Regarding earnings, I read a Bloomberg article yesterday with the following self-explanatory title 'FASB to Adopt Accounting Rule That Adds Future Retirement Costs'. WIth a forward looking market looking forward, wouldn't earnings and net worth fall off the cliff in many cases? I see this as a huge negative for the market and it appears no one has picked up on it yet. Am I seeing this clearly?
Home slump unlikely to bite Inland commercial sites
07:04 PM PDT on Friday, September 29, 2006
"The Inland housing market slowdown will probably not affect the region's ability to absorb its due complement of office space, two analysts who study the field said Friday."
Do you think they were reponding to the OC Registers story? I think Riverside just being dillusional (again). Just like our home values will never go down and that the IE is the Center of the Univers (according to Husing).
phil, if investors had good information (i.e. they read the footnotes), the accounting change shouldn't affect stock prices at all. All the information was already available - but I do support the change because it makes the accounting more transparent.
Angela, great find - thanks. It will be fun to see who is correct about the Inland Empire.
Housing activity is declining faster than we expected, but we dont expect the spillover effects to produce a general decline in G.D.P., said Brian Gendreau, investment strategist at ING Investment Management, a unit of the ING Group. People still have a large reservoir of housing net worth they can draw on..
I find most of these statments from investment types implying corporate profits will stay sound highly suspect. It's a bit like a car salesman saying "oh, don't worry... automobile sales won't be affected". You just can't expect accurate advice / analysis from parties with vested interests.
Don't you find it troubling that the best the bulls can come up with is: "Well, people still have enough equity to keep the spending going for a few more quarters."
How is borrowing against your home, and spending the cash, a sustainable economic scenario? Doesn't that merely shift future consumption into the present, leaving a big black hole sometime in the future?
CR, given how likely free and clear owners are to be elderly, on fixed incomes, and no longer able to afford their property taxes thanks to their highly-leveraged neighbors, I predict that "prescription drug costs" are going to start getting the better of "risk adverse."
People still have a large reservoir of housing net worth they can draw on.
This is such an idiotic canard. It presupposes that someone who didn't extract equirty to finance discretionary spending when times were good, will do so when times are bad, just to help the overall economy. In fact, people react in the exact opposite way.
During rises in asset, paper wealth, people will increase spending somewhat, even without reducing their position in the asset, because they feel more wealther, hence safer from fiscal peril.
During persiods of falling asset prices, the opposite will occur.
People who were prudent during the boom time will become more prudent.
They may well extract equity to pay medical bills, but they certainly aren't going to do it to buy a new car.
Tanta brings up an interesting point about rising property prices affecting the eldery by increasing property taxes.
The reverse of that is that a property tax decline of x% percent will reduce property taxes. It may be sticky as governments that were eager to reappraise property delay the apparaisals, but it will affect local government spending in a lot of places.
Thus another entity will be affected by housing's decline in value resulting in layoffs.
This is definitely causing problems for retirees on fixed incomes.
In Hawaii, for example, I know retirees that bought condominiums for $300,000 in 2002.
The condos doubled in price to $600,000 in 2005 ... and property taxes doubled as well. HOA fees also increased, going from $350 per month to $650 per month in three years.
Net effect: These retirees are now struggling to make ends meet. They didn't want home price inflation, they only want a nice place to live in their retirement years.
What are the big drwbacks to reverse mortgages? I know the fees charged to set one up are ridiculous, but aren't the main losers likely to be the borrower's heirs?
Has anyone compared the US housing bust with that of japans real estate bust during the early nineties? Although Japan and the us are quite different, there are some striking similarties.
It's curious that Wieting of Citigroup at least admits the possibility of a "bust" in housing. This is the same outfit that employs Steven Kim, one of the most relentlessly bullish home builder analysts. He's most recently famous for calling a bottom in these stocks. After enjoying fame during the bubble years, he has most recently become the most relentlessly wrong analyst on this sector. The Abby Joseph Cohen of the housing bubble, if you will.
