There are currently 28,258 new condominium units either under construction or being planned in Manhattan, according to Cushman & Wakefield, the commercial real estate brokerage.
Of these, 14,430 units are in buildings that have already broken ground, and 13,928 units are in buildings that are being planned. If they are all built, the total will approach the boroughs current stock of 36,000 condo units and will be equivalent to a fifth of Manhattans 138,000 co-op units, according to census data supplied by the Real Estate Board of New York.
I love this Q and A, plus his solution. Could you imagine RE with agents actually having a barrier to entry (and knowledge).
Q. Is this a bubble bursting, or just a natural, cyclical easing after a decade of grand performance?
A. It depends on what you mean by the latter vs. the former. If you think the late 70s run up in prices was a bubble, and the late 80s run up was a bubble, then this is a bubble bursting. The same market characteristics that defined the cooling starting in 1979 and 1989 are what we are seeing today. If you think that what we have seen in the past is just a normal cycle, then this is a normal cycle. The key point here is to remember that a bubble is simply a market mispricing an asset due to excessive speculation. I do believe that houses are substantially overpriced relative to their real value. Housing markets seem very prone to these problems -- probably due to the fact that unlike other asset markets such as in stocks and bonds the amateurs tend to dominate sales and the brokers in the markets are not required to understand anything about assets, what they are and how they work -- unlike the relatively stringent licensing requirements for bond and stock traders.
he should have said declines will be moderate but persistent year over year for the next several years. An oversupply of inventory with a restriction on lendable capital due to increased regulation can only lead to declines.
Cal,
Your point is one that has struck me several times. All news stories regarding real estate make comparisons between this year/month and 1996. The proper comparison based on economics and cyclical information is to compare this year to 1989, more or less.
One thing that is being over looked by many is how much of a catalyst the Subprime borrower will be in the down turn. One major source of concern is the amount of risk layered by the Subprime lenders and borrowers that is gradually being discovered. I think this layered risk could be the catalyst that will accelerate the credit crunch and bring about the collapse in housing. This would be a classic Minskyan credit crunch. As lenders and particularly subprime lenders panic and lend only to those who dont need the lending, liquidity in housing will dry up significantly. The lender panic is clearly on its way, for instance the well know subprime mortgage lender Option One Mortgage, is facing larger than expected losses from defaults on subprime mortgages and its parent company H&R Block has hired Goldman Sachs to help dump the one time extremely profitable king of subprime lending.
RFI (resedential fixed investment) was at 6% in 2005 this is expected to drop to 4% of the GDP this is not enough to affect the current growth of 2.6%. A problem from this is the ripple effect. New home owners tend to purchase new furnishing there by a turn down will trim the earnings of the retailers.
Well, this is causing me to rethink my whole outlook on the U.S. economy. I mean if someone like Thornberg can actually earn a living spewing this kind of mealy-mouthed rubbish, then there's obviously enormous untapped wealth out there to cushion any forthcoming downturn.
Among my favorite solecisms: "But don't expect that prices will collapse by, say, 30%. Housing markets aren't that liquid." Yeah, illiquidity is one of the best protections you can have against sharp declines in price.
And, oh yes: "Housing markets seem very prone to these problems -- probably due to the fact that unlike other asset markets such as in stocks and bonds the amateurs tend to dominate sales and the brokers in the markets are not required to understand anything about assets, what they are and how they work -- unlike the relatively stringent licensing requirements for bond and stock traders." Would somebody please send this guy a DVD of "Boiler Room."
All I can say is that I hope the good Professor didn't give up tenure at the UC in order to join the private sector -- because that would truly be tragic.
Thornberg, like CR, has no crystal ball, although CR says he's going to order one. Thornberg is telling us where the next fork in the road lies, and one of the next road maps we'll need is in the flow of funds. The amount of net worth lost will allow us to estimate what will happen to consumption and the overall economy, not just residential investment.
We are entering a key period for our slo-mo train wreck. If the market does not correct double-digit nominally in 2007, it might not at all.
The selling season of August 2007 will be two years from the bubble's volume peak. Our ARM-gamblers will have reset, and our 40%-income payers will have survived two years of house poverty. If you can hold on for that long then you can hold on.
I don't like to take the pessimistic side, but I sorta think we'll see the double digits.
I'm with Name... I think the market will tumble but could be wrong...
If liquidity injection stays high (say from Asians continuing to buy down their currency & OPEC sending petrodollars out of the middle east to US for safe keeping)... then that liquidity will have to go somewhere & since its fungible, could maintain valuations of a lot of shaky assets including RE.
That isn't to say prices will take off again... but pump enough liquidity in & folks might be able to tread water long enough that prices remain flat and inflation (from all that liquidity) does the damage instead.
But it still comes down to a pick your poison scenario.
A more thoughtful analysis might include some parameters with regard to the number of homes being held, not by primary home-occupiers, but by multi-home speculators who had planned on a quick sale to make them profitable. As time progresses and the sale proves 'illiquid' at the current pricing, and mere considerations of break even begin to pressure 'investors' to not lower prices dramatically, market forces (the impulse of solvency) will begin to move the market rather swiftly to a market clearing price equilibrium.
Granted that the FED can resist this by keeping the longer end of the yield curve artificially low (so as to insulate some of the ARM crowd from their malinvestment (in this case longer end of the yield curve means anyhting of greater duration than overnight Fed Funds).
At some point, the continuing manipulation of rates and the money supply is going to result in a market break and it could be more pervasive than otherwise, and bordering on the phenomenal.
Our ARM-gamblers will have reset, and our 40%-income payers will have survived two years of house poverty. If you can hold on for that long then you can hold on.
That isn't to say prices will take off again... but pump enough liquidity in & folks might be able to tread water long enough
I'm not so sure about that; in my experience the only thing that ever bails out 40% HTIs over the longish haul is rising income, not ever more strenuous budgeting or another refi or the next-door speculator managing to unload at break-even. We used to make 40% HTI/41% DTI fixed rate loans only to young first-time homebuyers, on the theory that it's doable when you are far from your peak earning years and "history" implies you have nowhere to go but up, income-wise. (In those days, of course, the models figured annual appreciation of 3-4% and young buyers were expected to eventually upgrade out of the starter home with a cash downpayment derived from a couple of years of saving the difference between 50% rent and 40% mortgage payment. The DLQ rate was icky, but there were options for both borrowers and lenders besides "nothing." Lordy, how old I am.) I just can't see where borrowers who qualified at the peak of their earning years at 40% or more going to housing payments at the top of the RE market with zip equity are going to find the additional income to bring that debt service load down to sustainable while they wait out the RE market "just" another year. Is anyone predicting real income gains, cheaper medical costs, or substantial deflation in food and fuel in the next year or so? A substantial drop in long (or longish) rates sufficient to put these folks in the money for a rate/term refi powerful enough to beat inflation? Realtors (and Atlas Van Lines) volunteering to work for free and lenders waiving all their closing costs so that these folks can relocate for a better job without bringing cash to the closing table? Noteholders discovering a magic way to "work out" a loan that started out one step away from impossible and then got worse? Subprime lenders staying solvent long enough to be there when the worm turns? If these folk "hang on" for another year their loans get old enough to hit the "historical" prime years for default. Maybe in the brave new world all you have to do is somehow manage to get through the first 24 months, then you break out of "historical" default expectations.
I don't have a crystal ball either, but the number of stars, planets and miscellaneous asteroids that have to line up for this horoscope to be even moderately cheerful is too much for me. Maybe it's just because I bought both orange juice and coffee yesterday. I'm going to have to learn to get a buzz out of tap water . . .
Tanta - as usual insightful and informed. Not being in the industry, aside from the direct mertis of your assessment, how much of the industry makes it's decisions on that kind of careful thinking ?
Judging from the idiot..scratch that...the young and foolish voices on the phone pushing interest only ARMS or somesuch unsinn not a lot. But then again don't know many decision-makers.
