Economist at MacroMarkets LLC.
Also See: he S&P/GRA Commercial Real Estate Indices (SPCREX) are designed to be a reliable and consistent benchmark for commercial real estate prices in the United States.
Re: On a National scale annual returns appear to be speeding up in their rate of deceleration, says David Blitzer, Managing Director and Chairman of the Index Committee at Standard & Poors. With annual returns at levels not seen since early 2004. The Apartments sector, following the trend of the residential market, continues to report increasingly negative annual returns.
"Anyway, I'm praying for a return to the days when houses were bought as homes. This has been one sick episode."
(preachermode on)
There'll be a lot of pain between here and there. So also pray for all those who made bad decisions because they were ill-informed or lied to -- but not greedy or crooked or looking to buy a Mercedes with MEW.
Sure, they're responsible for themeselves. But we as an economy spent billions of dollars telling them to go out on a limb; and practically no dollars telling them to be careful or what the risks are. So on the higher level, where's the moral hazard? And who does it really belong to?
Houston, thanks for that link above on the foreclosure follow-ups, also the previous link today on High Street retail.
One of the families in the FC article has not made a payment in a year and still lives in the house.
WTF? Crap, I'd be happy to pay the bank $200 a month in rent til they get their wishing price.
When they don't pay their property taxes, will that be okay too? In WA. State they just passed something where deadbeat property tax (non) payers can skip/defer half of their tax bill.
Things are really really out of control. Deadbeats at the helm now.
They are on Globex, you can find more details about the 11 or so futures and options on futures products on the Shiller equity indices, for the 10 metro areas + a coupla composite ones at: CME Group - Home
Enjoy. I think the housing downturn is well priced in so if you are thinking of using these as hedging - TOOO LATE.. but that's just IMO.
Shiller is saying nothing "new". If I made a living waiting for him to tell me what I (and nearly everyone breathing here) already knew, I'd be stupid and broke.
The joke here is that anyone responds with anything other than derision at Shiller for being so late and the news monkeys for sensationalizing the mundane.
The real news story is the towering debt constructed on the homes that will be jingled back into dirt.
That debt was tranched into multiple albatross necklaces happily accepted by the dumbest fund managers in the world who were employed by countebanks and worse.
To me, this is a tree limb, and lots of those dummies are out on that limb, and it just cracked. Some are scampering off, but the limb is broken and will tumble them all onto terra firma, with most of them broken boned or dead.
Sadly, it's beyond Shiller's expertise to mention the reality; ego is a tragic thing to waste; none lost there.
And as that $30 to $60 trillion in cutsie leverages get their haircuts, we will watch the economies as we know them go straight to Depression.
For me and other wiseguys here, this will be the greatest windfall of our lives. For the monkeys, each further crack will be of great import and much ado will be made of it, as well as a full chorus of keeners will wail up as they discover something negative and new yet again.
Im slow on this stuff: Options can be thought of as insurance policies. The
option buyer pays a price for the right but not the
obligation to buy or sell a futures contract within a
stated period of time at a predetermined price
I thought the ABX dealt in some of these insurance issues?
There's been a lot of pain already for the past 10 years just getting us to this rotten place. The whole RE bubble has been very painful for a lot of people and look where it's gotten us. To ultimate pain, broken homes, broken economy. People paying absurd percentages of their incomes just to put a roof over their heads and having to buy what they need on credit.
Sheesh, anyone who thinks that the pain of the bubble bursting will be worse than the pain of it continuing ad nauseum..I just don't know what to say.
I am not afraid of the pain of this burst.
But I am terrified of what will happen if they do not allow this to correct NOW.
Shiller is saying nothing "new". If I made a living waiting for him to tell me what I (and nearly everyone breathing here) already knew, I'd be stupid and broke.
GaudiaRay,
you're a stinky troll.. bad! I remember when you showed up.. could smell you a mile away.
Have you even read the 2nd edition of "Irrational Exuberance"?
It was published in 2005 and with all the additional information you need explaining why real estate will fall apart. So.. just like he did with the 1st addition and the stock market... he top-ticked the real estate boom.
I mean.. are you really an un-self aware troll? I can't decide..
IMO it's already too late. I'm just frightened by the prospect of a scared & angry nation lashing out with the world's best military at those who would no longer finance our voracious appetites, especially with regards to ever more scarce energy supplies.
Its options ON the futures - the precision is er, kinda important - I don't know how to do a futures strategy that hedges my downside well enough yet - so as a hedging instrument I'd have to buy put options on the futures( since I'm long in the cash market as it were - I have equity in the house ); then the worst of the downside is that the option expires worthless. But everything seems so priced in at the moment that I'd almost want to take the other side.
I want to repeat, again and again and again, this is NOT as easy as it seems.. Take care out there.
Thanks again, Im not going there just looking at info.
Im also confused by this, which seems insane:
Seeks to replicate as closely as possible, before expenses, the performance of the S&P Equal Weight Index Consumer Discretionary.
eli, my friend, without Shiller, I have been posting in blogs back in 2005 that gold would go way up, from the $450 that was my initial entry point and that real estate was an albatross.
What I missed, but saw soon enough, was the leverage.
"It's the leverage that counts, stupid," and when it was obvious about 1 year ago, the outcomes painted terrific opportunities to save one's economic bacon by taking one option and leaving the rest.
BTW, again, as to Shiller, if he's not talking "leverage" and the consequences beyond the first tier, this guy is just earning a living.
I noted your comment a couple of threads back about "a nasty kind of bear who takes aim at ordinary people in trouble".
Be aware there's an occasional blogger at thbb, also using the handle "rich", who is positively gloating about how he intends to hammer desperate sellers when he starts bargain hunting in a couple of years.
If everything when it occupies an equal space is at rest, and if that which is in locomotion is always occupying such a space at any moment, the flying arrow is therefore motionless.
Geometric series are the simplest examples of infinite series with finite sums. This makes them important in philosophy, where they provide a mathematical resolution to Zeno's paradoxes. Historically, geometric series played an important role in the early development of calculus, and they continue to be central in the study of convergence of series. Geometric series are used throughout mathematics, and they have important applications in physics, engineering, biology, economics, and finance.
Robyn, the 2005 CR post to which you linked was quoting someone else's prediction of a recession. Back in those days CR himself was, IIRC, rather of the opinion that the economy would muddle through. It's only recently he's started to become nearly as bearish as me.
And I must hasten to point out that while I have been amazed that recession has been staved off for so long, I've not been surprised by that -- a key element in this has been the "vendor financing fraud" of the Chinese and Japanese governments buying up the dollars earned by their exporters and lending them back to us (or in case of Japan, funding/forcing the yen carry trade through a zero-interest-rate policy), thereby indirectly financing this foolishness and ensuring that it would continue until we completely exhausted our stock of greater fools. Since there are no accurate statistics on the supply of greater fools, it's not been possible to predict just when we'd finally run out, however certain eventual exhaustion might be.
eli, my friend, without Shiller, I have been posting in blogs back in 2005 that gold would go way up, from the $450 that was my initial entry point and that real estate was an albatross.
(It's almost 2AM so I am allowed to drink a little troll juice)
GuadiaRay,
I'm leaning towards un-self-aware (how would one spell it???) now..
Look, I don't know how much tea costs in Xianyang.. and it doesn't necessarily matter when discussing whether or not Robert Shiller is late to predicting the housing collapse or a recession.
Your predictions about gold sound wildly lucrative.. just not sure how they are germane..
Anyhoo.. you are right that the leverage (and derivatives) will cook our goose..
but, what do you mean by this:
"the outcomes painted terrific opportunities to save one's economic bacon by taking one option and leaving the rest."
What option do I take to save my economic bacon?
Do you mean a literal option (as in a derivative) or just an option as.. the right course of action (which may or may not involve a derivative)?