Bob, I'm not really up-to-date on reverse mortgages, since no one has made me do it recently. I got sent to a Fannie Mae workshop on the subject back in the early 90s while the product was still in development. I came back and told my boss that if he ever asked me to calculate a pool balance on a bunch of reverse mortgages I would run away and join the circus. I can handle the perversity of general banking (my asset is your liability) but turbo-charged perversity (my asset is my liability until your asset becomes your liability at which point my asset is your liability again) crossed some psychic limit I seem to have.
So, from a point of relative ignorance, I'd say the steep fee problem won't go away any time soon. "Forward" mortgages have become so easy to service, and servicing platforms have become so enormous, that you can make money on 25 bps or less servicing fees, unless of course negative convexity causes you to hedge your servicing rights with too many bozone-layer derivatives, but that's last week's discussion. What I meant to say is that until reverse mortgage servicing becomes competitive, it will remain very costly.
You're right that the biggest bitching about reverse mortgages is those poor heirs who don't want granny to hock her house but also don't want to pay her taxes or buy her prescriptions, either. I would tell you what I think about those people, but this is a family blog.
Bob in MA - I think it is a bit more complicated than you describe about equity extraction, but generally I still agree. You have to think about the specific spot many homeowners are going ot find themselves in, in this particular cycle, which is a peculiar one. I think that people who have owned for a long time and actually built up equity, are likely to follow the script you laid out - they will not extract more equity from their declining asset because first, they wont likely need to as badly, and also, because there is a good chance they would be eating their retirement nest egg, as well as other reasons.
However, there is probably a slice of buyers in the more recent years, who will pull out equity that is more paper equity, since they havent spent any time building real equity (payments to capital) in order to save their ass, especially those with ARMS, IOs and NA loans.
Of course the most recent buyers (and more each day as prices fall) are already under water, so they cant really tap anything.
To the extent that earlier buyers HELOCed or refi-ed, they too could be under water.
So, really, where exactly is this giant equity tap going to come from? I just dont see it as a logical course of action for many people - perhaps a few, but not enough to save the economy.
I cant read that article, but in the OC, you have about 3% of stock coming to market in the two submarkets that are already experiencing negative absorption and rising vacancy. Not a good sign for rents or further building once that pipeline empties, especially since the bust in that region will be severe and there is a lot more in the way of job losses on the way.
I was able to get that article... sounds as if Husing is protecting the realtors who use him as a source of info. Typical symbiotic relationship I saw when in the industry. The economist can't say anything bad, since noone else cares what he has to say anyway. If he says housing is going to tank, then it follows that those people shouldnt hold onto the space they dont need, because housing wont come back soon enough to fill it back up after the huge layoffs that are under way. If they give consolidate and give back space, vacancy starts rising, building slows, prices are lower, and everybody's commissions are dropping. No fun.
I am truly amazed that the bozo analysts are still taken seriously. How accurately did they predict the last recession? Just long enough for their outfits to unload all their shares.
The platform company model has always been a short run harvest model. The seed corn has been eaten and winter is coming on. There is no more flesh on the bone, the buzzards have picked the carcas clean. The 2.6 % GDP number was the bell. The economy has to pass through 2.6 on it's way to 0.5.
One of the bad attributes of bubbles is that they deflate and income that is driven by bubbles, falls. The deflation of the little NASDAQ bubble devastated earnings and was a major factor in bringing on recession. The probability that the credit bubble will collapse increases each day. It isn't just real estate, it's equity markets, liquidity markets, credit cards, autos, unbalanced trade, government deficits. Wow
Double digit corporate earnings growth does not seem likely. The market is priced to perfection plus. Valuations left the reality zone some time ago.
The intransigent Fed, liquidity, and inflation are the wild cards. It usually takes a few quarters of inflation before people realize that inflation adjusted earnings growth is actually negative. Maybe the markets will continue up for a while, maybe not.
The intransigent Fed, liquidity, and inflation are the wild cards.
Add to that China & OPEC foreign flow of funds. Brad Setser has been following this story for a couple years. Go back through the postings - food for thought there.
Our liquidity binge isn't over until Peking & Riyadh say its over. Until then the only question is where will the binge bubble up next? The Dow?
