What a big mess we are in. Bad for the public at large. Good for those prepared for the opportunities of a volatile market. Recession equals investment opportunities.
Good graph. I was considering getting into income property in '01-'02, buying the dip. The timing was right, the economy was right; the dip should have been there. Prices did pause and decline slightly for a very few months., as the chart shows. Then they started back up again as if nothing had happened.
Not being financially sophisticated, I couldn't figure out why. Now I know.
"There is consternation from a growing minority on the Republican side as to why we're doing this," one senior Republican aide said. "Why are we increasing the risk to these organizations that have had problems historically to the benefit of people who don't really need it?"
Another potential wild card is Fannie and Freddie's regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo. The agency's director, James Lockhart, said his agency was "very disappointed" with the decision to raise the conforming-loan limit before Ofheo gets stronger regulatory powers. He said the agency would ensure that any increase goes through a "rigorous new product-approval process quickly and has appropriate risk-management policies and capital in place."
""There is consternation from a growing minority on the Republican side as to why we're doing this," one senior Republican aide said. "Why are we increasing the risk to these organizations that have had problems historically to the benefit of people who don't really need it?"
Get a bunch of overfed political bagmen around a table throwing out ideas to solve a problem, and this is the kind of solution you get: pay somebody off. Give them some money so they'll shut up until the next election. We shouldn't expect much more from this crowd.
Given several years of bad times, however, I would expect the composition of Congress to change at least somewhat for the better.
Just for fun, try integrating between the base 400,000 sales level and the sales curve. This cycle is at least four times bigger, in terms of marginal units sold, than any of the previous cycles.
Looks like we've had 5 bottoms to the market since the peak. I think each time they call it, a new batch of suckers get pulled in, but fewer still at each next bottom. I suspect we'll have one more little tick up this spring, which again will be pronounced as the turnaround, but after it too fails, we're set for major capitulation.
It's probably too early for contest time, since the sales level has so far to fall. But I'll take a stab and say that I wouldnt be surprised to get down to 375k.
--
Does anyone have good reason to believe that the lows in the previous cycles, 350-400K, wouldn't be reached?
BTW, the over-all housing demand in the US peaked in 1970s! At that time lot more multi-units were built and in this bubble lot more SFH were built. Shouldnt the over-building of SFH lead to a bottom lower than the previous lows?
I continue to believe that all of CRs estimates and forecasts of lows would prove to be optimistic. Depression, of course, would put a kibosh on the demand estimate; the average demand during 2001-2010 would come below 1.0M annual rate. What if all the demand for 2001-2010 was built by 2006?!
Best to look at household growth, which has been slowing steadily for the past decade plus. Demographic trends ahead are not conducive to any big turnaround ahead, but the accumulated growth of the past few years does support a higher level, all other things equal. Of course, all other things are anything but equal, and are just plain awful.
Seems the trick to understanding how low this goes is getting a peg on how fast prices fall. The big drop in December makes you wonder if it can't fall even faster. Race to the bottom, get the sales rate up, clear inventory asap. But of course, that requires BKs for the home builders. I suspect that becomes a fun story to watch this year.
Alex, the normalization should probably be by household formation as opposed to population. I've worked on this before, and the demographics is currently unfavorable for housing.
And that brings up an analyst that has been very wrong on housing: Stephen Kim. His job is apparently being cut. Kim argued (incorrectly IMO) that demographics were favorable for housing.
Geoff, I agree - BKs will probably be part of the story this year. The home building industry has too much capacity - plus BKs is a good way to get land prices down.
YouTube: Southern California Shanty Town / Tent City
umm... you did follow the url to see what that really was didn't you? It's a migrant worker camp on an indian reservation. . . sad, but not what it's billed as.
I follow current sales very closely in 4 SW Fl counties. As of today the actual title changes on the counties homepages are few and far between. Just in my county we only show 21 sales,37 FC's. We had 450/450 ea. approx last month. I also hear from friends up north in Fl thats its as bad...This could get very ugy,very quickly.
The best part...Within 15 minutes of my place I can find 5 different builders still knockin em out...
Marcus: currently I think that messer moneybags are saying something like:
"What do you mean the poor can't pay me the money they owe me? Now we're going to have to get our money from the government. Do you KNOW what politicians cost these days?"
And that brings up an analyst that has been very wrong on housing: Stephen Kim. His job is apparently being cut. Kim argued (incorrectly IMO) that demographics were favorable for housing.
Stephen Kim now -- "There's a housing DEPRESSION in this country!!!"
As in, when your neighbor loses their job, it's a recession; when you lose your job, it's a depression.
Confused here--I thought that at our current position on the downward slide, we were still at historically high levels of home sales? Or am I mixing up new- and existing-home sales?
Great graph. Anyone calling a bottom these days is talking their book/business. Annualized sales will fall to about 400K AND stay there for a year or two. No rapid recovery this time around.
What if all the demand for 2001-2010 was built by 2006?! -- Jas
My analysis shows that that the demand for 13 years was built between 2001 to 2007. Keep in mind that the overbuilding is skewed in certain areas, but practically the whole country saw it to some extent. It is a scary calculation to say the least, and the reason that around 75% of homebuilders will go BK or fail to exist before equilibrium is reestablished.
Few if any politician wants to admit it, but the only way financials and homebuilders are getting out of this debacle is by socializing the losses. It's ugly but the figures are just too large otherwise. The next generation tax payer is going to be picking up the tab to pay for this generation's greed.
like a frat house in here with everyone patting their buddy on the back with all your doom and gloom. the united states economy will be fine contrary to your grim assessments.
"Just curious, anyone know what led to the Jan 81 uptick that immediately seems to have collapsed?"
When Volker took over the Fed, the markets didn't think he was serious about raising rates far enough to lower inflation (via a recession). When he started raising rates, nearly everyone thought he would just raise a couple of times, and then the political pressure would be too intense to sustain the policy. So during the first several months while he was the Fed's head, monetary aggs. actually increased and the real rates of interest were negative due to high inflation. Interest rate sensitive sectors like housing did well.
Volker then adopted policy rules based on monetarism (even though he thought it was a bunch of baloney). The rules said to tighten monetary policy, so he did with abandon. He kept on tightening until the economy went into deep recession, taking housing for the ride.
Like a frat house in here with everyone patting their buddy on the back with all your doom and gloom. -- Richard
Same thing was going on two or three years ago. Now look at things. Guess all you need is some good analysis and rational thought. The rest works its way out. Gloom and doom sometimes is appropriate.
It is going to be fun to see how 08 new home sales number unfold. From the HB reported so far this year (Ryl, KBH, and LEN), their total backlog for 4Q06 is 33198 (4206 for RYL, 17384 for KBH, and 11608 for LEN). And for 4Q07 the total backlog for the same 3 companies is 13200 (2860 for RYL, 6322 for KBH, 4009 for LEN) or rougly 60% less than at the same time in 06.. Given the lead time in construction of 6 to 9 months, total sales is a function of the backlog + sales from inventory. So would it be out of line to guess that 08 sales will be 40-60% less than 07 for a total of 310K to about 460K? It would be an unprecedened small new sales number and what will it do to our economy?
What all this amounts to is a massive overstatement of GDP growth over the past decade. The debt fueled binge has masked a gutting of the economy.
Whent he final capitualtion comes and we accept that the intrinsic growth rates of the US are lower, there will be recalibration of valuation across the spectrum and hence multiple CONTRACTION.
Note the annoucned consortium today in China to compete with Airbus and Beoeing - the last bastion of manufactuirng is coming under assualt. With the financial advatnages proved a myth, the airline announcement represents a nothing more than kicking and pitting when you are down. Perhaps it is a referendum on what the Chinese are thinking about the long term prospects of the US.
Richard: Yeah, it's fine if you're in the top 1%. Everyone else, not so much.
The bottom 80% of us have been getting shafted ever since 1974. That's when real wages in this country peaked. Aside from a sustained rise during the Clinton years, they've been pretty much downhill ever since.
Abby Cohen's 4 Stock Picks for the Next 12 Months (Cohen bugs me more than anybody else on WS, however I agree with her Rohm & Haas pick. My mother worked for Rohm & Haas credit union and it is and always has been a solid company.)
Can we have a little bet on what new and existing home sales will be for the year? No money just bragging rights for being closest. My prediction is 390k for new and 4.30M for existing in 2008. Might be fun to look back this time 2009.
Sorry for the length, but "the united states economy will be fine contrary to your grim assessments." made me think of this:
BULLS: I move for no man.
BEARS: So be it!
[hah]
[parry thrust]
[BEAR chops the BULL's left arm off]
BEARS: Now stand aside, worthy adversary.
BULLS: 'Tis but a scratch.
BEARS: A scratch? Your arm's off!
BULLS: No, it isn't.
BEARS: Well, what's that then?
BULLS: I've had worse.
BEARS: You liar!
BULLS: Come on you pansy!
[hah]
[parry thrust]
[BEAR chops the BULL's right arm off]
BEARS: Victory is mine!
[kneeling]
We thank thee Lord, that in thy merc-
[hah]
BULLS: Come on then.
BEARS: What?
BULLS: Have at you!
BEARS: You are indeed brave, Sir knight, but the fight is mine.
BULLS: Oh, had enough, eh?
BEARS: Look, you stupid bastard, you've got no arms left.
BULLS: Yes I have.
BEARS: Look!
BULLS: Just a flesh wound.
[bang]
BEARS: Look, stop that.
BULLS: Chicken! Chicken!
BEARS: Look, I'll have your leg. Right!
[whop]
BULLS: Right, I'll do you for that!
BEARS: You'll what?
BULLS: Come 'ere!
BEARS: What are you going to do, bleed on me?
BULLS: I'm invincible!
BEARS: You're a loony.
BULLS: The BULLS always triumphs!
Have at you! Come on then.
[whop]
[BEAR chops the BULL's other leg off]
BULLS: All right; we'll call it a draw.
BEARS: Come, Patsy.
BULLS: Oh, oh, I see, running away then. You yellow bastards! Come back here and take what's coming to you. I'll bite your legs off!
Sometimes your combination of boosterism and lack of knowledge are hard to believe.
Think of any big, expensive war as a market cycle. The fiscal stimulus starts slowly and then gradually builds as the war gears up. As the war and war spending stabilize, the fiscal stimulus levels and tops. From that point on, it's all downhill. The maintenance and wind down of the war detract from GDP and the aftermath produces a horrible drag through higher taxes. (Check out nearly the whole 70s.)
We topped out on Iraq stimulus about a year or two ago. It's all downhill from there.
