I am packing and trying to get my house on the market in the next 10 days! The market here has slowed but not dropped (central texas) and I am both selling and then buying in a solid area not the edge suburbs. Prices here are also still roughly in line in with income and our punishing property taxes have protected us from the worst of the current bubble. I need to get into an area with a better high school and I am trying to move before prices really fall here and before interest rates start to rise -- I am also hearing that underwriting standards will tighten June 1st. Wish me luck!
Lubricated prices followed by several years of public disinterest. Sounds about right.
The people who will still get hurt are the ones who "invest" in homes in 2010 and think the prices will start to go up. The long flat price lull represents a period of no appreciation and negative yields due to holding costs. Four or five years of negative yields really screw up the return on investment.
Well done, CR. The graphs are very insightful. It will be interesting to look back in a few years to see how this all played out. What is especially interesting in the steep slope the Case-Shiller index.
Question: As a rule of thumb (so I'm told), the market price of a home reflects 120x rental prices. Obviously this isn't true in much of California at this time, but is it historically? If so, is this then a potential indicator of where prices will fall to?
CR,
The graph says it has been adjusted for inflation. Do you know the inflation numbers they are using? If it is tracking the CPI or anything the government has put out, I think we can all agree that is a gross misrepresentation of the true level of inflation. If inflation is drastically higher than what case-shiller is using, I think the recover will be pushed out even farther as it takes time for wages to catch up.
My mother bought her house in 1990, at the peak of the last real estate boom, for $265,000. Today, even with the slight dip in prices in NY, it is worth about $900,000.
According to inflationcalculator, $265,000 in 1990 is equivalent to $432,000 today.
Either the present bubble is twice as big as the last (late 1980's) bubble or the government CPI figures are understated. Probably both.
CR- Your analysis seems obvious as I am sure the world will agree in a few years. Interestingly yours is the first I've seen in the blogosphere to extrapolate Professor Shiller's finding that house prices don't increase significantly in real terms over time but oscillate around a fixed real value. The classic study, in the sense of the longest time series was of a group of Amsterdam houses that over 400 years had increased in real terms by 1/2 of 1 percent a year.
CR - Can you put up a CFC-BAC thread where those familiar with buy-out finance might post their thoughts on where that transaction is headed. IMO it is a big hornet's nest that appears to be ready to blow, but I have no basis other than reading between the line RE the latest posturing by BAC given the CFC downgrades, to make that assumption.
Seems to me fencing off 1/2 of CFC's debt and leaving it to fail sounds like a dead end which might encouage BAC to bail. I mean, if abandoning debt were that easy to do why wouldn't CFC just do it?
well, if it takes 15 months or so for a financial institution to dispose of reo, and you assume the foreclosure wave is underway, but, that we're closer to the beginning than to the end, you get into 2010 before those transactions begin to peter out and cease to persistently drive the market (down).
It'll be interesting to see how the bust shakes out this time around. In the mid-1990's, rental rates in downtown LA dropped below the 1980's rates.
I don't see how the condos now turned rentals soon to come on the market are going to sustain high rates. Luxury 'lofts' have only so much market appeal--especially in an area with no infrastructure for families with children.
Any thoughts on a possible dead cat bounce of sorts.
I mean the decent this time is rapid enough that you may overshoot, say around month 40, to the down side, and then get a short move up again due to the success of investors inspiring others. It seems that a slow decent tends to take the air out of investors sails overtime, but a rapid decent and overshoot allows a bottom to occur within memory of the last bubble, thereby causing another short one, say a move up to 125-150 around month 60 or so and then another slow grind down....forming sort of a lopsided W,
Good article, but be careful of drawing straight lines based on historical data. A couple of things are different this time.
1.1980's bubble in LA was punctured by demise of defense contractors. This his SoCal really hard.
2.Recovery in LA was helped by the development of new mortgage products.
3.Current housing crisis is largely financial rather than economic. We went into this downturn with good employment and despite all the sturm and drang employment is still solid. Very rare for housing downturns to occur in this environment.
4.We may not be near the end of this mess at all. See this link for discussion of Option ARM overhang-http://blog.metro-real-estate.com/?p=304.
5.Recovery is going to take place within a very constrained financing environment. Fewer qualified borrowers will be available to the market.
6.Baby boomers are going to be a diminishing source of demand for housing.
Good recap of points CR has made repeatedly here -- which is why I find CR's "optimism" regarding the severity of this general downturn somewhat curious!
IMHO housing will suffer it's worst price drops in the next couple years, followed by another decade of slow decline. If you want a house for a house and not an investment, 2010 will probably be as good as time as any to buy. By then I expect housing prices will reflect real incomes.
I have done precisely ONE regular institutional financed loan since August 9th when the pipeline closed.
I have done seller financed stuff; also all cash, and commercial closings, and I have some hard equity financed refis coming up. The institutional lenders may as well not exist in Miami, except to sell REOs.
Can somebody tell me where to check Shiller for the Miami graph cliff diving?
Right...also goint to be tough to get mortgage rates lower...that game is just about over.
Expect them to go higher -- much higher.
Perhaps it will come to a CASH only situation.
That'll be hard when nobody has any cash! There's obviously going to be no equity to transfer, so the move-up market is on life support and fading fast.
Actually tho it sez that we are nowhere near the bottom if you draw a straight line from 2000, you are not too far below where Miami is now.
Factor in some overshoot and maybe
there actually IS a bottom in sight.
My broker buddy who is selling cruises, but still has his license sez he does see at little bit of hope on the horizon. That hope may be dashed if the institutional lenders don't start lending again.
Maybe they will be forced to if only to finance their REO sales.
The overbuilt condo towers are another thing entirely.
"There's obviously going to be no equity to transfer, so the move-up market is on life support and fading fast."
The move-up market will have to be priced low enough, so people are tempted and can be financed. As a result, the value buy should be in moved-up houses for those who have the ability to close/buy them.
If the mortgage market (and banking system) hadn't been nationalized, we'd be a lot farther along. Thanks BushCo for keeping house prices unaffordable!
OK, so I'm looking at the second graph. I've looked at a lot of graphs and this one appears to show the same ramp-up rate, but the post-peak ramp-down is much steeper for the Composite 20 (and from graph 1, the LA ramp-down is even steeper). This, to me, indicates a strong possibility of an overshoot, well past "normal" appreciation.
As I recall from my Keynesian days, it is quite possible for the economy to stabilize at a high unemployment rate, so I'm wondering if it is possible for the housing market (assuming the labor market acts like a market) to stabilize at a much lower level.
The market needs to collapse. The faster and farther we fall, the sooner we can recover. Problem now is we face a future akin to Japan's "lost decade", only worse.
While I greatly admire CR's intellectual exercise in comparison, I have to say that there's a cartload of wild variables in the instant situation that has to be entirely ignored to make any such comparison at all.
To think that such a gentle and gradual walk down the slope as occurred previously is what is in store through the mine field of Alt-A resets in front of us, alone, seems fantastically optimistic.
I won't even go into the frantic efforts right now by the world central banks to unclog interbank lending, or just how big the explosion of CDSs is likely to be when that finally blows.
Is it just me, or does it seem like there is an impending collapse of the banking system? By that I mean that a lot of small to mid-sized banks will go out of business. The large banks won't, of course, because they own too many lawmakers. They "can't" fail.
Moderately OT, but wouldn't that make C a good rolling options play? Every time bad news comes out, they dip. When they do, buy some calls, then when the government murmurs something encouraging and the stock pops, sell those same calls? Does this sound right or have I gone totally to the dark side?
Let us note that the average person in Japan is doing a hell of alot better than an average person in most other countries....in spite of their bubble and bust.
Is it just me, or does it seem like there is an impending collapse of the banking system? By that I mean that a lot of small to mid-sized banks will go out of business.
It's not just you. The banking system is hideously exposed to RE, especially CRE. As I've noted previously, greater than that of Texas banks to oil prior to that bust (which took them all down).
FFDIC has also noted that the FDIC is in no way prepared to deal with it. Comforting, no?
We're not nearly in as good as shape as the Japanese were going into their bust. Their's will look like an absolute day in the park -- mildly overcast -- compared to the destruction that'll be wrought here. Nonetheless, I would agree with the "bring it on" sentiment.
I think we will see a small recovery in the housing market. As soon as everyone thinks it's safe and jumps in then the Option Arm reset wave will hit like a nuke..
In the late 1980s just before their big bust, Japanese markets were more inflated than ours has been. The Japanese lending practices were more liberal than ours have been (for example, banks would lend 125% ltv on re purchases). Japan's demographic outlook was (and remains) far less favorable than ours.
They initially met their demon of decline with severely restrictive policies which set in motion a deflationary spiral. By the time they loosened up their policies the death spiral was inescapable. They refused to write off bad balances and failed to clear the market for a healthy recovery.
We experienced a similar 1980s bubble and faced a potentially similar downturn at that same time. However, we followed much different policies and averted what could easily have been nearly as bad as what Japan experienced.
Instead, our accomodating monetary policy and the Resolution Trust Corp. process mitigated the decline but greatly prolonged the pain. This is a major reason for the 1990s RE decline being double the length of the normal decline. As RE cycles go it was an aberation and makes a poor standard for comparison.
If there ever was a chance for a repeat of the Great Depression or a lost decade in the US it was during the 1990s. We dodged that bullet. The risk is lower today.
The starting point for the Red Line - the current curve - already incorporates much of the run-up from the current boom. In addition to being steeper, this boom was longer.
Would be interesting to see the current LA line superimposed on this graph.
There are no soft landings in real estate cycles. And Los Angeles is a classic cyclical market.
Looking at the chart for LA, and adjusting for changes in incomes, interest rates and home sizes, I would expect the bottom to be reached at around 150 to 170 by 2010.
"As a result, the value buy should be in moved-up houses for those who have the ability to close/buy them."
I'm not telling anybody this, for fear of it catching on (or being wrong)... but I decided to sell my house last month to extract the equity gain, and then rent for 1-2 years with the hope of snapping up a good move-up buy when the market gets much worse. I'll have $500k in cash, good credit, and a no-contingent offer.