If you've paid attention to any of my ramblings, you'd know that I am Mr. Swaps Will Destroy The World. (or.. in the least.. the central banks of the world will have to temporarily triple the amount of currency in circulation to prevent total system lockup)
Shiller seems to think derivatives are a salve that one can rub on scraped knees, gradma's tumor, and all financial inequities.
I, personally, believe that the inequities are to be found in equities! (and their associated derivatives)
[I would like to announce that I am very proud of the wordplay just above this line.]
SHK, That Bloomberg piece is interesting, as this will truly be where the rubber mets the road.
While the Fed has cut 100bp, corporate paper has only moved 25bp.
Citi has $36b of paper that they have to roll over, ML $42b. Considering they're both already selling the family silver at the various SWF pawnbrokers for 1/8th those amounts, do they really think that they can get anything approaching par and those yields?
Does anybody think that they'll be able to hit the discount window for all of it on top of everything else they're losing?
I'm definitely now of the opinion that the only way Citi survives is by gutting it like a mortgage pig, I don't think Merrill has a chance even as a rump company.
How can the stocks of banks go up when they've just given away (sorry, sold at a discount) equity to "sovereign wealth funds"? To stave off bankruptcy in order that a foreign entity with its own agenda can step in? Wasn't there an absolute uproar when the State of Dubai tried to buy US ports? Looks like that's all been forgiven and forgotten. And why are the buyers allowed, in the main, to remain anonymous?
MTHood: It isn't Robyn's Law. More like Bilmon's Law. The scourge of popularity. Law of Many Posters. As the number of blog commenters increases, the content quality converges towards the expected banter of the average person.
And to get it back on topic, once CR has a graphic designer to sex up his charts with vice clamps, corporate logos, shaded areas under the curve, and two-toned, shadowed plot lines ala Times Online we can officially declare this place to have jumped the shark.
But, I think the question we all need to ask ourselves for the New Year is: When I'm gone, will the credit default swaps market even notice?
MTHood: There is a greater underlying force at work than just Robyn's Law. A General Unified Theory of Lameness. The scourge of popularity. Strong Law of Large Posters. As the number of blog commenters increases, the content quality converges towards the expected banter of the average person.
And to tie it all together, I think that once CR has a graphic designer to sex up his charts with vice clamps, corporate logos, shaded areas under the curve, and two-toned, shadowed plot lines ala Times Online we can officially declare this place to have jumped the shark (and I'll go ahead and call the bottom).
But, I think the question we all need to ask ourselves for the New Year is: When I'm gone, will the credit default swaps market even notice?
I don't know if this has been mentioned here before, but the Case Shiller index, although an econometric marvel, does not capture the true essence of the housing downturn. It uses the repeat sales methodology for detached/semi-detached single family, owner occupied homes - that excludes new construction, hence all of the homebuilder's inventory sold is not counted, it excludes condos (where the biggest drops are to be found), it excluded multi-family units (those that thought rental income would save them), it excludes investment properties and flips (again, where much of the damage is done). Trust me, the Shiller index actually makes things look pretty. I use a proprietary guage that starts with the shiller based futures but adds back all of the stuff above, and it has proven to be much more realistic.
I have this visual of the unsinkable mortgage ship, the Titanic, in my mind. It has been running at breakneck speed through the high north seas of the economy with the bankers and brokers shaking down the passengers on the ship instead of charting a safe course and navigating.
Robyn, the HMS (Home Mortgage Scam) Titanic hit the iceberg a couple of years ago, and CR & Tanta were polite enough to point it out then. It just took a couple of years for reality to sink in. People with half a brain could see the looming disaster, but with all of the patching and bailing, the bankers and brokers thought they could keep the ship afloat.
Now comes the messy part where most of the less fortunate borrowers, along with some of the brokers and bankers get tossed into the frigid sea. They are desperate now, and they will do anything to survive. Soon they will be standing on the shoulders of the less fortunate in a last ditch attempt to save themselves from drowning.
A few lucky souls made it in to the partially filled life boats, and they are refusing to pick up anyone who has fallen in the sea as they are afraid of being swamped themselves.
My wife and I were invited to go on the voyage, but our better sense prevailed and we kept our feet dry. When a home once again becomes a home and not an investment, we will consider getting our feet wet.
Regarding the bundling of mortgages into AAA rated 'investments'; you can wrap a pretty pink bow around a turd, but in the end it is still a turd. Still, it is amazing how many people only looked at the AAA rated pink bow and exclaimed 'How pretty! I want one!', and only now it is finally sinking in that they actually bought a turd.
You know, I think we all can learn something from Robyn. Modesty is a good thing, and we need more of it.
On this guy and his problem though, I was wondering if his recent income increase to $400k a year is due to flipping homes? What a twist!
Some people are more than happy to take advantage of a situation and grab the profits, no matter how they were obtained. In the case of home speculation/investment, many have suffered from the inflation in prices/values due to an artificial increase in demand while others were more than happy to take advantage of the situation and milk it for all it was worth.
But when the tide turned, do they take their lumps and say 'Oh well, live and learn.'? Hell no! They scramble around and try to find some way out from under it, no matter how it can be achieved. Good or bad, they expect others to pay for their decisions.
My luck in life has been such that if I make a bad decision, then I am always stuck with the consequences. So I am careful in my decisions. Unlike the fools on all sides of this mess we (and it is definitely "WE") are now in. I did not create it, and I do not want anyone bailed out at my expense.
If the parties involved can work it out, and it does not cost myself or society, then more power to them. But do not look to me to save your arse.
Being responsible for your decisions, what a quaint concept!
I have noticed that over the years people have discovered ways to take something and manipulate it in to something that it is not, then financially milk it dry. It almost seems like some kind of mindset that dictates to them 'Well, that last scam was great, but what can we do next to top it?'
Unrestrained capitalism is not pretty. The post awhile back about a young Greenspan and his thoughts on not restraining capitalism was quite the eye opener for me.
Naive, to say the very least. But as a young man, he was smart enough to know which hand to bite and which to kiss or lick in gratitude.
But in an established neighbourhood where each house is different, how precisely can I know price at any given moment? Depending on my agent, the luck of which buyers come to look at it, etc., I don't think I could be more precise than a 5-10 % window. Only by putting it on the market and getting an offer can I really be sure. Thus, I have never based my behaviour on the price or value of my house. I bet I'm not alone in that either. So gauging the effect of price changes on people's behaviour is not that simple, IMO.
Aheadofthecurve | 12.30.07 - 9:23 pm | #
Two comments: in the case of putting a house on the market, it can take some time for an offer to appear, even if your price is reasonable. The stock market is very very liquid; the real estate market rather less. You might as well use Zillow. I have found that its values are pretty close to sales figures. Far better than just guessing or asking your broker.
"You might as well use Zillow. I have found that its values are pretty close to sales figures. Far better than just guessing or asking your broker."
Zillow... works some places. In my case, not so much.
It shows my home being worth about 66% of what I paid (well, borrowed part of to pay for it). Of course, it does so for a number of good reasons:
1) There was a central air/heat pump system put in about 5 years ago that's missing from Zillow's information - Zillow still shows the 1962 situation of wall heaters and no air (in north Georgia);
2) It doesn't show the 1978 addition of about 300 sq ft or the interior modification of the original that made the house a 1900sf 3/2 instead of the original 1600 2/1;
3) It apparently ignores tax assessed value as well. Given bubble situations I can somewhat understand treating it with caution, but it's SO far off that, well... ain't no way the bubble in this neck of the woods is 50%.
enough. Bottom line, Zillow is an excellent demonstration of GIGO
I heard the best summary of 2007 so far last week. "2007 is kind of like the second half of Boogie Nights after they ran out of coke. It's just the hangover". That was a quote from Joel McHale on the Soup in reference to Paris Hilton and friends, but it does seem to apply to the financial industry.
