patrick.net

hanera says

Another good point, supporting my suspicion that the current RE rally in SFBA is mainly driven by tech folks and not foreigners.

I think it's a bit of both. A house for sale on my street in Mountain View had a full sized bus of asian investors pull up on a real estate investment tour. When I was bidding on houses, several houses that I bid on were picked up by all-cash absentee buyers (aka, investors). When housing is in such short supply, any demand drives up the prices.

I'm one of these people who's been working in tech here for almost 20 years, and after this long, I could barely afford a starter home here. Granted, I never won the startup or stock option lottery, so I had to do this on savings and paycheck income. I think I'm more typical than the guys hitting the huge fortunes at Google, Apple and Facebook, and I can hardly afford to live here anymore.

tr6 says

about the size of the Fed balance sheet

which is immaterial unless and until actual wage inflation comes.

full employment 1990s-style is still 12 million jobs away.

http://research.stlouisfed.org/fred2/graph/?g=sMf

or 2018 if we gain 250,000/mo

though I do suppose Fed balance sheet -> weaker dollar -> higher Brent -> higher gold

http://research.stlouisfed.org/fred2/graph/?g=sMh

Inflation (wage or otherwise) can happen irrespective of employment rates. Unemployment is caused by lots of things - regulation, recession, health care costs, etc. You can have rising wages and rising unemployment in a zombie economy like ours.

The Fed's balance sheet matters because it's related to bidding up prices of assets, namely, real estate and equities, which are the only things that can soak up trillions of dollars. Equities/real estate are very coupled to each other and to fed policy.

myob says

I think I'm more typical than the guys hitting the huge fortunes at Google, Apple and Facebook, and I can hardly afford to live here anymore.

I had a friend who *did* win the AAPL lottery who couldn't afford to live there an more.

Well, after he finally quit after 20+ years and didn't need to live so close to Cupertino he found $1M+ could buy 2 very nice acres above Santa Cruz vs. some shitbox in noise range of the 85.

Bellingham Bill says

which is immaterial unless and until actual wage inflation comes.

4.5 Trillion is about 2/3 of the total value of gold in existence. To me it's a relative value thing. If the Fed balance sheet gets to 5T and gold to $1000 which would put its total value somewhere in 5-6T range, which one would you buy?

5T is a lot of money that most people don't comprehend yet. There is no way to unwind it except to hold it to maturity.

hanera says

Are you implying that interest rate would stay low for a long time? Any increase would spur Fed to sell into it, hence keep it low.

I am implying that selling off bonds on the Fed balance sheet is not an option, because even small taper caused havoc in emerging markets. The Fed will hold the bond to maturity even if interest rates rise. They don't have to recognize the loss on the bond.

Yeah, but at least the boomers are whining all the way to the bank.

indigenous says

New Renter says

Assuming by that time the prices of Chilean beach homes don't make a corner Manhattan apartment with a park view look cheap.

Fortunately that won't happen because of Pinochet's legacy, although a Monetarist at least they do not suffer from Keynesian propaganda

???

Because Pinochet did not subscribe to the idea of fixing the economy by printing money. He decided to get advise from Milton Friedman so he did not suffer from as many western fallacies.

I'll have to watch this, bookmarking.

Mox News? In other words, some bloke posting up Youtube videos of someone talking to conspiracists. "Jon made a mockery of mainstream science." Dear me. That's your 'proof'? It was a laughable bit of one-sided conspiracy guff. An absolute embarrassment.

WOW! The UNtrustworthy are certainly in control of what information is apparent to the people!

Say hey! This was in the Wall Street Journal on March 30, 1999. Note "... how much it will buy."

Holy cow/interesting/compelling ...!

And where is it up to date??? Right here ... see the first chart shown in this thread.
Recent Dow day is Thursday, March 6, 2014 __ Level is 104.8

WOW! It is hideous that this is hidden! Is there any such "Homes, Inflation Adjusted"? Yes! This was in the New York Times on August 27, 2006:

And up to date (by me) is here:
http://patrick.net/?p=1219038&c=999083#comment-999083

WOW! The UNtrustworthy are certainly in control of what information is apparent to the people!

And http://patrick.net/?p=1230886

bgamall4 says

Bigsby says

some bloke

Shame on you. The guy lost a child at 9/11. Have you no shame Bigsby?

Who? And what has that got to do with anything? Lots of people lost relatives on 9/11. Does that suddenly make all of them experts?

Is jojo an old codger & the first BB to go on SS & medicare & just needs something to fill his empty hours?

The average annual return of the S&P 500 from January 1, 2000 to present day is 3.30%. The last 13 years for index investing has been lost essentially.

I've totally flipped on my pessimism btw. I don't think the Yellen Fed is going to taper until we hit the full-employment condition of the 1990s.

It was this graph that enlightened me:

http://research.stlouisfed.org/fred2/graph/?g=sO8

showing we're still 10M jobs away from full employment. If the Fed stops before that, they will be economic terrorists given how dysfunctional Congress is.

also it's the debt-to-GDP thing that makes me think Fed intervention is a bigger game-changer.

actual deficit (not counting Fed purchases, which we shouldn't:)

http://research.stlouisfed.org/fred2/graph/?g=sNm

debt to GDP, ex-Fed:

http://research.stlouisfed.org/fred2/graph/?g=sNo

This indicates Congress will have leeway to boost spending again in 2017. I don't expect the GOP to get with the program before then, but I do expect the program to include tax cuts for everyone later this decade.