Drop, prices, drop!
Now I just have to figure out a place to park the cash. Seriously considering c-notes under my bed. Or glod, but only if it hits ~650. Open to ideas.
"I think we will see a small recovery in the housing market."
The problem is the lock-down in financing options and high jumbo fixed rates. There may be a will, but not a way. Perhaps in 2009, some enterprising bank will bring back neg-am? But I agree - then Option Arms will hit, and blammo!
Now I just have to figure out a place to park the cash. Seriously considering c-notes under my bed. Or glod, but only if it hits ~650. Open to ideas.
go do everything you've always dreamt about doing, but have'nt, due to your job, mortgage, family. Take them, do it now, just in case the Doomers are right.
A major difference between the early '90s LA bust situation and the present is that back then the ownership rate among young people was much lower, so there was a pool of potential future buyers. During the bubble the ownership rate among young people reached a level previously seen only at the end of the late-70s bubble (and back then the overall ownership rate was somewhat lower).
Also, though perhaps there was a similar glut of supply on the market in the '90s, I rather doubt it.
One of the engines driving the bubble was the rise in ownership among young people who in earlier times would never have though of buying. Without those first-time buyers coming in at the low end, there will be no way for the current owners to move up.
How many move-up buyers can move up without selling their existing home? Not very many, I'd wager.
But a lot of the supply on the market is of high-end homes that can't be sold except to people moving up (or to high-six-figure income realtors or mortgage brokers, who have become rather thin on the ground).
Ok, you aren't perfect, but what about everybody else. As I said, I basically don't read the newspapers any more, except for the real estate section and the funnies. And if I, the compulsive reader, and information junky don't read the papers any more, you haven't got much hope.
Hummm, so my straight line should probably start before 2000 because things were slightly bubblicious even then?
Miami has come down about 22%. I think that if a prospective buyer finds something that is 1/3rd to 40% off the peak (assuming you can figure out what peak pricing was for the particular house) you will be ok, if you plan to stay 3-5 years.
Not the towers. The brokers are saying 50% off peak; unsold units don't pay maintenance; many of those towers are blacklisted by the banks due to fraud. I think that I would recommend buying only if it were 70-80% off peak. I'm serious. And, you had a number of friends and relatives buying at the same time, so you knew that somebody else would be living there. If you could buy 80% off peak, you could pay cash. It would be risky, but worth the risk.
Hummers...ha, I saw an Earth Day car ad for some mega dealer on TV a couple of weeks ago. They featured the Prius and similar vehicles at the beginning of the ad, but then they went on to say all the cars were for sale. At the end they mentioned Hummers.
Today, I was at REI (camping store). Someone had a Hybrid Chevy Tahoe. What's the alternative fuel, nuclear? They don't make batteries that big, do they?
CA prices are falling much faster than you'd expect from the bubble size. Areas have seen 5-6% declines in a single month, which is almost as bad as a entire year in the 90's decline. There's a panic environment in some areas which is unprecedented in CA real estate. I think prices in most areas will continue plummeting rapidly until they reach rent equivalence, and at current rates that's less than a year off. After that prices may level off, or continue to slide but slowly, depending on the macroeconomic environment.
We need a blog that calculates how much each market is PAYING buyers to STAY OUT. This chart goes a bit towards putting a number on LA's stipend, but I'd like to see it in terms of low, mid and high value properties. Eventually that stipend will shrink to an insignificant level but not until at least the option ARM crash is complete.
Personally, I am starting to think that 1996 price levels are today's lowball offer and next year's bubble price -- we're heading for the 80's lows.
Instead, our accomodating monetary policy and the Resolution Trust Corp. process mitigated the decline but greatly prolonged the pain. This is a major reason for the 1990s RE decline being double the length of the normal decline. As RE cycles go it was an aberation and makes a poor standard for comparison.
Zephr, do you have any data to back up your assertion that the 1990s U.S. real estate decline was abnormally long? The data seems to disagree with you. I see 7 years peak to trough for the previous bubble in England. Choose the middle series, UK house prices adjusted for inflation:
The CA market has split into schisms. There's a bunch who are and know they are screwed. There's those who are screwed but don't know it yet. There's an amazingly large number who are mere spectators thanks to the speed of run up and decline and of course Prop 13 protecting them from the secondary impacts of other peoples' folly. Finally, there's the group of 'us' who made the deliberate choices in anticipation. I sure ain't gonna be lured by rent equivalence. Not safe enough. I don't trust Prop 13 or California jobs and worse. The LAO (Legislative Analyst Office) is on record as saying the home mortgage interest deduction is a tax loophole. I personally blame that statement for a lot of the recent price drop.
Personally, I am starting to think that 1996 price levels are today's lowball offer and next year's bubble price -- we're heading for the 80's lows.
No Frog Speak
Let's take a breath. Not even with inflation adjustments are generalized 1996 prices likely. We may see prices approach inflation adjusted per square foot at the lowest.
Zephr, do you have any data to back up your assertion that the 1990s U.S. real estate decline was abnormally long? The data seems to disagree with you. I see 7 years peak to trough for the previous bubble in England. Choose the middle series, UK house prices adjusted for inflation:
Also, didn't the decline in Japan last over 15 years?
kis, I think the 300 day moving average on gold is ~$750. From what I read it usually tends to bounce off of there. When it gets to that range I expect to pick up some more. $650 could be a bad sign for gold.
Nobody is talking about the 3 L's: location, location, location. Desirable neighborhoods are keeping their values, while the values of properties in the exurbs are dropping like stones. Just take a look at the foreclosure data for DC and NYC.
The downturn of the 1990s in England is the same cycle period as the downturn of the 1990s in the US and Japan.
Each of the earlier downturns in the US (during the 1960s, 1970s, and 1980s) were about three years long. Even during the Great Depression of the 1930s the decline was only about four years - but very severe, with a long slow recovery.
I think the US market during the 1990s would have been more like the Great Depression pattern if the government had not intervened. They took inventory off the market and then released it slowly. I believe that this softened the initial collapse but also prolonged the decline as the the inventory was slowly released.
I was looking at the C-S numbers for New York. The "lost decade" of 1987 - 1997 gives me hope, but the decline now does not seem to be as steep as the areas in the West.
Anyone have more insight into the movement we can expect in New York, especially the outer boroughs? (I hear Queens may already be feeling some pain.)
Rob Dawg, I calculated that if San Diego reach 1997 real prices in 2012, after inflation they will be 2000 nominal prices. In San Diego we are already back at early 2004 nominal prices. Whether you are right or wrong, it will be an interesting trip getting there.
People tried to explain theisboom with rationalizations like "America is growing steadily", "Boomers want to move here" etc. They will equally try to explain the bust, the unavoidable exhausting of the boom, with "Stopping and reversing immigration pushed prices down", "Boomers must sell from 2011 on net" etc. When "everybody" understands that boomers will push prices down, the bottom is near.
Zephyr, what are you smoking? The risk these days is so much higher it won't even fit on the same chart.
Not even with inflation adjustments are generalized 1996 prices likely.
Dunno, Rob... I think 1996 is the best we can hope for.
The key for me still comes down to equity; by the time prices retreat to 2002 levels there won't be any. No equity means no move-up market, no prices higher than real incomes can directly support. That removes the pillar that has held CA prices at higher than average income multiples.
Nobody is talking about the 3 L's: location, location, location. Desirable neighborhoods are keeping their values, while the values of properties in the exurbs are dropping like stones. Just take a look at the foreclosure data for DC and NYC...
Manhattan and the District are holding up well. The outer suburbs - not so well.
That's the typical pattern.
Values in newly built and outlying areas plummet while more central areas hold their value.
Then the cheaper housing on the periphery begins to draw away more and more buyers from the "desirable" areas ultimately bringing their values down too.
What I have been "smoking" is 35 years of real-time analysis of the RE markets, and 28 years of investing in real estate with very successful market timing.
I remember what it was like during each of the downturns. And during each prior cycle I remember people like you saying that things were going to be like a repeat of the great depression. But it did not happen.
Now you think THIS one will be the big one. It is possible, but it does not look that way to me.
The 90s housing bubble was not accompanied by a sustained 100% increase in the price of gasoline. Real change in disposable income is critical, and not only has disposable income not kept up with housing prices, it is now falling markedly due to diversion of income towards energy costs and the knock-on effects in food and prices of other goods and services.
Lots of folks are focused on the effects of eliminating kamikaze loan products and application of traditional lending standards once again...I haven't heard mention of the effects of potentially having to lower allowable DTI ratios due to the basic changes in distribution of disposable income driven by energy and food inflation out of proportion with CPI.
Anyone have more insight into the movement we can expect in New York, especially the outer boroughs? (I hear Queens may already be feeling some pain.)
There are four concentric like rings to the NYC metro. There's Manhattan in the middle. Then, there's the rest of NYC. Then, there's the near-in burbs, which I define as those where you can commute by rapid transit (maybe with a short car ride to the train) in about an hour or less. Then, there's the exurbs where you have longer commutes, mostly by car.
So far, the re market has been declining from the outter rings in. The exurbs have fallen the most, Manhattan the least.
But that will now start to shift as Wall Street layoffs increase while city services decline and city taxes increase.
Here's a rough rule of thumb for the comparable cost for a family of four:
Manhattan = X
Boroughs = 80-90% of X
Near suburbs = 65-75% of X
Exurbs = 60-70% of X
As the recession squeezes families in NY, they move out in search of cheaper living. But they'll probably be moving to either the boroughs or near burbs on good mass transit lines.
I'd say exurb home prices are down about 15-20% now; near suburbs about 5-15%. Those will probably decline at least another 10%.
But I can see Manhattan dropping at least 25% from here.
The best news for the whole metro in the Peak Oil era is the best mass transit in the U.S. It's not cheap. But it beats paying a $30 toll soon to cross the GW Bridge.
". . .the Federal Reserve's new willingness to absorb any sort of crap collateral in exchange for massive cheap loans to insolvent companies and institutions. The Fed has, in effect, made itself the world's largest financial shit-magnet. . ."