If so, 2008 and 9 will be years we look at ourselves limp in the mirror.
I'm glad that this idea of printing your own money is finally making its way to the masses. Now we just have to wait for advertiser supported cash... that $1 bill must be worth more than $1 in advertising right?
"Maybe it's a difference between buying a while back , when houses were still considered to be homes and buying during the run up, when houses became investments. Most of the people I'm thinking about bought during the run-up. And they were definitely paying attention to prices and taking emotional cues from that.
Anyway, I'm praying for a return to the days when houses were bought as homes. This has been one sick episode."
Yes, waitinginPNW, there is a split, partly generational, partly when you bought. As someone who bought my house as a home and never have thought of it as anything else, I agree with you. This blog could use more thoughtful posters like you. If you're ever back in the area, I'll be happy to buy you a drink at Holmes & Watson in beautiful downtown Troy.
Best wishes for 2008 to all, whichever side you come down on.
No comments? What about geometry mean?
DH
"The Year In Review And a Look Ahead for 2008"
The Market Ticker
"American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years."
Oh, and he didn't cite me?
HaloScan.com - Comments
What is he referring to below? Is this any index in particular?
Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years, he said
I find K Denniger the only person in touch with reality. CR, Roubini, Krugman etc are too optimistic, but get credit because their positions look pessimistic when compared with Kudlow and Cramer.
Two years ago, the northeastern states of America became the first to slide into a recession
Did I miss a recession? I don't remember that one.
Anyway - CR, will you hat tip me when statistics finally show that a recession started in Nov/Dec of this year?
CR- You are mis-stating the Flow of Funds report. Real estate assets declined $ 67 billion in Q3, BUT total household assets actually rose something like $ 500 billion (I can't find the exact figure right now). In fact, total housefold assets are around $ 80 trillion, so RE is about 25 %, if I recall correctly.
CR, wish I could be happy that you seem to be coming 'round to my point of view about the scale of this problem.
Value? You keep using that word. I do not think it means what you think it means.
What houses have lost is estimated price. I know I'm preaching to the choir, but treating market capitalization as an asset is one of the things that caused this mess.
Daniel--think of it as lost potential energy.
Not DH
Aheadofthecurve, CR's original post (follow the link) correctly said "household real estate assets".
American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars worth of losses.
Well, of course.
Every bubble has always burst.
Either we get rid of our free markets using monster taxation, inflation, and regulation, or we suck it up and deal with the "losses".
Maybe people are too irresponsible to have free markets anymore?
I sense that's kinda where we're headed.
Aheadofthecurve, I'll add "real estate" to make that clear.
Best Wishes.
jm-But it completely ignored the INCREASE in total assets.
That is an important fact.
What houses have lost is estimated price. I know I'm preaching to the choir, but treating market capitalization as an asset is one of the things that caused this mess.
Something that never existed is "going away" and everybody is panicking.
It's very odd to watch.
We're not only back in Kansas, but we never left to begin with and everybody's screaming about it.
0_o
CR-sorry, I didn't see your post...
As an ordinary homeowner, I find house values, or prices if you prefer, a bit nebulous. I can go on line and in about 1 min get an exact value for my stock portfolio. But how do I know the price of my house at any given moment? In a new development where all the houses are identical and one just like mine sold very recently, perhaps. But in an established neighbourhood where each house is different, how precisely can I know price at any given moment? Depending on my agent, the luck of which buyers come to look at it, etc., I don't think I could be more precise than a 5-10 % window. Only by putting it on the market and getting an offer can I really be sure. Thus, I have never based my behaviour on the price or value of my house. I bet I'm not alone in that either. So gauging the effect of price changes on people's behaviour is not that simple, IMO.
I see that every one is burning the late night oil. As far as the US suffering a Japan-style slump, I would have to argue that it will be worst. Japan has manufacturing and savings where the US has outsourced our manufacturing and our savings. I expect a much shorter time but a much hard landing.
CR and Tanta:
love the Happy New Year Pig.
backodabus,
are we talking about the marble countertops that increased in value, or the vertically stacked, 8 way directional glass water jets enclosed in glass and italian granite showers?
Dear CR
That damn pig keeps popping up everywhere...
Regards,
OT
GM's China JV recalls 7,000 Buicks for break problem
GM's China JV recalls 7,000 Buicks for break problem
| Reuters
Rich did you write this headline?
Off topic, but has there been any word on those Calculated Risk-branded coffee mugs with Mortgage Pig (tm) Excel artwork?
I'd buy one in a New York minute...
He talks about $3 trillion in losses as if that were real money. Economics is the study of the absurd and criminal monetary system. You might as well be an expert on the rantings of a lunatic.
HELOC's = kinetic energy...tell 'em CR.
Not DH
I don't think we'll have a Japanese-style decline in properties. My understanding is things went down and then stagnated. In the U.S. this time around borrowers had ZERO skin in the game at the outset. I think that is the reason property values are plunging so quickly because lenders are forced to go through the foreclosure process sooner because borrowers are forced to throw in the towel.
I think this is going to be quick and violent at the beginning--if this were a roller coaster, I think we're at the crest of the first hill.
Kudlow and Cramer exist to sell stocks to true believers. The loss in housing values that we are facing will make some of the panics of the nineteenth century look good in comparison. We will survive, but never be the same.
It will become more and more acceptable to walk away from your home as time passes on. The more prices drop, the more people will do so. The more people do so, the more prices drop. The more prices drop, the tighter the lending criteria gets. The tighter the lending criteria gets, the more prices drop. The more prices drop, the less people will spend. The less people will spend, the less companies will hire. The less companies will hire, the worse the economy gets. The worse the economy gets, the less people spend. Round and round we go AGAIN! This time the spiral unwinds downward. We must unscrew what we already screwed!! What a ride is coming!
This article in the Orange County Register on Friday concerning option ARM delinquencies:
Option ARM delinquencies rise - Mortgage Insider : The Orange County Register
One of the more interesting aspects was a comment by a reader, see below:
slidewatcher Says:
December 28th, 2007 at 4:00 pm
I think the important point is that these loans were made in significant volumes in 2006 and 2007 and are being ignored in the discussions about the upcoming reset waves. Most people made the minimum payment on these because they had no hope of paying the fully amortizing payment (or in many cases, even the interest only payment). Because of this they are really more completely dependent on a refinance than even the ARM loans. The upcoming default wave is not being tracked because there is no scheduled reset deadline, but make no mistake, most of these loans are steadily proceeding to that 110 -115% max limit and a mandatory fully amortizing payment on a loan balance equal to 110 - 115% of the original loan balance. With values flat or falling refinance will be no option (nor will a bailout be available since they designed to exceed a 100% LTV on the original value). These loans will in most cases move directly to forecosure since they are designed to be refinanceable only if values increase significantly during the pay option period (by at least 20%).
It seems there are more holes in the dyke than imagined!
Two years ago, the northeastern states of America became the first to slide into a recession
Huh?
$6 trillion- That is a stack of one dollar bills to the moon and half way back to earth. I guess that would be significant.
Grasping Large Numbers
Happy new year to you both as well. Yes, Morticia was wearing lipstick.
No impact... soft landing... hard landing... mid-cycle slowdown... recession... NEXT UP, severe recession... DESTINATION... depression.
The problem is that this country is too vulnerable to take a recession without suffering a depression.
"This is a much bigger issue than sub-prime."
-Dr. Obvious, PhD, Yale
"I find K Denniger the only person in touch with reality."
Please.
You're talking about a guy who said our reason for invading Iraq and Afghanistan was to surround Iran.
But how much has the lenders and investors lost? How much of the 11 trillion dollars that was loaned will be repaid? the fantasy paper values of the homeowner seems to be the only measure of value that is discussed.
"The more prices drop, the less people will spend."
And the evidence for this is?
