patrick.net

Social Effects of Bubble:

1) Divorce (Actually have read anecdotal stories on craigslist about divorces happening because a husband didn't want to buy into this hype ... but the reality is many more divorces will happen in the fallout of this RE bubble ... financial stress is a major factor in divorce, i.e., blaming ones partner for bad decisions). Divorce has many affects on the childeren of divorce but will not be felt for many years later.

2) Vice is not Nice. Vice funds should do well (although I will never invest in one). People like distractions from reality and reality is going to suck for many in this credit deflation. I see social and moral entropy ... not across the board since some people will reflect on their decisions and awaken but many will seek distractions that will lead to their further downfall.

3) A minority of debtors (see 2) will strengthen themselves and become better for it. Struggle makes strength.

4) More Government and Taxes. If you rob Peter to Pay Paul you can always count on Paul's vote. I think we will tilt more socialistic since many voters will demand government to ease their suffering (suffering that is deserved in many cases such as speculator greed ... but I feel empathy to those that bought out of fear of being priced out, no matter how misguided they were).

5) Our illegals will be able to afford houses that are subsidized by the current housing debtors (and through Amnesty will be gifted with citizenship). This will further divide our country (divide and conquer is the moto -- I believe the death of the Constitution is the goal -- but I hate typing and it would take way to long to state my case).

investwith,
Sadly I agree with your point #4; and it relates to a big gripe of mine: more and more, when we as a society screw up, we look to government for the solution...rather than collective societal introspection. I think it relates to a social psychology that is increasingly based on external (vs. internal) locus of control (some psycho-babble terms I just heard about...google it--it's kind of interesting).

"Also, in an economic way, socialism can make sense to many. For instance, “taxes for the rich” are a constant success because few people fall into that rich category. As long as the poor and middle class outnumber the rich, there will always be political advantage to proposing to tax the rich and redistribute to others."

It's sad because it reflects that these people either (a) are only concerned with short-term affects on themselves (as opposed to general economic/societal well-being of America) and/or (b) they don't have any hope that some day they, or their children/grandchildren, will be the ones shouldering this increased burden.

SJ_Jim,

You're right on the no societal introspection. Many people are afraid to look inside of themselves out of fear that they may be wrong and have to change. Change can be painful, but only those who have love for the truth will bear down and accept the truth ... and change. Most will take the path of least resistance and look externally for blame. Winston Churchill once said...

"Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing ever happened."

"we look to government for the solution…"

So true.

I think people want to be lead because it is a lot of work to be the leader. Personally, I cut my own path through this world. I don't care what people think of me but most people who know me like me ... only because I love my neighbor and sincerely watch out for those who are foolish (I don't believe in the kind of gain that relishes in 'stupid' money passing into the hands of 'smart' money)

Stan, agreed; didn't mean to sound too naive and overly enamored with the "american way"...or whatever. I'm pretty well aware that there is overly gratuitous tax structure for extremely rich...which I would consider a long-time (how long?) shame for this nation.
Hey, going to bed. It was good to exchange thoughts. G'nite all.

Hey anyone dig astronomy? Just looked up and saw the moon, the pleiades star cluster, and mars arranged in a nice bilateral triangle. Pretty cool. g'nite again.

‹^›_‹(ô¿ô)›_‹^›

The scary thing about the doom-and-gloom prediction is that it could happen. A lot of parallel's have been drawn between the great depression and now. Low savings rate, credit bubble, RE speculation and so on. Does this mean we're in for another big depression? _shrug_
I sure hope not.

Maybe we should focus on what's different now to see if a similar depression is realistically possible. I'm not as economically savvy as a lot of posters so I'd need input from elsewhere to make the comparisons. But we didn't have FDIC insurance before the great depression. Will that make a difference? It should, but would it be enough? I'm afraid I have more questions than answers. Does anyone else have thoughts on this? Maybe a new thread possibilty?

Holy ____! Look at the size of this thing! Where do I begin?

"I was remembering something more in the neighborhood of cutting the line….
(still completely reasonable though! IMHO) (and in this particular case) "

Jack--
More of a joke than a real threat--although I felt the urge, and if an animal needs a mercy killing, I'm willing to obligue.

the reason American farmers have not invested in the capital is that the have the cheap labor.

Just for clarification, between 1948 and 1996 US agricultural productivity, as measured by inputs-to-outputs capital efficiency, increased by 250%. During that same period most European agriculture (excluding small, insignificant producers which usually have high productivity but low output), increased by less than 100%. I couldn't find Austrialian data for this same exact period, but from 1960 to 2000 Austrialian productivity rose by less than 100%, so unless Australia grew productivity astronomically between 1948 and 1960, they lag far behind US efficiency.