I agree that prices in CA are going to continue to climb. I've been to several open houses in the BA recently, and it is just amazing how many people swarm to $1.3M+ houses. One place I went to must have had over 100 people/families visit.

Although I think prices will climb, I'm concerned we're still somewhat close to a peak. Plus, the price to rent ratio isn't very good where I've been looking. So, I've been looking at non-BA real estate.

Any thoughts on where to invest - either other parts of CA or other states?

I'd not invest in real estate right now in the US. If you need a place to live, great, buy a place for that, but not as an investment. There are other assets that shield you from inflation, like commodities or even the stock market.

myob says

I'd not invest in real estate right now in the US. If you need a place to live, great, buy a place for that, but not as an investment. There are other assets that shield you from inflation, like commodities or even the stock market.

I've got a good amount in the stock market already. With the way it is so manipulated too, I'm not that comfortable putting too much more in. I've got a little in commodities, but they fluctuate so much, and as pretty as gold is, I can't do much with it. I can't imagine real estate in all of the US or elsewhere is overpriced.

Because the boomers have climbed the ladder and kicked it down behind them.

The Entry Level jobs have all been outsourced or insourced via H1B. When you have no Programmer Is and IIs, you don't get IIIs, IVs, and Vs later on. Even Accounting and Chart Reading jobs have been outsourced and this trend is rapidly increasing.

Why pay more?

Comp Sci grads have a 9+% unemployment rate.

How many of those jobs are part time?

ch_tah2 says

I've got a good amount in the stock market already. With the way it is so manipulated too, I'm not that comfortable putting too much more in. I've got a little in commodities, but they fluctuate so much, and as pretty as gold is, I can't do much with it. I can't imagine real estate in all of the US or elsewhere is overpriced.

If you don't mind sharing, what is the ratio of your investment, Stocks: RE (include owner-occupied): Cash: Bonds: Commodities? Mine is 57:35:8. Nothing in Bonds and commodities.

Heraclitusstudent says

No one will buy a house returning 2% when inflation is 10%. That means the price would have to fall 80% to return more than inflation.

Correct, the return should go up to 10% and not stay at 2% but it doesn't necessary lead to a price decline. Rent can go up to compensate for the inflation. Why do you think a price decline is more likely than a rent increase?

hanera says

If you don't mind sharing, what is the ratio of your investment, Stocks: RE (include owner-occupied): Cash: Bonds: Commodities? Mine is 57:35:8. Nothing in Bonds and commodities.

I'd say approx 25%: 40%: 30% with the other 5% in bonds and commodities (give or take 5% here and there).

kt1652 says

Housing crash… ok. See ya next time.

That graph shows household wealth going from $60 trillion in 2000 to $80 trillion at end of 2013. That means wealth growth was only about 2% annually over inflation. If inflation is assumed safely to be 3%, then that is a return of only 5% annually.

Now compare that to the S&P 500 which grew about 10.5% annually from 1987 to the end of 2013. Just reaffirms that the 2000's was truly the lost decade (primarily due to the effects of globalization on the middle class and government spending on the wars in Iraq and Afghanistan).

hanera says

Correct, the return should go up to 10% and not stay at 2% but it doesn't necessary lead to a price decline. Rent can go up to compensate for the inflation. Why do you think a price decline is more likely than a rent increase?

Oh sorry... rent goes up 10% so your return in fact is 2.2% and your house loses only 78%.

By bad.

"there is simply no reason for real-estate to outperform inflation"

inflation is not one-size-fits all.

inflation represents the exertion of pricing power on prices, nothing more.

http://research.stlouisfed.org/fred2/graph/?g=sQb

is CPI of 4 items; housing, energy, clothing, computers, all showing different price trends.

Clothing is flat! How can this beee??

And look at computers! Inflation? What inflation?

Thing is, housing is service good of very high necessity. Try living a couple of days without it. New clothing, cars, etc, can be deferred. We can't import housing by the boat from low-wage countries, and if we could it wouldn't matter because the land itself is fixed in supply, and the cheaper the fixed improvement gets we'll just take the savings and bid up the price of land.

This is why houses sold for $40,000 in the 1970s sell for $1M today. Same house, it's the land that rose in value, mostly.

Additionally, as far as purchase prices go, the rise of dual-income households:

http://research.stlouisfed.org/fred2/graph/?g=sQd

and falling interest-rate regime:

http://research.stlouisfed.org/fred2/series/MORTG

has boosted purchasing power and thus prices since 1974, when the Equal Credit Opportunity Act was passed IIRC.

"Let's wait to see how it will flow into these bonds if inflation reaches 10%."

inflation CANNOT "reach" 10% until WAGES rise 10%.

http://research.stlouisfed.org/fred2/graph/?g=sPq

cluephone, ringing for YOU

Bellingham Bill says

inflation CANNOT "reach" 10% until WAGES rise 10%.