Look, I challenge anyone here to tell me the price of your house to within +/- $ 10,000. I bet few, if any, can (I know I can't). If a stock I own has a big up day, I might come home and tell my spouse "We're going out to dinner tonight". But did anyone in 2004 come home and say "Our house is up $ 1,000 this week, let's go out". I know I never did.
So, the effect of house price declines on spending may not be quite so simple to assess.
the fantasy paper values of the homeowner seems to be the only measure of value that is discussed.
Do you really need more? Those "fantasy paper values" have been the fuel of our economy these past six years. The party of the century is over; now comes the mother of all hangovers.
Plenty of downside surprise remains. A local paper had interviews with local economists, none of them foresaw a recession in the near future. Talk about walking with a bag over the head.
Talking about direct real-estate losses misses all that was built on the back of the home mortgage.
Direct real estate losses $3T+. Damage to the rest of the world economy at least 10 times greater than that from all of the "funny money" innovation and the gearing associated with it--where do you think the "wealth explosion" came from?.
Laugh now, say I'm crazy, but that's my story and I'm sticking to it.
Add in personal, municipal, state and national bankruptcy, feedback loops, currency crisis, blowback, political instability, oil crisis, climate change and it WILL be a long time before we can relax again.
Happy New Year!!!
tj-if you ever decide to have a cheery thought, please warn us ahead of time.
Thanks!
How does that compare to this estimate of $2.6 trillion for Ca alone:
WASHINGTON (MarketWatch) -- Home buyers with the very best credit are still having a difficult time getting mortgages in California, raising concerns that the real estate market in the nation's most populous state could fall much further, sending home values spiraling lower and toppling the state's economy into recession.
The drop in home values could cost the typical homeowner as much as $200,000 in lost wealth, for a total hit of $2.6 trillion statewide.
"We could see rapid price declines," said Dean Baker, an economist with the Center for Economic and Policy Research, who's been warning about the housing bubble for years. "These are huge numbers," he said. "Consumption will fall off."
Bakersfield Bubble: California prices could plunge 35%, costing $2.6 trillion in lost wealth
So, the effect of house price declines on spending may not be quite so simple to assess.
Wrong. The "wealth effect" is a well-documented phenomenon that preceded the housing bubble, and the impact of MEW these past years is undeniable.
"I find K Denniger the only person in touch with reality."
I like his site and think he's pretty sensible about most things, but it's funny how he went from inflationist to deflationist in one week flat.
If the "wealth effect" preceded the housing bubble then it isn't due to house prices. Stock prices, yes, because it's easy to know exactly how much your portfolio is worth. Much harder with a house.
"Much harder with a house"
Not true, this is well documented by the FED and many others.
Aheadof-
Not in this world, maybe in yours.
Not DH
And the evidence for this is?
Let me introduce you to something. It's called a "home equity line of credit". A guy named greenspan, who will be in jail soon if there is any justice in this universe, which there isn't, wrote some stuff about it a while back.
You may find reading about this thing useful when deciding on the impact of housing value declines on consumer spending.
Warmest Regards,
prat
Well there's some happy "news" to start the year. Thanks we think
or (: ! Based on your stuff and others it seems to me we've got three levels of problem.
Level 1: a slowmotion slowdown subject to accelerating Housing and Credit shocks that are still being under-estimated (btw Floyd Norris started talking about it).
Level 2: the credit crisis is going to ebolasize to other asset classes making the problem much worse.
Level 3: (hat tip Paul Kasriel) consumers, firms and banks are extraordinarily vulnerable because they're all over-leveraged, under-funded and playing with fire. If this tips it could get really...really bad. Run don't walk to the Northern Trust site and read his latest outlook and Econtrarian reports. The latter especially needs to be factored in your thinking. ( Economic Research - Northern Trust )
And pardon but FWIW just spent much of the weekend updating my own inventory of high-frequency data and found no encouraging news and much bad, from the obvious here (New Home Sales) to capex spending but especially Kariel's monetary base indicators. Really not good: http://tinyurl.com/2tb9qg
I thought the FED was a bunch of incompetent crooks, Greenspan chief among them.
Anyway, if everything is that bad, why do you guys get out of bed in the morning? Speaking of which that's where I'm headed.
Tomorrow's a new day. I hope everyone can find at least 1 positive thought.
Good night
aotc,
The source of the perceived wealth does not matter. People that feel wealthier spend more, period. The opposite is true, too.
I get up easily every morning knowing I'm not only prepared for what's coming, but that I'll likely profit greatly from it. In the end the country will be better for it, too.
Anyway, if everything is that bad, why do you guys get out of bed in the morning?
Aheadofthecurve
To avoid losing money and perhaps to make money shorting ! And nope, we didn't cause it - if they'd only listened to me, to Austrian economists, to Minsky, to CR and Tanta and so on and so forth - but they didn't and here we are. Might as make money out of it.
-K
If this tips it could get really...really bad.
Oops, it tipped.
Good stuff, dblwyo!
"I hope everyone can find at least 1 positive thought."
I have one! Aheadofthecurve is done posting for the evening.
off topic: concerning the yen. Came across an article on Bloomberg that the Autralian and NZ dollars had their biggest annual gain in four years. Mentioned the australian dollar was at a 23 year high. I gotta think that these being two of the favorite destinations for the yen carry trade that the carry trade is getting to be a riskier and riskier bet. Not to mention the increased volatility and deleveraging we're starting to see in the markets.
Australian, N.Z. Dollars Set for Biggest Annual Gain in 4 Years - Bloomberg.com
Aheadofthecurve -
You live in Albany, so I'm guessing you're (at least somehwat) tethered to reality. Let me assure you that from where I sit - Bay Area California - reality has departed the room a long long time ago.
EVERYONE here obsesses about what his house is worth. Zillow is a religion, or at least a minor deity. HELOC appraisals are a sacrament, as is the MEW that allows the "temple" to be transformed for the greater glory of the Real Estate God.
Just an anecdote - my three year old boy is just starting to read, and he can recognize by various brand name the types of porta potties in front of all the houses being renovated. "Look Daddy - a United dirty potty!" "Look, that's a National potty!" He knows more brand names here than I do.... There have got to be 20 houses being renovated (with obligatory porta potties in the yard) within a three block radius (maybe 10-15% of the houses?) AT ANY GIVEN TIME over the last 4 years.
I can't remember where I saw the stat - someone here I'm sure has the exact figure - but mortgage debt went from $5T or so in 1999-2000 to approx $11T in 2007, and I'm sure it's still climbing. The notional value of residential real estate in the US over this period went from approx $10-11T to $21-25T (carious estimates I've seen) at the bubble peak 2005/06.
My rough guess - the coming bust will "wipe out" $5-7T of phantom bubble wealth, which will return us to trend as adjusted for the significant improvements in the housing stock. Approx $1T will be eaten by lenders and investors; the other $4-6T will be absorbed by FBs and homeowners who own their homes outright. All just guesses. If I'm wrong, my guess is I'm too optimistic, and total losses will be greater.
Why do we assume this is $20T in real valkue. On an opertaing basis, total value is nowhere near this. Therefore it makes sense to normalize the number based on historical gropwth rates of 6% and use that as the actual value, not some backward looking estimate. kind of like talking about bank balance sheets. the sad part is cuonsumers have yet to realize there assets are massivily overstates. Doesn't help when your cost of living escalates in double digits - oh the devlaution story continues
ditto what tj says, dblwyo. seeing those links makes comments area worth reading thru.
Despite the title of the article, I'd be surprised if Shiller actually used the phase "plunge into recession" at anytime during that interview. The journalistic standards at the Times are tragically low these days.
Actually, the value of a stock portfolio is rather mythical too. If I try to sell my miniscule holdings, no problem. If Buffet or Gates takes it in to their heads to sell, or hords of small potatoes investers like me decide all at once your so-called value quickly evaporates. Buffet and Gates are smart enuf to know they are elephants, and act accordingly. If the lemmings start to stampede, we have a different situation.
