patrick.net

I wish this low inflation and low interest rate scenario would not happen because higher inflation is very friendly to my investment strategy and positions. However, all of the data and economic forces point to this low inflation scenario for the longer term. So I will adjust to it... We can't change it through wishful thinking.

If you study the demographic profile of our country you would see that the age distributions are such that we are about to experience a significant increase in household formations

You Sir are a fucking idiot.

Leveraged ownership of real estate and stocks. Debt declines in real value as the assets rise in nominal price and real value. Moderate inflation accentuates the economics of this position, and rising inflation enables one to achieve lower real interest rates, as the debt markets lag the shift.

Surfer-X... Thank you for the compliment.

One must also examine the evolving nature of the fundamentals that drive real housing demand. There will be a decline, but how far depends not only on the current frothiness but also the underlying enduring fundamentals.

Huh?

If it were women and children I would feel guilty. But I know that it is just a bunch of bay area types who are as selfish as I am and, hence, when the screw gets turned on them it brings no pangs of guilt.

There should be no guilt whatsoever. Money ought to be amoral. Market participants ought to be apathetic.

If you study the demographic profile of our country you would see that the age distributions are such that we are about to experience a significant increase in household formations

If that is the case rent will go up extraordinarily. Once it is confirmed that such fundamental change overpowers the effects of the credit cycle, I will probably buy.

On the other hand, credit and markets do tend to affect the fundamentals. I will not be surprised that "household formation" be muted by "market conditions".

Moreover, one can argue that the current boom was caused by the anticipation of the "householf formation" going too far.

We will see.

If you study the demographic profile of our country you would see that the age distributions are such that we are about to experience a significant increase in household formations

FYI, here's a graph on population demographics.
I see a bulge past the usual "household formation" age
http://tinyurl.com/7r4pe

Zephyr, can you explain why the rate of household formation will increase?--flak

I would really like to hear that too Zehpyr. I agree wholeheartedly with basically everything you said EXCEPT for this about the demographics pointing to increased household formation. I don't see that in the data. I thought the demographic trend was toward an aging, larger population of boomers followed by a much smaller younger generation (even if you clump together Gen X, Gen Y, and the new breed coming up now), most of whom have already bought in to the RE market. And of course, many boomers own TWO homes. I don't see how we get to increased household formation going forward from where we are now.

More reaons why it is good to be a renter.

Homeowners' insurance: 10% to 35% more
Heating costs: 20% to 40% more

I don’t see how we get to increased household formation going forward from where we are now.

Especially given the fact that many have put off having children in order to be able to buy an overpriced shitbox.

I'll let ya'll know how this one works out:

Your Day Buy to open order for 1 TOL Dec 35 Put at a limit price of $0.95 was executed at $0.95. See order # 6 for details.

Gambling on the housing market is fun!
Disclaimer: options trading is not a viable long-term investment strategy for most people. Actually, it is risky and stupid, but it's more fun that the horse track! And better odds if you have some clue of what's going on...

Especially given the fact that many have put off having children in order to be able to buy an overpriced shitbox.

Exactly. Current conditions have really stunted a "normal life" for many in the bay area.

"People who are involved in raising the next generation are typically paid far less than they would make doing something else. You can earn more, for instance, teaching real estate than (teaching school).

Figures!............We need to hand out pins to the workers in the condom factories!

Funny thing, people want bigger houses yet they don't want children.

The MSN article is about a book by Phillip Longman, THE EMPTY CRADLE: How Falling Birthrates Threaten World Prosperity And What to Do About It.

The thing about this particular book is it contains some pretty good demographic research and is probably correct about the world's long term population trends. Where Longman falls short is in the over-broad conclusions he draws from that trend --namely, that a falling population will somehow "threaten" world prosperity.

Longman is definitely a student of the anti-Ehrlich "prosperity equals population growth" and "quantity over quality of life" school of thought. If anything, decades of environmental and economic research suggests the exact opposite conclusion: that smaller families and less population growth correlates with a rising standard of living and less environmental degradation. This makes sense, as smaller families can devote a greater percentage of their resources towards improving their overall quality of life (education, health care, sanitation, etc.) as opposed to the bare necessities for survival. If you are a typical parent in a third-world country, how much do you have left over after providing basic food and shelter for you and your 12 children? Your kids are probably not going to finish elementary school, much less college, and forget about health insurance.