"The increased velocity of non-performing mortgages and deadbeat credit card accounts is one thing that can't be hidden or escaped. America will feel and see very vividly when the repossession teams rush families from their homes, when the pickup truck is taken away . . ."
"If the bankers and treasury officials collude to prop up one more failing big bank a la Bear Stearns, the political fallout for Wall Street could be lethal."
Studying RE in isolation it might look that way, but this isn't your typical RE cycle. Hell, RE isn't even the disease, it's just the largest symptom of a much greater problem -- an international credit/debt bubble.
The axiom "all real estate is local" used to rule the day. No more.
Dunno, Rob... I think 1996 is the best we can hope for.
Tough crowd. 1996 in SoCal had REOs sitting at pre-Carter prices. We'd have to have another Carter.... oh nevermind.
I'm entertaining an interesting wrinkle. The 80s 90s vintage construction isn't worth 'dozing. I can't turn the air pressure up enough to drive a nail in my 1961 2x4s. I can't get staples to stick in my 2005 construction. I sense a revolution in housing manufacture as a form of substitution that will gut the McStucco market down to land/infrastructure value.
What good is Manhattan's mass transit if the skyscrapers are uninhabitable? Natural Gas is just a different form of petroleum, and it's days are numbered as well.
As the recession squeezes families in NY, they move out in search of cheaper living. But they'll probably be moving to either the boroughs or near burbs on good mass transit lines.
tj & the bear writes:
What good is Manhattan's mass transit if the skyscrapers are uninhabitable? Natural Gas is just a different form of petroleum, and it's days are numbered as well.
For reasons never adequately explained NYC metro claims 1/3rd less energy intensity per capita of any metro in the US. If energy becomes an issue expect urban planners to push the model.
For years my grandfather built some of the finest custom homes in the Northwest. I've yet to see anything like that quality anywhere since, and I was seeing his work decades after the fact.
Yes, tj, it is all connected. And the globalization of economies and financial markets has been increasing rapidly for decades. The direct and indirect effects of these changes do affect local markets.
But even with this reality, real estate is still very local. One need only compare Manhattan to Little Rock to see that.
This boom (and bust) didn't originate locally, though, and was not tied to any local fundamentals. Sure, location's always an issue, but this time it had to do more with the effect than the cause.
OT but interesting. UBS to Layoff 8,000.
This is the sort of news that impacts RE in Manhattan.
May 5 (Bloomberg) -- UBS AG may cut as many as 8,000 jobs as it grapples with the biggest credit writedowns of any European bank and a 12 billion-franc ($11.4 billion) first-quarter loss.
I think rising energy prices will lead to greater use of high rise living and office space. This is due to the cost impact on commuting and the better heat/cooling efficiency of greater density.
The market needs to collapse. The faster and farther we fall, the sooner we can recover. Problem now is we face a future akin to Japan's "lost decade", only worse.
tj & the bear | 05.04.08 - 6:32 pm | #
mock turtle agres but:
not so fast
first the current ruling junta needs to get out of town.
so the fallout can be blamed on the new junta
thats the plan...kicking the can down the road
i guarantee that next year you will hear blame fixed against the current administration...who ever it is...for f ups that were a decade in the making.
tj, The recent booms were very much driven by local factors at first. Then irrational exhuberence came into play (as it always does) and pushed prices to silly levels. This happened to greatly differing amounts in different local markets - even with the same national and global liquidity conditions. Local effects explain why some places (like Las Vegas) had much higher price increases than others. ...and why some will have much more pain than others.
Hey, they're politicians. They'll blame everyone else while doing everything in their power to avoid the inevitable. Instead of mitigating the circumstances they'll aggravate them -- count on it.
"If there ever was a chance for a repeat of the Great Depression or a lost decade in the US it was during the 1990s. We dodged that bullet. The risk is lower today."
Zephyr | Homepage | 05.04.08 - 7:28 pm | #
based on what trends or data???
every risk factor i can think of..that posed any risk at all 10 years ago is a far greater risk today. no?
tj, the efficiency of higher density has to do with the ratio of surface area to mass. The larger the object the less surface area relative to mass, and the slower the energy loss.
I can't turn the air pressure up enough to drive a nail in my 1961 2x4s.
Damn straight. I think that old wood is harder than the new box nails. I've stripped the heads off of screws going into that stuff (though with the crappy quality control, that's not saying much.)
The larger the object the less surface area relative to mass, and the slower the energy loss.
Something has to generate that energy you want to retain, though. You can't exactly burn wood in a skyscraper, and a lack of surface area becomes a huge negative when you're talking solar.
mock turtle, 1,200 banks and S&Ls went bust in the early stages of the last last cycle. Only a few have done so in this cycle. It was so bad that the S&L deposit insurance corp went insolvent BEFORE the price cycle peaked! In addition builders and developers also went bust left and right. More so than this time. Of course, there is more pain left in this cycle, but the pain in the last cycle started stronger and much earlier than this time. This cycle could get just as bad - but (aside from subprime) it is way behind schedule for that.
tj, It is true that you must have some energy to heat those high density buildings. But it takes more energy per sq foot to heat numerous smaller units. So enegy efficiency is increased with higher density.
Higher energy costs will also increase the incentive for people to move to milder climates. This has already been happening and is forecast to continue. The northeast is expected to have minimal population growth in the next decade (about 1/10th of the national average).
Each of the earlier downturns in the US (during the 1960s, 1970s, and 1980s) were about three years long. Even during the Great Depression of the 1930s the decline was only about four years - but very severe, with a long slow recovery.
while we are talking bout the S and L crisis:...here's a little history worth remembering from wikipedia
Silverado Savings and Loan
Silverado Savings and Loan collapsed in 1988, costing taxpayers $1.6 billion. Neil Bush, son of then Vice President of the United States George H. W. Bush, was Director of Silverado at the time. Neil was accused of giving himself a loan from Silverado, but he denied all wrongdoing. [2]
The US Office of Thrift Supervision investigated Silverado's failure and determined that Bush had engaged in numerous "breaches of his fiduciary duties involving multiple conflicts of interest." Although Bush was not indicted on criminal charges, a civil action was brought against him and the other Silverado directors by the Federal Deposit Insurance Corporation; it was eventually settled out of court, with Bush paying $50,000 as part of the settlement, as reported in the Washington Post [12].
As a director of a failing thrift, Bush voted to approve $100 million in what were ultimately bad loans to two of his business partners. And in voting for the loans, he failed to inform fellow board members at Silverado Savings & Loan that the loan applicants were his business partners.[citation needed]
Silverado's collapse cost taxpayers $1.3 billion.
Neil Bush paid a $50,000 fine and was banned from banking activities for his role in taking down Silverado, which cost taxpayers $1.3 billion. A Resolution Trust Corporation Suit against Bush and other officers of Silverado was settled in 1991 for $26.5 million.
A Republican fundraiser set up a fund to help defer costs Neil Bush incurred in his S&L dealings.
The current mess has spread to have worldwide impact. Worldwide like the impact from the Russian bond crisis, or the Asian financial crisis, or the Latin American financial crisis...
The impact during the 1990s from the 1980s bubble burst was also worldwide...
You believe that because things haven't yet reached the depths of the S&L crisis that we're better off. OTOH, I'm fully expecting a banking crisis that'll make the S&L fiasco look penny-ante by comparison. One of the hallmarks of the current downturn is the odd order in which events are unfolding (e.g., job losses following bust, not preceding).
Zephyr
my knowlege about these things is second and third hand...i'm not expert...
but speaking superficially it appears the leverage involved this time is far greater.
this problem is compounded by the complexity of the debt instruments that have been invented and marketed in ways, i am told that not even the the CEOs and top executive officers of the IBs fully understand.
finally the credit default swaps,( possible the most dangerous of the derrivatives), that are floating around somewhere out there are nothing more than bets taken on outcomes over which the counterparties don't necessarily have what would called an insurable interest, yet they sell these "policies", as if they did...
and the policies and premiums are sold, re packaged and sold again without a clear chain of possession.
it is a mess of unprecidented proportions. i guess we are seriously screwed.
that's why Big Ben bailed out Bear S...didn't want to open up Pandora's box, for fear of what the world would find is held inside...but we know cause we saw the look on his face when he peeked inside.
First of all I am talking about actual market price movements - not adjusted prices using someone's best guess at the inflation factor. Take a close look at the Shiller chart. Do you really think that housing prices declined during the frothy roaring 1920s, and then rose during most of the great depression? Or declined during the robust economy of the 1960s?
There is serious trouble in the price adjustments used for that chart. The raw actual market data reflects a much different picture - one that matches with market conditions. I believe Shiller has overstated inflation in the past and hit the recent history harder, suppressing the older year values and making the recent runup look more extreme. It is good marketing on his part.
Tom
I absolutely agree. The option arms look to be around the same total $ as sub prime, but losses will be far greater - IMO every single arm will lose a lot for the mtg holder - and the grand finale doesn't come until spring 2012, so final foreclosures are at year end or early 2013. These foreclosures will put huge downward pressure on prices (both housing and bank stocks) until finally cleared... even if prices are in line with rents by then we could seriously overshoot. If I were a buyer I would wait until Dec 2012 earliest, particularly CA and, to a lesser extent, NV and S. FL... maybe other areas not affected by arms will do better earlier.
Thanks for link to map of misery, had seen the option arm schedule before but not the map.
tj, Employment changes normally lag economic changes. So rising unemployment should follow the bust.
I believe we are only now begining to see the pain in that area. Rising unemployment in the next six months will add to the current mess - making the recovery harder to start. I expect we will have another "jobless" (and slow) recovery.
It is also normal to have a slow recovery for housing prices. So when the bottom comes the prices will move up very slowly at first. Less than inflation at first.
i'm going to have to read up about what you said regarding inflation and housing prices during the periods you cited.
but let me say i think RE is only the last snow flake that started the avalanche...it's not the avalanche itself.
this crisis has much to do with complexity, deregulation, leverage, derivatives, debt (public and private) and spreading the mess around(counter party risk)
RE is the precipitating event..the financial system underneath is rotte
Mock Turtle, The MBS insruments were overrated and overvaled. The leverage to the system from these and the CDS etc. was very risky to those who used them. But these are all obligations of one party to another. A change in valuation is a shift of wealth from one party to another - not a loss to the real economy.