I fully agree with everyone 'here' that the fundamentals suck - but don't complain to me about them - take that complaint up with the PBoC.
BTW - a friend did a recent trip to China and tells me the reports of 'increasing offshore labor cost' is a bit exaggerated & premature.
He said while their factories in Shanghai had seen 200% plus increases in labor cost over the last few years, it still cost less than $2000 per year to hire an experienced laborer (at a base of about 60 hours per week). Do the math.
Plus if you were willing to relocate about 200 clicks west of Shanghai, to say Wuhu or Wuxi, they could hire workers there for the good old price of about 25 cents an hour (RMB adjusted). Only about 300 million or so of them left out there in central China at that price though. Better hurry.
Corporations haven't even begun to approach 'Peak Labor' yet. There may not be as much room for top line growth but there is still room for cost cutting via wage arbitrage.
Good post, dryfly. I think that many readers of this blog surmise that the real estate bubble will burst, taking some proportion-- large or small-- of the rest of the economy with it, and that will be that. But it won't. The history of the current bubble-- and, arguably the the one before that-- strongly suggests otherwise.
As far as the next 'binge bubble' being focused on the Dow, though, gee, I dunno. If that were gonna happen, why hasn't it happened already? And US economic fundamentals aren't getting any better.
Bottom line: Hope for the best, prepare for the worst. If you can figure out how to.
Tom, the history of the last bubble is practically irrelevant to understanding this one. Weve never encountered this type of lending environment, so you cant just assume past behavior can explain the future. It's never happened quite like this before. Yes, there was overbuilding before, but there is much more this time. The demand this time around, however, is of a wholly different nature. And this time, we have practically no tools to counter a housing crash, residential building recession, because of previous profligacy, and we have consumers who have never before been so indebted on such precarious terms.
As for this bubble, there is practically no history, since it has only begun to deflate. The little history that there is (builders offering 30% off) should tell you just how ugly this could get.
The sales rate has much further to fall based on fundamental demand (not investment demand, which isnt supported by anything but price appreciation, which is now toast). With prices falling, cutting rates wont bring back buyers, and even to the extent in brings in some suckers, it wont be sufficient to compensate for massive amounts of inventory relative to few potential purchasers.
May I suggest that we are in some sort of paradynm shift on capital. Once capital was scarce, now it is plentiful. So plentiful that good uses cannot be found for it.
No previous decline started with the home "ownership" rate at nearly 69%, after such an enormous increase in housing prices over and above the general inflation rate and wage increases, with the ludicrously loose mortgage lending standards of today.
The highest the ownership rate ever got before the current bubble era was 66%, back at the end of the '70s hyperinflation, which took wages up along with prices. Might the factor that constrained it to 66% have been the fact that no one could have imagined mortgage loans being made on the terms available today?
In past busts, the ownership rate has always fallen back below 64%. From today's level that would be a 5 percentage point decrease, equivalent to about 5 million "homeowners" reverting to renter status.
Think a few minutes about what that would mean ...
"Tom, the history of the last bubble is practically irrelevant to understanding this one. Weve never encountered this type of lending environment, so you cant just assume past behavior can explain the future. It's never happened quite like this before."
As a fan of clichés, I'm just amused to see 'this time it's different' being used to support a 'past returns are no indication of future results' argument. Not that I don't agree though.
If the total population has 54% equity on average
and
34% of the total population has 100% equity
then
66% of the total population average 30% equity.
In that case, a 30% reduction in real market price would leave two-thirds of the population with no home equity (on average).
This exercise changes my perspective a little.
Based on historical income-to-price ratios I was thinking a 30% correction was reasonable. No way. The government would do all sorts of things to avoid that sort of national economic crunch. Lower rates, ramp up inflation, outlaw new residential construction, hire millions building the great wall of Texas, tax deductions for retail spending, trade barriers, invade France.
The government would do all sorts of things to avoid that sort of national economic crunch.
They can lead horse to water but can't make them drink. If people stop speculating on RE then they will stop & prices will fall. End of story.