I ask because it helps me(us) get a read on the broader outlook.
history doesn't repeat but it could rhyme. this is not the past and there are things today that are different than before. positive changes to name a few: more sophisticated lending instruments/financial markets to hedge risk, lesser impact of oil on GDP, burgeoning of higher paying information service jobs, massive loaning of money by export driven countries keeping rates at historic lows could all contribute to a different outcome. on the flip side you have more unqualified borrowers entering the mix who couldn't before, massive debt run-ups, a nation with most growth coming from consumption/RE that doesn't produce wealth, the exporting of jobs.
no one really knows how ugly it'll get so i don't see thornbergs analysis all that offensive.
Right on, per usual. At the end of two years, these peoples' houses will be worth less then they paid for them and there's a chance they'll be making less too. Anyone who thinks we've seen the end of downward pressure on wages due to the development of the big Asian economies is going to be in for a surprise.
DaveL, I spent 2001-2004 working for a mostly-conduit (bought closed loans from direct lenders, sold them in securities or in limited cases held them in investment portfolio). I hadn't had my nose in credit policy all day long for about five years prior to that. Even in that short period my approach to credit analysis had clearly become, um, stale.
The universal answers to any question I or any of the other Grizzled Vets would occasionally waste meeting time with:
The average homeowner moves every seven years. This proves that they won't stay in the home long enough for the ARM to reset.
You can always refi before [anything bad happens].
Mortgages have always been the safest investment out there.
This isn't a "bubble." It's fundamentals!
Leverage is the key to wealth. People aren't stupid.
But you are obsessing about cash flow and forgetting the tax advantages!
We can always make the correspondent buy the loan back/indemnify us against losses. Nothing is more stable than a mortgage banker's net worth!
The carry trade can't explode faster than we can unwind our positions, because we're more sophisticated than you poor buggers with your 486K PCs were back in 1994. We've got QRM, dude.
But we priced that risk.
Investment property loans are really safer than owner-occupied, because the borrowers are business people and Have A Plan and don't get all emotional about their properties (I actually heard this one in a meeting of mortgage professionals). Plus there are all these immigrants who are going to need a place to rent. No, we aren't also counting on them to be buyers, you're missing the point.
Feel free to circle any of the above that still sound plausible.
Tanta - if there is a flaw in the 'bubble melt down' model it is ignoring 'liquidity'. By that I don't mean the Fed and state regulated lenders or the US domestic credit markets at all - the stuff we are all fixating on.
Rather I'm thinking of the big two:
(1) the Asian need to manipulate their currency to buy jobs - meaning they have to recycle dollars back to the US in such a way they don't drive up their currency OR cause excessive internal wage based inflation in THEIR home economies.
(2) Throw in OPEC & petrodollars too. Even with 'low' oil prices of say $40-$50/bbl they literally pump money out of the ground (Saudi cost to produce is something in the single digits per barrel).
They need to get the dollars out so that in the 'unlikely' event they have political unrest they have some place to go where they don't have to live like.. well, like Palestinians.
Even if we tighten down our requirements - what's to stop either of these dollar pumps from essentially coming into the market & throwing money at anyone who will borrow?
I mean if you are the Sheik of Arabeik and lose 30% of you billions in principal but escape & save your head... and still have 70% remaining in US or UK MBS... call it a victory.
Likewise how much is it worth to the Central Committee of the CP & PBoC to buy jobs & maintain social harmony? Is it worth taking some loses on your US MBS portfolio? Remember they have something like 30 million people migrating from rural China to coastal cities almost every year - need to find work for them all, somehow - labor arbitrage is the way they have elected to do this.
To be honest with you - I'd expect to see some pretty funky alt 'alternative financing' mechanisms from sub 'sub-prime' lenders - many of them based offshore if necessary - if we are successful at tightening 'our' standards.
And I don't see anyone even thinking this way - call me 'crazy dryfly' if you will - but until liquidity is dried up, it will search for a home in debtors pockets.
And please don't 'misread' my above post... I'm NOT bullish on RE & don't think domestic or alt-financial institutions are going to come out completely wound free.
I just think 'global liquidity' will act like life support & transfusions to keep the patient (RE market) 'alive'. Alive in the way Terri Schiavo was 'alive'.
If AG & BB got one thing right - it was the 'conundrum' - recognizing that this situation has changed the landscape significantly.
Now if they were only clever enough to do something about it before our industrial base is hollowed out to the point we are all real estate agents & loan originators.
We have a money guru with a weekly talk show in Boston named Rich Shaffer. He has formally anounced the end of the housing slowdown. He added "it's different here in Boston. There's no place left to build."
The current RE cycle is a credit cycle rather then a business cycle.
It has been the easy money that has fueled the the entire buying and MEW activity. The RE correction or crash,soft landing, hand landing will reflect how the credit cycle continues to play out.
But clearly this can't go on forever, so as Herbert Stein said, it will stop.
I think there are two corollaries to that. First, it will go on longer than you think it will. And second, it will end more abruptly than you expect. And in a crisis, liquidity may evaportate. Look what happened in 1998.
China knows well that it will need to ease off this treadmill and is trying to increase domestic demand to take up the slack. They seem to be aware of the mistake Japan made.
I agree ron - but housing cycles are almost always 'credit cycles'... regardless it could be 'very hard' or 'soft' depending on how the credit dries up THIS time. With the 'globalization' of credit it will be very difficult to predict how it will change.
For those saying THIS WILL BE a soft landing for sure SPECIFICALLY because of this globalization. I would say to them you could make just as good a case why it could be a VERY hard landing for the same reasons.
If Asian CBs, Asian nouveau rich investors & OPEC decide there is a better solution to their needs than buying US denominated MBS & 10 years... possible since the decisions they make now aren't based on valuations but rather on 'other considerations' like currency manipulation & safe havens... if they can figure out a better way to accomplish those goals & change their preference for what they buy... then the bottom could fall out on us here from a 'credit market' perspective.
In such a situation Ben might not even have the cash to buy gas for his helicopter if that happens.
But it is just so difficult to tell - that's why Setser's blog is so good - doesn't predict a whole lot a la Roubini but sure is documenting the run up in reserves & flows of this 'liquidity'.
I feel like a blind mouse in a barn full of Clydesdales.
unlike the relatively stringent licensing requirements for bond and stock traders
You're kidding, right? As a former Series 7, 24, 63 licenseholder (and one other I can't remember) as well as real estate licenses in a few states, "relatively stringent" just isn't correct. There is more math in the former, but both are largely ethics driven. In my Series 7 training class, after all of one week of studying, over 95% of the candidates passed.
4shizl,
I think I understand what the author is talking about regarding liquidity and price declines. Several times in my career a given market has for all intents and purposes closed down. No trading, zip. What happened? By common, though unspoken, agreement, buy side and sell side didn't remark positions in any appreciable way since they had no way of doing so. The last time I saw this was the autumn of the collapse of LTCM. So if you look back at the junk market for that period it looked flat when in reality there were no buyers. Trading began again when it became clear LTCM was NOT the canary in a coal mine and the market quickly returned to earlier levels.
I don't know for certain if that's what he means, but it is the charitable reading.
China knows well that it will need to ease off this treadmill and is trying to increase domestic demand to take up the slack. They seem to be aware of the mistake Japan made.
If you read Setser - it doesn't appear to be showing up in the reserve accumulation data yet. So maybe they know they should quit like an over weight person knows they should diet while waiting in line at the drive through at McDonald's. Tomorrow.
And if it is actually starting, it looks like maybe their 'individual' investors are increasing their buy just as the CBs have been backing off.
It will end. Everything does. Eventually. When & how is the question. Looking at purely domestic forces is probably insufficient right now.
That's why a 'temporary' soft landing is entirely possible. That's my main point.
I mean no one has answered my a question I've been asking for a long time... Could I go to China, get a bunch of manufacturer's & regional banks flush with US greenbacks & originate loans in the US DIRECTLY (say via domestic sub-contractors in strip malls like Ameriquest) or via internet & phone like how Geico sells insurance - do it all from offices in China with contracted lawyers recording & 'collateralizing' the loans in courthouses in the US... and completely bypass the US financial industry & their cut... and subsequent regulations and overhead?
In effect out source the out-sourcers?
Who could stop Joe Uptohisnecksixpack from taking out such a loan that way to buy more time? Could BB do much about it considering WTO & capital flow liberalizations?