AOTC....
You mention that you can look up the VALUE of your stock portfolio in a minute. You can look up the market price in a minute. It's the value only if you are selling at that moment.
Just something to think about.
"...consumers, firms and banks are extraordinarily vulnerable because they're all over-leveraged, under-funded and playing with fire."
Like I tell my bank, 'I'm not overdrawn, I'm under-deposited.'
Not DH
Prediction could be correct. Then again - this site was touting an imminent recession over 2 years ago.
Calculated Risk: US Bank Economist: Recession Imminent
Since the average recession lasts about 11 months - being off by 2 years is kind of a problem. Bottom line - do your own research - reach your own conclusions - manage your investments and financial life taking into account your personal situation - and ignore most so-called experts. I am neither a perma-bull - nor a perma-bear. I just know that both of the latter get it wrong a lot of the time (the perma-bears more than the perma-bulls since bear markets tend to be shorter than bull markets - doesn't mean you can't lose a whole lot of money in bear markets).
Just drove back home from Phoenix to San Diego tonight. I was struck by the mad housing building being over, some developments just sitting obviously half-done or just models sitting with nothing built around them. And some commercial real estate sites just built, some stores open, nothing at all around them in the ass end of nowhere.
Commercial real estate bust is very obviously next - these commercial sites in the middle of nothing were just weird.
And lots and lots and lots of land for sale.....
And they STILL have the damned cows cooped up in feed lots instead of roaming the ranges, and wonder why they are now having brush fires in the deserts. It's just dumb.... and grain fed beef is bad for you anyway and causes e coli breakouts.
Funny how Ponzi schemes can distort reality, huh Robyn.
Kinda what this post is about.
Did you ever hear 'There's no I in Team'?
Not DH
Satchel - Where in the Bay Area are you? I talk with some people in the Palo Alto area (from design blogs). They're renovating places they've owned for quite a while - and they seem to be doing ok. A lot of the same is going on where I live. So what's the problem with people renovating/improving their houses?
must... not... respond... to... shallow... posts...
must... NOT... respond... to... shallow... posts...
MUST... NOT... ARGGGHHHH IT'S SOOO HARD!!!!
mp, please ask conjure how he's survived this long surrounded by otherwise intelligent people that believe everything they read in the MSM???
Schiller might be correct, but I don't think calling something simultaneously with its happening is 'prediction'.
Also, housing is an elephant in this economy, but not the only one. The weak dollar has offsetting effects: it increases US trade competitiveness.
I really, really enjoy this blog, but it does focus on housing.
Just a wild guess Robyn, (doer of own research and mo), you any relation to Sebastian?
Does this:
I am neither a perma-bull - nor a perma-bear.
mean that CR is a perma-bear, unlike your flexible self who, owing to self-researching an all, neva gets it wrong...not under the current tag at any rate?
Since the average recession lasts about 11 months - being off by 2 years is kind of a problem. I would say you are a kind of a narcissistic problem...who might get it right one of these days.
Wally, that's because housing is the only the most obvious symptom of a bursting global credit/debt/currency bubble. It's also the straw that breaks the camel's back.
Did you ever hear 'There's no I in Team'?
But there is a Me
Just a thought. Please dismiss it if it has no utility.
Goodwins law states:
As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches one.
Thankfully, invoking Goodwins law is rarely required on this blog.
However, I will submit that we need a dose of something to address our recent troll infestation. May I suggest Robyns law:
During an online anonymous discussion, the more a contributor references her personal qualifications, the probability of her being a troll approaches one.
(If someone has already created such a law elsewhere, please correct me. I just havent found an applicable corollary to Goodwins law.)
For example, if the question before the anonymous online discussion is, Will larger numbers of upside-down homeowners mail in the keys this cycle?, I could respond No, John and Jane ARM are rational economic actors as well as highly moral beings, and I could list the following as support for my statement:
As I continued listing my qualifications, accomplishments, acquaintances, snippets from my curriculum vitae, and personal anecdotes about my spouse, one of you vigilant readers could simply write, Robyns law, MTHood.
This would remind everyone (in few words) that since this discussion is anonymous, my law degree and deity are not verifiable, and even if they were, they dont trump facts, data, links, cool graphs and logic.
Perhaps then the discussion could return to reasoned discourse and sharing of views.
Yes, Dont feed the trolls is the first, best method. But for those of us who just find it hard to keep silent, perhaps the option of raising a quick Robyns law objection will prevent us from multi-paragraph digressions.
I especially like how the author stated that Shiller wrote "Irrational Exuberance" before Greenspan used the phrase. heh.
-Jaso
jus sayin: 'Me thinks'....ah, better!
Not DH
Conjure and I were sitting in a church sanctuary about fourteen years ago, talking with an old friend of ours, a priest, now long dead.
We were talking about reality and perceptions of reality. Our friend said, "After hearing so many confessions from government officials, I've come to the conclusion that governments' ability to operate is nothing short of a miracle."
In short, what is your reality?
Re: are we talking about the marble countertops that increased in value...
They call it substitution
Not Really DH
commercial landlords facing a rough 08 in the UK
Landlords face office rent crisis - Telegraph
dblwyo,
A sly chuckle for your "ebolasize" imagery. Should see a lot of corporate shenanigans over the next 3-4 weeks as managements determine how to spin their 4th quarter earning reports. The more damage is unearthed in the banking sector the more I scratch my head about what the Fed and the Treasury have been doing over the last 3-4 years. These problems did not pop up overnight.
Would we be very afraid if we knew the answer to the question "what did Greenspan/Bernanke & Paulson know, and when did they know it?" Stephen Roach at MorganStanley was the first person I remember talking with authority about the inevitable adjustment, but it was so currency-centric.
Update from my peeps in DC: slight softness inside the beltway, nothing to worry about, it is different there.
Aheadofthecurve, You need a moniker change. How 'bout, I_can't_see_the_curve_right_ahead_of_me
I'm thinkin' we now know the moniker of the lurkin' Fed official.
PS - Don't drive a car
a revisit of 4 families facing freclosure in july of this year
How life worked out for 4 Bay Area homeowners facing foreclosure
I think the financial variation of the Godwin's Law substitutes Enron for Nazis.
If the lemmings start to stampede, we have a different situation.
True, but since so much of the wealth is tied up in mutual funds, I think the dynamic would be a little different than a straight up panic. It'd still be a hell of a mess, but it wouldn't just be x million people tossing in SL MKT orders.
The thing about housing values, consumer spending, and MEW is that values didn't even have to decline to have a huge impact. With all the people stripping out equity, all that needed to happen was for prices to not go up and that would have seriously impacted MEW. Having the values decline just make a bad situation worse.
The theme for this bubble wasn't that prices never go down, it was that prices always go up by stupidly large amounts.
tj&bear/hhbh - thanks guys. Much appreciated. Takes a bit of work but...gad what if those charts are spot on ?
CR made a point in an earlier post about how long he & Tanta have been calling the current mess. Those charts broaden out across everything I thought of and then Kariel got into the act.
Now that's scary that is. (hat tip - Larry the Cable Guy)
.
p.s. - of course given all my bets are leveraged down on a personal basis real soon now would be good, as Jerry Pournelle used to say
Paper losses for some. Real for others.
So?
Real estate went down before. It will go down again.
dollah taking some hits this morning against most majors. Any chance it'll drop into the 90s (or 80s)against the Yen in '08, or does it stiffen up?
... US futures markets had priced in further declines in house prices in the short term, with contracts on the S&P Shiller index pointing to decreases of up to 14 per cent.
Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years, he said.
Happy New year,
The Holidays
Define "lose".
If I buy a house for $200K and it goes up (based on comps) to $600K and then declines to $400K in a credit contraction, have I lost $200K or gained $200K? The same holds true for equities.