The US gov't can pump in liquidity (along with foreign CBs) and it will bubble up somewhere - but not necessarily in housing.
Ask yourself - can you remember a time where the gov't - any gov't - refloated a collapsing bubble? I can't. If somebody else can I'd like to hear/read about it.
There are plenty of places where the gov't REPLACED a bubble with another bubble - say NASDAQ for RE as a recent example - with injection of liquidity.
But I can't think of a refloat so don't expect it here. This time isn't different.
I think RE is dead men walking & the 'hot money' knows it & has moved on. The questions worth asking are (1) what is the impact on the economy overall from the RE fall - CR is trying to answer that here... and (2) if the liquidity continues to flow, where will it bubble up next and are we 'slow learners' already too late to get in on it?
BTW - I'm with vader, there is a LOT of liquidity still out there waiting for it's own personal Schumpeter creative destruction party. It will have to work double time to destroy all the hot money racing around out there (sort of like whack-a-mole) but I believe these 'creative forces' are up to the task - time is on its side.
Dryfly -- that doesn't bode well for profit. I'd be surprised if moving factories to wuxu will boost profits much.
Shark,
Two years ago I'd agree with you on this - not today. The PRC is ramping up infrastructure INLAND like you would not believe. Where just two years ago it took months to get product out of places like Wuxi & Wuhu - now it is days & weeks at most.
There are still bottlenecks at the ports but manageable. Wage arbitrage is still alive and doing well.
CR, I'm honored to make it into the bulk of a post, rather than just into the comments section. The yellow flags I was refering to were the ones that are well discussed here, housing bubble, inverted yield curve, negative savings rate, etc. Still the jury is still out on what this landing will look like, hard, soft or bumpy. I still think that the key to determining it will be in the forecasts for corporate profits, and how analysts act in revising them. No analyst wants to be forecasting that company X will grow its earnings 15% Yr/yr, and then see the company report a yr/yr decline. To much professional pride, plus economic incentives for that. They want to be right. Now forecasting earnings is not an easy task. However as you get closer and closer to the end of the period in question, the more accurate the estimate should be. Currently for 2007, the median growth rate expected for S&P 500 firms is 12.8% over 2006 levels. While that number is a median, it is a median of means for individual stocks. As a matter of arithmatic, the only ways that a mean can fall is if some of the numbers that are being averaged decline, or if new numbers are added or deleted from the mix. Historically there has not been a lot of adding or deleting of estimates at this point in the year (happens for some individual stocks, but not enough to really affect the overall S&P 500). Thus the key is to watch the number of estimates being revised upwards relative to the number being cut, or the revisions ratio. For the last 3 weeks the rolling 4 week totals of estimate revised upwards have been about 80% of the totals being cut. Prior to this, upward revisions were consistently higher than cuts, for both this year and next. This is a clear warning sign, since (assuming that the individual magnitude of cuts is on average the same for the magnitude of the increases) if revisions continue to outnumber increases the expected growth rate will start to fall. However the past 3 weeks have been in a seasonally very slow period for revisions. Revisions activity will pick up significantly as companies report their 3Q earnings. The strong expected earnings growth is the elephant in the room for the recession predictors. Quite simply, earnings dont go up double digits in a recession. Expected growth rates don't come down without estimate cuts far outnumbering estimate increases. It is very possible that the expected growth rates will not pan out. However this will be seen first in the revisions ratio. If the expected growth rates dont start falling, it seems impossible to have a recession. Keep an eye on the revisions ratio, it could be one of the most significant economic indicators out there. I would rate the current 0.8 level to be a yellow flag. If it stays there or falls further as the 3Q earnings are released, then it becomes more of a red flag.
Regarding earnings, I read a Bloomberg article yesterday with the following self-explanatory title 'FASB to Adopt Accounting Rule That Adds Future Retirement Costs'. WIth a forward looking market looking forward, wouldn't earnings and net worth fall off the cliff in many cases? I see this as a huge negative for the market and it appears no one has picked up on it yet. Am I seeing this clearly?