However, the uncertainty over valuation and the resulting counterparty credit risk causes fear and panic that can have significant impact on the financial markets and then on the real economy. Bernanke has moved to mitigate that fear and panic. I hope it was enough.
The price of treasury bonds is a good barometer of such fear and panic. The fact that the prices have been falling is a sign that the fear is declining. I do think the worst fear is behind us. However, the real impact on the economy is still working through the system.
I bought treasury bonds in late 2006 in anticipation of a flight to safety, and I sold those bonds a month ago when I thought the fear and panic had peaked. I made a 15% annual return on those treasury bonds. I did the same thing back in 2000 to 2002, with a similar result.
Mock turtle, I agree that the real estate market reflects a manifistation of other fundamental issues. And it does seem that the WS guys were far too risky and foolish with these newer tools. But I do not think our system is rotten - just a bit out of control. And too driven by short-term incentives and shortsighted strategies.
Sunday he took a few jabs at rivals, saying he was confounded by the ability of his municipal-bond insurer's biggest rivals, MBIA Inc. and Ambac Financial Corp., to retain their triple-A ratings.
"If you can find another illustration of a company whose stock that's gone down by 95% in one year and is still rated triple-A, I have yet to see it," Mr. Buffett said.
Do you really think that housing prices declined during the frothy roaring 1920s, and then rose during most of the great depression?
Zephyr
Yes. They did. The major driver for the stock market crash of 1929 was the deflation in other asset classes over the previous couple of decades. Essentially, the only thing going up was the stock market, so people sold their other asset classes to put the cash into stocks.
Moreover, leverage played a key role in that same market crash, as did the usual Wall Street lying, cheating, and stealing. At the time, it was pretty much a Milton Friedman paradise of unregulated swindling. Not that it's a great deal better today.
And, obviously, housing values will go up after they hit bottom. All Republicans hate this, but Roosevelt's policies were, in fact, making a major positive difference in the US economy because those policies benefited regular working people instead of just the rich.
Zephyr writes:
I think rising energy prices will lead to greater use of high rise living and office space. This is due to the cost impact on commuting and the better heat/cooling efficiency of greater density.
Zephyr writes:
tj, the efficiency of higher density has to do with the ratio of surface area to mass. The larger the object the less surface area relative to mass, and the slower the energy loss.
Where do you get all this? It contradicts everything I thought I knew on the subject.
Uh, huh - so everyone in this future will be living in skyscrapers... and how do you intend to get food and water to all these people? And how are you going to get products to them? Trash out of the area? How will trade be conducts? All of those things require fossil fuels. The "new urbanist" idea won't work because it still has a huge energy load to support all those people living in the paved-over "paradise" of the future. Smaller, self-sufficient communities will be the result of a lack of fossil fuels, not towering cities.
Zephyr,
Your comments are too over general to spend all the time necessary to megapost a full reply. Let's start with: the cost impact on commuting.
2006 National Aggregate Transit Data:
Total Operating Funds Expended $23,891,400,000
Total Capital Funds Expended $10,261,000,000
Annual Passenger Miles 40,763,900,000
Fare Revenues Earned $8,847,900,000
Cost 84¢ per passenger mile.
Charge to riders 22¢ per passenger mile.
See the problem? Transit is too inefficient to save either energy or money.
The "new urbanist" idea won't work because it still has a huge energy load to support all those people living in the paved-over "paradise" of the future. Smaller, self-sufficient communities will be the result of a lack of fossil fuels, not towering cities.
Only if there's a mass die-off, in which case it's all kind of irrelevant, as our greatest challenge will be securing all the dead people's crap before it rots in place.
Otherwise you're going to see an inmigration of the exurban population to the urban core and a pushing-out of the poor to the shabby crap structures built in the developments of the housing bubble, where they can be controlled and ghettoized more efficiently.
People who want to live in their little farming community or survivalist shack are going to be burned out or stripped of their capital by the various armies people will field during the long emergency. Urban and built-up suburban environments are defensible, but places that make a good freehold or steading are also the kind of places that make good bastion regions for guerilla formations.
I've decided to rent for the next couple of years and it's nice to see my predictions in line with CR's. Signed a 12 mo lease yesterday for a condo in which I can wait out the mess. Got an option to renew at the same price as well.
With all the property for sale around here (central NJ) I did not expect to have such a hard time finding a place for rent. Reason given by the agent? A huge increase in the number of people renting due to foreclosure -- particularly those renting in ADVANCE of foreclosure or an intent to jingle mail.
Some landlords are wise to this and are requiring 6-12 months paid up front before they'll take a tenant, particularly if their credit is less than ideal. "We're having to get really creative to find them something", the agent said. And at this point I'm thinking to myself "yea, just as f'ing creative as you were putting these losers in houses they couldn't afford?"
I'm with the others who say "bring on the price declines". Sooner the prices come back to reality, the sooner I can stop changing my address every other year.
Byzantine Ruins: If you're going to start talking about armies rampaging across the land, then the rest of the discussion about New Urbanist ideals becomes moot since nothing is "defensible" if you're going to bomb and burn everything. Also, if all the farmland is going to be burned by these armies, how are we going to get food to the wonderful "cities of the future?" Or, are we going to have magical cities of the future with vertical skyscraper farms or some other nonsense + armies rampaging across the land?
Sorry, but once one gets past cheap, easy energy, it only makes sense for society to revert back to the way things were before cheap energy came into play, which does not include huge cities that have yet to address the problems of getting food, water, and products in and waste and products out without using a lot of energy.
It's all about cost of living and cash flow. California is going to crash and act like a black hole, sucking in cash and burning the economy to a crisp!
Rob Dawg, I agree that mass transit is not as efficient or a cheap as it appears to be. However, the full true cost of travel by automobile is far more than most people realize as well.
The discussion question was the incremental impact of higher energy costs.
Higher density would reduce total travel distances as people and places are closer together. So higher fuel costs would shift the trade-off toward higher density because of the reduced miles traveled and the need for less fuel per mile.
Higher fuel costs also favor higher density because of the physics of heat loss relative to mass. Heating and cooling costs would be reduced by the reduced energy loss of larger aggregated structures vs. many small stand alone structures, and by the efficiencies of larger systems. That is simple physics.
To illustrate the physics, imagine 8 cubes each of one foot dimention on all sides. The total mass is 8 cubic feet, and the total surface area is 48 sq ft.
Now take those 8 cubes and aggregate them into one (high density) cube being 2 ft per dimension on all sides. You still have a total mass of 8 cubic feet, but the exposed surface area is reduced to only 24 sq feet. A 50% reduction in the heat losing surface area.
Manhammer, Your pre-1929 deflation theory does not hold water. It was not just a stock stock bubble. There was a real estate bubble during the 1920s as well. This is well documented.
People were paying crazy prices for real estate at that time. That was the era from which the reference to buying swamp land in Florida was coined - because people literally did buy swamp land in Florida. Sight unseen! The speculative bubble for real estate was very strong during the 1920s. Residential real estate prices did not return to the 1920s levels again until about 1950.
If the great depression was as you noted, then a repeat would be nothing to fear for real estate investors. However, the reality was a price collapsing disaster for real estate.
As for Roosevelt's policies - some helped and some hurt.
Well, 2010 is the year I intend to buy! Keep up the good work.
Well, 2010 is the year I intend for taxpayers to subsidize the purchase of my new home! Keep up the good work.
CR - marvelous post thank you. Too bad all the "worst is over crowd" doesn't get it yet. But that's the thing about Darwin...sooner or later he wins.
Blue curve in the graph looks like Camel. Red one looks like a Horse. It will have to turn into donkey before the bottom.
I am packing and trying to get my house on the market in the next 10 days! The market here has slowed but not dropped (central texas) and I am both selling and then buying in a solid area not the edge suburbs. Prices here are also still roughly in line in with income and our punishing property taxes have protected us from the worst of the current bubble. I need to get into an area with a better high school and I am trying to move before prices really fall here and before interest rates start to rise -- I am also hearing that underwriting standards will tighten June 1st. Wish me luck!
Warren Buffet is in Omaha spouting off about how he gives no consideration to market conditions and you shouldn't try to time markets.
He sold his house in CA two or three years ago.
Maybe he needed the money.
Lubricated prices followed by several years of public disinterest. Sounds about right.
The people who will still get hurt are the ones who "invest" in homes in 2010 and think the prices will start to go up. The long flat price lull represents a period of no appreciation and negative yields due to holding costs. Four or five years of negative yields really screw up the return on investment.
Well done, CR. The graphs are very insightful. It will be interesting to look back in a few years to see how this all played out. What is especially interesting in the steep slope the Case-Shiller index.
Question: As a rule of thumb (so I'm told), the market price of a home reflects 120x rental prices. Obviously this isn't true in much of California at this time, but is it historically? If so, is this then a potential indicator of where prices will fall to?
Thanks.
At the bearish Irvine Housing blog, the multiplier is thought to be 160, by the main blogster, Irvine Renter. I have no opinion on this.
CR,
The graph says it has been adjusted for inflation. Do you know the inflation numbers they are using? If it is tracking the CPI or anything the government has put out, I think we can all agree that is a gross misrepresentation of the true level of inflation. If inflation is drastically higher than what case-shiller is using, I think the recover will be pushed out even farther as it takes time for wages to catch up.
Anyone want to make a prediction on the next low?
I am going to suggest the low will be faster this time, maybe 2011. I base that on the fact that prices are coming down faster.
My mother bought her house in 1990, at the peak of the last real estate boom, for $265,000. Today, even with the slight dip in prices in NY, it is worth about $900,000.
According to inflationcalculator, $265,000 in 1990 is equivalent to $432,000 today.
Either the present bubble is twice as big as the last (late 1980's) bubble or the government CPI figures are understated. Probably both.
CR- Your analysis seems obvious as I am sure the world will agree in a few years. Interestingly yours is the first I've seen in the blogosphere to extrapolate Professor Shiller's finding that house prices don't increase significantly in real terms over time but oscillate around a fixed real value. The classic study, in the sense of the longest time series was of a group of Amsterdam houses that over 400 years had increased in real terms by 1/2 of 1 percent a year.