The answer of course is timing - if one bought at $550K, then they are underwater actual money - not wealth illusion.
Buy low, sell high - works every time. The trick of course is to know the difference.
Jim
Did an IP scan of Robyn's comments - He is a 63 yo man living in a home with a NOD in Sacramento Ca. more info to follow...
barley - LMAO!!
C&C -- LMAO!!!
Dang it guys. Please don't feed the trolls. Please. Please. Please. It wrecks the comments section.
Aheadofthecurve, you must run with a different crowd than the one I knew in the Capitol Region.
The people I knew were very giddy about and focused on their RE gains when I lived there (Troy) in 04/05, and, from what I hear from them over the past couple of years, still are.
They weren't consuming as conspiculously as out here on the West Coast (understatement!) and not as HELOC nutty, but they definitely "felt richer".
Maybe it's a difference between buying a while back , when houses were still considered to be homes and buying during the run up, when houses became investments. Most of the people I'm thinking about bought during the run-up. And they were definitely paying attention to prices and taking emotional cues from that.
Anyway, I'm praying for a return to the days when houses were bought as homes. This has been one sick episode.
NC Jim,
CR has already shown that if Shilling's predictions come to pass then all homeowner equity will effectively disappear. Soooo... reconsider the question when the home has had the mortgage jacked up to the $600K.
As they say, "Debt is real, but equity is a matter of opinion".
This has been one sick episode.
Amen.
Robyn,
I'm on the west side of San Francisco - a nice area with homes ranging from about $1.25MM - $2.50MM (that covers about +- 1SD around the mean I'd guess).
The renovation around here is (just a guess) 25% flippers, 25% new owners and 50% longtime owners spending their house through MEW. Nothing wrong with any of it per se, but I am just surmising that most view their renovations as "investments" rather than consumption items. The price signals generated by the housing bubble have induced a "can't lose" mentality - in my view ther is a lot of misallocation of resources going on and malinvestment generally. But, for those who just want to improve their standard of living, no problem with that, but it's funny that all of a sudden (over the last 4-5 years) so many suddenly decided that it was time to improce their standard of living, don't you think?
Just anecdotal, but my wife and I know someone who has spent about $250K (so far) renovating their modest 3/2. Now they're complaining that they can't afford to send their young daughter to private or Catholic school, and so they are entrusting her to the maniacs that run the SF Unified Schoiol District. Now that's malinvestment....
CLARIFICATION: All mortgaged homeowner equity will effectively disappear.
More info on Robyn IP search - The IP address reads "21.3.9.125 - Folsom State Penintentiary"...more info to follow
S&P/Case-Shiller® Home Price Indices
New York, December 26, 2007 Data through October 2007, released today by Standard & Poors for its S&P/Case-Shiller® Home Price Indices, the leading measure of U.S. home prices, show broadbased declines in the prices of existing single family homes across the United States
http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_122622.pdf
No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim, says Robert J. Shiller, Chief Economist at MacroMarkets LLC.
Also See: he S&P/GRA Commercial Real Estate Indices (SPCREX) are designed to be a reliable and consistent benchmark for commercial real estate prices in the United States.
http://www2.standardandpoors.com/spf/pdf/index/spgra_release_121842.pdf
Re: On a National scale annual returns appear to be speeding up in their rate of deceleration, says David Blitzer, Managing Director and Chairman of the Index Committee at Standard & Poors. With annual returns at levels not seen since early 2004. The Apartments sector, following the trend of the residential market, continues to report increasingly negative annual returns.
Real DH
Schiller is a rosie-eyed optomist.
Whoops, wrote my "don't feed the trolls " plea before I saw your investigative IP report Crispy. LOL. Please continue and fill us in.
awgee,
He cant help himself, he has to make a living!
Can someone explain the US futures market in regard to the S&P Shiller index? I didnt see that @ S&P, is in Chicago?
More data arriving - "Next of kin located, somone named 'rich' who writes for the 'penny saver' newspaper...
HAHAHAHAHAHAHAHAHA!!! c&c, you kill me!
Yah,
Buy low sell high!
CME Group - Home
Doc H
"Anyway, I'm praying for a return to the days when houses were bought as homes. This has been one sick episode."
(preachermode on)
There'll be a lot of pain between here and there. So also pray for all those who made bad decisions because they were ill-informed or lied to -- but not greedy or crooked or looking to buy a Mercedes with MEW.
Sure, they're responsible for themeselves. But we as an economy spent billions of dollars telling them to go out on a limb; and practically no dollars telling them to be careful or what the risks are. So on the higher level, where's the moral hazard? And who does it really belong to?
(preachermode off)
"I especially like how the author stated that Shiller wrote "Irrational Exuberance" before Greenspan used the phrase. heh.
-Jason"
Thanks Jason, I missed that. Classic.
Bob,
I pray for friends & relatives who've been riding this train and just refuse to acknowledge that it's already jumped the tracks.
Houston, thanks for that link above on the foreclosure follow-ups, also the previous link today on High Street retail.
One of the families in the FC article has not made a payment in a year and still lives in the house.
WTF? Crap, I'd be happy to pay the bank $200 a month in rent til they get their wishing price.
When they don't pay their property taxes, will that be okay too? In WA. State they just passed something where deadbeat property tax (non) payers can skip/defer half of their tax bill.
Things are really really out of control. Deadbeats at the helm now.
Can someone explain the US futures market in regard to the S&P Shiller index? I didnt see that @ S&P, is in Chicago?
Anonymous
You can find the quote for the LA index here:
CME Group - Home
They are on Globex, you can find more details about the 11 or so futures and options on futures products on the Shiller equity indices, for the 10 metro areas + a coupla composite ones at:
CME Group - Home
Enjoy. I think the housing downturn is well priced in so if you are thinking of using these as hedging - TOOO LATE.. but that's just IMO.
-K
Thanks k,
Futures versus options?
Shiller is saying nothing "new". If I made a living waiting for him to tell me what I (and nearly everyone breathing here) already knew, I'd be stupid and broke.
The joke here is that anyone responds with anything other than derision at Shiller for being so late and the news monkeys for sensationalizing the mundane.
The real news story is the towering debt constructed on the homes that will be jingled back into dirt.
That debt was tranched into multiple albatross necklaces happily accepted by the dumbest fund managers in the world who were employed by countebanks and worse.
To me, this is a tree limb, and lots of those dummies are out on that limb, and it just cracked. Some are scampering off, but the limb is broken and will tumble them all onto terra firma, with most of them broken boned or dead.
Sadly, it's beyond Shiller's expertise to mention the reality; ego is a tragic thing to waste; none lost there.
And as that $30 to $60 trillion in cutsie leverages get their haircuts, we will watch the economies as we know them go straight to Depression.
For me and other wiseguys here, this will be the greatest windfall of our lives. For the monkeys, each further crack will be of great import and much ado will be made of it, as well as a full chorus of keeners will wail up as they discover something negative and new yet again.
Hogwash.
Oh, and Shiller... thank you for keeping the mushrooms in the dark.
Im slow on this stuff: Options can be thought of as insurance policies. The
option buyer pays a price for the right but not the
obligation to buy or sell a futures contract within a
stated period of time at a predetermined price
Bob Dobbs-
There's been a lot of pain already for the past 10 years just getting us to this rotten place. The whole RE bubble has been very painful for a lot of people and look where it's gotten us. To ultimate pain, broken homes, broken economy. People paying absurd percentages of their incomes just to put a roof over their heads and having to buy what they need on credit.
Sheesh, anyone who thinks that the pain of the bubble bursting will be worse than the pain of it continuing ad nauseum..I just don't know what to say.
I am not afraid of the pain of this burst.
But I am terrified of what will happen if they do not allow this to correct NOW.
Shiller is saying nothing "new". If I made a living waiting for him to tell me what I (and nearly everyone breathing here) already knew, I'd be stupid and broke.