Business | PE.com | Southern California News | News for Inland Southern California
OFFICES KEEP ON SPROUTING
Home slump unlikely to bite Inland commercial sites
07:04 PM PDT on Friday, September 29, 2006
"The Inland housing market slowdown will probably not affect the region's ability to absorb its due complement of office space, two analysts who study the field said Friday."
Do you think they were reponding to the OC Registers story? I think Riverside just being dillusional (again). Just like our home values will never go down and that the IE is the Center of the Univers (according to Husing).
Angela
Sorry CR. Meant the above comment for your previous post.
Angela
phil, if investors had good information (i.e. they read the footnotes), the accounting change shouldn't affect stock prices at all. All the information was already available - but I do support the change because it makes the accounting more transparent.
Angela, great find - thanks. It will be fun to see who is correct about the Inland Empire.
Best Wishes.
Housing activity is declining faster than we expected, but we dont expect the spillover effects to produce a general decline in G.D.P., said Brian Gendreau, investment strategist at ING Investment Management, a unit of the ING Group. People still have a large reservoir of housing net worth they can draw on..
I find most of these statments from investment types implying corporate profits will stay sound highly suspect. It's a bit like a car salesman saying "oh, don't worry... automobile sales won't be affected". You just can't expect accurate advice / analysis from parties with vested interests.
ac,
Don't you find it troubling that the best the bulls can come up with is: "Well, people still have enough equity to keep the spending going for a few more quarters."
How is borrowing against your home, and spending the cash, a sustainable economic scenario? Doesn't that merely shift future consumption into the present, leaving a big black hole sometime in the future?
CR, given how likely free and clear owners are to be elderly, on fixed incomes, and no longer able to afford their property taxes thanks to their highly-leveraged neighbors, I predict that "prescription drug costs" are going to start getting the better of "risk adverse."
Reverse Mortgages: tomorrow's "nontraditional mortgage problem."
People still have a large reservoir of housing net worth they can draw on.
This is such an idiotic canard. It presupposes that someone who didn't extract equirty to finance discretionary spending when times were good, will do so when times are bad, just to help the overall economy. In fact, people react in the exact opposite way.
During rises in asset, paper wealth, people will increase spending somewhat, even without reducing their position in the asset, because they feel more wealther, hence safer from fiscal peril.
During persiods of falling asset prices, the opposite will occur.
People who were prudent during the boom time will become more prudent.
They may well extract equity to pay medical bills, but they certainly aren't going to do it to buy a new car.
Tanta brings up an interesting point about rising property prices affecting the eldery by increasing property taxes.
The reverse of that is that a property tax decline of x% percent will reduce property taxes. It may be sticky as governments that were eager to reappraise property delay the apparaisals, but it will affect local government spending in a lot of places.
Thus another entity will be affected by housing's decline in value resulting in layoffs.
Re: Rising property values = rising property taxes
This is definitely causing problems for retirees on fixed incomes.
In Hawaii, for example, I know retirees that bought condominiums for $300,000 in 2002.
The condos doubled in price to $600,000 in 2005 ... and property taxes doubled as well. HOA fees also increased, going from $350 per month to $650 per month in three years.
Net effect: These retirees are now struggling to make ends meet. They didn't want home price inflation, they only want a nice place to live in their retirement years.
Quite a problem.
Tanta,
What are the big drwbacks to reverse mortgages? I know the fees charged to set one up are ridiculous, but aren't the main losers likely to be the borrower's heirs?
Has anyone compared the US housing bust with that of japans real estate bust during the early nineties? Although Japan and the us are quite different, there are some striking similarties.
It's curious that Wieting of Citigroup at least admits the possibility of a "bust" in housing. This is the same outfit that employs Steven Kim, one of the most relentlessly bullish home builder analysts. He's most recently famous for calling a bottom in these stocks. After enjoying fame during the bubble years, he has most recently become the most relentlessly wrong analyst on this sector. The Abby Joseph Cohen of the housing bubble, if you will.