Sebastian said: Note that the escalation of the Vietnam War in the '60s kept the economy out of recession, even though New Home sales were falling." You keep mentioning this, but blatantly ignore the Iraq War.
Sebastian, the Iraq War is not escalating the way the Vietnam War did in the mid to late 60's. Also, the cost of Vietnam as a percentage of GDP was much higher. There is no analogy to be drawn from that decade.
01/20/2009 end of an error said: "Can we have a little bet on what new and existing home sales will be for the year?"
And maybe a side-bet on the stock market.
Based on my analysis of 40 years of SP500 corrections and subsequent recoveries, the index will be at new all-time highs again within this calendar year. (Also based on the fact that the valuations are the best they've been since the 2002-03 lows.)
I've already got my neck stuck pretty far out with my "no recession" call, what with preliminary Q4 2007 GDP coming out this week, so what the Hell?
Cliff diving of new home sales will likely stop the overbuilding by the builders and reduce prices. That would in turn pressure existing home sales and prices.
Since home prices are sticky on the way down, what are the factors that actually cause price reductions. The one that's most obvious is where the owner cannot service the debt or the owner has no skin in the game and walks and the lender sells at a clearing price. Are there other non-obvious factors that change the dynamic and cause prices to reduce?
--
Since No-Recession-Sebastian is Questioning CR (who has a far superior record than Sebastian)...
Here is one from Sebastian in late 2006:
Jas Jain, you love to go for the "shock value" of way-out, off-the-wall forecasts, so here's one you'll appreciate. Pay close attention, and mark my words: Even if the unthinkable happens and a second 9/11-style terrorist attack occurs in 2007, there will not be a recession in the U.S. next year. That is how far wrong you are with your forecast. S.
Later he predicted that there would be no recession during 2008-09 either. He absolutely denied that housing could ever lead to recession.
Jas
PS: I must admit that back in 2006 I was early in my forecast for the recession by some 6-8 months. I am usually early in my bearish forecasts.
Sebastian -
On forward earnings the stock market is much more expensive than you're implying. Also, the current p/e even on a trailing basis is above the long term average. And please dont give me the fed model argument that low interest rates argue for higher p/e's - if that were a true the Japanese market would be the best value in the world by far given their interest rates.
I definately agree with you though on the Iraq War and that that has been a big contributor to gdp probably keeping us out of a recession in 2007. However, unlike Vietnam that war isnt escalating - it actually appears to be stablizing recently. When we start pulling troops out (which could very well start to happen in 2008) it will definately hurt gdp and contribute to unemployment. In other words, things will go from bad to worse.
There is a great deal of enthusiasm in Florida that the passage of increased property tax relief and the creation of the Save Our Homes portability will cause a rebound in new house sales. The vote will occur tomorrow as part of the primary.
Not being discussed as a consequence is the likely increase in supply of older homes as owners seek to downsize. Many owners would have lost the Save Our Homes tax benefit if they moved. If this does occur,and the public is greatly in favor of it, the Florida market will be even more depressed by late Spring.
Malabar - you have to distinguish the prices for new and existing, with the former likely putting in motion trends in the latter. New home prices have to fall much furhter, and they can fall much faster, since you've got a totally different issue as to whom is doing the bringing to market. The homebuilders can't stay forever under the financial strain theyve been under lately, so although it is hard to tell exactly how this unwinds, prices have to fall, building has to pull back and builders have to go bust. Going bust helps the pullback, cutting prices faster helps demand and lessens any pullback, but cutting prices forces BKs quicker. It's all interconnected, but in the end, new home sales prices are heading down down down and the fallout will spread wide, including the relative spread in price of new vs existing, which can't widen continuously..eventually it hits existing prices. That market can stall to some extent (at least as far as (IOs and resets havent infected it) but any distress there from loans that cant be paid at full amortization, or worse, job losses, shrinks this spread in new vs existing prices faster.
sportsfan said: "Sebastian, the Iraq War is not escalating the way the Vietnam War did in the mid to late 60's. Also, the cost of Vietnam as a percentage of GDP was much higher. There is no analogy to be drawn from that decade."
Another "it's different this time.":) MOM already explained to me that, yes, low interest rates were a factor in driving home prices up before, but not this time. And now an expensive foreign war kept the U.S. economy out of recession in the 1960's, but not this time.
You honestly, truly don't see that this is exactly what rationalizations are like? That this is the way our President "thinks"?))
"When we start pulling troops out (which could very well start to happen in 2008) it will definately hurt gdp and contribute to unemployment. In other words, things will go from bad to worse."
No, unlike Vietnam, the troops coming home from Iraq will not be discharged. The enrollments in the Army are at bare bones levels right now and plans are to increase them at least 50%. Rumsfeld was completely wrong about fighting with very few boots on the ground (as he was about almost everything else).
But consider that the U.S. consumer last year spent $9.5 trillion. Chinese consumers spent about $1 trillion, and Indians about $650 billion. The power of the American consumer is still six times that of this new "Chindian" consumer. It's mathematically impossible to see a major decrease in U.S. consumption being made up by the Chinese and Indians.
Sebastian wrote: MOM already explained to me that, yes, low interest rates were a factor in driving home prices up before, but not this time.
Sebastian:
I don't recall MOM saying quite this. Not to put words in MOM's mouth, but I recall MOM saying that low interest rates were definitely a factor in 2001-2004, but MORE important were the relaxing of lending guidelines.
Going forward, if interest rates go down, but lending guidelines DON'T relax, then that is a big "difference".
There are VERY FEW first time homebuyers in California that can afford 20% down on a home, regardless if the mortgage rate is 3% or lower...
they don't have the downpayment.
The RE machine "needs" NINA and SISA loans and low to no downpayments to continue the stratospheric rise of the past.
simply lowering mortgage rates doesn't mimic the conditions that were present in the first half of the decade
FFDIC - caught the NC Times article yesterday (completely vested interest there).
"Leau said he put no money down on his home, paid no closing costs and estimates he has netted about $50,000 in cash from refinancing. He used the money to pay off $8,000 in debt and fund a vacation to Hawaii."
There are two types of recession forecasters -- those who are early (my forecast for the recession to begin was Mar-May'07) and those who forecast it after the recession has begun.
You take your pick.
I am forthright in admitting that I have been early in all my bearish forecasts -- Tech Bubble burst, Housing Bubble burst, and the recession.
I did predict the current Scam Market top on 10/11/07 minutes after the top, but I did expect it to have peaked earlier. Sorry, I always warn people early.
Also, think in these terms: "Demand for capital goods also softened, suggesting business investment will be a drag on economic growth. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, fell 0.4 percent after a 2.9 percent decrease in October that was larger than previously estimated. Shipments of those items, used in calculating gross domestic product, increased 0.2 percent after dropping a larger-than- previously-estimated 1.2 percent in October."
The 0.1 percent increase, the first gain in four months, followed a revised 0.4 percent drop in October that was larger than previously reported, the Commerce Department said today in Washington. Excluding transportation, demand fell 0.7 percent.
In other words, had October not been revised downwards, November data would also have been negative. Weaker CapEx spending is but the latest sign of a slowing economy.
Sebastian - interest rates helped drive up home prices when they were already moving up. Now they are moving down. There is a certain momentum to thing you dont seem to understand. Had someone added a few points to a loan during the bubble, it wouldnt make any difference, some sucker would have taken that small penalty as a minor hit to the expected appreciation ahead. Whatever! Thats why plenty of folks saw no problem with subprime loans and resets into the double digits. Who cares!? We'll be rich.
Well, now, you could give me a loan at -2%, as in, pay me money to take it, and Im not going to, because it wont be enough to overcome the capital loss Im expecting.
Do you get it now? All other factors are not equal, so you can't make the silly comparison you are making. When someone uses the phrase "it's different this time" you might want to be able to sense the irony. That was a hollow argument that somehow tried to refute long held notions about how the economic world works with a simple catchphrase since there was no good reason to believe it. These ideas when looked at factually were kind of preposterous (eg. home prices always go up.)
It is now being used to say something completely at odds with your thinking that you cannot seem to grasp. We are not saying that the forces you proclaim are not legitimate, you just dont seem able to grasp how inconsequential they are. Why is that?
Sebastain -
Different this time? What about the Gulf War?! We started to deploy troops in August 1990 and pulling them out in February 1991 - we had a recession in progress that entire time! Started in July 1990 and ended in March 1991. Looks like a war didnt keep us out of our last consumer led recession....
your ideas are quite contrary to many on this board, and to some economists, EXCEPT one.
I (and many here have) felt that a strenghtening dollar is highly possible, depending on what happens with the rest of the world's currencies (Euro, Yen, Pound, etc).
It won't be IMO that the dollar is really worth more, but simply that the other currencies fall in value, sot he dollar may improve by comparison.
once the toxic sludge that fills Europe and Britain takes center stage they will fall as well... it's just "contained" to the States thus far...
as for Housing surprising to the upside... that's entirely possible, but only because there may be REALLY low estimates!
"Well, now, you could give me a loan at -2%, as in, pay me money to take it, and Im not going to, because it wont be enough to overcome the capital loss Im expecting."
Are you nuts? Put 10% down on a $ 1 M house. Get a $ 900K mortgage. Collect $18,000/year vs $ 4,000 in a CD. Live there for 20 or 30 years. Sell.
Another low in home sales and the market rallies on the hopes for yet another massive FF rate cut. Futures now priced in between 50 & 75 pts cut @ ~75%. Amazing. The Fed will save equities LOL!
Ahead of curve - sell at what price? Do you not realize how inflated a $1mil home is these days? Im throwing out hypothetical numbers, so that the simple minded can get my point.
O-Joe -
You've certainly been consistent.
You've been saying the same things for 6+ months.
I've done the exact opposite and done quite well.
I was very much a bull from late 2002 until the end of 2006. I became concerned about the economy in late 06 - early 07 and turned bearish in April/May.
The facts and trends I saw develop changed my mind.
Good luck to you, but like an old mentor of mine used to say, "there's a fine line between being a contrarian and stupid because conventional wisdom is right 90% of the time..."
Doesn't a new home sales decline show the market correcting? I put more weight on Existing Home Sales (equally bad, or worse, I know) but this stat and graph mean nothing to me.
--
"Jas: I think you are behind the long wave curve. It bottomed in April 2003."
O-Joe, please don't destroy my reputation. I am always ahead-of-the-curve, i.e., early, sometimes too early.