Look, I don't know what inflation will be in the future. I don't pretend I know. Maybe we fall back into deflation. It is certainly not impossible. It certainly not impossible either that wages go up 10% because of inflation. It happened before.

I answered a post that claimed real-estate is an inflation edge. So we're talking of a scenario where there is inflation.

Well, in a scenario with 10% inflation, people holding assets returning 2% will get their collective asses handed back to them.
That should be simple enough to understand.

Bellingham Bill says

inflation CANNOT "reach" 10% until WAGES rise 10%.

False. Refer to the 1970's stagflation as a counter-example to that statement.

Inflation is an overloaded word which refers to two economic factors. The first is monetary inflation, which is the money creation by the central bank. The second is price inflation. The two forms of inflation are very loosely coupled, if at all.

Monetary inflation will manifest itself in the market, but it's hard to predict where it will go because it depends on who gets the new money, it depends on productivity, and it depends on the amount of money available to different demographics. For example, if you give money to the wealthy, as is the case with the current QE, operation twist, etc, you don't increase their demand for stuff like food, but you do increase demand for hard assets, stocks, housing, high end luxuries, etc. If those trillions went to the poorest members of society, you would see rampant inflation in basics and some modest luxury items, since you'd have a lot more money being spent be people who had to economize in the past on food, clothing etc.

The reason that monetary inflation is a favored policy is simple - it devalues debt, and the biggest debtor is the government. It is a transfer of wealth from the poor to the rich because wages don't keep pace with inflation, but people with assets can invest around inflation.

So, I think that the Bay Area's ludicrous house prices are the result of inflation - both through tech company valuations which allow option holders to bid up the market, and directly by making credit cheap.

myob says

Refer to the 1970's stagflation as a counter-example to that statement.

http://research.stlouisfed.org/fred2/graph/?g=sQj

blue is per-worker wages YOY % increase

red is CPI YOY increase.

You were saying?

the thing about the 1970s that made it 'stagflation' was mostly the productivity rise of the 1940s-1965 came to a slowdown:

http://research.stlouisfed.org/fred2/graph/?g=sQl

The economy still gained 20M jobs -- the baby boom was absolutely FLOODING into the job market, since the demographic center turned 18 in 1973.

If the Fed hadn't fucked with interest rates to trigger severe recessions, the 1970s would have been pretty great (number of jobs gained in the 2000s: NEGATIVE 1M)

http://research.stlouisfed.org/fred2/graph/?g=sQm

Well, also, all that unpleasant oil-shock business, first with the embargo and then Iran falling apart.

I prefer to throw the bankster into the helicopter blades while they are at maximum rpms. I find it's more fun.

What wine recommendations do you have for serving with grilled bankster?

It's dangerous to skull fuck a bankster, they bite and have venomous saliva.

They have to be boiled first.

I thought skull fucking used the eye socket, necessitating the removal of the eyeball. I feel so naive!

Ceffer says

They have to be boiled first.

NEVER boil banksters! They should be seared on all sides and then broiled in the oven in a pan coated with olive oil and/or butter. Then serve with a red, not white, wine and a side of yams.

Alternatively, as Apocalypse has suggested, they may be battered in barbecue sauce and roasted on an open flame. That's Cajun style.

Iosef V HydroCabron says

I thought skull fucking used the eye socket, necessitating the removal of the eyeball. I feel so naive!

They could still bite ball.

Bellingham Bill says

the thing about the 1970s that made it 'stagflation' was mostly the productivity rise of the 1940s-1965 came to a slowdown:

http://research.stlouisfed.org/fred2/graph/?g=sQl

The economy still gained 20M jobs -- the baby boom was absolutely FLOODING into the job market, since the demographic center turned 18 in 1973.

If the Fed hadn't fucked with interest rates to trigger severe recessions, the 1970s would have been pretty great (number of jobs gained in the 2000s: NEGATIVE 1M)

http://research.stlouisfed.org/fred2/graph/?g=sQm

Well, also, all that unpleasant oil-shock business, first with the embargo and then Iran falling apart.

Did it ever occur to you that you just proved the fallacy in equating GDP to economy or standards of living?

If we chart the GDP of the world's leading economies during WWII, all the bombs, tanks, war planes added tremendously to the GDP, yet the living standards for people all around the world collapsed, with many of the leading economies collapsing, if not literally going up in flames. Fire fighting, the entire city burning down, the clean up and tent cities also boost GDP! in Krugman's broken window fantasy land, that's somehow good for the economy, if one is stupid enough to equate GDP with the economy.

Likewise, the 1970's saw the escalation of government war on the middle class. The rapid expansion of government bureaucracy boosted GDP while degraded the real economy and real standards of living for the ordinary people.

The inflationary monetary policies of the FED during the 70' accommodated the rapid growth of the government. That led to double-digit inflation by the end of that decade. The recession-causing tightening by the FED during 1980-1982 was the only thing that saved the dollar. Otherwise, if gold had been allowed to continue doubling every year like it did from 1979 to early 1980, the dollar would have been finished.