Bob, I'm not really up-to-date on reverse mortgages, since no one has made me do it recently. I got sent to a Fannie Mae workshop on the subject back in the early 90s while the product was still in development. I came back and told my boss that if he ever asked me to calculate a pool balance on a bunch of reverse mortgages I would run away and join the circus. I can handle the perversity of general banking (my asset is your liability) but turbo-charged perversity (my asset is my liability until your asset becomes your liability at which point my asset is your liability again) crossed some psychic limit I seem to have.
So, from a point of relative ignorance, I'd say the steep fee problem won't go away any time soon. "Forward" mortgages have become so easy to service, and servicing platforms have become so enormous, that you can make money on 25 bps or less servicing fees, unless of course negative convexity causes you to hedge your servicing rights with too many bozone-layer derivatives, but that's last week's discussion. What I meant to say is that until reverse mortgage servicing becomes competitive, it will remain very costly.
You're right that the biggest bitching about reverse mortgages is those poor heirs who don't want granny to hock her house but also don't want to pay her taxes or buy her prescriptions, either. I would tell you what I think about those people, but this is a family blog.
Bob in MA - I think it is a bit more complicated than you describe about equity extraction, but generally I still agree. You have to think about the specific spot many homeowners are going ot find themselves in, in this particular cycle, which is a peculiar one. I think that people who have owned for a long time and actually built up equity, are likely to follow the script you laid out - they will not extract more equity from their declining asset because first, they wont likely need to as badly, and also, because there is a good chance they would be eating their retirement nest egg, as well as other reasons.
However, there is probably a slice of buyers in the more recent years, who will pull out equity that is more paper equity, since they havent spent any time building real equity (payments to capital) in order to save their ass, especially those with ARMS, IOs and NA loans.
Of course the most recent buyers (and more each day as prices fall) are already under water, so they cant really tap anything.
To the extent that earlier buyers HELOCed or refi-ed, they too could be under water.
So, really, where exactly is this giant equity tap going to come from? I just dont see it as a logical course of action for many people - perhaps a few, but not enough to save the economy.
Angela,
I cant read that article, but in the OC, you have about 3% of stock coming to market in the two submarkets that are already experiencing negative absorption and rising vacancy. Not a good sign for rents or further building once that pipeline empties, especially since the bust in that region will be severe and there is a lot more in the way of job losses on the way.
Here's a link to a plot I made of the "Household Debt Service and Financial Obligations Ratios" numbers referenced in the post:
http://img126.imageshack.us/img126/4930/debtratiosly5.jpg
I was able to get that article... sounds as if Husing is protecting the realtors who use him as a source of info. Typical symbiotic relationship I saw when in the industry. The economist can't say anything bad, since noone else cares what he has to say anyway. If he says housing is going to tank, then it follows that those people shouldnt hold onto the space they dont need, because housing wont come back soon enough to fill it back up after the huge layoffs that are under way. If they give consolidate and give back space, vacancy starts rising, building slows, prices are lower, and everybody's commissions are dropping. No fun.
Housing will bounce back in 07, yeh! (idiots)
I am truly amazed that the bozo analysts are still taken seriously. How accurately did they predict the last recession? Just long enough for their outfits to unload all their shares.
The platform company model has always been a short run harvest model. The seed corn has been eaten and winter is coming on. There is no more flesh on the bone, the buzzards have picked the carcas clean. The 2.6 % GDP number was the bell. The economy has to pass through 2.6 on it's way to 0.5.
One of the bad attributes of bubbles is that they deflate and income that is driven by bubbles, falls. The deflation of the little NASDAQ bubble devastated earnings and was a major factor in bringing on recession. The probability that the credit bubble will collapse increases each day. It isn't just real estate, it's equity markets, liquidity markets, credit cards, autos, unbalanced trade, government deficits. Wow
Double digit corporate earnings growth does not seem likely. The market is priced to perfection plus. Valuations left the reality zone some time ago.
The intransigent Fed, liquidity, and inflation are the wild cards. It usually takes a few quarters of inflation before people realize that inflation adjusted earnings growth is actually negative. Maybe the markets will continue up for a while, maybe not.
The intransigent Fed, liquidity, and inflation are the wild cards.