GaudiaRay,
you're a stinky troll.. bad! I remember when you showed up.. could smell you a mile away.
Have you even read the 2nd edition of "Irrational Exuberance"?
It was published in 2005 and with all the additional information you need explaining why real estate will fall apart. So.. just like he did with the 1st addition and the stock market... he top-ticked the real estate boom.
I mean.. are you really an un-self aware troll? I can't decide..
Shiller has been saying this shit for years.
heh.. addition = edition .. I shouldn't drink scotch while sick..
og
waitinginPNW,
IMO it's already too late. I'm just frightened by the prospect of a scared & angry nation lashing out with the world's best military at those who would no longer finance our voracious appetites, especially with regards to ever more scarce energy supplies.
rich et. al. LCC vs. ML-Implode Lawsuit Over
The Mortgage Lender Implode-O-Meter News Pick-ups: LCC vs. ML-Implode Lawsuit Over
Whats up with this?
http://stockcharts.com/h-sc/ui?c=rcd,uu[w,a]daclyyay[dc][pb20!b50!f][vc60][iut!ld20!lc20]
Futures versus options?
Anonymous
Its options ON the futures - the precision is er, kinda important - I don't know how to do a futures strategy that hedges my downside well enough yet - so as a hedging instrument I'd have to buy put options on the futures( since I'm long in the cash market as it were - I have equity in the house ); then the worst of the downside is that the option expires worthless. But everything seems so priced in at the moment that I'd almost want to take the other side.
I want to repeat, again and again and again, this is NOT as easy as it seems.. Take care out there.
-K
K,
Thanks again, Im not going there just looking at info.
Im also confused by this, which seems insane:
Seeks to replicate as closely as possible, before expenses, the performance of the S&P Equal Weight Index Consumer Discretionary.
Rydex SGI :: Essential for Modern Markets
Rydex S&P Equal Weight Consumer Discretionary ETF
eli, my friend, without Shiller, I have been posting in blogs back in 2005 that gold would go way up, from the $450 that was my initial entry point and that real estate was an albatross.
I didn't have the charts or the job title.
Wanna see? Go to CurEvents.com - A Global Current Events Discussion Forum - powered by vBulletin and search the blog history for my positions. It was obvious then and it's nothing more than blatant now.
If you're a follower, then Shiller is your man. Kewl. But that makes you a mental normal, and leaves room for those who look around the corner.
What I missed, but saw soon enough, was the leverage.
"It's the leverage that counts, stupid," and when it was obvious about 1 year ago, the outcomes painted terrific opportunities to save one's economic bacon by taking one option and leaving the rest.
BTW, again, as to Shiller, if he's not talking "leverage" and the consequences beyond the first tier, this guy is just earning a living.
If rich reads this thread:
I noted your comment a couple of threads back about "a nasty kind of bear who takes aim at ordinary people in trouble".
Be aware there's an occasional blogger at thbb, also using the handle "rich", who is positively gloating about how he intends to hammer desperate sellers when he starts bargain hunting in a couple of years.
If everything when it occupies an equal space is at rest, and if that which is in locomotion is always occupying such a space at any moment, the flying arrow is therefore motionless.
Zeno
Geometric series - Wikipedia, the free encyclopedia
Geometric series are the simplest examples of infinite series with finite sums. This makes them important in philosophy, where they provide a mathematical resolution to Zeno's paradoxes. Historically, geometric series played an important role in the early development of calculus, and they continue to be central in the study of convergence of series. Geometric series are used throughout mathematics, and they have important applications in physics, engineering, biology, economics, and finance.
GaudiaRay,
Go easy on Shiller. Someone has to break the bad news to the world, even if that means via spoonfeeding.
Robyn, the 2005 CR post to which you linked was quoting someone else's prediction of a recession. Back in those days CR himself was, IIRC, rather of the opinion that the economy would muddle through. It's only recently he's started to become nearly as bearish as me.
And I must hasten to point out that while I have been amazed that recession has been staved off for so long, I've not been surprised by that -- a key element in this has been the "vendor financing fraud" of the Chinese and Japanese governments buying up the dollars earned by their exporters and lending them back to us (or in case of Japan, funding/forcing the yen carry trade through a zero-interest-rate policy), thereby indirectly financing this foolishness and ensuring that it would continue until we completely exhausted our stock of greater fools. Since there are no accurate statistics on the supply of greater fools, it's not been possible to predict just when we'd finally run out, however certain eventual exhaustion might be.
eli, my friend, without Shiller, I have been posting in blogs back in 2005 that gold would go way up, from the $450 that was my initial entry point and that real estate was an albatross.
(It's almost 2AM so I am allowed to drink a little troll juice)
GuadiaRay,
I'm leaning towards un-self-aware (how would one spell it???) now..
Look, I don't know how much tea costs in Xianyang.. and it doesn't necessarily matter when discussing whether or not Robert Shiller is late to predicting the housing collapse or a recession.
Your predictions about gold sound wildly lucrative.. just not sure how they are germane..
Anyhoo.. you are right that the leverage (and derivatives) will cook our goose..
but, what do you mean by this:
"the outcomes painted terrific opportunities to save one's economic bacon by taking one option and leaving the rest."
What option do I take to save my economic bacon?
Do you mean a literal option (as in a derivative) or just an option as.. the right course of action (which may or may not involve a derivative)?
If you've paid attention to any of my ramblings, you'd know that I am Mr. Swaps Will Destroy The World. (or.. in the least.. the central banks of the world will have to temporarily triple the amount of currency in circulation to prevent total system lockup)
Shiller seems to think derivatives are a salve that one can rub on scraped knees, gradma's tumor, and all financial inequities.
I, personally, believe that the inequities are to be found in equities! (and their associated derivatives)
[I would like to announce that I am very proud of the wordplay just above this line.]
GuadiaRay is not a troll. I happen to appreciate most of his comments.
Corporate Bond Yields Drop as Companies Refinance $557 Billion
WTF!
Expired
SHK, That Bloomberg piece is interesting, as this will truly be where the rubber mets the road.
While the Fed has cut 100bp, corporate paper has only moved 25bp.
Citi has $36b of paper that they have to roll over, ML $42b. Considering they're both already selling the family silver at the various SWF pawnbrokers for 1/8th those amounts, do they really think that they can get anything approaching par and those yields?
Does anybody think that they'll be able to hit the discount window for all of it on top of everything else they're losing?
I'm definitely now of the opinion that the only way Citi survives is by gutting it like a mortgage pig, I don't think Merrill has a chance even as a rump company.
How can the stocks of banks go up when they've just given away (sorry, sold at a discount) equity to "sovereign wealth funds"? To stave off bankruptcy in order that a foreign entity with its own agenda can step in? Wasn't there an absolute uproar when the State of Dubai tried to buy US ports? Looks like that's all been forgiven and forgotten. And why are the buyers allowed, in the main, to remain anonymous?
MTHood: It isn't Robyn's Law. More like Bilmon's Law. The scourge of popularity. Law of Many Posters. As the number of blog commenters increases, the content quality converges towards the expected banter of the average person.
And to get it back on topic, once CR has a graphic designer to sex up his charts with vice clamps, corporate logos, shaded areas under the curve, and two-toned, shadowed plot lines ala Times Online we can officially declare this place to have jumped the shark.
But, I think the question we all need to ask ourselves for the New Year is: When I'm gone, will the credit default swaps market even notice?
Pakistan Default Risk Rises to One-Month High on Bhutto Killing - Bloomberg.com
Pakistan, come on down, you are the next contestant on the Price Is Right!
About to lose access to credit... I wonder how that will impact stability. Good thing they don't have nukes.
More tangents than a high school geometry exam.
