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As the steroids pump up the muscles, the cheap credit pumps up the bubble.
Take away the cheap credit, the bubble must shrivel like the muscles of a girly boy cut off by his steroid pusher while living too far from the Mexican border.
How far can designer body modification analogies be stretched to explain past economic modifications of all girly boy market interventionists?
As credit is cut off, will girly boy financial geniuses lose their financial powers and be reduced to pumped up wannabes with sand kicked in their faces?
At the end of the “correction”, will the housing market/girly boys be:
10% cheaper/smaller? 20% cheaper/smaller? 30% cheaper/smaller? 40% cheaper/smaller? 50% cheaper/smaller? God help us, even cheaper or smaller than that?
NO, I tell you, this spring prices will be at an all time high and they will PUMP YOU UP UP UP!
True or not? Offended or not?
tsusiat
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The US Treasury must rollover 1 trillion dollars of short term debt this year and 1 trillion next year.
This is because they took advantage of low interest rates in years past to finance the national debt with short term paper.
Because of this, bond yields will continue to rise for years to come; even if the fed stops raising interest rates. This means that mortgage interest rates will continue to rise as it becomes more and more difficult to float all that paper.
The debt service for the national debt will cause massive spending cuts or taxes to rise. Where will the money come from if taxes rise?
Here’s a thought. Before Regan took office, corporations were paying 32% of all revenues collected. Today corporations contribute only 7%. Should corporate contributions be ratcheted back up to pay for the shortfall?
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It all boils down to the job situation, and the job situation boils down to how much the US consumers can still afford to keep spending, just a reminder, our consumers account for 2/3 of the US economy.
So I say housing price in SoCal will come down at least 50% in general, I always laugh when I heard people saying that LA has a supply problem, WTF are they talking about. Bay Area is the only place on the west coast with a true supply problem because the valley is confined by natural mountainous barriers on both sides, so desirable pockets of Bay Area may not come down that much, but 20-30% is still very possible. Once you get into places like Tracy, Danville, etc. expect half off at least. The high-end properties north of 2M in the Bay Area will take a serious haircut, there are simply not that many multi-millionaires to support that kind of price, and the last time I checked, 0 down neg-am loan is not offered to a 5M property.
For AZ, NV, oh well, I won't be surprised if I see price shaved off 80% Tokyo style.
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The perfect economic storm is brewing.
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I for one don't think housing prices would go down by 50% or any such obscene number.
Here is some investing 101 revision.
10% drop wipes out 11% gain.
15% drop wipes out 17% gain.
20% drop wipes out 25% gain.
25% drop wipes out 33% gain.
33% drop wipes out 50% gain.
So, it doesn't have to drop by 50%. I will be very satisfied with 20% drop, which wipes out 25% gain. I think we will have nominal price drop of 20% by 2008. The real problem would start afterwords, as I suspect housing will NOT be able to keep up with inflation at all. I do think, the deficit and money supply problems will cause long term inflation. And at that rates, it will be difficult to "afford" the monthly PITI payments.
Of course, this is just a guess.
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Cruiser,
there is a flaw in your argument, where is the money pumped? Because where the pumped money enter the system will largely affect how it will affect prices of different asset prices.
For example, if you drop 100 dollar bill down from a helicopter to everyone on the street, you will see run-up in price for food and normal consumer items. If you pump the money through giving money to major IBanks for free, you see a different beast.
The reason why our inflation is contained is because it was dropped at a more concentrated point through the financial channels, the only way for those few parties who got showered with the free money is to lend it out at an artificially low rate, and hence the realty run-up. Also, that is why you see the stock market, commodity market, bond market all sustained at high levels, because that is where free money is channeled.
However, the run-up in commodity will eventually come back and haunt us in the consumer products, oil is such an important part of our economy not only in transporation but also in plastic containers for different beverages and food...It takes time for the commodity price to work its way through the aisles. When an average family gets squeezed on essential items like gas, heating oil, food, how can he spend much on buying a home, no matter how loose the lending policy is?
So housing price will fall, because housing in the end cannot be disconnected from people's income and pay. Anything that has something to do with our lives has a ceiling set by people's affordability.
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There will be an after Christmas sale on houses this year. Everyting 50% off.