It sounds like I've stumbled on some of Tanta's better meds... but why couldn't this happen & drag this thing out 'forever' considering the appetites of US borrowers & offshore lenders?
Depends. If you are going to collateralize and sell down the loans, the you are either going to have to do so via a registered entity or you are going to pay a meaningful premium to do a private placement. In either of those cases you will still be competing with, not bypassing the US financial markets.
If you just wanted to create a new lending entity and were willing to hold the mortgages? Then you'd be another "hard money" guy. Those are folks who can charge big rates to sub-sub prime borrowers and who, for the most part, hold their loans.
Then you'd be another "hard money" guy. Those are folks who can charge big rates to sub-sub prime borrowers and who, for the most part, hold their loans.
Ya but banker - NOT in the US & not with US capital. Collateral would be US & recorded same as always - capital source & ultimate originating entity would be offshore. Just use McBankers her in the US to record & verify there actually IS an asset.
Right now if I'm Acme Pretty Good Machine Co in Shanghai selling product in the US - I'm flush with USD. My only option is to go to the regional local Chinese bank & exchange it for RMB (8:1). That regional bank is then encouraged to exchange their USD holdings with the PBoC that then goes out & buys MBS & treasuries with the USD to 'get rid' of them & keep the RMB 'competitive'.
But that creates a huge amount of RMB in China - inflationary to say the least. To keep money growth IN CHINA within bounds - the regional banks authorized by PBoC - go and sell domestic bonds to soak up the RMB created from the influx of dollars turned into RMB.
It's really pretty savvy on the part of those dumb commies. Create RMB bonds collateralized against USD denominated securities & keep the currency cheap to boot.
Everything works honky dory as long as MBS &/or treasuries can be bought AND their domestic bonds can be sold to keep the dollars cycling. There is accumulations though - showing up in THEIR reserves & OUR debt offset by their own 'internal debt' and our accumulation of 'asset values' (RE) here.
It all makes sense - sort of - if you take enough Percocets.
Now supposedly our tightening is going to restrict this. Somebody at the Fed must not be too comfortable with other countries CBs playing economic wag the dog.
If that happens, what's to stop the local Chinese banks & or ACME from taking their dollars and either buying MBS or even going one step further & originating loans in the US themselves with the hard earned dollars we gave them at WalMart?
They wouldn't resell the debt but rather hold it themselves as a way to get around BOTH the PBoC & US financial industry and still sterilize a bunch of USD.
From what I'm reading it sounds like the PBoC might think this is just fine AS LONG AS it doesn't result in them losing control of the RMB in China.
And this is just one not very sophisticated 'financial engineer' (me) thinking of this issue. Imagine what smart hedge fund types could dream up.
Point is - if there is liquidity, it will find a home no matter what the Fed or regulatory bodies do... UNLESS they attack the core problem which is the excess liquidity itself (and good luck doing that).
How professorial is this from Thornberg: But all in all there are two scenarios.
Very. He wants us (maybe somewhat unfit recreational economists) to know the basic groundwork underneath the 'hard' and 'soft' landing script that everybody is using when they have exhausted everyone else's patience with "Ugly".
Not very. He spares us, all in all, the details, all in all, of his thorough history of previous housing downturns here: If people respond to a cooling in housing prices by cutting back on home spending it could get ugly
and caters to the less fit recreational economists for whom 'ugly' is the only pitch they can handle.
Q. Given current trends in real wages, (and increasing income disparity distributions) where is that spending going to come from? (Windfalls from $1/gal gasoline?) and what is it going to be spent on? (Mega yachts built in Taiwan?)
We used to make 40% HTI/41% DTI fixed rate loans only to young first-time homebuyers, on the theory that it's doable when you are far from your peak earning years and "history" implies you have nowhere to go but up, income-wise.
Seems like this sort of logic would also apply in an inflationary environment (i.e. as a counterbalance to high interest rates in the 80s), and make lenders more cautious in a potentially disinflationary environment.
To put it another way, it provides a counterargument to the "people should buy more house 'cause interest rates are low" argument.
"Meeting participants judged that consumer expenditures going forward were likely to expand at a steady pace a little below the growth in disposable income, supported by favorable financial conditions, continued increases in employment and income, and the recent decline in energy prices. Nonetheless, many participants expressed concern that ongoing developments in the housing market could have a more pronounced impact on consumer and other spending, especially if house prices declined significantly."
Watch house prices and their effect on net worth. Once you know what net worth is, you can calculate "ugly" on the back of an envelope.
Liquidity is like a waterfall,the impact area reflects the shock while its effect decreases as the wave moves to the edges.
In Calif the outer edges, central valley,wine country,San Diego,etc have shown the largest drop off in RE sales. Bay Area and Greater LA with higher stable employment are suffering also but not to the same degree. Could be the the significantly larger debt service requirements both in gov't and private sector have started to soak up some of this excess money.
Those are some exceptional percosets. But your basic point is correct, liquidity will find a home. If you're China and Europe is growing so slowly it doesn't need big capital, Japan has $10 trillion of liquidity, India needs capital, but since they are a regional threat (of sorts) you'd probably rather not go there, where else can you put your money to work but in the US? Same with the oil money. The Chinese are getting as locked into us as we are to them. Tough to see them taking steps to damage their own investments, isn't it?
For some up-to-the-minute insight into the question of whether illiquidity will prevent abrupt and severe price declines in the SFR market, read the following:
If you're betting on a housing/consumer-led recession (as I am), you gotta love these guys at Lennar. Banker, do your bond-trading friends in Greenwich chant poems at their weekly meetings too?
If you're China and Europe is growing so slowly it doesn't need big capital, Japan has $10 trillion of liquidity, India needs capital, but since they are a regional threat (of sorts) you'd probably rather not go there, where else can you put your money to work but in the US?
And see that is another part of the problem - we look at their motives as 'putting money to work' as in getting a return off the investment... they look at it as 'putting money to work' as in keeping their currency weak to continue to export.
And anyway, who in India is going to buy a lot of big screens?
In a perverse sort of way our perceptions of why they do what they do and their perceptions of why we do what we do don't form a 'counter balance' to force a convergence to a reasonable & rational market rebalancing on BOTH sides of the Pacific but rather a reinforcing negative feedback loop driving greater & greater imbalance.
This thing is likely to end very badly - but maybe not as soon as many think with RE & mortgage markets just one (albeit large) piece of this liquidity story.
Oh, banker, don't be so touchy. I was only trying to make the point that your experience in the bond market is not likely to be applicable to what's unfolding in the housing arena. The strategy that Lennar and its competitors are pursuing appears to be one of "mutually assured destruction." Maybe it's an outgrowth of construction site machismo -- maybe there's some other pathology at work. Regardless, the outcome will be a searing sense of betrayal on the part of their recent customer base -- something that I believe will haunt the industry (and the economy) for years to come.
If need be, we can agree to disagree on this. No offense intended. ;>)
So civil 4shzl, thank you for that demo. I wonder how large the party is that think this is mere satire? (Not you, I hope.)[Could this be some more?]
One (me too) needs to be so careful in times like this where the slightest little thing that could be construed as 'just vicious' is...even more so...construed as vicious.
Ok, thank you atleast for the appearance of an apology that I, for one, am only too willing to accept...as atleast a brilliant acting job.
Shoot, I quit.
In the long run, it is pretty clear that China will eventually stop accumulating US holdings, and possibly spending down what that have accumulated so far. No country HAS to export to grow an economy. The Chinese government could, for example, just buy products from Chinese manafacturers and toss them in the ocean to keep people busy. Exporting is better than public works spending simply because there is less tendency towards corruption and junk projects (bridges to nowhere). But in the long run, the Chinese are not so stupid as to continue accepting pieces of paper in exchange for real goods, when they could demand good in exchange for goods.
Liquidity, debt, trade deficits, etc are all meaningless in the long run. You can't eat money. What counts is the real economy. Right now the US is consuming about 6% more than it produces, and racking up debts to pay for that 6%. At some point, the US will thus either have to consume less or work more. Not just be 6% either, but rather 6% (to close the trade deficit) plus a few percent more (let's say 2%) to pay interest on the debt we've run up so far (unless we plan to repudiate our debts somehow). Bottom line, the US will either have to cut consumption by about 8% or work about 8% more hours. Working extra is probably not feasible, so I won't discuss that option further.