Add to that China & OPEC foreign flow of funds. Brad Setser has been following this story for a couple years. Go back through the postings - food for thought there.
Our liquidity binge isn't over until Peking & Riyadh say its over. Until then the only question is where will the binge bubble up next? The Dow?
I fully agree with everyone 'here' that the fundamentals suck - but don't complain to me about them - take that complaint up with the PBoC.
BTW - a friend did a recent trip to China and tells me the reports of 'increasing offshore labor cost' is a bit exaggerated & premature.
He said while their factories in Shanghai had seen 200% plus increases in labor cost over the last few years, it still cost less than $2000 per year to hire an experienced laborer (at a base of about 60 hours per week). Do the math.
Plus if you were willing to relocate about 200 clicks west of Shanghai, to say Wuhu or Wuxi, they could hire workers there for the good old price of about 25 cents an hour (RMB adjusted). Only about 300 million or so of them left out there in central China at that price though. Better hurry.
Corporations haven't even begun to approach 'Peak Labor' yet. There may not be as much room for top line growth but there is still room for cost cutting via wage arbitrage.
I am not prejudiced but if its in the NY TIMES there is an agenda!!!
:>)
Paarl
Dryfly -- that dosnt bode well for profit. I'd be surprised if moving factories to wuxu will boost profits much.
Good post, dryfly. I think that many readers of this blog surmise that the real estate bubble will burst, taking some proportion-- large or small-- of the rest of the economy with it, and that will be that. But it won't. The history of the current bubble-- and, arguably the the one before that-- strongly suggests otherwise.
As far as the next 'binge bubble' being focused on the Dow, though, gee, I dunno. If that were gonna happen, why hasn't it happened already? And US economic fundamentals aren't getting any better.
Bottom line: Hope for the best, prepare for the worst. If you can figure out how to.
Tom, the history of the last bubble is practically irrelevant to understanding this one. Weve never encountered this type of lending environment, so you cant just assume past behavior can explain the future. It's never happened quite like this before. Yes, there was overbuilding before, but there is much more this time. The demand this time around, however, is of a wholly different nature. And this time, we have practically no tools to counter a housing crash, residential building recession, because of previous profligacy, and we have consumers who have never before been so indebted on such precarious terms.
As for this bubble, there is practically no history, since it has only begun to deflate. The little history that there is (builders offering 30% off) should tell you just how ugly this could get.
The sales rate has much further to fall based on fundamental demand (not investment demand, which isnt supported by anything but price appreciation, which is now toast). With prices falling, cutting rates wont bring back buyers, and even to the extent in brings in some suckers, it wont be sufficient to compensate for massive amounts of inventory relative to few potential purchasers.
May I suggest that we are in some sort of paradynm shift on capital. Once capital was scarce, now it is plentiful. So plentiful that good uses cannot be found for it.
No previous decline started with the home "ownership" rate at nearly 69%, after such an enormous increase in housing prices over and above the general inflation rate and wage increases, with the ludicrously loose mortgage lending standards of today.
The highest the ownership rate ever got before the current bubble era was 66%, back at the end of the '70s hyperinflation, which took wages up along with prices. Might the factor that constrained it to 66% have been the fact that no one could have imagined mortgage loans being made on the terms available today?
In past busts, the ownership rate has always fallen back below 64%. From today's level that would be a 5 percentage point decrease, equivalent to about 5 million "homeowners" reverting to renter status.
Think a few minutes about what that would mean ...
"Tom, the history of the last bubble is practically irrelevant to understanding this one. Weve never encountered this type of lending environment, so you cant just assume past behavior can explain the future. It's never happened quite like this before."
As a fan of clichés, I'm just amused to see 'this time it's different' being used to support a 'past returns are no indication of future results' argument. Not that I don't agree though.
If the total population has 54% equity on average
and
34% of the total population has 100% equity
then
66% of the total population average 30% equity.
In that case, a 30% reduction in real market price would leave two-thirds of the population with no home equity (on average).
This exercise changes my perspective a little.