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To BA,
if you don't disagree that Americans are made of special materials, and therefore entirely different people in psychology and emotional reaction from the Japanese, then housing can easily come down 50%. In fact, in the 1990 crash of SoCal, housing of select areas did come down 50% and more! I have a colleague who bought in LA in 1989, he didn't see his home returning to the original nominal value until 1999! At the lowest point, his home was worth 40% of what he paid. I won't even venture to compare the state of affairs in 1991 to 2006.
You will get your vengeance, just need to be patient. Once the market starts going down, market psychology will again overshoot. I have no problems seeing the nominal value of housing in the bay area return to 2001 price.
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Cruser,
The fed can only play its game for so long.
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Hate to rent,
The link was on this site. I believe a recent news story.
Not sure exactly where. Check it out.
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A news story on The Daily Reckoning site, I believe.
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Owneroc,
For the prices to reach 2001, they have to drop by 50%. Even if that happens, it will take a long time - like 4/5 years. Actually, till 2008, I do not see a significant downturn. That's when the ARM resets will happen en masse. I also believe housing prices are sticky on their way down.
Prices in Phoenix are not down much, in spite of inventory explosion. BA is way behind the curve.
The 50% drop you expect - is that real prices or nominal prices ?
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Two more interesting facts.
The majority of Americans (More than 50%) earn less money today than they did 5 years ago, when factoring in inflation.
And, the national savings rate is now negative.
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I expect 50% price in nominal terms for outlying areas of Bay Area, Tracy and beyond. I concur that it won't happen before 2008, that is why I won't even consider trading up until after 2009, when the ARM reset crest is past.
The saver for America is, people don't have that kind of savings to sustain the negative cashflow. In Japan, personal bankruptcy is considered a shame to himself and his family, they would rather commit suicide than turning the keys back to the bank, plus if one gets into the troubles in a family, everybody pitches in the help. I don't see this kind of culture here, so if there is a blowup, it happens faster. How many Joe sixpacks have enough savings to last 6 months? 12 months? What do you think the average household savings of the Bay Area is? I believe that even for the 250K families, it will be significantly less than 200K after they get into a home, and we know the annual running cost of mortgage + property tax + insurance, mortgage insurance these days for a million-dollar-home Bay Area household.
Prior to the bubble burst in Japan, the average household savings rate was close to 20%, as compared to negative savings rate for the US. For Hong Kong, the average savings *per person* (including kids and infants) was around $75K in 1997. Yeah I know housing is sticky on the way down, but the homedebtor must have enough financial cushion to make it sticky. Therefore, I don't see the average American moron homedebtors have that kind of financial resources to hold on to their homes when the market turns.
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I told my family and friends a few years ago;
The next depression will make the great depression look like a picnic.
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Some of you may like this.
http://tinyurl.com/m432t
I like the inventory figure for Pleasanton, for example. (Topic of discussion in prev thread) In case you have problems opening the link, the stats are for week ending 3/30.
Listings 139 compared to 56 last year. More than 100% increase.
Pending sales 11 compared to 30 last year. Almost 66% drop.
So I calculate. Ratio of inventory to pending sales has gone from
56/30 = 1.87
to
139/11 = 12.64
WOW ! This is pending sales, a very good leading indicator. I mean WOW.
This is just one week, and may be a particularly bad week. But heck, the numbers are awesome.
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Different Sean's website
George says:
And now, I bring you a letter written to a Florida Broker (ripped from Mike Shedlock’s site)
Is this a true story, or a 'composite' fictionalised picture? Can you source it for me, George? I could certainly use that...
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To BA Or Not To BA Says:
Drops and rates...
In mu locality, San Diego, I expect 40% drop. Yes, I know that pretty much wipes out 100% appreciation minus inflation over the same timeframe.
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HARM's website
tsusiat,
Hope you don't mind me taking the liberty of supplying artwork for your thread --just couldn't resist with all your steroids/girly man imagery. :-)
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Different Sean's website
George Says:
Here ya go DS
thanks, have sent him a note...
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I think I found a property that will break the cuckooness index of the Los Gatos neighborhood.
Here is one property that is for sale at 2.75M, it was bought in 1998 for $270K, no space added, just some kitchen and bathroom remodeling. Must be one hell of a remodel with 10x jump in "value", but judging from the photos, one can only say such a remodel must be very subtle.
Welcome to the dotcom of real estate. Whoever is gonna buy that place for more than 1.375M should have his brain checked out.