In dollar terms, for someone working 40 hours a week and earning $50K a year, pre-tax and maybe $40K after tax, an 8% cut in consumption equates to about a $4K pay cut after-tax (the cut in consumption is non-deductible on our taxes, because it is effecively accomplished by higher prices), or a 10% cut in after-tax income. Another way of looking at the problem is to say that everyone will have their taxes raised by about 40% (taxes are $10K in the example and $4K/$10K = 40%). My number might be off, but it's pretty clear there's going to be a big hit to US living standards in the future.
If you're betting on a housing/consumer-led recession (as I am), you gotta love these guys at Lennar. Banker, do your bond-trading friends in Greenwich chant poems at their weekly meetings too?
Gee I've been waiting on it for at least 6 years. The time I've been reading prudentbear.com. The situation has not made any sense under classical economics at least since then Of course there are polical reasons, the commies want to keep their labor force from revolt by keeping them producing and the US keeps their labor force from revolt by easy credit.
Since the ending has not happened, I am of the opinion that Capitalism has gone the way of the dodo bird, done in my governments, though a cynic would note that except for government support, most times against workers, Capitalism would be in the came league as Marxism, a quant theory taught in obsecure history courses.
However, one solution is for the Chinese to simply burn $$$s. Solves the problem for all.
You know, it is not much different from today's situation where rich folks invest in intangable securities, bidding them up to a point where there is a bubble bust and the things lose value, thus in effect 'burning' the currency.
Indeed one could visualize a future world where the poor and workers are minimally provided for by a goverment who allows the wealty unlimited ability to 'surpress' the workers so that they can put their surplus into flamable secuirities which combust while keeping inflation very low. Everyone is happy, low inflation, no one starves, the wealthy are very rich in things in storehouse that rust into nothingless.
Frank - the Chinese didn't just get 'pieces of paper' out of this deal... they got the biggest & fastest industrialization the world has ever seen. Vader is right - they could burn all the paper IOUs and they would still have the factories, ports, infrastructure and now a trained work force. It's amazing what worthless paper can buy.
Oh but then worthless paper also buys you McHovels & crap at WalMart to put in the McHovel.
And as for making stuff and throwing it in the ocean? They couldn't have done that 10 years ago because 10 years ago they didn't have the capacity to make stuff - they sure do now.
Export was the only way they get there fast and to their credit (and our multi-nationals) they did it.
The trillion $$$ reserve accumulation isn't 'worthless paper'... it's hostage money... not in a military sense but rather in an economic sense - they can defend their currency to the tune of a billion dollar additional explosion of liquidity if they have to. And the fact they would be willing to 'burn it' via liquidation of this holding on world markets is a MAD threat our treasury & commerce dept & even congress needs to keep in the FRONT of their mind, not the back.
I agree this can't go on forever - but like vader pointed out it has gone on a lot longer than I would have ever expected. And of course, as Lord Keynes so eloquently put it 60-70 some years ago... "In the long run we are all dead."
This debate brings to mind the comment "Some day this war is gonna end." from Apocalypse Now.
Some day this dollar is going to end...but the madness keeps getting deeper. I still sort of believe in the dollar, but someday it will be the old silver and gold denominated dollar....
As long as the blips keep wringing out more and more resources from the rest of the world...I personally believe the drop in consumption will be about 25% for generation Y, but we will be living virtually by then- people are already beginning to eke out a living online in virtual society- with real money at stake.
As for housing prices, I think that there will be a period of loss and stagnation, but that the house prices of 2001 are already history, never to be seen again as inflation begins to subsume through wages the stagnation that we perceive. Stagflation for anything that doesn't have a world price. Got gold? World price? Got oil? World price? Got bauxite? World price?
Got soybeans? Same thing.
Watch the dollar begin a serious decline in real things. Copper will most likely never drop below two dollars again...
Some day this dollar is going to end...but the madness keeps getting deeper. I still sort of believe in the dollar, but someday it will be the old silver and gold denominated dollar....
I agree with everything you write but the above... we'll never see precious metal denominated money again. It will never happen - nation states won't allow it.
However that isn't to say we won't continue using gold, silver, land, stocks (enterprises), etc. - plug in hard non-money asset of your choice - as a store of wealth when fiat money goes bad.
The wealthy have done that forever & still do it... they transfer 'money' into wealth as fast as they can and then only transfer it back into money to consummate necessary transactions before converting what they can back into wealth.
Wealth preservation is foremost consideration, income second... for wage slaves its always the reverse.
Money can be a form of wealth but not all wealth is money.
dryfly,
one might argue the nation states will never allow it, but their writ doesn't run very far these days...I knew it was going to be very interesting when the motor cycle gangs started using 100 ounce bars of silver for drug transactions a couple of years ago. So others are starting to use metals as a proxy for cash.
Now the informal economy still runs on greenbacks, but I am beginning to believe with the advent of a "cashless" society gold and silver will resume trading underground. Just look at how successful pawn shops are at that interface.
So dry, while the middle class still believes in the greenback, the rest of the world and our criminals are starting to not believe any more...that I find to be a little bit disturbing. I also note that the etf's for precious metals seem to be well loved by wall street in spite of the lousy IRS treatment of gains.
I knew it was going to be very interesting when the motor cycle gangs started using 100 ounce bars of silver for drug transactions a couple of years ago. So others are starting to use metals as a proxy for cash.
That isn't so hard to understand - money laundering.
My sis worked w/ the DOJ Criminal Tax & her husband still does for IRS... we talked about stuff like this all the time - metal bars can be melted, cast, exported and recast & sold... ANYWHERE. No serial numbers, no trace.
But for the rest of us that won't happen - instead we'll convert assets into dollars then buy & sell in dollars then convert the dollars back into something else to 'save' the wealth.
Even today no one 'holds' the greenback directly for wealth preservation, or very few do - but they do hold assets denominated in greenbacks - of which gold is one option... land & stocks, bonds are others.
The question is which asset appreciates more from a pure wealth perspective (say what could it buy in the future vs now)... not necessarily how many dollars is it worth... that would depend on what those dollars can buy.
As the US dollar falls from the BWII perch in future years - Americans will have to become as savvy as Europeans & Asians at watching currency effects. Up until now they haven't had to do that.
But that still won't mean the dollar or some other fiat money will fall as the primary medium of transaction. Hells Angels might take silver bars for meth but you'll still swipe a card & pay dollars for gasoline.
The average american can't exist except for that piece of plastic- which is why they are beginning to sell stuff at a fantastic rate to maintain enough to use that piece of plastic. I have followed prices on ebay for quite a while, and collectables have truly gone to the dictum of one more than you need, the extra is worthless. I do find that the coin market is currently in a bit of disbelief with the ability to purchase coins below melt value cropping up on a regular basis. In other words nobody really believes that the metals are going to continue going up...
Of course, I see at some independent gas stations that they take silver pre64 in exchange for gas- unofficially of course.
I think the underground economy is closer than we think in terms of a reality for the joe six pack folks.
after all even calculated risk is doing a blog entry on the interest on the national debt....
Re the Asians: Yes they want to buy US$ debt for trade reasons. But that doesn't mean they are not going to want a risk premium for MBS's. They can just buy Treasuries you know. They are not going to throw their nominal dollars away.
Re the oil producers: They have no reason at all to buy US$ debt. They can just sell their oil to someone who can supply them with real goods - i.e. the Europeans, Chinese, Japanese, etc. Plus oil is a limited resource that they don't want to sell at high volume/low prices - the exact opposite of the Chinese.
There are currently 28,258 new condominium units either under construction or being planned in Manhattan, according to Cushman & Wakefield, the commercial real estate brokerage.
Of these, 14,430 units are in buildings that have already broken ground, and 13,928 units are in buildings that are being planned. If they are all built, the total will approach the boroughs current stock of 36,000 condo units and will be equivalent to a fifth of Manhattans 138,000 co-op units, according to census data supplied by the Real Estate Board of New York.
Changing Course to Avert a Glut - NY Times
This guys views are worthless.