The real issue is the size of the bubble. If things really normalize back to 100 -- whenever -- there will be tremendous dislocation in the market.
As a side note, S&P stopped rating home equity loans last week.
CR - Can you put up a CFC-BAC thread where those familiar with buy-out finance might post their thoughts on where that transaction is headed. IMO it is a big hornet's nest that appears to be ready to blow, but I have no basis other than reading between the line RE the latest posturing by BAC given the CFC downgrades, to make that assumption.
Seems to me fencing off 1/2 of CFC's debt and leaving it to fail sounds like a dead end which might encouage BAC to bail. I mean, if abandoning debt were that easy to do why wouldn't CFC just do it?
well, if it takes 15 months or so for a financial institution to dispose of reo, and you assume the foreclosure wave is underway, but, that we're closer to the beginning than to the end, you get into 2010 before those transactions begin to peter out and cease to persistently drive the market (down).
It'll be interesting to see how the bust shakes out this time around. In the mid-1990's, rental rates in downtown LA dropped below the 1980's rates.
I don't see how the condos now turned rentals soon to come on the market are going to sustain high rates. Luxury 'lofts' have only so much market appeal--especially in an area with no infrastructure for families with children.
CR,
Any thoughts on a possible dead cat bounce of sorts.
I mean the decent this time is rapid enough that you may overshoot, say around month 40, to the down side, and then get a short move up again due to the success of investors inspiring others. It seems that a slow decent tends to take the air out of investors sails overtime, but a rapid decent and overshoot allows a bottom to occur within memory of the last bubble, thereby causing another short one, say a move up to 125-150 around month 60 or so and then another slow grind down....forming sort of a lopsided W,
thoughts?
Good article, but be careful of drawing straight lines based on historical data. A couple of things are different this time.
1.1980's bubble in LA was punctured by demise of defense contractors. This his SoCal really hard.
2.Recovery in LA was helped by the development of new mortgage products.
3.Current housing crisis is largely financial rather than economic. We went into this downturn with good employment and despite all the sturm and drang employment is still solid. Very rare for housing downturns to occur in this environment.
4.We may not be near the end of this mess at all. See this link for discussion of Option ARM overhang-http://blog.metro-real-estate.com/?p=304.
5.Recovery is going to take place within a very constrained financing environment. Fewer qualified borrowers will be available to the market.
6.Baby boomers are going to be a diminishing source of demand for housing.
All in all I might be happy with 2013.
CR, You are good man !!! excellent as always...
Right...also goint to be tough to get mortgage rates lower...that game is just about over.
In the last downturn purchasers had the luxury of declining mortgage rates. Not anymore.
LawyerLiz,
That may be a localized rent multiplier, as "The OC" has always been pricey. Most of the nationwide multipliers I've seen ran from 100x to 120x.
Perhaps it will come to a CASH only situation.
I wonder how much a million dollar house would go for?
Tom,
Good recap of points CR has made repeatedly here -- which is why I find CR's "optimism" regarding the severity of this general downturn somewhat curious!
IMHO housing will suffer it's worst price drops in the next couple years, followed by another decade of slow decline. If you want a house for a house and not an investment, 2010 will probably be as good as time as any to buy. By then I expect housing prices will reflect real incomes.
I have done precisely ONE regular institutional financed loan since August 9th when the pipeline closed.
I have done seller financed stuff; also all cash, and commercial closings, and I have some hard equity financed refis coming up. The institutional lenders may as well not exist in Miami, except to sell REOs.
Can somebody tell me where to check Shiller for the Miami graph cliff diving?
Right...also goint to be tough to get mortgage rates lower...that game is just about over.
Expect them to go higher -- much higher.
Perhaps it will come to a CASH only situation.
That'll be hard when nobody has any cash! There's obviously going to be no equity to transfer, so the move-up market is on life support and fading fast.
LawyerLiz,
Check here:
The Mess That Greenspan Made: Can't ... keep ... home ... prices ... from ... falling
Thanks, mucho, TJ.
Actually tho it sez that we are nowhere near the bottom if you draw a straight line from 2000, you are not too far below where Miami is now.
Factor in some overshoot and maybe
there actually IS a bottom in sight.
My broker buddy who is selling cruises, but still has his license sez he does see at little bit of hope on the horizon. That hope may be dashed if the institutional lenders don't start lending again.
Maybe they will be forced to if only to finance their REO sales.
The overbuilt condo towers are another thing entirely.
"There's obviously going to be no equity to transfer, so the move-up market is on life support and fading fast."
The move-up market will have to be priced low enough, so people are tempted and can be financed. As a result, the value buy should be in moved-up houses for those who have the ability to close/buy them.
If the mortgage market (and banking system) hadn't been nationalized, we'd be a lot farther along. Thanks BushCo for keeping house prices unaffordable!
Bailouts are similar to life-support systems.
They both work for awhile.
The free markets and living organisms are actually quite similar in certain ways.
They both can live and die. They both may be born, grow, mature and get old and then be put on life support.
CR is there anything that can prevent the market from collapsing?
There is a credit cycle right? There probably is a bunch of small ones that make up a biiger one right?
If so, nature dictates that a credit cycle that is born has little credit.
Why? Because most of it was destroyed in the last down cycle.
Right?
OK, so I'm looking at the second graph. I've looked at a lot of graphs and this one appears to show the same ramp-up rate, but the post-peak ramp-down is much steeper for the Composite 20 (and from graph 1, the LA ramp-down is even steeper). This, to me, indicates a strong possibility of an overshoot, well past "normal" appreciation.
As I recall from my Keynesian days, it is quite possible for the economy to stabilize at a high unemployment rate, so I'm wondering if it is possible for the housing market (assuming the labor market acts like a market) to stabilize at a much lower level.
Tim,
The market needs to collapse. The faster and farther we fall, the sooner we can recover. Problem now is we face a future akin to Japan's "lost decade", only worse.
While I greatly admire CR's intellectual exercise in comparison, I have to say that there's a cartload of wild variables in the instant situation that has to be entirely ignored to make any such comparison at all.
To think that such a gentle and gradual walk down the slope as occurred previously is what is in store through the mine field of Alt-A resets in front of us, alone, seems fantastically optimistic.
I won't even go into the frantic efforts right now by the world central banks to unclog interbank lending, or just how big the explosion of CDSs is likely to be when that finally blows.
Is it just me, or does it seem like there is an impending collapse of the banking system? By that I mean that a lot of small to mid-sized banks will go out of business. The large banks won't, of course, because they own too many lawmakers. They "can't" fail.
Moderately OT, but wouldn't that make C a good rolling options play? Every time bad news comes out, they dip. When they do, buy some calls, then when the government murmurs something encouraging and the stock pops, sell those same calls? Does this sound right or have I gone totally to the dark side?
Let us note that the average person in Japan is doing a hell of alot better than an average person in most other countries....in spite of their bubble and bust.
BRING IT ON BABY.
Is it just me, or does it seem like there is an impending collapse of the banking system? By that I mean that a lot of small to mid-sized banks will go out of business.
It's not just you. The banking system is hideously exposed to RE, especially CRE. As I've noted previously, greater than that of Texas banks to oil prior to that bust (which took them all down).
FFDIC has also noted that the FDIC is in no way prepared to deal with it. Comforting, no?
Anon,
We're not nearly in as good as shape as the Japanese were going into their bust. Their's will look like an absolute day in the park -- mildly overcast -- compared to the destruction that'll be wrought here. Nonetheless, I would agree with the "bring it on" sentiment.
I think we will see a small recovery in the housing market. As soon as everyone thinks it's safe and jumps in then the Option Arm reset wave will hit like a nuke..
The previous comment thread died out before I had a chance to finish a discussion. Apologies to anyone who wants one.
From LawyerLiz:
At some point a decent reporter will realize he cannot do his job properly, and will not be able to for the foreseeable future.
But I CAN do my job properly! I just can't do it perfectly. With some intelligent criticism, maybe I can do it a little better next time.
Plausible analysis, CR. We'll see if government steps aside and allows a faster liquidation or intervenes and prompts a slower liquidation.
But, the liquidation will happen.
I'm with tj on 'special pricing' for certain parts of SoCal; based on my analysis, the typical La Jolla rent-to-price multiple appears to be ~200-240.
What About Price-to-Annualized Rent in La Jolla? | Piggington's Econo-Almanac | San Diego Housing Bubble News and Analysis
In the late 1980s just before their big bust, Japanese markets were more inflated than ours has been. The Japanese lending practices were more liberal than ours have been (for example, banks would lend 125% ltv on re purchases). Japan's demographic outlook was (and remains) far less favorable than ours.
They initially met their demon of decline with severely restrictive policies which set in motion a deflationary spiral. By the time they loosened up their policies the death spiral was inescapable. They refused to write off bad balances and failed to clear the market for a healthy recovery.
We experienced a similar 1980s bubble and faced a potentially similar downturn at that same time. However, we followed much different policies and averted what could easily have been nearly as bad as what Japan experienced.
Instead, our accomodating monetary policy and the Resolution Trust Corp. process mitigated the decline but greatly prolonged the pain. This is a major reason for the 1990s RE decline being double the length of the normal decline. As RE cycles go it was an aberation and makes a poor standard for comparison.
If there ever was a chance for a repeat of the Great Depression or a lost decade in the US it was during the 1990s. We dodged that bullet. The risk is lower today.
A couple of comments about the second graph:
There are no soft landings in real estate cycles. And Los Angeles is a classic cyclical market.
Looking at the chart for LA, and adjusting for changes in incomes, interest rates and home sizes, I would expect the bottom to be reached at around 150 to 170 by 2010.
"As a result, the value buy should be in moved-up houses for those who have the ability to close/buy them."
I'm not telling anybody this, for fear of it catching on (or being wrong)... but I decided to sell my house last month to extract the equity gain, and then rent for 1-2 years with the hope of snapping up a good move-up buy when the market gets much worse. I'll have $500k in cash, good credit, and a no-contingent offer.