In the King & King International economic policy report they cite overly strong US agricultural productivity as being the primary reason that developing nations seek 1-way trade barriers on agricultural goods. Simply, if the US agricultural output was turned loose on the global markets it would destroy prices for Europe and most of the developing world.

Holy cow. Are we shooting for the world record thread here or what?

HARM, I will register as soon as I can figure out how... I won't start a thread for the next week though. I have a book deadline in a week and should be banning myself from the internet at this very moment. Must...resist...tempation...

Lots of great discussion going on here (Owneroccupier, loved your last big post), but I'm going to make this my last post for now and vow to shut up until I get my work done. Somebody kick me in the ass if I post again before October 1.

Maybe we should focus on what’s different now to see if a similar depression is realistically possible. I’m not as economically savvy as a lot of posters so I’d need input from elsewhere to make the comparisons. But we didn’t have FDIC insurance before the great depression. Will that make a difference? It should, but would it be enough? I’m afraid I have more questions than answers. Does anyone else have thoughts on this? Maybe a new thread possibilty?

It is always possible, but probably significantly less likely. It would make a good thread, as would a discussion about how these multiple shocks to the US and gobal economy might play out.

The events that led up to the Great Depression were a "perfect storm" of factors coupled with a general lack of understanding about economic theory and capital market theory. Remember that Keynes had yet to publish his critical work (the Great Depression was the data he used to form modern theory that led to the IS-LM model).

In the 1930s the Federal Reserve initiated perfectly antagonistic monetary policy while the Federal Government, pre FDR, initiated perfectly wrong fiscal policy. Add in an unregulated banking system, a vacuum of consumer protections for deposits (actually, I think in a well functioning economy FDIC insurance does more harm than good, but that's a deeper discussion), and very inefficient capital markets and you have the seeds of a depression.

Also, the pre-depression period was marked by a dramatic contraction of global trade, which had been on the rise pre WWI. It did recover some in the intra-war period, but started to decline when Germany enountered the hyper-inflation era. Today we have an order of magnitude greater gobal trade, and it is rising not declining. Global trade and free movement of capital tends to blunt some of the factors necessary for a dramatic, sustained deflationary cycle.

Of course, with new Fed leadership, an ignorant Federal leadership (Congress and the Administration), and a well placed war or 2, we could have most of the ingredients necessary to cause another depression. We'd need to see some ill-founded capital controls and trade policy enacted too.

So, this doesn't really keep me up at night. Stagflation, on the other hand...

Randy H

Since you seem so knowledgeable, and most here agree that your posts are well thought out, maybe you could suggest a thread topic-- I'll post but you can run with it. I'm fairly busy and getting too brain fried to think of good posts. So any ideas are helpful.

"Must…resist…tempation…"

Um, that was supposed to be "temptation." Oh, and I'm supposed to be gone now. Oops.

Thread Suggestion:

Oil Shock! It now appears that the US will suffer another severe blow to its oil refining infrastructure. With this being the second major shock to the supply-side of energy in less than a month, and with oil, gas and petrol being major inputs into the US economy, how could this affect the overall US economic situation. Could inflationary energy pressures, rising interest rates, and worsening deficits finally pop the real-estate bubbles in the "frothy" RE markets?

C’mon, how hard is it to register and create ONE MEASLY THREAD!

Harm--sure, I have a bit more time to contribute on that; I'll go ahead and register.
To avoid a possible "bubble of threads", how do we make this orderly?
Is the X-man first?

Kurt

Since this thread is so bloated, I'm going to go ahead and post Randy H's suggestion. There's no rule that another thread can't be posted simultaneously, so if Surfer-X wants to post then that would be great, and you can put yours up whenever you want to. It'll all work itself out I'm sure.

OK Randy H, I'm going to be obligated to play your anti-self.

You wrote . . .
"The events that led up to the Great Depression were a “perfect storm” of factors coupled with a general lack of understanding about economic theory and capital market theory. Remember that Keynes had yet to publish his critical work (the Great Depression was the data he used to form modern theory that led to the IS-LM model)."

I disagree that the Depression was caused by a perfect storm of factors. The depression was caused by the Fed. The next depression will again have been caused by the Fed.
Everybody please save the above-quote. It will be used by economists in 40 years to explain the next ten.

Keynes' critical work. Many intelligent people with very sophisticated backgrounds in economics think Keynes was a fool and his theory even more foolish.

You think Randy H is right? You think modern economics "understands" things better than the economic folks who were pulling the levers back in the 20s?

OK. They ask 100 economists with PhDs what's going to happen over the next 5 years. You'll get 100 answers. Some will say bad bad things. Some will say, like Randy H, good good things.

What does that tell you?

It tells you economics is all a bunch of hooey that provides extraordinarly weak method of predicting the future, which is all we really want it to do.