The world's human population has already reached staggering proportions (6.4 billion+) and has gotten so large that the environment may already be stretched to the breaking point. Exactly how much more population growth do we really need? How about economic "growth" via an improving standard of living for those who are already here?

Exactly how much more population growth do we really need? How about economic “growth” via an improving standard of living for those who are already here? --HARM

The reason we have these downward pressures on population growth particularly in the developed world (i.e. dis-incentives to rampant procreation) is just economics at work. Downward pressure on growth would not exist if the current system were not stressed at this point on the demographic curve--the system is trying to create an equilibrium at a point of lower population.

In addition, economic "growth" can still occur given a static or decreasing population level, however it is called "increased efficiency" instead of growth when this occurs. Technological advance and ingenuity does design ways to run the economic system of the world on less manual human labor, at which point efficiency is increased and a larger population is unnecessary. On the contrary, the larger population creates "diminishing returns to scale" whereby too many people actually strain the system and hinder its' smooth operation (think: too many cooks in the kitchen getting in each others' way).

Sorry if I bored anyone to tears with that little diatribe. I was an Economics major and actually find this stuff extremely intersting. :)

Double jeopardy for landlords

do you guys still think a bubble exsists? did you read ww.ReyEstate.com’s theory or UCLA’s Forecast report yesterday? Ouch, tough pill to swallow eh guys?

There will soon be no bubble in housing.

Lobster rules!

"SpendingURRent" -- what an F'ing idiot you are. Of course I read the report, the difference between you and me is that I don't need to take "hooked on phonics" to comprehend an economic report. Your chosen screenname alone belies your idiocy--there is no mortgage available in the entire Bay Area that charges less in monthly interest than I currently pay in rent. And that's just the interest expense of home-owning. So who's spending what? It's idiots like you that inflate asset bubbles in the first place--markets only deviate from fundamentals when their participants are irrational. Good luck off-loading your condos at break-even.

SpendingUrRent, do you happen to know a restaurant in SF that serves fugu? I want the whole meal: sashimi, nabe, skin, "white roe".

maybe i can form an asset bubble with lots of crap postings around the net on how its the next housing boom … A1337

I know you're kidding, but that is actually market manipulation and can be prosecuted. In addition, if you had a professional investment designation such as a CFA, you would be stripped of it by the CFA Institute if the spreading of information (even on the internet) was traced back to you. No joke.

maybe i can form an asset bubble with lots of crap postings around the net on how its the next housing boom …

Physical gold is a small asset class though.

How did SpendingUrRent miss this?

http://news.yahoo.com/s/ap/economic_forecast

He only reads what he wants to hear.

Pushy isn't he?

Any macroeconomics guru here who could enlighten me about inflation or interest rate forecast for each year from 2006 thru 2009? I believe if intereste rates shoot up to 12% in 2009, then I would be worse off than now even if the home prices reduce by 20% in real dollars (not nominal). Comments?

Try www.inflationdata.com

@Realistic Desi,

How would you be worse off? Are you a homeowner, RE investor, or prospective homebuyer? If you're a homeowner and/or RE investor, are you heavily leveraged with IO/option-ARMs, or are you locked in with fixed-rate mortgages?

The details make all the difference in the world.

In any case, none of us here are professional economists (and you know what they say about economists: "An economist is someone who will know tomorrow why the things he predicted yesterday didn't happen today." --L.J. Peter.) :-)

Regardless, some on this blog are predicting interest rates will continue to rise for a short while, followed by "B52-Ben" slashing them to mitigate a bubble-aftermath recession and/or trigger higher inflation (currency and debt debasement), myself included. Others are predicting they could rise much higher, based on the assumption that overall inflation is picking up steam and the Fed will try to beat it back. Take your pick --no one has a crystal ball.

One thing to consider about inflation: as Peter P often points out, "inflation is not a single variable". Housing prices can still be falling --in real or nominal terms-- while the price of other goods and services rise. there is no economic law that will automatically prevent this from happening, and it has happened before. In such an environment, just about any investment other than RE (and providing a return above inflation) would be a good bet.