Drop, prices, drop!
Now I just have to figure out a place to park the cash. Seriously considering c-notes under my bed. Or glod, but only if it hits ~650. Open to ideas.
"I think we will see a small recovery in the housing market."
The problem is the lock-down in financing options and high jumbo fixed rates. There may be a will, but not a way. Perhaps in 2009, some enterprising bank will bring back neg-am? But I agree - then Option Arms will hit, and blammo!
Used Hummer Cars For Sale In San Francisco, CA - Yahoo! Autos
Hummer offerings in the bay area.
9-12mpg.. hmmm
pass
Now I just have to figure out a place to park the cash. Seriously considering c-notes under my bed. Or glod, but only if it hits ~650. Open to ideas.
go do everything you've always dreamt about doing, but have'nt, due to your job, mortgage, family. Take them, do it now, just in case the Doomers are right.
A major difference between the early '90s LA bust situation and the present is that back then the ownership rate among young people was much lower, so there was a pool of potential future buyers. During the bubble the ownership rate among young people reached a level previously seen only at the end of the late-70s bubble (and back then the overall ownership rate was somewhat lower).
Also, though perhaps there was a similar glut of supply on the market in the '90s, I rather doubt it.
One of the engines driving the bubble was the rise in ownership among young people who in earlier times would never have though of buying. Without those first-time buyers coming in at the low end, there will be no way for the current owners to move up.
How many move-up buyers can move up without selling their existing home? Not very many, I'd wager.
But a lot of the supply on the market is of high-end homes that can't be sold except to people moving up (or to high-six-figure income realtors or mortgage brokers, who have become rather thin on the ground).
I was still checking the previous thread, John S.
Ok, you aren't perfect, but what about everybody else. As I said, I basically don't read the newspapers any more, except for the real estate section and the funnies. And if I, the compulsive reader, and information junky don't read the papers any more, you haven't got much hope.
"Hummer offerings in the bay area. 9-12mpg.. hmmm"
Some of those Hummers are a recent vintage with lots of miles. What kind of person buys a Hummer that needs to drive several hundred miles a day?
Hummm, so my straight line should probably start before 2000 because things were slightly bubblicious even then?
Miami has come down about 22%. I think that if a prospective buyer finds something that is 1/3rd to 40% off the peak (assuming you can figure out what peak pricing was for the particular house) you will be ok, if you plan to stay 3-5 years.
Not the towers. The brokers are saying 50% off peak; unsold units don't pay maintenance; many of those towers are blacklisted by the banks due to fraud. I think that I would recommend buying only if it were 70-80% off peak. I'm serious. And, you had a number of friends and relatives buying at the same time, so you knew that somebody else would be living there. If you could buy 80% off peak, you could pay cash. It would be risky, but worth the risk.
Hummers...ha, I saw an Earth Day car ad for some mega dealer on TV a couple of weeks ago. They featured the Prius and similar vehicles at the beginning of the ad, but then they went on to say all the cars were for sale. At the end they mentioned Hummers.
Today, I was at REI (camping store). Someone had a Hybrid Chevy Tahoe. What's the alternative fuel, nuclear? They don't make batteries that big, do they?
CA prices are falling much faster than you'd expect from the bubble size. Areas have seen 5-6% declines in a single month, which is almost as bad as a entire year in the 90's decline. There's a panic environment in some areas which is unprecedented in CA real estate. I think prices in most areas will continue plummeting rapidly until they reach rent equivalence, and at current rates that's less than a year off. After that prices may level off, or continue to slide but slowly, depending on the macroeconomic environment.
We need a blog that calculates how much each market is PAYING buyers to STAY OUT. This chart goes a bit towards putting a number on LA's stipend, but I'd like to see it in terms of low, mid and high value properties. Eventually that stipend will shrink to an insignificant level but not until at least the option ARM crash is complete.
Personally, I am starting to think that 1996 price levels are today's lowball offer and next year's bubble price -- we're heading for the 80's lows.
Instead, our accomodating monetary policy and the Resolution Trust Corp. process mitigated the decline but greatly prolonged the pain. This is a major reason for the 1990s RE decline being double the length of the normal decline. As RE cycles go it was an aberation and makes a poor standard for comparison.
Zephr, do you have any data to back up your assertion that the 1990s U.S. real estate decline was abnormally long? The data seems to disagree with you. I see 7 years peak to trough for the previous bubble in England. Choose the middle series, UK house prices adjusted for inflation:
House Prices - Data Download
The CA market has split into schisms. There's a bunch who are and know they are screwed. There's those who are screwed but don't know it yet. There's an amazingly large number who are mere spectators thanks to the speed of run up and decline and of course Prop 13 protecting them from the secondary impacts of other peoples' folly. Finally, there's the group of 'us' who made the deliberate choices in anticipation. I sure ain't gonna be lured by rent equivalence. Not safe enough. I don't trust Prop 13 or California jobs and worse. The LAO (Legislative Analyst Office) is on record as saying the home mortgage interest deduction is a tax loophole. I personally blame that statement for a lot of the recent price drop.
Personally, I am starting to think that 1996 price levels are today's lowball offer and next year's bubble price -- we're heading for the 80's lows.
No Frog Speak
Let's take a breath. Not even with inflation adjustments are generalized 1996 prices likely. We may see prices approach inflation adjusted per square foot at the lowest.
Zephr, do you have any data to back up your assertion that the 1990s U.S. real estate decline was abnormally long? The data seems to disagree with you. I see 7 years peak to trough for the previous bubble in England. Choose the middle series, UK house prices adjusted for inflation:
Also, didn't the decline in Japan last over 15 years?
kis, I think the 300 day moving average on gold is ~$750. From what I read it usually tends to bounce off of there. When it gets to that range I expect to pick up some more. $650 could be a bad sign for gold.
Nobody is talking about the 3 L's: location, location, location. Desirable neighborhoods are keeping their values, while the values of properties in the exurbs are dropping like stones. Just take a look at the foreclosure data for DC and NYC.
DC area
HotPads.com - File Not Found
NYC area
HotPads.com - File Not Found
Manhattan and the District are holding up well. The outer suburbs - not so well.
Harsh Reality,
The downturn of the 1990s in England is the same cycle period as the downturn of the 1990s in the US and Japan.
Each of the earlier downturns in the US (during the 1960s, 1970s, and 1980s) were about three years long. Even during the Great Depression of the 1930s the decline was only about four years - but very severe, with a long slow recovery.
I think the US market during the 1990s would have been more like the Great Depression pattern if the government had not intervened. They took inventory off the market and then released it slowly. I believe that this softened the initial collapse but also prolonged the decline as the the inventory was slowly released.
Lawyer Liz:
And if I, the compulsive reader, and information junky don't read the papers any more, you haven't got much hope.
You're right. I don't.
I was looking at the C-S numbers for New York. The "lost decade" of 1987 - 1997 gives me hope, but the decline now does not seem to be as steep as the areas in the West.
Anyone have more insight into the movement we can expect in New York, especially the outer boroughs? (I hear Queens may already be feeling some pain.)
Rob Dawg, I calculated that if San Diego reach 1997 real prices in 2012, after inflation they will be 2000 nominal prices. In San Diego we are already back at early 2004 nominal prices. Whether you are right or wrong, it will be an interesting trip getting there.
People tried to explain theisboom with rationalizations like "America is growing steadily", "Boomers want to move here" etc. They will equally try to explain the bust, the unavoidable exhausting of the boom, with "Stopping and reversing immigration pushed prices down", "Boomers must sell from 2011 on net" etc. When "everybody" understands that boomers will push prices down, the bottom is near.
The risk is lower today.
Zephyr, what are you smoking? The risk these days is so much higher it won't even fit on the same chart.
Not even with inflation adjustments are generalized 1996 prices likely.
Dunno, Rob... I think 1996 is the best we can hope for.
The key for me still comes down to equity; by the time prices retreat to 2002 levels there won't be any. No equity means no move-up market, no prices higher than real incomes can directly support. That removes the pillar that has held CA prices at higher than average income multiples.
Nobody is talking about the 3 L's: location, location, location. Desirable neighborhoods are keeping their values, while the values of properties in the exurbs are dropping like stones. Just take a look at the foreclosure data for DC and NYC...
Manhattan and the District are holding up well. The outer suburbs - not so well.
That's the typical pattern.
Values in newly built and outlying areas plummet while more central areas hold their value.
Then the cheaper housing on the periphery begins to draw away more and more buyers from the "desirable" areas ultimately bringing their values down too.
But maybe this time it's different.
tj,
What I have been "smoking" is 35 years of real-time analysis of the RE markets, and 28 years of investing in real estate with very successful market timing.
I remember what it was like during each of the downturns. And during each prior cycle I remember people like you saying that things were going to be like a repeat of the great depression. But it did not happen.
Now you think THIS one will be the big one. It is possible, but it does not look that way to me.
3L! That's me!...well only if I quit reading this and pass my final.
Irony defined: Procrastination of Real Estate Finance study to read comments on CalculatedRisk.
The 90s housing bubble was not accompanied by a sustained 100% increase in the price of gasoline. Real change in disposable income is critical, and not only has disposable income not kept up with housing prices, it is now falling markedly due to diversion of income towards energy costs and the knock-on effects in food and prices of other goods and services.
Lots of folks are focused on the effects of eliminating kamikaze loan products and application of traditional lending standards once again...I haven't heard mention of the effects of potentially having to lower allowable DTI ratios due to the basic changes in distribution of disposable income driven by energy and food inflation out of proportion with CPI.
20% down and 22% front end DTI? That might hurt.
cd
Even the nicest locations eventually plunge. What goes up must come down.
Here in SoCal Beverly Hills, Bel Air, Brentwood, etc. all tanked (relatively speaking) the last go-round.
If there's a timing difference now it's due to the economic bifurcation. IOW, the rich haven't gotten hit the way J6P has -- yet.
There are four concentric like rings to the NYC metro. There's Manhattan in the middle. Then, there's the rest of NYC. Then, there's the near-in burbs, which I define as those where you can commute by rapid transit (maybe with a short car ride to the train) in about an hour or less. Then, there's the exurbs where you have longer commutes, mostly by car.