Based on historical income-to-price ratios I was thinking a 30% correction was reasonable. No way. The government would do all sorts of things to avoid that sort of national economic crunch. Lower rates, ramp up inflation, outlaw new residential construction, hire millions building the great wall of Texas, tax deductions for retail spending, trade barriers, invade France.
The government would do all sorts of things to avoid that sort of national economic crunch.
They can lead horse to water but can't make them drink. If people stop speculating on RE then they will stop & prices will fall. End of story.
The US gov't can pump in liquidity (along with foreign CBs) and it will bubble up somewhere - but not necessarily in housing.
Ask yourself - can you remember a time where the gov't - any gov't - refloated a collapsing bubble? I can't. If somebody else can I'd like to hear/read about it.
There are plenty of places where the gov't REPLACED a bubble with another bubble - say NASDAQ for RE as a recent example - with injection of liquidity.
But I can't think of a refloat so don't expect it here. This time isn't different.
I think RE is dead men walking & the 'hot money' knows it & has moved on. The questions worth asking are (1) what is the impact on the economy overall from the RE fall - CR is trying to answer that here... and (2) if the liquidity continues to flow, where will it bubble up next and are we 'slow learners' already too late to get in on it?
BTW - I'm with vader, there is a LOT of liquidity still out there waiting for it's own personal Schumpeter creative destruction party. It will have to work double time to destroy all the hot money racing around out there (sort of like whack-a-mole) but I believe these 'creative forces' are up to the task - time is on its side.
Dryfly -- that doesn't bode well for profit. I'd be surprised if moving factories to wuxu will boost profits much.
Shark,
Two years ago I'd agree with you on this - not today. The PRC is ramping up infrastructure INLAND like you would not believe. Where just two years ago it took months to get product out of places like Wuxi & Wuhu - now it is days & weeks at most.
There are still bottlenecks at the ports but manageable. Wage arbitrage is still alive and doing well.
CR, I'm honored to make it into the bulk of a post, rather than just into the comments section. The yellow flags I was refering to were the ones that are well discussed here, housing bubble, inverted yield curve, negative savings rate, etc. Still the jury is still out on what this landing will look like, hard, soft or bumpy. I still think that the key to determining it will be in the forecasts for corporate profits, and how analysts act in revising them. No analyst wants to be forecasting that company X will grow its earnings 15% Yr/yr, and then see the company report a yr/yr decline. To much professional pride, plus economic incentives for that. They want to be right. Now forecasting earnings is not an easy task. However as you get closer and closer to the end of the period in question, the more accurate the estimate should be. Currently for 2007, the median growth rate expected for S&P 500 firms is 12.8% over 2006 levels. While that number is a median, it is a median of means for individual stocks. As a matter of arithmatic, the only ways that a mean can fall is if some of the numbers that are being averaged decline, or if new numbers are added or deleted from the mix. Historically there has not been a lot of adding or deleting of estimates at this point in the year (happens for some individual stocks, but not enough to really affect the overall S&P 500). Thus the key is to watch the number of estimates being revised upwards relative to the number being cut, or the revisions ratio. For the last 3 weeks the rolling 4 week totals of estimate revised upwards have been about 80% of the totals being cut. Prior to this, upward revisions were consistently higher than cuts, for both this year and next. This is a clear warning sign, since (assuming that the individual magnitude of cuts is on average the same for the magnitude of the increases) if revisions continue to outnumber increases the expected growth rate will start to fall. However the past 3 weeks have been in a seasonally very slow period for revisions. Revisions activity will pick up significantly as companies report their 3Q earnings. The strong expected earnings growth is the elephant in the room for the recession predictors. Quite simply, earnings dont go up double digits in a recession. Expected growth rates don't come down without estimate cuts far outnumbering estimate increases. It is very possible that the expected growth rates will not pan out. However this will be seen first in the revisions ratio. If the expected growth rates dont start falling, it seems impossible to have a recession. Keep an eye on the revisions ratio, it could be one of the most significant economic indicators out there. I would rate the current 0.8 level to be a yellow flag. If it stays there or falls further as the 3Q earnings are released, then it becomes more of a red flag.