One thing to consider about inflation: as Peter P often points out, “inflation is not a single variable”. Housing prices can still be falling –in real or nominal terms– while the price of other goods and services rise. there is no economic law that will automatically prevent this from happening, and it has happened before. In such an environment, just about any investment other than RE (and providing a return above inflation) would be a good bet.

This is actually a law, or more like a science....people are already stretched, if people had to pay more for gas, food, utilities and such, they would have less disposable income to to service a monthly mortgage....This would certainly push back on the prices.

This is actually a law, or more like a science….people are already stretched, if people had to pay more for gas, food, utilities and such, they would have less disposable income to to service a monthly mortgage….This would certainly push back on the prices.

Better yet, housing price is not part of the CPI. Will we have hidden deflation?

Some general points on the population and Household formation:

The people who will form the new households during the next 20 years have already been born. They are in school now. They have been counted. There are more of them than there are people who will die during the next 20 years.

The population of the US is currently growing at about 1.3% per year. It will continue to grow for many decades. Because of immigration, the birth rate does not need to be above the replacement level for growth to continue.

Even without counting the expected additions from immigrants, the household formation growth is obvious.

The chart that was posted in Calculatedrisk.blogspot shows the percentage distribution of the population, not the absolute volume of each age cohort. As the population increases a smaller percentage of the ever larger total population can be a larger group.

The baby boom generation is a bulge in the population profile. That is not so important (yet). What is important is that the age cohorts that preceded the boomers are much smaller than the age cohorts that follow the baby boomers. So, as the parents of the baby boomers die off, the children of the baby boomers and others outnumber the dying cohorts. The population and household formations both increase.

Population growth tends to cause economic expansion. However, this does not necessarily mean increased prosperity. For prosperity to improve, the economic growth must exceed the population growth.

Flak, I generally come by here late at night. I am on the east coast. I can't stay around long because I am pretty much done for the day. It helps that I have very high energy and need less sleep than most. If I post I will normally wait for a while to discuss. I also return the next night to follow up. But it will be late like tonight.

Peter P, The fundamentals are not static, they shift over time on an upward long-term trend. So, when prices are above the fundaments and they decline, the bottom is not where the fundamentals once were, but where they have grown to be. In a growing economy the decline is normally smaller than the rise.

Regarding anticipation of household formation and demand compression: These are very real effects that are a factor in the prices rising faster than the fundamental-supported long-term trend. These are cyclical effects, and there is an opposite effect during the market decline. Classic market cycle stuff...

Well it’s very late on this side of the Hudson River, and I am going to bed. Lots of snow and ice expected here tomorrow… oh joy.

Peter P. wrote:

"Better yet, housing price is not part of the CPI. Will we have hidden deflation?

I checked into this recently, and was surprised at what I found. You can go to the website of the Bureau of Labor Statistics and look at the components of the CPI. I would encourage interested persons to do so. All the expenses in the "basket of goods" are given a weighting factor.

And yes there is a housing price factor in the CPI, they call it the rental equivalency or something like that. I compared the weighting of it to that in my own personal spending, it was within a percent of the proportion assigned in the CPI. So were the expenditures on all the major categories, within about a percent of the CPI weighting: the food, transportation, etc. The only item that was far off between my budget and the CPI was the life insurance premium: I did not see it in the CPI.

It's in vogue now to dismiss off the CPI, but at least for the time being, now that I've done the exercise, I'm not so skeptical about its accuracy.

I think what it really says is that if housing approaches half the personal spending, it's not the housing price that's out of whack: it's the spending on housing that's out of whack. (Three or so decades ago what folks deride here as $hitboxes were considered to be reasonably modest abodes. Certainly by standards of living all over the world they are still so.)

Better yet, housing price is not part of the CPI.

Housing should have its own index FPI (flipper price index). This index is very high right now, but is falling.

Look at this desperate broker

Ajh, Interesting… Zoovisitor obviously reads this website, since my lengthy post was copied word for word.

I don’t know whether I should be flattered or annoyed.

The peak of retirement will likely come between 2020 and 2025. However, it is the departure for nursing homes and the great beyond that will make the boomers net sellers of real estate.

Net housing formations will go flat for a bout 15 years as the boomers die off. I expect the period 2025 to 2040 to be the weakest real estate since the great depression. I have not yet tried to estimate how severe the price pressure will be because it it so far into the future -- so much can change.