So far, the re market has been declining from the outter rings in. The exurbs have fallen the most, Manhattan the least.
But that will now start to shift as Wall Street layoffs increase while city services decline and city taxes increase.
Here's a rough rule of thumb for the comparable cost for a family of four:
Manhattan = X
Boroughs = 80-90% of X
Near suburbs = 65-75% of X
Exurbs = 60-70% of X
As the recession squeezes families in NY, they move out in search of cheaper living. But they'll probably be moving to either the boroughs or near burbs on good mass transit lines.
I'd say exurb home prices are down about 15-20% now; near suburbs about 5-15%. Those will probably decline at least another 10%.
But I can see Manhattan dropping at least 25% from here.
The best news for the whole metro in the Peak Oil era is the best mass transit in the U.S. It's not cheap. But it beats paying a $30 toll soon to cross the GW Bridge.
James Howard Kunstler says:
". . .the Federal Reserve's new willingness to absorb any sort of crap collateral in exchange for massive cheap loans to insolvent companies and institutions. The Fed has, in effect, made itself the world's largest financial shit-magnet. . ."
"The increased velocity of non-performing mortgages and deadbeat credit card accounts is one thing that can't be hidden or escaped. America will feel and see very vividly when the repossession teams rush families from their homes, when the pickup truck is taken away . . ."
"If the bankers and treasury officials collude to prop up one more failing big bank a la Bear Stearns, the political fallout for Wall Street could be lethal."
Zephyr,
Studying RE in isolation it might look that way, but this isn't your typical RE cycle. Hell, RE isn't even the disease, it's just the largest symptom of a much greater problem -- an international credit/debt bubble.
The axiom "all real estate is local" used to rule the day. No more.
tj & the bear writes:
Dunno, Rob... I think 1996 is the best we can hope for.
Tough crowd. 1996 in SoCal had REOs sitting at pre-Carter prices. We'd have to have another Carter.... oh nevermind.
I'm entertaining an interesting wrinkle. The 80s 90s vintage construction isn't worth 'dozing. I can't turn the air pressure up enough to drive a nail in my 1961 2x4s. I can't get staples to stick in my 2005 construction. I sense a revolution in housing manufacture as a form of substitution that will gut the McStucco market down to land/infrastructure value.
rich,
What good is Manhattan's mass transit if the skyscrapers are uninhabitable? Natural Gas is just a different form of petroleum, and it's days are numbered as well.
As the recession squeezes families in NY, they move out in search of cheaper living. But they'll probably be moving to either the boroughs or near burbs on good mass transit lines.
Massive transit subsidies will do that.
tj & the bear writes:
What good is Manhattan's mass transit if the skyscrapers are uninhabitable? Natural Gas is just a different form of petroleum, and it's days are numbered as well.
For reasons never adequately explained NYC metro claims 1/3rd less energy intensity per capita of any metro in the US. If energy becomes an issue expect urban planners to push the model.
Rob,
For years my grandfather built some of the finest custom homes in the Northwest. I've yet to see anything like that quality anywhere since, and I was seeing his work decades after the fact.
So much for progress.
Yes, tj, it is all connected. And the globalization of economies and financial markets has been increasing rapidly for decades. The direct and indirect effects of these changes do affect local markets.
But even with this reality, real estate is still very local. One need only compare Manhattan to Little Rock to see that.
This boom (and bust) didn't originate locally, though, and was not tied to any local fundamentals. Sure, location's always an issue, but this time it had to do more with the effect than the cause.
OT but interesting. UBS to Layoff 8,000.
This is the sort of news that impacts RE in Manhattan.
May 5 (Bloomberg) -- UBS AG may cut as many as 8,000 jobs as it grapples with the biggest credit writedowns of any European bank and a 12 billion-franc ($11.4 billion) first-quarter loss.
I think rising energy prices will lead to greater use of high rise living and office space. This is due to the cost impact on commuting and the better heat/cooling efficiency of greater density.
the better heat/cooling efficiency of greater density.
How does that work in the absence of cheap NG?
tj & the bear wrote:
Tim,
The market needs to collapse. The faster and farther we fall, the sooner we can recover. Problem now is we face a future akin to Japan's "lost decade", only worse.
tj & the bear | 05.04.08 - 6:32 pm | #
mock turtle agres but:
not so fast
first the current ruling junta needs to get out of town.
so the fallout can be blamed on the new junta
thats the plan...kicking the can down the road
i guarantee that next year you will hear blame fixed against the current administration...who ever it is...for f ups that were a decade in the making.
tj, The recent booms were very much driven by local factors at first. Then irrational exhuberence came into play (as it always does) and pushed prices to silly levels. This happened to greatly differing amounts in different local markets - even with the same national and global liquidity conditions. Local effects explain why some places (like Las Vegas) had much higher price increases than others. ...and why some will have much more pain than others.
mock turtle,
Hey, they're politicians. They'll blame everyone else while doing everything in their power to avoid the inevitable. Instead of mitigating the circumstances they'll aggravate them -- count on it.
Zephyr wrote
"If there ever was a chance for a repeat of the Great Depression or a lost decade in the US it was during the 1990s. We dodged that bullet. The risk is lower today."
Zephyr | Homepage | 05.04.08 - 7:28 pm | #
based on what trends or data???
every risk factor i can think of..that posed any risk at all 10 years ago is a far greater risk today. no?
tj, the efficiency of higher density has to do with the ratio of surface area to mass. The larger the object the less surface area relative to mass, and the slower the energy loss.
I can't turn the air pressure up enough to drive a nail in my 1961 2x4s.
Damn straight. I think that old wood is harder than the new box nails. I've stripped the heads off of screws going into that stuff (though with the crappy quality control, that's not saying much.)
Zephyr,
Not arguing that point. The difference is that a typical RE boom would've stalled before this one really took off.
For example, LV & PHX wouldn't have gotten 45% YoY gains if it were not for a complete disappearance of lending standards.
tj & the bear
i hear you
that's why i wrote checks to Kucinich and Ron Paul...
even though one is very conservative and the other very liberal they have something in common...not political whores
each tells the truth as they see it and dams the pollsters.
The larger the object the less surface area relative to mass, and the slower the energy loss.
Something has to generate that energy you want to retain, though. You can't exactly burn wood in a skyscraper, and a lack of surface area becomes a huge negative when you're talking solar.
p.s.: I'm not picking on you.
mock,
Good for you! Unfortunately men like that have no chance in modern politics. Sigh.
mock turtle, 1,200 banks and S&Ls went bust in the early stages of the last last cycle. Only a few have done so in this cycle. It was so bad that the S&L deposit insurance corp went insolvent BEFORE the price cycle peaked! In addition builders and developers also went bust left and right. More so than this time. Of course, there is more pain left in this cycle, but the pain in the last cycle started stronger and much earlier than this time. This cycle could get just as bad - but (aside from subprime) it is way behind schedule for that.
Zephyr
i agree with you that during the last banking crisis cycle there were more bank failures early on.
there were reasons for that...this time the cycle has been dampened...but
even though the losses last time were less than 1/4 trillion dollars those losses were "localized" to the US,
this time the loses will be much larger even on an adjusted verses nominal basis AND the shit storm will be world wide.
world wide! and that's what made the great depression...the great depression.
tj, It is true that you must have some energy to heat those high density buildings. But it takes more energy per sq foot to heat numerous smaller units. So enegy efficiency is increased with higher density.
Higher energy costs will also increase the incentive for people to move to milder climates. This has already been happening and is forecast to continue. The northeast is expected to have minimal population growth in the next decade (about 1/10th of the national average).
Each of the earlier downturns in the US (during the 1960s, 1970s, and 1980s) were about three years long. Even during the Great Depression of the 1930s the decline was only about four years - but very severe, with a long slow recovery.
Zephyr, you are wrong about all 4 periods that you mentioned. That makes you 0 for 5. See graph:
http://www.financialsense.com/editorials/bronson/2006/images/0907/chart10_lg.gif
while we are talking bout the S and L crisis:...here's a little history worth remembering from wikipedia
Silverado Savings and Loan
Silverado Savings and Loan collapsed in 1988, costing taxpayers $1.6 billion. Neil Bush, son of then Vice President of the United States George H. W. Bush, was Director of Silverado at the time. Neil was accused of giving himself a loan from Silverado, but he denied all wrongdoing. [2]
The US Office of Thrift Supervision investigated Silverado's failure and determined that Bush had engaged in numerous "breaches of his fiduciary duties involving multiple conflicts of interest." Although Bush was not indicted on criminal charges, a civil action was brought against him and the other Silverado directors by the Federal Deposit Insurance Corporation; it was eventually settled out of court, with Bush paying $50,000 as part of the settlement, as reported in the Washington Post [12].
As a director of a failing thrift, Bush voted to approve $100 million in what were ultimately bad loans to two of his business partners. And in voting for the loans, he failed to inform fellow board members at Silverado Savings & Loan that the loan applicants were his business partners.[citation needed]
Silverado's collapse cost taxpayers $1.3 billion.
Neil Bush paid a $50,000 fine and was banned from banking activities for his role in taking down Silverado, which cost taxpayers $1.3 billion. A Resolution Trust Corporation Suit against Bush and other officers of Silverado was settled in 1991 for $26.5 million.
A Republican fundraiser set up a fund to help defer costs Neil Bush incurred in his S&L dealings.
Mock turtle,
The current mess has spread to have worldwide impact. Worldwide like the impact from the Russian bond crisis, or the Asian financial crisis, or the Latin American financial crisis...
The impact during the 1990s from the 1980s bubble burst was also worldwide...
Zephyr,
Ah, I see the source of your "optimism".
You believe that because things haven't yet reached the depths of the S&L crisis that we're better off. OTOH, I'm fully expecting a banking crisis that'll make the S&L fiasco look penny-ante by comparison. One of the hallmarks of the current downturn is the odd order in which events are unfolding (e.g., job losses following bust, not preceding).
Time will tell.