I am not going to comment on this post.
I love this Q and A, plus his solution. Could you imagine RE with agents actually having a barrier to entry (and knowledge).
Q. Is this a bubble bursting, or just a natural, cyclical easing after a decade of grand performance?
A. It depends on what you mean by the latter vs. the former. If you think the late 70s run up in prices was a bubble, and the late 80s run up was a bubble, then this is a bubble bursting. The same market characteristics that defined the cooling starting in 1979 and 1989 are what we are seeing today. If you think that what we have seen in the past is just a normal cycle, then this is a normal cycle. The key point here is to remember that a bubble is simply a market mispricing an asset due to excessive speculation. I do believe that houses are substantially overpriced relative to their real value. Housing markets seem very prone to these problems -- probably due to the fact that unlike other asset markets such as in stocks and bonds the amateurs tend to dominate sales and the brokers in the markets are not required to understand anything about assets, what they are and how they work -- unlike the relatively stringent licensing requirements for bond and stock traders.
he should have said declines will be moderate but persistent year over year for the next several years. An oversupply of inventory with a restriction on lendable capital due to increased regulation can only lead to declines.
Cal,
Your point is one that has struck me several times. All news stories regarding real estate make comparisons between this year/month and 1996. The proper comparison based on economics and cyclical information is to compare this year to 1989, more or less.
One thing that is being over looked by many is how much of a catalyst the Subprime borrower will be in the down turn. One major source of concern is the amount of risk layered by the Subprime lenders and borrowers that is gradually being discovered. I think this layered risk could be the catalyst that will accelerate the credit crunch and bring about the collapse in housing. This would be a classic Minskyan credit crunch. As lenders and particularly subprime lenders panic and lend only to those who dont need the lending, liquidity in housing will dry up significantly. The lender panic is clearly on its way, for instance the well know subprime mortgage lender Option One Mortgage, is facing larger than expected losses from defaults on subprime mortgages and its parent company H&R Block has hired Goldman Sachs to help dump the one time extremely profitable king of subprime lending.
From looking at 30 years of historical price movements for the DOW and S&P 500, it seems we're headed for a new support. Look at the charts:
http://datawink.com/blog
RFI (resedential fixed investment) was at 6% in 2005 this is expected to drop to 4% of the GDP this is not enough to affect the current growth of 2.6%. A problem from this is the ripple effect. New home owners tend to purchase new furnishing there by a turn down will trim the earnings of the retailers.
Well, this is causing me to rethink my whole outlook on the U.S. economy. I mean if someone like Thornberg can actually earn a living spewing this kind of mealy-mouthed rubbish, then there's obviously enormous untapped wealth out there to cushion any forthcoming downturn.
Among my favorite solecisms: "But don't expect that prices will collapse by, say, 30%. Housing markets aren't that liquid." Yeah, illiquidity is one of the best protections you can have against sharp declines in price.
And, oh yes: "Housing markets seem very prone to these problems -- probably due to the fact that unlike other asset markets such as in stocks and bonds the amateurs tend to dominate sales and the brokers in the markets are not required to understand anything about assets, what they are and how they work -- unlike the relatively stringent licensing requirements for bond and stock traders." Would somebody please send this guy a DVD of "Boiler Room."
All I can say is that I hope the good Professor didn't give up tenure at the UC in order to join the private sector -- because that would truly be tragic.
"But don't expect that prices will collapse by, say, 30%"
Thornberg: See 1990-1995 housing. 30% drops easy in many areas.
Maybe he means 30% in one year. That's a reasonable expectation.
Thornberg, like CR, has no crystal ball, although CR says he's going to order one. Thornberg is telling us where the next fork in the road lies, and one of the next road maps we'll need is in the flow of funds. The amount of net worth lost will allow us to estimate what will happen to consumption and the overall economy, not just residential investment.
We are entering a key period for our slo-mo train wreck. If the market does not correct double-digit nominally in 2007, it might not at all.
The selling season of August 2007 will be two years from the bubble's volume peak. Our ARM-gamblers will have reset, and our 40%-income payers will have survived two years of house poverty. If you can hold on for that long then you can hold on.
I don't like to take the pessimistic side, but I sorta think we'll see the double digits.
IF consumers cut back on spending?!!!
IF?
Oops. Just a minute. My rose-colored glasses had slipped.
OK now. The economy is just fine.
MSM, can't live with 'em and can't shoot 'em.
BTW, I've already cut back on spending.
I'm with Name... I think the market will tumble but could be wrong...
If liquidity injection stays high (say from Asians continuing to buy down their currency & OPEC sending petrodollars out of the middle east to US for safe keeping)... then that liquidity will have to go somewhere & since its fungible, could maintain valuations of a lot of shaky assets including RE.
That isn't to say prices will take off again... but pump enough liquidity in & folks might be able to tread water long enough that prices remain flat and inflation (from all that liquidity) does the damage instead.
But it still comes down to a pick your poison scenario.
A more thoughtful analysis might include some parameters with regard to the number of homes being held, not by primary home-occupiers, but by multi-home speculators who had planned on a quick sale to make them profitable. As time progresses and the sale proves 'illiquid' at the current pricing, and mere considerations of break even begin to pressure 'investors' to not lower prices dramatically, market forces (the impulse of solvency) will begin to move the market rather swiftly to a market clearing price equilibrium.
Granted that the FED can resist this by keeping the longer end of the yield curve artificially low (so as to insulate some of the ARM crowd from their malinvestment (in this case longer end of the yield curve means anyhting of greater duration than overnight Fed Funds).
At some point, the continuing manipulation of rates and the money supply is going to result in a market break and it could be more pervasive than otherwise, and bordering on the phenomenal.
Our ARM-gamblers will have reset, and our 40%-income payers will have survived two years of house poverty. If you can hold on for that long then you can hold on.
That isn't to say prices will take off again... but pump enough liquidity in & folks might be able to tread water long enough
I'm not so sure about that; in my experience the only thing that ever bails out 40% HTIs over the longish haul is rising income, not ever more strenuous budgeting or another refi or the next-door speculator managing to unload at break-even. We used to make 40% HTI/41% DTI fixed rate loans only to young first-time homebuyers, on the theory that it's doable when you are far from your peak earning years and "history" implies you have nowhere to go but up, income-wise. (In those days, of course, the models figured annual appreciation of 3-4% and young buyers were expected to eventually upgrade out of the starter home with a cash downpayment derived from a couple of years of saving the difference between 50% rent and 40% mortgage payment. The DLQ rate was icky, but there were options for both borrowers and lenders besides "nothing." Lordy, how old I am.) I just can't see where borrowers who qualified at the peak of their earning years at 40% or more going to housing payments at the top of the RE market with zip equity are going to find the additional income to bring that debt service load down to sustainable while they wait out the RE market "just" another year. Is anyone predicting real income gains, cheaper medical costs, or substantial deflation in food and fuel in the next year or so? A substantial drop in long (or longish) rates sufficient to put these folks in the money for a rate/term refi powerful enough to beat inflation? Realtors (and Atlas Van Lines) volunteering to work for free and lenders waiving all their closing costs so that these folks can relocate for a better job without bringing cash to the closing table? Noteholders discovering a magic way to "work out" a loan that started out one step away from impossible and then got worse? Subprime lenders staying solvent long enough to be there when the worm turns? If these folk "hang on" for another year their loans get old enough to hit the "historical" prime years for default. Maybe in the brave new world all you have to do is somehow manage to get through the first 24 months, then you break out of "historical" default expectations.
I don't have a crystal ball either, but the number of stars, planets and miscellaneous asteroids that have to line up for this horoscope to be even moderately cheerful is too much for me. Maybe it's just because I bought both orange juice and coffee yesterday. I'm going to have to learn to get a buzz out of tap water . . .
Tanta - as usual insightful and informed. Not being in the industry, aside from the direct mertis of your assessment, how much of the industry makes it's decisions on that kind of careful thinking ?
Judging from the idiot..scratch that...the young and foolish voices on the phone pushing interest only ARMS or somesuch unsinn not a lot. But then again don't know many decision-makers.
I ask because it helps me(us) get a read on the broader outlook.