Longwave is years away from bottoming. Evidence: Long-term USTs have out-performed the S&P 500 for the past ten years! This NEVER could happen if the Longwave had bottomed years ago. Just watch 10-year yield to go below 2% some time during 2009.
"The market" (I'm assuming you mean the housing market) is correcting - downward, and fast. "The market" is dragging other markets, market segments, and economies with it. What we're waiting for is the bottom.
Use any yardstick you want to measure the correction - it's downward and we can't see bottom.
Your comment that losses may have to be socialized as an only realist fix for the bubble just inflates another bubble in pubic debt. When the Comptroller General states that there are over $50 TRILLION in currently unfunded debt, the answer is not to create more.
Are you nuts? Put 10% down on a $ 1 M house. Get a $ 900K mortgage. Collect $18,000/year vs $ 4,000 in a CD. Live there for 20 or 30 years. Sell.
Geoff, I assume, was referring to a fully-amortizing mortgage, not an - ahem - "interest-only" loan. You'd still have to make monthly payments. Let's assume a 15-year loan at -2% ... on a $900K balance that's $4,283 a month (vs. $5,792 @ +2%, by comparison). By comparison, a 15-year fixed @ 5% would produce an equivalent payment on a mortgage balance of $540K (thus a home price of $600K).
So refusing to take a -2% loan when the market's at 5% would imply that you believe the home in question is overvalued by more than 40%. I don't think that's such an outrageous assumption for a lot of $1M McMansions in certain locations.
Steve: "New home sales (and thus new home construction) are much more important to growth."
Steve, Existing Home Sales are almost equally important, if not more. They create huge economic activity due to move up, furnishings, modernization, moving, etc., not to mention supporting 3-4M realtors.
I'm seeing a real bifurcation in the effects of this recession, and the proposed steps to remedy it. The higher GSE limits will make 400-700k houses more affordable in areas where people's incomes can really sustain that (better parts of NY, CA, DC area). Modesto, Cleveland, most of FL are toast. However the effects of massive overbuilding of exactly the wrong product in the face of the demographic shift links the two somewhat. Downtowns can't go up much if aging boomers cant sell their suburban barns. The whole key is consumer spending. If it drops enough, all segments go down. My thought is that even if the top 25% keep up their spending, the middle 50% will have to cut, and that will drop us.
Mook, I live in CA, so that's kind of what Im talking about. My numbers weren't for specific calculating purposes, otherwise I would have put the full info in on the specs. Obviously, as AOC says, if it were a fixed -2% youd pocket 18k a year for 30 years. Nice. But you dont think anyone would give you that loan now, would you? Even in the crazy days of 05 I dont think anything even that stupid was offered. But quite possibly some equivalents of -2% for a few years was easily available. Basically, it's called overappraisal and cash out of the difference. Happened all the time. Still, unless you escape the tax man in foreclosure, it looks like it could have been a pretty stupid bet.
I (and many here have) felt that a strenghtening dollar is highly possible, depending on what happens with the rest of the world's currencies (Euro, Yen, Pound, etc).
In a global recession, the USD may rise simply because so much debt is denominated in USD. People will scramble for US dollars simply because they need USD to pay USD denominated debt.
New home sales are better forecasters of the direction of the economy. For investors, these numbers should carry more weight. Thus, to me, at least, new home sales are much more important.
In a global recession, the USD may rise simply because so much debt is denominated in USD. People will scramble for US dollars simply because they need USD to pay USD denominated debt.
Or more simply if all the hot money that left the US in search of higher yields returns home. It's not much different than the Yen carry trade unwinding, except it's the Dollar carry trade.
Jas: Steve, Existing Home Sales are almost equally important, if not more. They create huge economic activity due to move up, furnishings, modernization, moving, etc., not to mention supporting 3-4M realtors.
This is not true. Existing home sales is not close to new home construction/sales in terms of economic growth. See this post from CR for more information.
What kind of rate cut do you think we will get to help correct this several trillion dollar economic/systemic impairment/softlanding?
IMHO, we will get another 1% this week and another 1/2% later as we go to zero. This seems to be a good way to help stocks short term, but then what? Negative rate reductions (below zero) are somewhat difficult to model, but as long as enough money is printed we should be ok, yah?
It will, apparently, continue its downward trajectory, and it appears to be gaining momentum and creating shock waves.
We are severely overbuilt.
Prices were severely inflated.
To complicate things, the inflated gains were turned into liquidity (pseudo-wealth), and then into debt (as if by magic) as the value of the hyper-inflated underlying assets dropped.
To make matters even worse, Wall Street "banks" and hustlers securitized the bad debt and seeded it throughout the world economy. We're seeing the harvest of those seeds.
Longwave is years away from bottoming. Evidence: Long-term USTs have out-performed the S&P 500 for the past ten years! This NEVER could happen if the Longwave had bottomed years ago. Just watch 10-year yield to go below 2% some time during 2009.
Jas
Jas Jain
Jas,
It's too late for the old K-cycle. The last one bottomed in the late 1940s. The 53-56 year period is over. Since 2003, the stock market outperformed Treasuries handsomely. Also, raw material prices bottomed in the 1998-2001 period. IRs bottomed April 2003 and now we're making a higher low to that, followed by another upswing. I think the next significant low to 2003 is already in as of last week.
The higher GSE limits will make 400-700k houses more affordable in areas where people's incomes can really sustain that (better parts of NY, CA, DC area).
Sorry ... I'm sure you mean well, but this statement just makes me laugh.
For decades, loan officers used a standard of 22% of gross pay as a "ceiling" for the mortgage payment one could afford.
It slowly crept up to 25%, then 28% over the years, before all semblance between one and the other went completely out the window during this decade.
Assuming any kind of return to normalcy (i.e. a 28% ceiling), do you know what income level is required to support a 30-year mortgage at 6% for a $417,000 house?
Try $107,148 a year. And that's the bottom end of this new GSE range! Take it to $700K and "prudent" lending standards mean you should be earning $180K a year.
"Help our GSE's support the American Dream of home ownership for those with six-figure incomes!" Why do I suspect that this wouldn't make a great rallying cry for Nancy Pelosi?
Sebastian, the Iraq War is not escalating the way the Vietnam War did in the mid to late 60's. Also, the cost of Vietnam as a percentage of GDP was much higher. There is no analogy to be drawn from that decade.
The overall cost of Vietnam and Iraq/Afghanistan will be about the same. The analogies and costs are similar in terms of GDP and other measures.
They will both go down in the books as hugely costly wars for the American people that produced short-term economic stimulus (1962-1969 and 2002-2007) followed by years of economic pain in the decade after 1969 and 2007.
Wars don't produce any permanent industry, demand or jobs. They create heavy medical, social welfare and judicial system afermath costs, as a (sure to be Pulitzer) series now running in the NY Times documents.
Wars create false stimulus, much like rebate handouts. They boost the economy in the present while borrowing heavily from the future.
The future starts now. Almost all stimulus of Iraq is gone.
It's difficult to really compare the economic stimulus effects between ANY of the US's major wars.
Labor per unit hour of output was higher in 1968, compared to 2008. That means the multiplier effects were different, because spending on people typically has a higher multiplier than spending on capital. Public mood, propensity to lend, reserve requirements, energy imports, have all changed since 1968.
Clearing this up is a subject for an entire paper, and won't be solved either way with a Haloscan comment.
In any case, an 'unnecessary' war is about the stupidest way to add GDP that I can think of.
Building unecessary homes, a distant second.
"This debt will end" when the system collapses. Maybe, you have a better reason, or explanation, for when. If so, please share the how part.
Jas
Jas Jain
It's me again
My explanation is that not every ~54 year long wave cycle there has to be complete debt collapse. Apart from Argentina and maybe Russia, there was hardly any government debt failure. Now's the time to start ammassing more debt again and repeat the cycle from a new beginning. IMO you have to look at the sovereign debt - not the privately held.
Obviously, the -2% interest is silly, but let's play it out. A $900k 30 year mortgage means $ 30K /year in principal. But the negative interest pays you $ 18 k/year, so your out of pocket costs are $ 12K/year. Live there 30 years, the mortgage is paid off. Sell for $ 600k (you said the house is 40% over value at $1 M), walk away with $500k profit after living well on $ 1k/month for 30 years. Seems like a good deal to me.
Yes, this example sounds silly but I use it to counter those who say the Fed is out of ammunition once rates hit 0 %.
--
Steve, I do disagree with CR on this and few other aspects of housing. Existing Home Sales were far more stimulative to the economy in this cycle (2002-2007), especially, due to unprecedented modernization based on refi and HELOC, than in previous cycles. Anyway, we can disagree.
I don't think there's been much economic stimulus due to the Iraq war, other than a few of the big old-school defense contractors, Halliburton, Blackwater, KBR, Parsons, and a handful of Bush Administration insiders (all of whom appear to fill logistics and support functions). I can't see any positive industrial or transportation impact.
wars are very poor economic stimulators vs dollars spent. Domestic infrastructure is far more efficient. My understanding is that Halliburton had a very poor ROC on their Iraq contracts. Given how good the oil drilling business has been over the last 5 years, they would have been better off staying away from defense and deploying all of their capital drilling for Texas Tea
Sol,
I was in Oceanside, Vista, San Marcos a decade ago when my cousin, Susan Eubanks', trial was held. I testified during the penalty phase asking the jury to spare her life. It sadly did not and Susan is on California death row in Chowchilla along with about 15 other women. The San Marcos fire department burned the rented home where she and her four deceased boys had lived. A sad case for our family and your community. Once you have endured hard times like this an economic crisis just isn't as large of a concern, however I am worred no doubt about that.
Wars may be a poor stimulus vs dollars spent, but they are still a stimulus and lead the military to be drain on the workforce. When we start pulling troops out of Iraq there will be less stimulus and more unemployed.
Cal - I couldn't agree more. We're just above 22% DTI on our home now, and with two commutes, one child, and another on the way I honestly don't know how we could afford to spend another 6% of our gross on a mortgage, never mind 13%.
Wait - actually I do. Our contributions to our 401s, Roths, 529s, etc. come to about 16% of our gross, so all we'd have to do is eliminate those and we could make a 35% DTI payment, easily! Why didn't we think of that sooner? rolls eyes
Your thinking and your models fail to account for the primary mover in today's market: a credit bubble of historic portions.
It's hard to take you seriously because you have never once acknowledged the importance of our recent horrific loan standards and the widespread underpricing of risk.
Your thinking and your models fail to account for the primary mover in today's market: a credit bubble of historic portions.
It's hard to take you seriously because you have never once acknowledged the importance of our recent horrific loan standards and the widespread underpricing of risk.