MTHood: There is a greater underlying force at work than just Robyn's Law. A General Unified Theory of Lameness. The scourge of popularity. Strong Law of Large Posters. As the number of blog commenters increases, the content quality converges towards the expected banter of the average person.
And to tie it all together, I think that once CR has a graphic designer to sex up his charts with vice clamps, corporate logos, shaded areas under the curve, and two-toned, shadowed plot lines ala Times Online we can officially declare this place to have jumped the shark (and I'll go ahead and call the bottom).
But, I think the question we all need to ask ourselves for the New Year is: When I'm gone, will the credit default swaps market even notice?
Pakistan Default Risk Rises to One-Month High on Bhutto Killing - Bloomberg.com
Pakistan, come on down, you are the next contestant on the Price Is Right!
About to lose access to credit... I wonder how that will impact stability. Good thing they don't have nukes.
More tangents than a high school geometry exam.
I don't know if this has been mentioned here before, but the Case Shiller index, although an econometric marvel, does not capture the true essence of the housing downturn. It uses the repeat sales methodology for detached/semi-detached single family, owner occupied homes - that excludes new construction, hence all of the homebuilder's inventory sold is not counted, it excludes condos (where the biggest drops are to be found), it excluded multi-family units (those that thought rental income would save them), it excludes investment properties and flips (again, where much of the damage is done). Trust me, the Shiller index actually makes things look pretty. I use a proprietary guage that starts with the shiller based futures but adds back all of the stuff above, and it has proven to be much more realistic.
For more info, see Reggie Middleton says... | The Real Trend in US Housing Prices... - Quote from the WSJ: "Underscoring the growing pessimism about housing, econom... | Reggie Middleton's Boom Bust Blog | Which, Prices, Year, Index
I have this visual of the unsinkable mortgage ship, the Titanic, in my mind. It has been running at breakneck speed through the high north seas of the economy with the bankers and brokers shaking down the passengers on the ship instead of charting a safe course and navigating.
Robyn, the HMS (Home Mortgage Scam) Titanic hit the iceberg a couple of years ago, and CR & Tanta were polite enough to point it out then. It just took a couple of years for reality to sink in. People with half a brain could see the looming disaster, but with all of the patching and bailing, the bankers and brokers thought they could keep the ship afloat.
Now comes the messy part where most of the less fortunate borrowers, along with some of the brokers and bankers get tossed into the frigid sea. They are desperate now, and they will do anything to survive. Soon they will be standing on the shoulders of the less fortunate in a last ditch attempt to save themselves from drowning.
A few lucky souls made it in to the partially filled life boats, and they are refusing to pick up anyone who has fallen in the sea as they are afraid of being swamped themselves.
My wife and I were invited to go on the voyage, but our better sense prevailed and we kept our feet dry. When a home once again becomes a home and not an investment, we will consider getting our feet wet.
Regarding the bundling of mortgages into AAA rated 'investments'; you can wrap a pretty pink bow around a turd, but in the end it is still a turd. Still, it is amazing how many people only looked at the AAA rated pink bow and exclaimed 'How pretty! I want one!', and only now it is finally sinking in that they actually bought a turd.
It would seem that the crystal balls are giving conflicting forecasts. For a quick summary the New Economist offers six views:
New Economist: Is the US heading into a recession?
Being neither a professional optimist or pessimist I lean heavily towards, "Nobody knows."
Now that he's part of the homepage, I believe you're compelled to name the pig.
Just don't call him the Excel Pig or you may get sued for copyright infringement.
Happy New Year All!!!
You know, I think we all can learn something from Robyn. Modesty is a good thing, and we need more of it.
On this guy and his problem though, I was wondering if his recent income increase to $400k a year is due to flipping homes? What a twist!
Some people are more than happy to take advantage of a situation and grab the profits, no matter how they were obtained. In the case of home speculation/investment, many have suffered from the inflation in prices/values due to an artificial increase in demand while others were more than happy to take advantage of the situation and milk it for all it was worth.
But when the tide turned, do they take their lumps and say 'Oh well, live and learn.'? Hell no! They scramble around and try to find some way out from under it, no matter how it can be achieved. Good or bad, they expect others to pay for their decisions.
My luck in life has been such that if I make a bad decision, then I am always stuck with the consequences. So I am careful in my decisions. Unlike the fools on all sides of this mess we (and it is definitely "WE") are now in. I did not create it, and I do not want anyone bailed out at my expense.
If the parties involved can work it out, and it does not cost myself or society, then more power to them. But do not look to me to save your arse.
Being responsible for your decisions, what a quaint concept!
I have noticed that over the years people have discovered ways to take something and manipulate it in to something that it is not, then financially milk it dry. It almost seems like some kind of mindset that dictates to them 'Well, that last scam was great, but what can we do next to top it?'
Unrestrained capitalism is not pretty. The post awhile back about a young Greenspan and his thoughts on not restraining capitalism was quite the eye opener for me.
Naive, to say the very least. But as a young man, he was smart enough to know which hand to bite and which to kiss or lick in gratitude.
Looks like it paid off for him.
But in an established neighbourhood where each house is different, how precisely can I know price at any given moment? Depending on my agent, the luck of which buyers come to look at it, etc., I don't think I could be more precise than a 5-10 % window. Only by putting it on the market and getting an offer can I really be sure. Thus, I have never based my behaviour on the price or value of my house. I bet I'm not alone in that either. So gauging the effect of price changes on people's behaviour is not that simple, IMO.
Aheadofthecurve | 12.30.07 - 9:23 pm | #
Two comments: in the case of putting a house on the market, it can take some time for an offer to appear, even if your price is reasonable. The stock market is very very liquid; the real estate market rather less. You might as well use Zillow. I have found that its values are pretty close to sales figures. Far better than just guessing or asking your broker.
The trend I've noticed more and more on blogs is this; if someone says something you don't like, call them a troll.
"You might as well use Zillow. I have found that its values are pretty close to sales figures. Far better than just guessing or asking your broker."
Zillow... works some places. In my case, not so much.
It shows my home being worth about 66% of what I paid (well, borrowed part of to pay for it). Of course, it does so for a number of good reasons:
1) There was a central air/heat pump system put in about 5 years ago that's missing from Zillow's information - Zillow still shows the 1962 situation of wall heaters and no air (in north Georgia);
2) It doesn't show the 1978 addition of about 300 sq ft or the interior modification of the original that made the house a 1900sf 3/2 instead of the original 1600 2/1;
3) It apparently ignores tax assessed value as well. Given bubble situations I can somewhat understand treating it with caution, but it's SO far off that, well... ain't no way the bubble in this neck of the woods is 50%.
enough. Bottom line, Zillow is an excellent demonstration of GIGO
I heard the best summary of 2007 so far last week. "2007 is kind of like the second half of Boogie Nights after they ran out of coke. It's just the hangover". That was a quote from Joel McHale on the Soup in reference to Paris Hilton and friends, but it does seem to apply to the financial industry.
If so, 2008 and 9 will be years we look at ourselves limp in the mirror.
spall- OT
I'm glad that this idea of printing your own money is finally making its way to the masses. Now we just have to wait for advertiser supported cash... that $1 bill must be worth more than $1 in advertising right?
"Maybe it's a difference between buying a while back , when houses were still considered to be homes and buying during the run up, when houses became investments. Most of the people I'm thinking about bought during the run-up. And they were definitely paying attention to prices and taking emotional cues from that.
Anyway, I'm praying for a return to the days when houses were bought as homes. This has been one sick episode."
Yes, waitinginPNW, there is a split, partly generational, partly when you bought. As someone who bought my house as a home and never have thought of it as anything else, I agree with you. This blog could use more thoughtful posters like you. If you're ever back in the area, I'll be happy to buy you a drink at Holmes & Watson in beautiful downtown Troy.
Best wishes for 2008 to all, whichever side you come down on.
Happy New Year to you too Aheadofthecurve and thanks for the invite!