Thanks.
history doesn't repeat but it could rhyme. this is not the past and there are things today that are different than before. positive changes to name a few: more sophisticated lending instruments/financial markets to hedge risk, lesser impact of oil on GDP, burgeoning of higher paying information service jobs, massive loaning of money by export driven countries keeping rates at historic lows could all contribute to a different outcome. on the flip side you have more unqualified borrowers entering the mix who couldn't before, massive debt run-ups, a nation with most growth coming from consumption/RE that doesn't produce wealth, the exporting of jobs.
no one really knows how ugly it'll get so i don't see thornbergs analysis all that offensive.
Tanta,
Right on, per usual. At the end of two years, these peoples' houses will be worth less then they paid for them and there's a chance they'll be making less too. Anyone who thinks we've seen the end of downward pressure on wages due to the development of the big Asian economies is going to be in for a surprise.
DaveL, I spent 2001-2004 working for a mostly-conduit (bought closed loans from direct lenders, sold them in securities or in limited cases held them in investment portfolio). I hadn't had my nose in credit policy all day long for about five years prior to that. Even in that short period my approach to credit analysis had clearly become, um, stale.
The universal answers to any question I or any of the other Grizzled Vets would occasionally waste meeting time with:
Feel free to circle any of the above that still sound plausible.
Tanta - if there is a flaw in the 'bubble melt down' model it is ignoring 'liquidity'. By that I don't mean the Fed and state regulated lenders or the US domestic credit markets at all - the stuff we are all fixating on.
Rather I'm thinking of the big two:
(1) the Asian need to manipulate their currency to buy jobs - meaning they have to recycle dollars back to the US in such a way they don't drive up their currency OR cause excessive internal wage based inflation in THEIR home economies.
(2) Throw in OPEC & petrodollars too. Even with 'low' oil prices of say $40-$50/bbl they literally pump money out of the ground (Saudi cost to produce is something in the single digits per barrel).
They need to get the dollars out so that in the 'unlikely' event they have political unrest they have some place to go where they don't have to live like.. well, like Palestinians.
Even if we tighten down our requirements - what's to stop either of these dollar pumps from essentially coming into the market & throwing money at anyone who will borrow?
I mean if you are the Sheik of Arabeik and lose 30% of you billions in principal but escape & save your head... and still have 70% remaining in US or UK MBS... call it a victory.
Likewise how much is it worth to the Central Committee of the CP & PBoC to buy jobs & maintain social harmony? Is it worth taking some loses on your US MBS portfolio? Remember they have something like 30 million people migrating from rural China to coastal cities almost every year - need to find work for them all, somehow - labor arbitrage is the way they have elected to do this.
To be honest with you - I'd expect to see some pretty funky alt 'alternative financing' mechanisms from sub 'sub-prime' lenders - many of them based offshore if necessary - if we are successful at tightening 'our' standards.
And I don't see anyone even thinking this way - call me 'crazy dryfly' if you will - but until liquidity is dried up, it will search for a home in debtors pockets.
And please don't 'misread' my above post... I'm NOT bullish on RE & don't think domestic or alt-financial institutions are going to come out completely wound free.
I just think 'global liquidity' will act like life support & transfusions to keep the patient (RE market) 'alive'. Alive in the way Terri Schiavo was 'alive'.
If AG & BB got one thing right - it was the 'conundrum' - recognizing that this situation has changed the landscape significantly.
Now if they were only clever enough to do something about it before our industrial base is hollowed out to the point we are all real estate agents & loan originators.
We have a money guru with a weekly talk show in Boston named Rich Shaffer. He has formally anounced the end of the housing slowdown. He added "it's different here in Boston. There's no place left to build."
The current RE cycle is a credit cycle rather then a business cycle.
It has been the easy money that has fueled the the entire buying and MEW activity. The RE correction or crash,soft landing, hand landing will reflect how the credit cycle continues to play out.
So, Rich Shaffer never heard of bulldozers?
dryfly,
But clearly this can't go on forever, so as Herbert Stein said, it will stop.
I think there are two corollaries to that. First, it will go on longer than you think it will. And second, it will end more abruptly than you expect. And in a crisis, liquidity may evaportate. Look what happened in 1998.
China knows well that it will need to ease off this treadmill and is trying to increase domestic demand to take up the slack. They seem to be aware of the mistake Japan made.
I agree ron - but housing cycles are almost always 'credit cycles'... regardless it could be 'very hard' or 'soft' depending on how the credit dries up THIS time. With the 'globalization' of credit it will be very difficult to predict how it will change.
For those saying THIS WILL BE a soft landing for sure SPECIFICALLY because of this globalization. I would say to them you could make just as good a case why it could be a VERY hard landing for the same reasons.
If Asian CBs, Asian nouveau rich investors & OPEC decide there is a better solution to their needs than buying US denominated MBS & 10 years... possible since the decisions they make now aren't based on valuations but rather on 'other considerations' like currency manipulation & safe havens... if they can figure out a better way to accomplish those goals & change their preference for what they buy... then the bottom could fall out on us here from a 'credit market' perspective.
In such a situation Ben might not even have the cash to buy gas for his helicopter if that happens.
But it is just so difficult to tell - that's why Setser's blog is so good - doesn't predict a whole lot a la Roubini but sure is documenting the run up in reserves & flows of this 'liquidity'.
I feel like a blind mouse in a barn full of Clydesdales.
Cal,
unlike the relatively stringent licensing requirements for bond and stock traders
You're kidding, right? As a former Series 7, 24, 63 licenseholder (and one other I can't remember) as well as real estate licenses in a few states, "relatively stringent" just isn't correct. There is more math in the former, but both are largely ethics driven. In my Series 7 training class, after all of one week of studying, over 95% of the candidates passed.
4shizl,
I think I understand what the author is talking about regarding liquidity and price declines. Several times in my career a given market has for all intents and purposes closed down. No trading, zip. What happened? By common, though unspoken, agreement, buy side and sell side didn't remark positions in any appreciable way since they had no way of doing so. The last time I saw this was the autumn of the collapse of LTCM. So if you look back at the junk market for that period it looked flat when in reality there were no buyers. Trading began again when it became clear LTCM was NOT the canary in a coal mine and the market quickly returned to earlier levels.
I don't know for certain if that's what he means, but it is the charitable reading.
China knows well that it will need to ease off this treadmill and is trying to increase domestic demand to take up the slack. They seem to be aware of the mistake Japan made.
If you read Setser - it doesn't appear to be showing up in the reserve accumulation data yet. So maybe they know they should quit like an over weight person knows they should diet while waiting in line at the drive through at McDonald's. Tomorrow.
And if it is actually starting, it looks like maybe their 'individual' investors are increasing their buy just as the CBs have been backing off.
Here:
Rising private Chinese purchases of US debt
It will end. Everything does. Eventually. When & how is the question. Looking at purely domestic forces is probably insufficient right now.
That's why a 'temporary' soft landing is entirely possible. That's my main point.
I mean no one has answered my a question I've been asking for a long time... Could I go to China, get a bunch of manufacturer's & regional banks flush with US greenbacks & originate loans in the US DIRECTLY (say via domestic sub-contractors in strip malls like Ameriquest) or via internet & phone like how Geico sells insurance - do it all from offices in China with contracted lawyers recording & 'collateralizing' the loans in courthouses in the US... and completely bypass the US financial industry & their cut... and subsequent regulations and overhead?
In effect out source the out-sourcers?
Who could stop Joe Uptohisnecksixpack from taking out such a loan that way to buy more time? Could BB do much about it considering WTO & capital flow liberalizations?
It sounds like I've stumbled on some of Tanta's better meds... but why couldn't this happen & drag this thing out 'forever' considering the appetites of US borrowers & offshore lenders?
Somebody?
Dryfly,
Depends. If you are going to collateralize and sell down the loans, the you are either going to have to do so via a registered entity or you are going to pay a meaningful premium to do a private placement. In either of those cases you will still be competing with, not bypassing the US financial markets.
If you just wanted to create a new lending entity and were willing to hold the mortgages? Then you'd be another "hard money" guy. Those are folks who can charge big rates to sub-sub prime borrowers and who, for the most part, hold their loans.