"Or more simply if all the hot money that left the US in search of higher yields returns home. It's not much different than the Yen carry trade unwinding, except it's the Dollar carry trade."
There is the slight problem that the U.S. has still an ~800 billion current account deficit that might be very difficult to overcome with slowing exports. In addition in a slowing world economy, there will be much more pressure on the surplus countries to spend their money at home.
Even if the dollar were to stabilize in the short term, this would immediately reduce the dollar purchases by the surplus FCBs as they would not need to support their currencies anymore igniting the process over again.
Until the CA is reasonably in balance (~2%) it is an excellent bet that the dollar fall will continue. Note that the strong dollar in the nineties was only possible because of the promise of superior investment returns in the U.S. I don't see anything on the horizon that would support such a view.
Meltdown Man, I don't like that outcome I see, but I am in full agreement with you and that is why I'm almost totally in Gold. There's only one way to get out of this mess when the National tab is that high. Monetize Debt. Dollar = RIP over the coming years.
I find it interesting that for this chart, the blue column indicating "recession" is 4 quarters in duration. Is that a prediction or simply an arbitrary length of time? I don't recall any prior discussion from CR on how long we can expect to be in the blue.
--
ac: "I was just saying all those "economic benefits" sounded constructive to me until I got to the part about the 3-4 million Realtor jobs."
That is a non-answer. Am I wrong? Or, how much employment and incomes realtors/agents receive is not material? I just wanted to be corrected if I have a wrong view, or at least get some argument as to why I am wrong.
FFDIC - Summers is resorting to the last refuge of scoundrels. It's sort of the false patriotism argument...an unswerving belief that this financial system is not corrupt, that the debts are not bad, that this is a liquidity and fear issue, rather than a solvency issue at heart. These arguments are necessarily made without substance, and with great historical attachment, but they are devoid of truth. His stance is once he cannot avoid, as it is the last leg left standing. The question is, how long before it too snaps?
That is a non-answer. Am I wrong? Or, how much employment and incomes realtors/agents receive is not material? I just wanted to be corrected if I have a wrong view, or at least get some argument as to why I am wrong.
It was just a joke about Realtors... not saying you're wrong.
One unique impact of the Iraq war is to permanently drive up the future cost of uniformed mililtary labor and recruiting by many percent.
The National Guard and Reserve produced low-cost soldiers for a long time, and now Bush has squandered that resource for at least a generation. A lot of the war cost has been transferred to the families and employees of Guard and Reserve members.
CR, is there any co-relation between the % drop and the type/duration of the recession. In other words, if you were to plot this as a year over year change, would the steepness of the falling line give any indication of the nature of the forthcoming recession ?
Geoff - Thanks man. I haven't had a chance to read Summers today. Been dicking with First Choice Power about going on balanced billing with my 800 FICO and paid off home - denied due to too many late payments. Need to pay the bills on time and read CR less!
--
Thanks, ac. I am little slow on jokes, sometimes.
BTW, locally it is really bad for realt-whores. I have no idea how most of them are paying their bills. I know that many were doing refis and HELOC last year. Maybe, they are just waiting for the spring bounce in business. last year there was no spring bounce here.
As far as wars being stimulative, I think part of that depends on where the war happens. World War II decimated the industrial base of most of our economic competitors, all of whom were wealthy enough to buy our goods. So our factories were able to pretty quickly transfer from defense goods to export goods. Indeed the globabl market and limited competition was part of how American blue collar workers were so well paid in the postwar years. In Vietnam and Iraq that wasn't/isn't the case so much.
In case it helps, we are tracking the worst, or even worse than that, the 1973-75 decline. That 1974 recession was a whopper. This recession is going to be far worse. I am sure that the high oil price part is also in play.
My forecast is for the depression to begin during 2008Q4-2009Q1.
Stuart-
We both see this ending the same way. I've struggled trying to decide if it will be through currency debasement or a deflationary spiral. I too, am in gold, but I hope that it will support itself in deflation. I've tried to tell people I care about what is coming in the not too distant future...they either don't get it or won't face up to it.
If that article is any indication, we are in deeper trouble than I thought if Summers ends up in a Democratic administration. This is not an outlyer, every time he gives a speech he demonstrates how far behind the curve he is. No objectivity, no competence, no shame.
Meltdown man - while deflation is possible, there are many vested interests who would much rather see inflation. The US government is one of them, being a huge debtor. Any homewoner with a mortgage is another. Since massive deflation would lead to economic collapse, those with a vested interest in inflation vs. deflation includes almost all foreign governments.
I can't see who would ever support deflationary policies. Some deflation may be unavoidable, but if interest rates have to go to zero, then that is what will happen.
Also - if the US currency does take another nosedive, that is going to ultimately be inflationary for the US market.
What is the big argument for deflation? - if the whole thing unwinds laissez-faire with no government intervention?
I would still argue existing home sales are a better indicators of the directior of the real estate market. Builders will physically stop building homes forcing this number down. Existings homes are there pretty much forever so tracking that inventory seems more important too me.
PS - Existing home sales are in equally bad meltdown mode I just think new home sales in general are a poor statistic to analyze in declining real estate market.
My forecast is for the depression to begin during 2008Q4-2009Q1.
Jas
Jas Jain
Jas,
That's again way behind the curve. Depressions could have only occurred in the 1980s - early 2000s time frame. Time's up.
But they will return in the early 2050s. I think my model even helps to predict the severity of the downswings in a given Kondratiev cycle. Incidentally, the downswing in the (IMO) past cycle would be very weak; the one in the 2050s will be sharper, but also short-lived.
"Incidentally, the downswing in the (IMO) past cycle would be very weak; the one in the 2050s will be sharper, but also short-lived."
Interesting, but likely incorrect. MY model has the next depression beginning on March 6th 2063. Until that point, the S&P 500 will experience exactly 8.93% growth annually.
I could be wrong, but I doubt it. I have a spreadsheet and I'm standing by it.
We need more cowbell and fewer words!!
http://www.financialsense.com/editorials/bronson/2006/images/0907/chart10_lg.gif
damn!
What a big mess we are in. Bad for the public at large. Good for those prepared for the opportunities of a volatile market. Recession equals investment opportunities.
Good graph. I was considering getting into income property in '01-'02, buying the dip. The timing was right, the economy was right; the dip should have been there. Prices did pause and decline slightly for a very few months., as the chart shows. Then they started back up again as if nothing had happened.
Not being financially sophisticated, I couldn't figure out why. Now I know.
CR, I don't think the blue vertical line on the right side of the graph is nearly wide enough.
Can you extend it to the end of my natural life expectancy?
Details Lacking on Mortgage-Relief Plan
Details Lacking on Mortgage-Relief Plan - WSJ.com
"There is consternation from a growing minority on the Republican side as to why we're doing this," one senior Republican aide said. "Why are we increasing the risk to these organizations that have had problems historically to the benefit of people who don't really need it?"
Another potential wild card is Fannie and Freddie's regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo. The agency's director, James Lockhart, said his agency was "very disappointed" with the decision to raise the conforming-loan limit before Ofheo gets stronger regulatory powers. He said the agency would ensure that any increase goes through a "rigorous new product-approval process quickly and has appropriate risk-management policies and capital in place."
will we get to yearly rate of 200K ?
Some alts and edits for the chart:
""There is consternation from a growing minority on the Republican side as to why we're doing this," one senior Republican aide said. "Why are we increasing the risk to these organizations that have had problems historically to the benefit of people who don't really need it?"
Get a bunch of overfed political bagmen around a table throwing out ideas to solve a problem, and this is the kind of solution you get: pay somebody off. Give them some money so they'll shut up until the next election. We shouldn't expect much more from this crowd.
Given several years of bad times, however, I would expect the composition of Congress to change at least somewhat for the better.
Just for fun, try integrating between the base 400,000 sales level and the sales curve. This cycle is at least four times bigger, in terms of marginal units sold, than any of the previous cycles.
Can you extend it to the end of my natural life expectancy?
Please tell me you are at least 75.
Anonymous | Homepage | 01.28.08 - 12:03 pm |
Republican Reps waking up from Kool-Aid binge:
"Hey! Wait a doggone minute! We've been robbed! And raped! This is serious!"
Sheesh.
Looks like we've had 5 bottoms to the market since the peak. I think each time they call it, a new batch of suckers get pulled in, but fewer still at each next bottom. I suspect we'll have one more little tick up this spring, which again will be pronounced as the turnaround, but after it too fails, we're set for major capitulation.
It's probably too early for contest time, since the sales level has so far to fall. But I'll take a stab and say that I wouldnt be surprised to get down to 375k.
And as they say, that's gonna leave a mark.
The mark will be left on the ground at impact.
Note that the escalation of the Vietnam War in the '60s kept the economy out of recession, even though New Home sales were falling.
See, we just need to get involved in a costly war of dubious objective to save the economy. Wait a second...
It would be interesting to normalize this by population growth. 600,000 homes sold in 2007 probably equals 400,000 homes sold in the 80's.
Re: new home purchase prior to dumping the current home now underwater (and possibly behind in payments)
Consequences:
More???
--
Does anyone have good reason to believe that the lows in the previous cycles, 350-400K, wouldn't be reached?
BTW, the over-all housing demand in the US peaked in 1970s! At that time lot more multi-units were built and in this bubble lot more SFH were built. Shouldnt the over-building of SFH lead to a bottom lower than the previous lows?
I continue to believe that all of CRs estimates and forecasts of lows would prove to be optimistic. Depression, of course, would put a kibosh on the demand estimate; the average demand during 2001-2010 would come below 1.0M annual rate. What if all the demand for 2001-2010 was built by 2006?!
Jas
Best to look at household growth, which has been slowing steadily for the past decade plus. Demographic trends ahead are not conducive to any big turnaround ahead, but the accumulated growth of the past few years does support a higher level, all other things equal. Of course, all other things are anything but equal, and are just plain awful.
Seems the trick to understanding how low this goes is getting a peg on how fast prices fall. The big drop in December makes you wonder if it can't fall even faster. Race to the bottom, get the sales rate up, clear inventory asap. But of course, that requires BKs for the home builders. I suspect that becomes a fun story to watch this year.
Alex, the normalization should probably be by household formation as opposed to population. I've worked on this before, and the demographics is currently unfavorable for housing.
And that brings up an analyst that has been very wrong on housing: Stephen Kim. His job is apparently being cut. Kim argued (incorrectly IMO) that demographics were favorable for housing.
Best to all.