Economists, investment gurus, and a myriad of others all suck you in with the same technique. They start quoting this and that theory knowing that you can't possibly keep up unless you've been schooled in the same garbage. After enough time, people start believing that the economists must know something.

But in the end economists are just like palm readers . . . They will argue till the end that they know what's going on, but if you ask them for a simple, well-limited prediction, they can't do it repeatedly.

Some will say, like Randy H, good good things.

Just for the record, Randy H is not an economist, and doesn't think good good things are in store. I just don't think a depression is likely, and I study a lot of economics in my line of work (econometrics, actually). Finally, I have never met an economist of any credibility who ever portends to predict the future, only to understand the variables at play. Economics is a sciene insofar as it lends itself to hypotehis testing and falsification. The popular media tends to misuse economics, as it does other softer-sciences like psychology. But, emperical testing is factual, and can reveal interesting phenomena, correlations, and interdependencies.

Randy H, ok, I take your point . . .

I'll throw out that your comment . . .

"Economics is a sciene insofar as it lends itself to hypothesis testing and falsification."

can be extended to read . . .

"Goblin hunting, sociology, and tarrot card reading are sciences insofar as they lend themselves to hypothesis testing and falsification."

I'd define a "science," as distiguished from other things, as a field of study that . . .

"uses the scientific method to move toward conclusions on the basic nature of observed phenomena, wherein those conclusions are verifiable through testing that yields repeatable results."

This definition applies well to physics, biology, chemistry, and so on.

Not so well with economics, which, although replete with elements that individually fit within the definition, becomes less and less of a science when viewed in the aggregate.

In other words, while it is ostensibly scientific to note that "bond yields will fall when investors believe inflation will worsen in the near term," it is, in my opinion, unscientific to use economics to predict the direction of an economy three years down the road.

I guess I derive this from the sheer number of factors, and, in particular, the role of human behavior.

Whereas true sciences like biology are independent of human proclivities, things like macroeconomics are not.

At some point, trying to figure out the ecomony is like trying to figure out when the first hurricane of 06 will reach landfall - it's possible, but given the huge amount of inputs, it's pragmatically beyond reach.

So the only thing that I need from economic theory is a maintained list of those things that cause big problems.

Like fiat currencies . . .
Fed pumping of money into the system . . .
Stupid people overextending to buy houses, thereby putting me indirectly at risk, and so on . . .

Escaped from DC,

I accept your points as well, but I disagree that overwhelming complexity precludes scientific method. The problems with economics also apply to weather-prediction, cosmology, and quantum mechanics, which I hope you'll agree are scientifically driven endeavors. Just because human behavior is an input doesn't mean that models can't be applied. In fact, human interaction directly affects quantum outcomes, yet this is consisitent with quantum theory.

And, the fact that economics is a self-falsifying discipline which replaces old theories with new solidifies the scientific nature of it, not the opposite. I've yet to see a good model for "goblin hunting" which passes the hurdle of occam's razor. If you can point to a more unifying, simpler explanation for economic-phenomena, then I'll jump in with both feet.

Do you know anybody that has lost money in real estate in California, such as the bay area, in last 20 years or so? Assuming that they held onto the purchase for more than 2 years.

I do NOT know of a single person that has lost money in real estate. I am in the market for a condo in San Jose' but they seem so outrageously expensive. Of course, that is what I said last year. But now look at the prices! It's practically doubled in last couple of years. I'm waiting for the prices to drop but if I had NOT taken any of your advice and bought it 2003 or 2004, I'd be sitting pretty!

Are you ever going to get it right?

Phoung, If I had a time machine I'd be mindbendingly rich. If you want to dive into the bucket, kindly do so. No one is forcing you to do anything. Buy that condo if you want.

Do you know anybody that was hit by lightning in a golf course? Assuming that they did not swing a 1-iron in a storm?

I do NOT know of a single person that was hit by lightning.

I’m waiting for the prices to drop but if I had NOT taken any of your advice and bought it 2003 or 2004, I’d be sitting pretty!

You must have missed the (Not investment advice) disclaimer. No advice of any kind was expressed or implied.

Phoung Nguyen, I am not trying to be mean. Can you tell us why did you think prices were expensive back then?

Do you know anybody that has lost money in real estate in California?

Well, didn't LA have a bust in the early '90s, where values dropped an average of 30%?
There was a similar bust in Vancover BC, where the prices tanked by 40%
Once again,

"But now look at the prices! It’s practically doubled in last couple of years...if I had NOT taken any of your advice and bought it 2003 or 2004, I’d be sitting pretty...Are you ever going to get it right? "

I hope you're not suggesting that a healthy level of caution has kept you from buying a home--forever?