Zephyr
my knowlege about these things is second and third hand...i'm not expert...
but speaking superficially it appears the leverage involved this time is far greater.
this problem is compounded by the complexity of the debt instruments that have been invented and marketed in ways, i am told that not even the the CEOs and top executive officers of the IBs fully understand.
finally the credit default swaps,( possible the most dangerous of the derrivatives), that are floating around somewhere out there are nothing more than bets taken on outcomes over which the counterparties don't necessarily have what would called an insurable interest, yet they sell these "policies", as if they did...
and the policies and premiums are sold, re packaged and sold again without a clear chain of possession.
it is a mess of unprecidented proportions. i guess we are seriously screwed.
that's why Big Ben bailed out Bear S...didn't want to open up Pandora's box, for fear of what the world would find is held inside...but we know cause we saw the look on his face when he peeked inside.
fear, deep fear
Mock turtle,
First of all I am talking about actual market price movements - not adjusted prices using someone's best guess at the inflation factor. Take a close look at the Shiller chart. Do you really think that housing prices declined during the frothy roaring 1920s, and then rose during most of the great depression? Or declined during the robust economy of the 1960s?
There is serious trouble in the price adjustments used for that chart. The raw actual market data reflects a much different picture - one that matches with market conditions. I believe Shiller has overstated inflation in the past and hit the recent history harder, suppressing the older year values and making the recent runup look more extreme. It is good marketing on his part.
Tom
I absolutely agree. The option arms look to be around the same total $ as sub prime, but losses will be far greater - IMO every single arm will lose a lot for the mtg holder - and the grand finale doesn't come until spring 2012, so final foreclosures are at year end or early 2013. These foreclosures will put huge downward pressure on prices (both housing and bank stocks) until finally cleared... even if prices are in line with rents by then we could seriously overshoot. If I were a buyer I would wait until Dec 2012 earliest, particularly CA and, to a lesser extent, NV and S. FL... maybe other areas not affected by arms will do better earlier.
Thanks for link to map of misery, had seen the option arm schedule before but not the map.
tj, Employment changes normally lag economic changes. So rising unemployment should follow the bust.
I believe we are only now begining to see the pain in that area. Rising unemployment in the next six months will add to the current mess - making the recovery harder to start. I expect we will have another "jobless" (and slow) recovery.
It is also normal to have a slow recovery for housing prices. So when the bottom comes the prices will move up very slowly at first. Less than inflation at first.
Employment changes normally lag economic changes.
Yes, but don't housing busts typically lag economic & employment changes?
Zephyr
i'm going to have to read up about what you said regarding inflation and housing prices during the periods you cited.
but let me say i think RE is only the last snow flake that started the avalanche...it's not the avalanche itself.
this crisis has much to do with complexity, deregulation, leverage, derivatives, debt (public and private) and spreading the mess around(counter party risk)
RE is the precipitating event..the financial system underneath is rotte
Mock Turtle, The MBS insruments were overrated and overvaled. The leverage to the system from these and the CDS etc. was very risky to those who used them. But these are all obligations of one party to another. A change in valuation is a shift of wealth from one party to another - not a loss to the real economy.
However, the uncertainty over valuation and the resulting counterparty credit risk causes fear and panic that can have significant impact on the financial markets and then on the real economy. Bernanke has moved to mitigate that fear and panic. I hope it was enough.
The price of treasury bonds is a good barometer of such fear and panic. The fact that the prices have been falling is a sign that the fear is declining. I do think the worst fear is behind us. However, the real impact on the economy is still working through the system.
I bought treasury bonds in late 2006 in anticipation of a flight to safety, and I sold those bonds a month ago when I thought the fear and panic had peaked. I made a 15% annual return on those treasury bonds. I did the same thing back in 2000 to 2002, with a similar result.
Mock turtle, I agree that the real estate market reflects a manifistation of other fundamental issues. And it does seem that the WS guys were far too risky and foolish with these newer tools. But I do not think our system is rotten - just a bit out of control. And too driven by short-term incentives and shortsighted strategies.
Warren is confounded:
Sunday he took a few jabs at rivals, saying he was confounded by the ability of his municipal-bond insurer's biggest rivals, MBIA Inc. and Ambac Financial Corp., to retain their triple-A ratings.
"If you can find another illustration of a company whose stock that's gone down by 95% in one year and is still rated triple-A, I have yet to see it," Mr. Buffett said.
Do you really think that housing prices declined during the frothy roaring 1920s, and then rose during most of the great depression?
Zephyr
Yes. They did. The major driver for the stock market crash of 1929 was the deflation in other asset classes over the previous couple of decades. Essentially, the only thing going up was the stock market, so people sold their other asset classes to put the cash into stocks.
Moreover, leverage played a key role in that same market crash, as did the usual Wall Street lying, cheating, and stealing. At the time, it was pretty much a Milton Friedman paradise of unregulated swindling. Not that it's a great deal better today.
And, obviously, housing values will go up after they hit bottom. All Republicans hate this, but Roosevelt's policies were, in fact, making a major positive difference in the US economy because those policies benefited regular working people instead of just the rich.
Zephyr writes:
I think rising energy prices will lead to greater use of high rise living and office space. This is due to the cost impact on commuting and the better heat/cooling efficiency of greater density.
Zephyr writes:
tj, the efficiency of higher density has to do with the ratio of surface area to mass. The larger the object the less surface area relative to mass, and the slower the energy loss.
Where do you get all this? It contradicts everything I thought I knew on the subject.
Uh, huh - so everyone in this future will be living in skyscrapers... and how do you intend to get food and water to all these people? And how are you going to get products to them? Trash out of the area? How will trade be conducts? All of those things require fossil fuels. The "new urbanist" idea won't work because it still has a huge energy load to support all those people living in the paved-over "paradise" of the future. Smaller, self-sufficient communities will be the result of a lack of fossil fuels, not towering cities.
Zephyr,
Your comments are too over general to spend all the time necessary to megapost a full reply. Let's start with: the cost impact on commuting.
2006 National Aggregate Transit Data:
Total Operating Funds Expended $23,891,400,000
Total Capital Funds Expended $10,261,000,000
Annual Passenger Miles 40,763,900,000
Fare Revenues Earned $8,847,900,000
Cost 84¢ per passenger mile.
Charge to riders 22¢ per passenger mile.
See the problem? Transit is too inefficient to save either energy or money.
The "new urbanist" idea won't work because it still has a huge energy load to support all those people living in the paved-over "paradise" of the future. Smaller, self-sufficient communities will be the result of a lack of fossil fuels, not towering cities.
Only if there's a mass die-off, in which case it's all kind of irrelevant, as our greatest challenge will be securing all the dead people's crap before it rots in place.
Otherwise you're going to see an inmigration of the exurban population to the urban core and a pushing-out of the poor to the shabby crap structures built in the developments of the housing bubble, where they can be controlled and ghettoized more efficiently.
People who want to live in their little farming community or survivalist shack are going to be burned out or stripped of their capital by the various armies people will field during the long emergency. Urban and built-up suburban environments are defensible, but places that make a good freehold or steading are also the kind of places that make good bastion regions for guerilla formations.
I've decided to rent for the next couple of years and it's nice to see my predictions in line with CR's. Signed a 12 mo lease yesterday for a condo in which I can wait out the mess. Got an option to renew at the same price as well.
With all the property for sale around here (central NJ) I did not expect to have such a hard time finding a place for rent. Reason given by the agent? A huge increase in the number of people renting due to foreclosure -- particularly those renting in ADVANCE of foreclosure or an intent to jingle mail.
Some landlords are wise to this and are requiring 6-12 months paid up front before they'll take a tenant, particularly if their credit is less than ideal. "We're having to get really creative to find them something", the agent said. And at this point I'm thinking to myself "yea, just as f'ing creative as you were putting these losers in houses they couldn't afford?"
I'm with the others who say "bring on the price declines". Sooner the prices come back to reality, the sooner I can stop changing my address every other year.
Byzantine Ruins: If you're going to start talking about armies rampaging across the land, then the rest of the discussion about New Urbanist ideals becomes moot since nothing is "defensible" if you're going to bomb and burn everything. Also, if all the farmland is going to be burned by these armies, how are we going to get food to the wonderful "cities of the future?" Or, are we going to have magical cities of the future with vertical skyscraper farms or some other nonsense + armies rampaging across the land?
Sorry, but once one gets past cheap, easy energy, it only makes sense for society to revert back to the way things were before cheap energy came into play, which does not include huge cities that have yet to address the problems of getting food, water, and products in and waste and products out without using a lot of energy.
It's all about cost of living and cash flow. California is going to crash and act like a black hole, sucking in cash and burning the economy to a crisp!
Rob Dawg, I agree that mass transit is not as efficient or a cheap as it appears to be. However, the full true cost of travel by automobile is far more than most people realize as well.
The discussion question was the incremental impact of higher energy costs.
Higher density would reduce total travel distances as people and places are closer together. So higher fuel costs would shift the trade-off toward higher density because of the reduced miles traveled and the need for less fuel per mile.
Higher fuel costs also favor higher density because of the physics of heat loss relative to mass. Heating and cooling costs would be reduced by the reduced energy loss of larger aggregated structures vs. many small stand alone structures, and by the efficiencies of larger systems. That is simple physics.
To illustrate the physics, imagine 8 cubes each of one foot dimention on all sides. The total mass is 8 cubic feet, and the total surface area is 48 sq ft.
Now take those 8 cubes and aggregate them into one (high density) cube being 2 ft per dimension on all sides. You still have a total mass of 8 cubic feet, but the exposed surface area is reduced to only 24 sq feet. A 50% reduction in the heat losing surface area.
Manhammer, Your pre-1929 deflation theory does not hold water. It was not just a stock stock bubble. There was a real estate bubble during the 1920s as well. This is well documented.
People were paying crazy prices for real estate at that time. That was the era from which the reference to buying swamp land in Florida was coined - because people literally did buy swamp land in Florida. Sight unseen! The speculative bubble for real estate was very strong during the 1920s. Residential real estate prices did not return to the 1920s levels again until about 1950.
If the great depression was as you noted, then a repeat would be nothing to fear for real estate investors. However, the reality was a price collapsing disaster for real estate.
As for Roosevelt's policies - some helped and some hurt.