Geoff, I agree - BKs will probably be part of the story this year. The home building industry has too much capacity - plus BKs is a good way to get land prices down.
Best Wishes.
YouTube: Southern California Shanty Town / Tent City
umm... you did follow the url to see what that really was didn't you? It's a migrant worker camp on an indian reservation. . . sad, but not what it's billed as.
Got's to love them Internets tubes. Thanks for the debunking. I'll be sure to read the fine print next time.
OTOH, could be the wave of the future.
You see a migrant worker camp on an indian reservation, I'll bet the RE industry sees qualified homebuyers.
I follow current sales very closely in 4 SW Fl counties. As of today the actual title changes on the counties homepages are few and far between. Just in my county we only show 21 sales,37 FC's. We had 450/450 ea. approx last month. I also hear from friends up north in Fl thats its as bad...This could get very ugy,very quickly.
The best part...Within 15 minutes of my place I can find 5 different builders still knockin em out...
Chris
Marcus: currently I think that messer moneybags are saying something like:
"What do you mean the poor can't pay me the money they owe me? Now we're going to have to get our money from the government. Do you KNOW what politicians cost these days?"
Jas - due to extensive oversupply we will overshoot the previous lows, no doubt.
You see a migrant worker camp on an indian reservation, I'll bet the RE industry sees qualified homebuyers.
Marcus Aurelius
LOL! Comment of the day.
-K
And that brings up an analyst that has been very wrong on housing: Stephen Kim. His job is apparently being cut. Kim argued (incorrectly IMO) that demographics were favorable for housing.
Stephen Kim now -- "There's a housing DEPRESSION in this country!!!"
As in, when your neighbor loses their job, it's a recession; when you lose your job, it's a depression.
Confused here--I thought that at our current position on the downward slide, we were still at historically high levels of home sales? Or am I mixing up new- and existing-home sales?
Stephen Kim gone. Interesting news.
This is a new spin on reality: being wrong leads to consequences.
This is a constructive development.
Great graph. Anyone calling a bottom these days is talking their book/business. Annualized sales will fall to about 400K AND stay there for a year or two. No rapid recovery this time around.
Anyone want to tell me why we dont bottom out at 400k or lower SAAR?
Hope Bush's SOTU address is printed on 2-ply soft tissue paper so it can be used appropriately.
What if all the demand for 2001-2010 was built by 2006?! -- Jas
My analysis shows that that the demand for 13 years was built between 2001 to 2007. Keep in mind that the overbuilding is skewed in certain areas, but practically the whole country saw it to some extent. It is a scary calculation to say the least, and the reason that around 75% of homebuilders will go BK or fail to exist before equilibrium is reestablished.
Hope Bush's SOTU address is printed on 2-ply soft tissue paper so it can be used appropriately.
He should be proactive and blame the mess in housing on the next president.
Just curious, anyone know what led to the Jan 81 uptick that immediately seems to have collapsed?
--
CR:"I've worked on this before, and the demographics is currently unfavorable for housing."
Have you factored that in your 1.7M annual rate demand estimate?
Thanks.
Jas
Few if any politician wants to admit it, but the only way financials and homebuilders are getting out of this debacle is by socializing the losses. It's ugly but the figures are just too large otherwise. The next generation tax payer is going to be picking up the tab to pay for this generation's greed.
WSJ - Countrywide CEO Forfeits $37.5 Million as He Exits (threads on Mr. Mozilo generate blogger flames fame)
Countrywide CEO Forfeits $37.5 Million as He Exits - WSJ.com
You see a migrant worker camp on an indian reservation, I'll bet the RE industry sees qualified homebuyers.
Marcus Aurelius
LOL! Comment of the day.
LOL agreed. . . However, I think MA is right Realtors are trying to find the camp as we speak, er. . . type.
like a frat house in here with everyone patting their buddy on the back with all your doom and gloom. the united states economy will be fine contrary to your grim assessments.
"Just curious, anyone know what led to the Jan 81 uptick that immediately seems to have collapsed?"
When Volker took over the Fed, the markets didn't think he was serious about raising rates far enough to lower inflation (via a recession). When he started raising rates, nearly everyone thought he would just raise a couple of times, and then the political pressure would be too intense to sustain the policy. So during the first several months while he was the Fed's head, monetary aggs. actually increased and the real rates of interest were negative due to high inflation. Interest rate sensitive sectors like housing did well.
Volker then adopted policy rules based on monetarism (even though he thought it was a bunch of baloney). The rules said to tighten monetary policy, so he did with abandon. He kept on tightening until the economy went into deep recession, taking housing for the ride.
Like a frat house in here with everyone patting their buddy on the back with all your doom and gloom. -- Richard
Same thing was going on two or three years ago. Now look at things. Guess all you need is some good analysis and rational thought. The rest works its way out. Gloom and doom sometimes is appropriate.
It is going to be fun to see how 08 new home sales number unfold. From the HB reported so far this year (Ryl, KBH, and LEN), their total backlog for 4Q06 is 33198 (4206 for RYL, 17384 for KBH, and 11608 for LEN). And for 4Q07 the total backlog for the same 3 companies is 13200 (2860 for RYL, 6322 for KBH, 4009 for LEN) or rougly 60% less than at the same time in 06.. Given the lead time in construction of 6 to 9 months, total sales is a function of the backlog + sales from inventory. So would it be out of line to guess that 08 sales will be 40-60% less than 07 for a total of 310K to about 460K? It would be an unprecedened small new sales number and what will it do to our economy?
Thanks for the info rc.
Richard: Care to provide some analytical reasoning behind your assertion, or are you following in the steps of our dear leader?
"Like a frat house in here"
Hmmm....there is lots of talk of bongwater.
(which used to be the name of was an awesome band by the way)
What all this amounts to is a massive overstatement of GDP growth over the past decade. The debt fueled binge has masked a gutting of the economy.
Whent he final capitualtion comes and we accept that the intrinsic growth rates of the US are lower, there will be recalibration of valuation across the spectrum and hence multiple CONTRACTION.
Note the annoucned consortium today in China to compete with Airbus and Beoeing - the last bastion of manufactuirng is coming under assualt. With the financial advatnages proved a myth, the airline announcement represents a nothing more than kicking and pitting when you are down. Perhaps it is a referendum on what the Chinese are thinking about the long term prospects of the US.
CR said: "Note that the escalation of the Vietnam War in the '60s kept the economy out of recession, even though New Home sales were falling."
You keep mentioning this, but blatantly ignore the Iraq War. It's poor salesmanship.
S.
"the united states economy will be fine contrary to your grim assessments."
A "faith-based" forecast...
Richard: Yeah, it's fine if you're in the top 1%. Everyone else, not so much.
The bottom 80% of us have been getting shafted ever since 1974. That's when real wages in this country peaked. Aside from a sustained rise during the Clinton years, they've been pretty much downhill ever since.
Someday this war's gonna end....
Abby Cohen's 4 Stock Picks for the Next 12 Months (Cohen bugs me more than anybody else on WS, however I agree with her Rohm & Haas pick. My mother worked for Rohm & Haas credit union and it is and always has been a solid company.)
Abby Cohen's 4 Stock Picks for the Next 12 Months - Barron's -- Seeking Alpha
CR,
Can we have a little bet on what new and existing home sales will be for the year? No money just bragging rights for being closest. My prediction is 390k for new and 4.30M for existing in 2008. Might be fun to look back this time 2009.
CR,please explain why there would be more than one data point in any single January.
Richard:
I doubt your rhetoric can overcome reality. The assessment is grim, because the reality is grim.
Sorry for the length, but "the united states economy will be fine contrary to your grim assessments." made me think of this:
BULLS: I move for no man.
BEARS: So be it!
[hah]
[parry thrust]
[BEAR chops the BULL's left arm off]
BEARS: Now stand aside, worthy adversary.
BULLS: 'Tis but a scratch.
BEARS: A scratch? Your arm's off!
BULLS: No, it isn't.
BEARS: Well, what's that then?
BULLS: I've had worse.
BEARS: You liar!
BULLS: Come on you pansy!
[hah]
[parry thrust]
[BEAR chops the BULL's right arm off]
BEARS: Victory is mine!
[kneeling]
We thank thee Lord, that in thy merc-
[hah]
BULLS: Come on then.
BEARS: What?
BULLS: Have at you!
BEARS: You are indeed brave, Sir knight, but the fight is mine.
BULLS: Oh, had enough, eh?
BEARS: Look, you stupid bastard, you've got no arms left.
BULLS: Yes I have.
BEARS: Look!
BULLS: Just a flesh wound.
[bang]
BEARS: Look, stop that.
BULLS: Chicken! Chicken!
BEARS: Look, I'll have your leg. Right!
[whop]
BULLS: Right, I'll do you for that!
BEARS: You'll what?
BULLS: Come 'ere!
BEARS: What are you going to do, bleed on me?
BULLS: I'm invincible!
BEARS: You're a loony.
BULLS: The BULLS always triumphs!
Have at you! Come on then.
[whop]
[BEAR chops the BULL's other leg off]
BULLS: All right; we'll call it a draw.
BEARS: Come, Patsy.
BULLS: Oh, oh, I see, running away then. You yellow bastards! Come back here and take what's coming to you. I'll bite your legs off!
Sebastian,
Sometimes your combination of boosterism and lack of knowledge are hard to believe.
Think of any big, expensive war as a market cycle. The fiscal stimulus starts slowly and then gradually builds as the war gears up. As the war and war spending stabilize, the fiscal stimulus levels and tops. From that point on, it's all downhill. The maintenance and wind down of the war detract from GDP and the aftermath produces a horrible drag through higher taxes. (Check out nearly the whole 70s.)
We topped out on Iraq stimulus about a year or two ago. It's all downhill from there.
Sebastian said: Note that the escalation of the Vietnam War in the '60s kept the economy out of recession, even though New Home sales were falling." You keep mentioning this, but blatantly ignore the Iraq War.
Sebastian, the Iraq War is not escalating the way the Vietnam War did in the mid to late 60's. Also, the cost of Vietnam as a percentage of GDP was much higher. There is no analogy to be drawn from that decade.
01/20/2009 end of an error said: "Can we have a little bet on what new and existing home sales will be for the year?"
And maybe a side-bet on the stock market.
Based on my analysis of 40 years of SP500 corrections and subsequent recoveries, the index will be at new all-time highs again within this calendar year. (Also based on the fact that the valuations are the best they've been since the 2002-03 lows.)
I've already got my neck stuck pretty far out with my "no recession" call, what with preliminary Q4 2007 GDP coming out this week, so what the Hell?