Then you'd be another "hard money" guy. Those are folks who can charge big rates to sub-sub prime borrowers and who, for the most part, hold their loans.
Ya but banker - NOT in the US & not with US capital. Collateral would be US & recorded same as always - capital source & ultimate originating entity would be offshore. Just use McBankers her in the US to record & verify there actually IS an asset.
Right now if I'm Acme Pretty Good Machine Co in Shanghai selling product in the US - I'm flush with USD. My only option is to go to the regional local Chinese bank & exchange it for RMB (8:1). That regional bank is then encouraged to exchange their USD holdings with the PBoC that then goes out & buys MBS & treasuries with the USD to 'get rid' of them & keep the RMB 'competitive'.
But that creates a huge amount of RMB in China - inflationary to say the least. To keep money growth IN CHINA within bounds - the regional banks authorized by PBoC - go and sell domestic bonds to soak up the RMB created from the influx of dollars turned into RMB.
It's really pretty savvy on the part of those dumb commies. Create RMB bonds collateralized against USD denominated securities & keep the currency cheap to boot.
Everything works honky dory as long as MBS &/or treasuries can be bought AND their domestic bonds can be sold to keep the dollars cycling. There is accumulations though - showing up in THEIR reserves & OUR debt offset by their own 'internal debt' and our accumulation of 'asset values' (RE) here.
It all makes sense - sort of - if you take enough Percocets.
Now supposedly our tightening is going to restrict this. Somebody at the Fed must not be too comfortable with other countries CBs playing economic wag the dog.
If that happens, what's to stop the local Chinese banks & or ACME from taking their dollars and either buying MBS or even going one step further & originating loans in the US themselves with the hard earned dollars we gave them at WalMart?
They wouldn't resell the debt but rather hold it themselves as a way to get around BOTH the PBoC & US financial industry and still sterilize a bunch of USD.
From what I'm reading it sounds like the PBoC might think this is just fine AS LONG AS it doesn't result in them losing control of the RMB in China.
And this is just one not very sophisticated 'financial engineer' (me) thinking of this issue. Imagine what smart hedge fund types could dream up.
Point is - if there is liquidity, it will find a home no matter what the Fed or regulatory bodies do... UNLESS they attack the core problem which is the excess liquidity itself (and good luck doing that).
How professorial is this from Thornberg:
But all in all there are two scenarios.
Very. He wants us (maybe somewhat unfit recreational economists) to know the basic groundwork underneath the 'hard' and 'soft' landing script that everybody is using when they have exhausted everyone else's patience with "Ugly".
Not very. He spares us, all in all, the details, all in all, of his thorough history of previous housing downturns here:
If people respond to a cooling in housing prices by cutting back on home spending it could get ugly
and caters to the less fit recreational economists for whom 'ugly' is the only pitch they can handle.
Q. Given current trends in real wages, (and increasing income disparity distributions) where is that spending going to come from? (Windfalls from $1/gal gasoline?) and what is it going to be spent on? (Mega yachts built in Taiwan?)
We used to make 40% HTI/41% DTI fixed rate loans only to young first-time homebuyers, on the theory that it's doable when you are far from your peak earning years and "history" implies you have nowhere to go but up, income-wise.
Seems like this sort of logic would also apply in an inflationary environment (i.e. as a counterbalance to high interest rates in the 80s), and make lenders more cautious in a potentially disinflationary environment.
To put it another way, it provides a counterargument to the "people should buy more house 'cause interest rates are low" argument.
From the October Fed minutes:
"Meeting participants judged that consumer expenditures going forward were likely to expand at a steady pace a little below the growth in disposable income, supported by favorable financial conditions, continued increases in employment and income, and the recent decline in energy prices. Nonetheless, many participants expressed concern that ongoing developments in the housing market could have a more pronounced impact on consumer and other spending, especially if house prices declined significantly."
Watch house prices and their effect on net worth. Once you know what net worth is, you can calculate "ugly" on the back of an envelope.
Liquidity is like a waterfall,the impact area reflects the shock while its effect decreases as the wave moves to the edges.
In Calif the outer edges, central valley,wine country,San Diego,etc have shown the largest drop off in RE sales. Bay Area and Greater LA with higher stable employment are suffering also but not to the same degree. Could be the the significantly larger debt service requirements both in gov't and private sector have started to soak up some of this excess money.
Dryfly,
Those are some exceptional percosets.
But your basic point is correct, liquidity will find a home. If you're China and Europe is growing so slowly it doesn't need big capital, Japan has $10 trillion of liquidity, India needs capital, but since they are a regional threat (of sorts) you'd probably rather not go there, where else can you put your money to work but in the US? Same with the oil money. The Chinese are getting as locked into us as we are to them. Tough to see them taking steps to damage their own investments, isn't it?
We'll see.
For some up-to-the-minute insight into the question of whether illiquidity will prevent abrupt and severe price declines in the SFR market, read the following:
West Palm Beach Business: News, stock quotes, financial, Real Money, health care, real estate | The Palm Beach Post
If you're betting on a housing/consumer-led recession (as I am), you gotta love these guys at Lennar. Banker, do your bond-trading friends in Greenwich chant poems at their weekly meetings too?
404 | MiamiHerald.com
If you're China and Europe is growing so slowly it doesn't need big capital, Japan has $10 trillion of liquidity, India needs capital, but since they are a regional threat (of sorts) you'd probably rather not go there, where else can you put your money to work but in the US?
And see that is another part of the problem - we look at their motives as 'putting money to work' as in getting a return off the investment... they look at it as 'putting money to work' as in keeping their currency weak to continue to export.
And anyway, who in India is going to buy a lot of big screens?
In a perverse sort of way our perceptions of why they do what they do and their perceptions of why we do what we do don't form a 'counter balance' to force a convergence to a reasonable & rational market rebalancing on BOTH sides of the Pacific but rather a reinforcing negative feedback loop driving greater & greater imbalance.
This thing is likely to end very badly - but maybe not as soon as many think with RE & mortgage markets just one (albeit large) piece of this liquidity story.
4shzl,
It appears polite discourse may be beyond you. Too bad.
As for my friends in Greenwich? They don't have any time to chant, they barely have time to count all their money.
Oh, banker, don't be so touchy. I was only trying to make the point that your experience in the bond market is not likely to be applicable to what's unfolding in the housing arena. The strategy that Lennar and its competitors are pursuing appears to be one of "mutually assured destruction." Maybe it's an outgrowth of construction site machismo -- maybe there's some other pathology at work. Regardless, the outcome will be a searing sense of betrayal on the part of their recent customer base -- something that I believe will haunt the industry (and the economy) for years to come.
If need be, we can agree to disagree on this. No offense intended. ;>)
So civil 4shzl, thank you for that demo. I wonder how large the party is that think this is mere satire? (Not you, I hope.)[Could this be some more?]
One (me too) needs to be so careful in times like this where the slightest little thing that could be construed as 'just vicious' is...even more so...construed as vicious.
Ok, thank you atleast for the appearance of an apology that I, for one, am only too willing to accept...as atleast a brilliant acting job.
Shoot, I quit.
I have placed my thoughts on rent versus buy for the bay area at Crude Thoughts
In the long run, it is pretty clear that China will eventually stop accumulating US holdings, and possibly spending down what that have accumulated so far. No country HAS to export to grow an economy. The Chinese government could, for example, just buy products from Chinese manafacturers and toss them in the ocean to keep people busy. Exporting is better than public works spending simply because there is less tendency towards corruption and junk projects (bridges to nowhere). But in the long run, the Chinese are not so stupid as to continue accepting pieces of paper in exchange for real goods, when they could demand good in exchange for goods.
Liquidity, debt, trade deficits, etc are all meaningless in the long run. You can't eat money. What counts is the real economy. Right now the US is consuming about 6% more than it produces, and racking up debts to pay for that 6%. At some point, the US will thus either have to consume less or work more. Not just be 6% either, but rather 6% (to close the trade deficit) plus a few percent more (let's say 2%) to pay interest on the debt we've run up so far (unless we plan to repudiate our debts somehow). Bottom line, the US will either have to cut consumption by about 8% or work about 8% more hours. Working extra is probably not feasible, so I won't discuss that option further.