Understandably, you're ticked off at these prices, as many are here. Quite a few here suspect the recent RE run-up is not normal at all, but due to a credit-driven speculative bubble. You can poke around for historical data and current figures to make the decision for yourself. The very fact that many people cannot afford a home today (especially here) highly suggests that real estate is abnormally high--and is indeed due for a correction. Unless we think cheap credit, speculation, and double-digit price gains will continue forever. Personally, I do not.

Cathy, if you can afford the condo conservatively and if it can meet your needs for the next 7-10 years, buying is not necessarily a bad choice. It is not an investment property, right?

However, do compare the cost of renting vs owning before you make your decision.

(Not investment advice)

Cathy, can you afford it without a NAAVLP? Your payment is likely to be 3-5X your current rent payment, can you and are you willing to dish out that much?

We are planning to pay 5 to 10% downpayment
Do u think the above is advisable to buy

I'm not qualified to give you "investment advice", but consider this:

Currently you pay $1350/mo.
While a $600K 30-yr mortgage @ 5.75% is roughly $3500/mo, plus taxes and HOA fees.
So, $4500/mo easy.

That's a rather big difference per month; is owning worth over $3K/mo more?
Many people think so, because assuming the market will always go up, they fear being left out in the cold if they do not buy now. Given the wealth of info out there...you should be able to make a decision that best fits your situation.
Caveat Emptor.
(not investment advice)

Cathy, all of the advice from Kurt, Surfer & Peter is good. I'd only add that you should be careful to not get lured into leveraging your way in with too exotic of a loan. My rule of thumb is to use a 30-year fixed mortgage with 20% down as a baseline. If you can afford that, and you have the discipline to put some of that cash away safely, then you might consider an ARM so long as you are ready to refinance into a fixed once rates start heading up. But, I think going with less than 20% down is a mistake, if for no other reason, then to avoid PMI.

A financial planner friend of mine recommends that people only buy homes in this market if they can afford 15-year, fixed, 20% down, no-second, as a way to protect people from over-leveraging themselves and give them some protection from a long downturn in prices.

A financial planner friend of mine recommends that people only buy homes in this market if they can afford 15-year, fixed, 20% down, no-second, as a way to protect people from over-leveraging themselves and give them some protection from a long downturn in prices.

Very good advice. This is one of my personal reference points too.

Use 15YR amortization to determine affordability, but get a 30YR FRM for the flexibility. Make sure that there is no prepayment penalty.

Get hold of today’s New York Times.
They do the maths on the buying/rental dilemna.
I think you will be shocked at the conclusions.

NYT has such a larger reader base...
Psychology is changing...

NYT has such a larger reader base…
Psychology is changing…

Not to mention the great reader retorts to the Wharton "study" in the WSJ.

I have seen at least 3 loss cases in RE in CA, so people who claimed that they have never seen any losses in CA are just kids who haven't been around the block long enough. And mind you, I came to this country only 15 years ago, so the ugly stories I know only represent a small fraction.

One ex-colleague of mine bought a home in LA in 1990, and he didn't even see his home back to the price he bought at in 2000! He had to move for a job so he took a 8% loss on his home in 2000. Had he held it till now, he would have made a small gain, but think about the cost of interest, and the opportunity cost of the money he could have put into something else! Another ex-colleague of mine bougt a home in East Bay in 1987, the price didn't breakeven for him until late 1996.

So the general observation is, in bad times, you need to hold your property for >10 years after a dip. If that is your primary residence, that is probably ok. But how many investors will call it a good investment to wait 10 years to see the price breaking even? How many 10 years do you have in your life?

I have seen at least 3 loss cases in RE in CA, so people who claimed that they have never seen any losses in CA are just kids who haven’t been around the block long enough.

Very well said. One of my father's friend said that his home lost 50% of value after the tech bust. The house of my friend's friend lost millions in value just a few years ago.

Those two cases were in the Bad Area / Silly Valley.

But how many investors will call it a good investment to wait 10 years to see the price breaking even? How many 10 years do you have in your life?

Important distinction this time...RE has become "Dot-Com II". While I think most investors won't hold off until the bitter end, I'd venture to guess many haven't even caught wind of the change (such as my coworker). When investors do run for the door, I anticipate an inventory build-up that will pale past booms/busts.

I've posted examples before of people I know who also had to ride out the down market for 10 years just to see the house return to the purchase price. Also the post I put on this thread about the guy who's already dropped his asking price $100,000 should be a good indicator that right now is not the time to buy, but in 2-3 years you might look at the market again.

Important distinction this time…RE has become “Dot-Com II”. While I think most investors won’t hold off until the bitter end, I’d venture to guess many haven’t even caught wind of the change (such as my coworker). When investors do run for the door, I anticipate an inventory build-up that will pale past booms/busts.

Exactly. It seems that many people are trying to time the top of the boom. They will not hesitate to sell if they are convinced that the peak has arrived or has passed.