Sebastia
You really should normalize the chart to population, so as to be per capita sales per month.
The chart will look even worst.
Cliff diving of new home sales will likely stop the overbuilding by the builders and reduce prices. That would in turn pressure existing home sales and prices.
Since home prices are sticky on the way down, what are the factors that actually cause price reductions. The one that's most obvious is where the owner cannot service the debt or the owner has no skin in the game and walks and the lender sells at a clearing price. Are there other non-obvious factors that change the dynamic and cause prices to reduce?
--
Since No-Recession-Sebastian is Questioning CR (who has a far superior record than Sebastian)...
Here is one from Sebastian in late 2006:
Jas Jain, you love to go for the "shock value" of way-out, off-the-wall forecasts, so here's one you'll appreciate. Pay close attention, and mark my words: Even if the unthinkable happens and a second 9/11-style terrorist attack occurs in 2007, there will not be a recession in the U.S. next year. That is how far wrong you are with your forecast. S.
Later he predicted that there would be no recession during 2008-09 either. He absolutely denied that housing could ever lead to recession.
Jas
PS: I must admit that back in 2006 I was early in my forecast for the recession by some 6-8 months. I am usually early in my bearish forecasts.
North County Times
Forclosure mess emptying Oceanside neighborhoods, hurting those who've stayed "If it weren't for family and friends, right now we'd be homeless"
http://www.nctimes.com/articles/2008/01/27/news/top_stories/1_01_991_26_08.txt
PS: I must admit that back in 2006 I was early in my forecast for the recession by some 6-8 months. I am usually early in my bearish forecasts.
Sorry, if you predicted a recession in 2006 and there still hasn't been one, you weren't early you were wrong.
But, but....the President told me that we can spend our way out of this...
Sebastian -
On forward earnings the stock market is much more expensive than you're implying. Also, the current p/e even on a trailing basis is above the long term average. And please dont give me the fed model argument that low interest rates argue for higher p/e's - if that were a true the Japanese market would be the best value in the world by far given their interest rates.
I definately agree with you though on the Iraq War and that that has been a big contributor to gdp probably keeping us out of a recession in 2007. However, unlike Vietnam that war isnt escalating - it actually appears to be stablizing recently. When we start pulling troops out (which could very well start to happen in 2008) it will definately hurt gdp and contribute to unemployment. In other words, things will go from bad to worse.
There is a great deal of enthusiasm in Florida that the passage of increased property tax relief and the creation of the Save Our Homes portability will cause a rebound in new house sales. The vote will occur tomorrow as part of the primary.
Not being discussed as a consequence is the likely increase in supply of older homes as owners seek to downsize. Many owners would have lost the Save Our Homes tax benefit if they moved. If this does occur,and the public is greatly in favor of it, the Florida market will be even more depressed by late Spring.
Malabar - you have to distinguish the prices for new and existing, with the former likely putting in motion trends in the latter. New home prices have to fall much furhter, and they can fall much faster, since you've got a totally different issue as to whom is doing the bringing to market. The homebuilders can't stay forever under the financial strain theyve been under lately, so although it is hard to tell exactly how this unwinds, prices have to fall, building has to pull back and builders have to go bust. Going bust helps the pullback, cutting prices faster helps demand and lessens any pullback, but cutting prices forces BKs quicker. It's all interconnected, but in the end, new home sales prices are heading down down down and the fallout will spread wide, including the relative spread in price of new vs existing, which can't widen continuously..eventually it hits existing prices. That market can stall to some extent (at least as far as (IOs and resets havent infected it) but any distress there from loans that cant be paid at full amortization, or worse, job losses, shrinks this spread in new vs existing prices faster.
sportsfan said: "Sebastian, the Iraq War is not escalating the way the Vietnam War did in the mid to late 60's. Also, the cost of Vietnam as a percentage of GDP was much higher. There is no analogy to be drawn from that decade."
Another "it's different this time.":) MOM already explained to me that, yes, low interest rates were a factor in driving home prices up before, but not this time. And now an expensive foreign war kept the U.S. economy out of recession in the 1960's, but not this time.
You honestly, truly don't see that this is exactly what rationalizations are like? That this is the way our President "thinks"?
))
Sebastia
Jas:
May I be the first to thank you for your new-found tone today.
Your posts on this thread are excellent. They are pertinent, and have data.
They also lack some of the vitriol that in the past overshadowed some of your points. (regardless if the vitriol has merit or not)
Boat 52, Are you implying there is a housing market in FL? Because, if you are, you'd be mistaken.
"When we start pulling troops out (which could very well start to happen in 2008) it will definately hurt gdp and contribute to unemployment. In other words, things will go from bad to worse."
No, unlike Vietnam, the troops coming home from Iraq will not be discharged. The enrollments in the Army are at bare bones levels right now and plans are to increase them at least 50%. Rumsfeld was completely wrong about fighting with very few boots on the ground (as he was about almost everything else).
I'd also like to second the request to have these charts population adjusted.
I honestly cannot imagine that housing will turn up anytime soon.
I travel a LOT, all over the US and Latin America...
it is astonishing to see how much housing has been built worldwide over the last 9 years or so.
Even areas that have DECREASING population (like Duluth MN) had unimaginable amounts of building (for "rich Twin Cities" people to have second homes)
they have borrowed demand from the future to build yesterday.
Roach hits the nail with the well aimed hammer:
But consider that the U.S. consumer last year spent $9.5 trillion. Chinese consumers spent about $1 trillion, and Indians about $650 billion. The power of the American consumer is still six times that of this new "Chindian" consumer. It's mathematically impossible to see a major decrease in U.S. consumption being made up by the Chinese and Indians.
Sebastian wrote: MOM already explained to me that, yes, low interest rates were a factor in driving home prices up before, but not this time.
Sebastian:
I don't recall MOM saying quite this. Not to put words in MOM's mouth, but I recall MOM saying that low interest rates were definitely a factor in 2001-2004, but MORE important were the relaxing of lending guidelines.
Going forward, if interest rates go down, but lending guidelines DON'T relax, then that is a big "difference".
There are VERY FEW first time homebuyers in California that can afford 20% down on a home, regardless if the mortgage rate is 3% or lower...
they don't have the downpayment.
The RE machine "needs" NINA and SISA loans and low to no downpayments to continue the stratospheric rise of the past.
simply lowering mortgage rates doesn't mimic the conditions that were present in the first half of the decade
FFDIC - caught the NC Times article yesterday (completely vested interest there).
"Leau said he put no money down on his home, paid no closing costs and estimates he has netted about $50,000 in cash from refinancing. He used the money to pay off $8,000 in debt and fund a vacation to Hawaii."
Must have been one hell of a vacation.
--
Steve,
There are two types of recession forecasters -- those who are early (my forecast for the recession to begin was Mar-May'07) and those who forecast it after the recession has begun.
You take your pick.
I am forthright in admitting that I have been early in all my bearish forecasts -- Tech Bubble burst, Housing Bubble burst, and the recession.
I did predict the current Scam Market top on 10/11/07 minutes after the top, but I did expect it to have peaked earlier. Sorry, I always warn people early.
Jas
Related thought to Roach:
How much of that $9.5 Trillion is in the bank?
Also, think in these terms: "Demand for capital goods also softened, suggesting business investment will be a drag on economic growth. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, fell 0.4 percent after a 2.9 percent decrease in October that was larger than previously estimated. Shipments of those items, used in calculating gross domestic product, increased 0.2 percent after dropping a larger-than- previously-estimated 1.2 percent in October."
The 0.1 percent increase, the first gain in four months, followed a revised 0.4 percent drop in October that was larger than previously reported, the Commerce Department said today in Washington. Excluding transportation, demand fell 0.7 percent.
In other words, had October not been revised downwards, November data would also have been negative. Weaker CapEx spending is but the latest sign of a slowing economy.
Sebastian - interest rates helped drive up home prices when they were already moving up. Now they are moving down. There is a certain momentum to thing you dont seem to understand. Had someone added a few points to a loan during the bubble, it wouldnt make any difference, some sucker would have taken that small penalty as a minor hit to the expected appreciation ahead. Whatever! Thats why plenty of folks saw no problem with subprime loans and resets into the double digits. Who cares!? We'll be rich.
Well, now, you could give me a loan at -2%, as in, pay me money to take it, and Im not going to, because it wont be enough to overcome the capital loss Im expecting.
Do you get it now? All other factors are not equal, so you can't make the silly comparison you are making. When someone uses the phrase "it's different this time" you might want to be able to sense the irony. That was a hollow argument that somehow tried to refute long held notions about how the economic world works with a simple catchphrase since there was no good reason to believe it. These ideas when looked at factually were kind of preposterous (eg. home prices always go up.)
It is now being used to say something completely at odds with your thinking that you cannot seem to grasp. We are not saying that the forces you proclaim are not legitimate, you just dont seem able to grasp how inconsequential they are. Why is that?
I would like to second Sebastian here (what a surprise):
I guess this is also as much contrarian as it goes. The herd (not only CR herd, also economists herd)expects the exact opposite.
Jas: I think you are behind the long wave curve. It bottomed in April 2003.
O-Joe
Sebastain -
Different this time? What about the Gulf War?! We started to deploy troops in August 1990 and pulling them out in February 1991 - we had a recession in progress that entire time! Started in July 1990 and ended in March 1991. Looks like a war didnt keep us out of our last consumer led recession....
O-Joe:
your ideas are quite contrary to many on this board, and to some economists, EXCEPT one.
I (and many here have) felt that a strenghtening dollar is highly possible, depending on what happens with the rest of the world's currencies (Euro, Yen, Pound, etc).
It won't be IMO that the dollar is really worth more, but simply that the other currencies fall in value, sot he dollar may improve by comparison.
once the toxic sludge that fills Europe and Britain takes center stage they will fall as well... it's just "contained" to the States thus far...
as for Housing surprising to the upside... that's entirely possible, but only because there may be REALLY low estimates!
O-Joe, Are you retired? Why are you worried about the ebb and flow of equities prices?
"Well, now, you could give me a loan at -2%, as in, pay me money to take it, and Im not going to, because it wont be enough to overcome the capital loss Im expecting."
Are you nuts? Put 10% down on a $ 1 M house. Get a $ 900K mortgage. Collect $18,000/year vs $ 4,000 in a CD. Live there for 20 or 30 years. Sell.
Optimistic Joe | 01.28.08 - 1:53 pm |
So, Joe, I've got $100K in cash to invest. What should I buy, or should I just hold the dollars?