In dollar terms, for someone working 40 hours a week and earning $50K a year, pre-tax and maybe $40K after tax, an 8% cut in consumption equates to about a $4K pay cut after-tax (the cut in consumption is non-deductible on our taxes, because it is effecively accomplished by higher prices), or a 10% cut in after-tax income. Another way of looking at the problem is to say that everyone will have their taxes raised by about 40% (taxes are $10K in the example and $4K/$10K = 40%). My number might be off, but it's pretty clear there's going to be a big hit to US living standards in the future.
My number might be off, but it's pretty clear there's going to be a big hit to US living standards in the future.
This will be a very bitter pill for the Consumption Society to swallow; perhaps it can be slipped into the Ritalin, Prozac and Viagra.
If you're betting on a housing/consumer-led recession (as I am), you gotta love these guys at Lennar. Banker, do your bond-trading friends in Greenwich chant poems at their weekly meetings too?
404 | MiamiHerald.com
Why am I not surprised to find McMansion builders reciting doggerel that likens home buyers to worms?
Their chairman mysteriously dropped dead this month--a poetry-related mishap?
When will it end?
Gee I've been waiting on it for at least 6 years. The time I've been reading prudentbear.com. The situation has not made any sense under classical economics at least since then Of course there are polical reasons, the commies want to keep their labor force from revolt by keeping them producing and the US keeps their labor force from revolt by easy credit.
Since the ending has not happened, I am of the opinion that Capitalism has gone the way of the dodo bird, done in my governments, though a cynic would note that except for government support, most times against workers, Capitalism would be in the came league as Marxism, a quant theory taught in obsecure history courses.
However, one solution is for the Chinese to simply burn $$$s. Solves the problem for all.
You know, it is not much different from today's situation where rich folks invest in intangable securities, bidding them up to a point where there is a bubble bust and the things lose value, thus in effect 'burning' the currency.
Indeed one could visualize a future world where the poor and workers are minimally provided for by a goverment who allows the wealty unlimited ability to 'surpress' the workers so that they can put their surplus into flamable secuirities which combust while keeping inflation very low. Everyone is happy, low inflation, no one starves, the wealthy are very rich in things in storehouse that rust into nothingless.
Frank - the Chinese didn't just get 'pieces of paper' out of this deal... they got the biggest & fastest industrialization the world has ever seen. Vader is right - they could burn all the paper IOUs and they would still have the factories, ports, infrastructure and now a trained work force. It's amazing what worthless paper can buy.
Oh but then worthless paper also buys you McHovels & crap at WalMart to put in the McHovel.
And as for making stuff and throwing it in the ocean? They couldn't have done that 10 years ago because 10 years ago they didn't have the capacity to make stuff - they sure do now.
Export was the only way they get there fast and to their credit (and our multi-nationals) they did it.
The trillion $$$ reserve accumulation isn't 'worthless paper'... it's hostage money... not in a military sense but rather in an economic sense - they can defend their currency to the tune of a billion dollar additional explosion of liquidity if they have to. And the fact they would be willing to 'burn it' via liquidation of this holding on world markets is a MAD threat our treasury & commerce dept & even congress needs to keep in the FRONT of their mind, not the back.
I agree this can't go on forever - but like vader pointed out it has gone on a lot longer than I would have ever expected. And of course, as Lord Keynes so eloquently put it 60-70 some years ago... "In the long run we are all dead."
Correction...
to the tune of a billion dollar additional explosion of liquidity
Make that..
to the tune of a trillion dollar additional explosion of liquidity
Begs the question... If a billion here and a billion there is 'real money'... what's a trillion here and there?
This debate brings to mind the comment "Some day this war is gonna end." from Apocalypse Now.
Some day this dollar is going to end...but the madness keeps getting deeper. I still sort of believe in the dollar, but someday it will be the old silver and gold denominated dollar....
As long as the blips keep wringing out more and more resources from the rest of the world...I personally believe the drop in consumption will be about 25% for generation Y, but we will be living virtually by then- people are already beginning to eke out a living online in virtual society- with real money at stake.
As for housing prices, I think that there will be a period of loss and stagnation, but that the house prices of 2001 are already history, never to be seen again as inflation begins to subsume through wages the stagnation that we perceive. Stagflation for anything that doesn't have a world price. Got gold? World price? Got oil? World price? Got bauxite? World price?
Got soybeans? Same thing.
Watch the dollar begin a serious decline in real things. Copper will most likely never drop below two dollars again...
Some day this dollar is going to end...but the madness keeps getting deeper. I still sort of believe in the dollar, but someday it will be the old silver and gold denominated dollar....
I agree with everything you write but the above... we'll never see precious metal denominated money again. It will never happen - nation states won't allow it.
However that isn't to say we won't continue using gold, silver, land, stocks (enterprises), etc. - plug in hard non-money asset of your choice - as a store of wealth when fiat money goes bad.
The wealthy have done that forever & still do it... they transfer 'money' into wealth as fast as they can and then only transfer it back into money to consummate necessary transactions before converting what they can back into wealth.
Wealth preservation is foremost consideration, income second... for wage slaves its always the reverse.
Money can be a form of wealth but not all wealth is money.
dryfly,
one might argue the nation states will never allow it, but their writ doesn't run very far these days...I knew it was going to be very interesting when the motor cycle gangs started using 100 ounce bars of silver for drug transactions a couple of years ago. So others are starting to use metals as a proxy for cash.
Now the informal economy still runs on greenbacks, but I am beginning to believe with the advent of a "cashless" society gold and silver will resume trading underground. Just look at how successful pawn shops are at that interface.
So dry, while the middle class still believes in the greenback, the rest of the world and our criminals are starting to not believe any more...that I find to be a little bit disturbing. I also note that the etf's for precious metals seem to be well loved by wall street in spite of the lousy IRS treatment of gains.
I knew it was going to be very interesting when the motor cycle gangs started using 100 ounce bars of silver for drug transactions a couple of years ago. So others are starting to use metals as a proxy for cash.
That isn't so hard to understand - money laundering.
My sis worked w/ the DOJ Criminal Tax & her husband still does for IRS... we talked about stuff like this all the time - metal bars can be melted, cast, exported and recast & sold... ANYWHERE. No serial numbers, no trace.
But for the rest of us that won't happen - instead we'll convert assets into dollars then buy & sell in dollars then convert the dollars back into something else to 'save' the wealth.
Even today no one 'holds' the greenback directly for wealth preservation, or very few do - but they do hold assets denominated in greenbacks - of which gold is one option... land & stocks, bonds are others.
The question is which asset appreciates more from a pure wealth perspective (say what could it buy in the future vs now)... not necessarily how many dollars is it worth... that would depend on what those dollars can buy.
As the US dollar falls from the BWII perch in future years - Americans will have to become as savvy as Europeans & Asians at watching currency effects. Up until now they haven't had to do that.
But that still won't mean the dollar or some other fiat money will fall as the primary medium of transaction. Hells Angels might take silver bars for meth but you'll still swipe a card & pay dollars for gasoline.
The average american can't exist except for that piece of plastic- which is why they are beginning to sell stuff at a fantastic rate to maintain enough to use that piece of plastic. I have followed prices on ebay for quite a while, and collectables have truly gone to the dictum of one more than you need, the extra is worthless. I do find that the coin market is currently in a bit of disbelief with the ability to purchase coins below melt value cropping up on a regular basis. In other words nobody really believes that the metals are going to continue going up...
Of course, I see at some independent gas stations that they take silver pre64 in exchange for gas- unofficially of course.
I think the underground economy is closer than we think in terms of a reality for the joe six pack folks.
after all even calculated risk is doing a blog entry on the interest on the national debt....
Re the Asians: Yes they want to buy US$ debt for trade reasons. But that doesn't mean they are not going to want a risk premium for MBS's. They can just buy Treasuries you know. They are not going to throw their nominal dollars away.
Re the oil producers: They have no reason at all to buy US$ debt. They can just sell their oil to someone who can supply them with real goods - i.e. the Europeans, Chinese, Japanese, etc. Plus oil is a limited resource that they don't want to sell at high volume/low prices - the exact opposite of the Chinese.