Another low in home sales and the market rallies on the hopes for yet another massive FF rate cut. Futures now priced in between 50 & 75 pts cut @ ~75%. Amazing. The Fed will save equities LOL!
Ahead of curve - sell at what price? Do you not realize how inflated a $1mil home is these days? Im throwing out hypothetical numbers, so that the simple minded can get my point.
Apropos of the slowdown in new construction, a new building in my area just slashed prices by $100,000.
Brownstoner: Condos of the Day: Price Cuts at Forte
AOC - also, you dont really think Im talking about a fixed rate, do you?
Futures now priced in between 50 & 75 pts cut @ ~75%. Amazing. The Fed will save equities LOL!
It would be funnier if the Fed hadn't rescued equities just last week.
I've consistently underestimated the Fed's disregard for inflation, but in IMHO anything more than 25bps will blow their credibility for eternity.
O-Joe -
You've certainly been consistent.
You've been saying the same things for 6+ months.
I've done the exact opposite and done quite well.
I was very much a bull from late 2002 until the end of 2006. I became concerned about the economy in late 06 - early 07 and turned bearish in April/May.
The facts and trends I saw develop changed my mind.
Good luck to you, but like an old mentor of mine used to say, "there's a fine line between being a contrarian and stupid because conventional wisdom is right 90% of the time..."
F.F. - consider it blown.
Doesn't a new home sales decline show the market correcting? I put more weight on Existing Home Sales (equally bad, or worse, I know) but this stat and graph mean nothing to me.
CR and Tanta, good work. I guess there is not much doubt that we are heading towards a housing crash induced recession. At least it feels like one.
Any thoughts about the end game? When can we start looking for a turnaround? 2010? 2015?.
F.F. -
Be shocked if they didnt cut 50bps.
Doesn't a new home sales decline show the market correcting?
Yes, but it takes people receiving paychecks (or cash at 5pm) to build new homes. Falling existing homes sales has different knock-on effects.
--
"Jas: I think you are behind the long wave curve. It bottomed in April 2003."
O-Joe, please don't destroy my reputation. I am always ahead-of-the-curve, i.e., early, sometimes too early.
Longwave is years away from bottoming. Evidence: Long-term USTs have out-performed the S&P 500 for the past ten years! This NEVER could happen if the Longwave had bottomed years ago. Just watch 10-year yield to go below 2% some time during 2009.
Jas
Derek,
New home sales (and thus new home construction) are much more important to growth.
Derek:
"The market" (I'm assuming you mean the housing market) is correcting - downward, and fast. "The market" is dragging other markets, market segments, and economies with it. What we're waiting for is the bottom.
Use any yardstick you want to measure the correction - it's downward and we can't see bottom.
On the other hand, I could be completely wrong.
Stuart,
Your comment that losses may have to be socialized as an only realist fix for the bubble just inflates another bubble in pubic debt. When the Comptroller General states that there are over $50 TRILLION in currently unfunded debt, the answer is not to create more.
YouTube - Glenn Beck - The Real Story, Touching the Third Rail
Some day this debt will end.
Are you nuts? Put 10% down on a $ 1 M house. Get a $ 900K mortgage. Collect $18,000/year vs $ 4,000 in a CD. Live there for 20 or 30 years. Sell.
Geoff, I assume, was referring to a fully-amortizing mortgage, not an - ahem - "interest-only" loan.
You'd still have to make monthly payments. Let's assume a 15-year loan at -2% ... on a $900K balance that's $4,283 a month (vs. $5,792 @ +2%, by comparison). By comparison, a 15-year fixed @ 5% would produce an equivalent payment on a mortgage balance of $540K (thus a home price of $600K).
So refusing to take a -2% loan when the market's at 5% would imply that you believe the home in question is overvalued by more than 40%. I don't think that's such an outrageous assumption for a lot of $1M McMansions in certain locations.
Steve: "New home sales (and thus new home construction) are much more important to growth."
Steve, Existing Home Sales are almost equally important, if not more. They create huge economic activity due to move up, furnishings, modernization, moving, etc., not to mention supporting 3-4M realtors.
Jas
I'm seeing a real bifurcation in the effects of this recession, and the proposed steps to remedy it. The higher GSE limits will make 400-700k houses more affordable in areas where people's incomes can really sustain that (better parts of NY, CA, DC area). Modesto, Cleveland, most of FL are toast. However the effects of massive overbuilding of exactly the wrong product in the face of the demographic shift links the two somewhat. Downtowns can't go up much if aging boomers cant sell their suburban barns. The whole key is consumer spending. If it drops enough, all segments go down. My thought is that even if the top 25% keep up their spending, the middle 50% will have to cut, and that will drop us.
Mook, I live in CA, so that's kind of what Im talking about. My numbers weren't for specific calculating purposes, otherwise I would have put the full info in on the specs. Obviously, as AOC says, if it were a fixed -2% youd pocket 18k a year for 30 years. Nice. But you dont think anyone would give you that loan now, would you? Even in the crazy days of 05 I dont think anything even that stupid was offered. But quite possibly some equivalents of -2% for a few years was easily available. Basically, it's called overappraisal and cash out of the difference. Happened all the time. Still, unless you escape the tax man in foreclosure, it looks like it could have been a pretty stupid bet.
They create huge economic activity due to move up, furnishings, modernization, moving, etc., not to mention supporting 3-4M realtors.
That was sounding pretty good there right up until the end.
I (and many here have) felt that a strenghtening dollar is highly possible, depending on what happens with the rest of the world's currencies (Euro, Yen, Pound, etc).
In a global recession, the USD may rise simply because so much debt is denominated in USD. People will scramble for US dollars simply because they need USD to pay USD denominated debt.
New home sales are better forecasters of the direction of the economy. For investors, these numbers should carry more weight. Thus, to me, at least, new home sales are much more important.
In a global recession, the USD may rise simply because so much debt is denominated in USD. People will scramble for US dollars simply because they need USD to pay USD denominated debt.
Or more simply if all the hot money that left the US in search of higher yields returns home. It's not much different than the Yen carry trade unwinding, except it's the Dollar carry trade.
Jas: Steve, Existing Home Sales are almost equally important, if not more. They create huge economic activity due to move up, furnishings, modernization, moving, etc., not to mention supporting 3-4M realtors.
This is not true. Existing home sales is not close to new home construction/sales in terms of economic growth. See this post from CR for more information.
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MM" "Some day this debt will end."
MM, I started to end some of my posts with "It Is the Debt, Stupid!" for more than ten years.
"This debt will end" when the system collapses. Maybe, you have a better reason, or explanation, for when. If so, please share the how part.
Jas
What kind of rate cut do you think we will get to help correct this several trillion dollar economic/systemic impairment/softlanding?
IMHO, we will get another 1% this week and another 1/2% later as we go to zero. This seems to be a good way to help stocks short term, but then what? Negative rate reductions (below zero) are somewhat difficult to model, but as long as enough money is printed we should be ok, yah?
New or existing, it's all down.
It will, apparently, continue its downward trajectory, and it appears to be gaining momentum and creating shock waves.
We are severely overbuilt.
Prices were severely inflated.
To complicate things, the inflated gains were turned into liquidity (pseudo-wealth), and then into debt (as if by magic) as the value of the hyper-inflated underlying assets dropped.
To make matters even worse, Wall Street "banks" and hustlers securitized the bad debt and seeded it throughout the world economy. We're seeing the harvest of those seeds.
It's all contained.
Longwave is years away from bottoming. Evidence: Long-term USTs have out-performed the S&P 500 for the past ten years! This NEVER could happen if the Longwave had bottomed years ago. Just watch 10-year yield to go below 2% some time during 2009.
Jas
Jas Jain
Jas,
It's too late for the old K-cycle. The last one bottomed in the late 1940s. The 53-56 year period is over. Since 2003, the stock market outperformed Treasuries handsomely. Also, raw material prices bottomed in the 1998-2001 period. IRs bottomed April 2003 and now we're making a higher low to that, followed by another upswing. I think the next significant low to 2003 is already in as of last week.
It's the 1950s all over again.
O-Joe
The higher GSE limits will make 400-700k houses more affordable in areas where people's incomes can really sustain that (better parts of NY, CA, DC area).
Sorry ... I'm sure you mean well, but this statement just makes me laugh.
For decades, loan officers used a standard of 22% of gross pay as a "ceiling" for the mortgage payment one could afford.
It slowly crept up to 25%, then 28% over the years, before all semblance between one and the other went completely out the window during this decade.
Assuming any kind of return to normalcy (i.e. a 28% ceiling), do you know what income level is required to support a 30-year mortgage at 6% for a $417,000 house?
Try $107,148 a year. And that's the bottom end of this new GSE range! Take it to $700K and "prudent" lending standards mean you should be earning $180K a year.
"Help our GSE's support the American Dream of home ownership for those with six-figure incomes!" Why do I suspect that this wouldn't make a great rallying cry for Nancy Pelosi?
The overall cost of Vietnam and Iraq/Afghanistan will be about the same. The analogies and costs are similar in terms of GDP and other measures.
They will both go down in the books as hugely costly wars for the American people that produced short-term economic stimulus (1962-1969 and 2002-2007) followed by years of economic pain in the decade after 1969 and 2007.
Wars don't produce any permanent industry, demand or jobs. They create heavy medical, social welfare and judicial system afermath costs, as a (sure to be Pulitzer) series now running in the NY Times documents.
Wars create false stimulus, much like rebate handouts. They boost the economy in the present while borrowing heavily from the future.
The future starts now. Almost all stimulus of Iraq is gone.
Mook,
I read the Fannie/Freddie guidelines as 28% but I have been hearing 35% being bandied about.
It's all just insane.
It's difficult to really compare the economic stimulus effects between ANY of the US's major wars.
Labor per unit hour of output was higher in 1968, compared to 2008. That means the multiplier effects were different, because spending on people typically has a higher multiplier than spending on capital. Public mood, propensity to lend, reserve requirements, energy imports, have all changed since 1968.
Clearing this up is a subject for an entire paper, and won't be solved either way with a Haloscan comment.
In any case, an 'unnecessary' war is about the stupidest way to add GDP that I can think of.
Building unecessary homes, a distant second.
"This debt will end" when the system collapses. Maybe, you have a better reason, or explanation, for when. If so, please share the how part.
Jas
Jas Jain
It's me again
My explanation is that not every ~54 year long wave cycle there has to be complete debt collapse. Apart from Argentina and maybe Russia, there was hardly any government debt failure. Now's the time to start ammassing more debt again and repeat the cycle from a new beginning. IMO you have to look at the sovereign debt - not the privately held.
O-Joe
Obviously, the -2% interest is silly, but let's play it out. A $900k 30 year mortgage means $ 30K /year in principal. But the negative interest pays you $ 18 k/year, so your out of pocket costs are $ 12K/year. Live there 30 years, the mortgage is paid off. Sell for $ 600k (you said the house is 40% over value at $1 M), walk away with $500k profit after living well on $ 1k/month for 30 years. Seems like a good deal to me.
Yes, this example sounds silly but I use it to counter those who say the Fed is out of ammunition once rates hit 0 %.
I just wanted to try something in regard to housing bubble:
/^s(S[^|].?S|S)s|s*(?:
--
Steve, I do disagree with CR on this and few other aspects of housing. Existing Home Sales were far more stimulative to the economy in this cycle (2002-2007), especially, due to unprecedented modernization based on refi and HELOC, than in previous cycles. Anyway, we can disagree.
ac, what is your opinion on realtors' employment?
Jas
/^s(S[^|].?S|S)s|s*(?, what was that regular expression for?
Doc - don't be a jerk and try to fool the killfile script. Just take your meds.
rich, Edwin Starr said it succinctly:
YouTube -
I don't think there's been much economic stimulus due to the Iraq war, other than a few of the big old-school defense contractors, Halliburton, Blackwater, KBR, Parsons, and a handful of Bush Administration insiders (all of whom appear to fill logistics and support functions). I can't see any positive industrial or transportation impact.
wars are very poor economic stimulators vs dollars spent. Domestic infrastructure is far more efficient. My understanding is that Halliburton had a very poor ROC on their Iraq contracts. Given how good the oil drilling business has been over the last 5 years, they would have been better off staying away from defense and deploying all of their capital drilling for Texas Tea
ac, what is your opinion on realtors' employment?
I was just saying all those "economic benefits" sounded constructive to me until I got to the part about the 3-4 million Realtor jobs.
Safe Haven | The Crash of the Bank of United States
Sol,
I was in Oceanside, Vista, San Marcos a decade ago when my cousin, Susan Eubanks', trial was held. I testified during the penalty phase asking the jury to spare her life. It sadly did not and Susan is on California death row in Chowchilla along with about 15 other women. The San Marcos fire department burned the rented home where she and her four deceased boys had lived. A sad case for our family and your community. Once you have endured hard times like this an economic crisis just isn't as large of a concern, however I am worred no doubt about that.
Wars may be a poor stimulus vs dollars spent, but they are still a stimulus and lead the military to be drain on the workforce. When we start pulling troops out of Iraq there will be less stimulus and more unemployed.
Cal - I couldn't agree more. We're just above 22% DTI on our home now, and with two commutes, one child, and another on the way I honestly don't know how we could afford to spend another 6% of our gross on a mortgage, never mind 13%.
Wait - actually I do. Our contributions to our 401s, Roths, 529s, etc. come to about 16% of our gross, so all we'd have to do is eliminate those and we could make a 35% DTI payment, easily! Why didn't we think of that sooner? rolls eyes
Seb and O-Joe,
Your thinking and your models fail to account for the primary mover in today's market: a credit bubble of historic portions.
It's hard to take you seriously because you have never once acknowledged the importance of our recent horrific loan standards and the widespread underpricing of risk.
Seb and O-Joe,
Your thinking and your models fail to account for the primary mover in today's market: a credit bubble of historic portions.
It's hard to take you seriously because you have never once acknowledged the importance of our recent horrific loan standards and the widespread underpricing of risk.
a san Francisco-based bank loved by Warren Buffet layed of 200 IT folks today, the rumor is...
/^s(S[^|].?S|S)s|s*(?:
Definitely not a valid expression. Try again. I love regular expressions. True perls of wisdom.
AC,
"Or more simply if all the hot money that left the US in search of higher yields returns home. It's not much different than the Yen carry trade unwinding, except it's the Dollar carry trade."
There is the slight problem that the U.S. has still an ~800 billion current account deficit that might be very difficult to overcome with slowing exports. In addition in a slowing world economy, there will be much more pressure on the surplus countries to spend their money at home.
Even if the dollar were to stabilize in the short term, this would immediately reduce the dollar purchases by the surplus FCBs as they would not need to support their currencies anymore igniting the process over again.
Until the CA is reasonably in balance (~2%) it is an excellent bet that the dollar fall will continue. Note that the strong dollar in the nineties was only possible because of the promise of superior investment returns in the U.S. I don't see anything on the horizon that would support such a view.
Meltdown Man, I don't like that outcome I see, but I am in full agreement with you and that is why I'm almost totally in Gold. There's only one way to get out of this mess when the National tab is that high. Monetize Debt. Dollar = RIP over the coming years.
Definitely not a valid expression. Try again. I love regular expressions. True perls of wisdom.
Sometimes regular expressions in a form post aren't such a good thing.
Treasury Assistant Sec. for Financial Markets Ryan: Remarks at the World Research Group Liquidity:
HP-774: Treasury Assistant Secretary for Financial MarketsAnthony W. RyanRemarks at the World Research Group Liquidity
I find it interesting that for this chart, the blue column indicating "recession" is 4 quarters in duration. Is that a prediction or simply an arbitrary length of time? I don't recall any prior discussion from CR on how long we can expect to be in the blue.
Soldiers for the next war will come from the ranks of the unemployed and high-school kids trying to find a way to pay for college.
FT - IMF head in shock fiscal warning (Naked Cap wrote about this and another article by Larry Summers)
FT.com / In depth - IMF head in shock fiscal warning
naked capitalism
Wars generate employment in many sectors.
--
ac: "I was just saying all those "economic benefits" sounded constructive to me until I got to the part about the 3-4 million Realtor jobs."
That is a non-answer. Am I wrong? Or, how much employment and incomes realtors/agents receive is not material? I just wanted to be corrected if I have a wrong view, or at least get some argument as to why I am wrong.
Jas
FFDIC - Summers is resorting to the last refuge of scoundrels. It's sort of the false patriotism argument...an unswerving belief that this financial system is not corrupt, that the debts are not bad, that this is a liquidity and fear issue, rather than a solvency issue at heart. These arguments are necessarily made without substance, and with great historical attachment, but they are devoid of truth. His stance is once he cannot avoid, as it is the last leg left standing. The question is, how long before it too snaps?
That is a non-answer. Am I wrong? Or, how much employment and incomes realtors/agents receive is not material? I just wanted to be corrected if I have a wrong view, or at least get some argument as to why I am wrong.
It was just a joke about Realtors... not saying you're wrong.
Here's the situation in the NYC-Metro
area:
New York Fed Releases Zip Code Level Data on Nonprime Mortgages - Federal Reserve Bank of New York
One unique impact of the Iraq war is to permanently drive up the future cost of uniformed mililtary labor and recruiting by many percent.
The National Guard and Reserve produced low-cost soldiers for a long time, and now Bush has squandered that resource for at least a generation. A lot of the war cost has been transferred to the families and employees of Guard and Reserve members.
CR, is there any co-relation between the % drop and the type/duration of the recession. In other words, if you were to plot this as a year over year change, would the steepness of the falling line give any indication of the nature of the forthcoming recession ?
Regards.
Geoff - Thanks man. I haven't had a chance to read Summers today. Been dicking with First Choice Power about going on balanced billing with my 800 FICO and paid off home - denied due to too many late payments. Need to pay the bills on time and read CR less!
--
Thanks, ac. I am little slow on jokes, sometimes.
BTW, locally it is really bad for realt-whores. I have no idea how most of them are paying their bills. I know that many were doing refis and HELOC last year. Maybe, they are just waiting for the spring bounce in business. last year there was no spring bounce here.
Jas
As far as wars being stimulative, I think part of that depends on where the war happens. World War II decimated the industrial base of most of our economic competitors, all of whom were wealthy enough to buy our goods. So our factories were able to pretty quickly transfer from defense goods to export goods. Indeed the globabl market and limited competition was part of how American blue collar workers were so well paid in the postwar years. In Vietnam and Iraq that wasn't/isn't the case so much.
--
Vikram,
In case it helps, we are tracking the worst, or even worse than that, the 1973-75 decline. That 1974 recession was a whopper. This recession is going to be far worse. I am sure that the high oil price part is also in play.
My forecast is for the depression to begin during 2008Q4-2009Q1.
Jas
Stuart-
We both see this ending the same way. I've struggled trying to decide if it will be through currency debasement or a deflationary spiral. I too, am in gold, but I hope that it will support itself in deflation. I've tried to tell people I care about what is coming in the not too distant future...they either don't get it or won't face up to it.
If that article is any indication, we are in deeper trouble than I thought if Summers ends up in a Democratic administration. This is not an outlyer, every time he gives a speech he demonstrates how far behind the curve he is. No objectivity, no competence, no shame.
Meltdown man - while deflation is possible, there are many vested interests who would much rather see inflation. The US government is one of them, being a huge debtor. Any homewoner with a mortgage is another. Since massive deflation would lead to economic collapse, those with a vested interest in inflation vs. deflation includes almost all foreign governments.
I can't see who would ever support deflationary policies. Some deflation may be unavoidable, but if interest rates have to go to zero, then that is what will happen.
Also - if the US currency does take another nosedive, that is going to ultimately be inflationary for the US market.
What is the big argument for deflation? - if the whole thing unwinds laissez-faire with no government intervention?
I would still argue existing home sales are a better indicators of the directior of the real estate market. Builders will physically stop building homes forcing this number down. Existings homes are there pretty much forever so tracking that inventory seems more important too me.
PS - Existing home sales are in equally bad meltdown mode I just think new home sales in general are a poor statistic to analyze in declining real estate market.
My forecast is for the depression to begin during 2008Q4-2009Q1.
Jas
Jas Jain
Jas,
That's again way behind the curve. Depressions could have only occurred in the 1980s - early 2000s time frame. Time's up.
But they will return in the early 2050s. I think my model even helps to predict the severity of the downswings in a given Kondratiev cycle. Incidentally, the downswing in the (IMO) past cycle would be very weak; the one in the 2050s will be sharper, but also short-lived.
O-Joe
"Incidentally, the downswing in the (IMO) past cycle would be very weak; the one in the 2050s will be sharper, but also short-lived."
Interesting, but likely incorrect. MY model has the next depression beginning on March 6th 2063. Until that point, the S&P 500 will experience exactly 8.93% growth annually.
I could be wrong, but I doubt it. I have a spreadsheet and I'm standing by it.