patrick.net

Semper fi bitches? Mmmmmmm sweet delicious anger, HARM embrace the darkside, I'm your Father.

Many of the long-timers here originally came here because we found ourselves priced out of the market through no faults of our own (like Joe Schmoe & myself) and wanted to understand WHY?

Kindly add my name to this list. Well put HARM, as usual. Would you consider maybe using a tad more profanity?

speedingpullet,

Interesting point. However, while 'innumerate' may be a more technically precise term, I doubt most people know what it means. Besides, one of the accepted definitions of illiterate is "displaying a marked lack of knowledge in a particular field: He is musically illiterate."

Well put HARM, as usual. Would you consider maybe using a tad more profanity?

Thanks, X. Though I occasionally dabble in the Profane Arts form time to time (as required for troll suppression), I am a but a dilettante as compared to yourself.

I must recuse myself and defer to the Supreme Lord of Profanity.

but..but...muscial scoring is languge

....nuts, so is math...

ah, well.

@Max,

Good point. ;-)

hmm, yes, 'computer illiterate' - i think 'numerically illiterate' is a fine line tho, it's just one of those things...

Well, I may give BA another year or so, but after that we're bailing if the prices don't come down - our income could probably even buy a nice house in Boston - but not the BA! I wouldn't mind so much, but the education system here sucks - got my daughter's report today - she's a bright girl, top group in her class, yet the teacher has her marked as limited proficency - I bet next report card she improves, and then the last one will be great - making her teacher look like a really good one.

RandyH,

Not sure what I did to offend you.

Let's say I want to buy a house. I want to buy it next month. Is "inflation" a factor in my thinking? If so, why should it be?

The original point about "inflation" is qute nebulous to me. It apparently involves guessing about the impact of inflation as a long-term major input on real estate values.

Ordinarily when I think about buying a house, I look at my finances and the mortgage and that's it. If a wizard with a crystal ball could tell me what the inflation rate was going to be over the next 30 years and what impact this will have on real-estate that might be useful. Absent such data we have to go with what we have.

Inflation as I perceive it is prices go up and hopefully my salary goes up by that or more. I am not an economist, please elucidate.

I bet next report card she improves, and then the last one will be great - making her teacher look like a really good one.

Funny, this is almost the exact same formula most companies use for employee reviews. Regardless of actual performance, you start out the year at "needs improvement", followed by "making progress', and ending up at "satisfactory". That way, they can give you your obligatory 3% raise and look magnanimous about it.

Did you see the yield curve over at Bloomberg this morning? You like to ski… (guess by your handle)… the drop from 6m-2y is steeper than the bowls at A Basin & K’stone.

dryfly,

Yup, I ski...way too friggin' much, in fact. Nice analogy, btw. I did check out the yield curve today, in fact. It's still sortof blue square to single black diamond in steepness. Plus, top elevation (short term rates) is not very high in historical terms. Either way, the yield curve has been screaming recession for a while now, yet, the economy has ignored to date. What gives?

How do dramatic housing price declines hurt the overall economy?

Jakob,

Yes, you're basically correct, but are missing a large part of the equation in today's unusual situation. Basically since the dot-bomb implosion, there has been an unprecedented phenomenon of significant extraction of equity from houses in the form of cash-out refinancing and HELOC's for anything from paying down consumer debt, to paying for luxury items, cars, home remodeling, etc by "homeowners." Folks on this board call it mortgage equity withdrawl (MEW). It's more or less widely accepted that this effect has to a large extent kept the American consumer-based economy humming the last few years. This process *requires* appreciating prices so that every refinance sets a home's assessment higher, thereby allowing cashing out some or all of the increased assessment value. If prices drop, this whole process grinds to a halt, and places like Walmart start hurtin'.

The issue of declining sales due to buyers sitting on the sidelines certainly plays a part, too, but probably not so much. That fits in with the larger context of a slowing real estate market drying up the food supply for all the carnivores in the housing industry (known here as the Real Estate Industrial Complex - REIC), including realtors (commissions), assessors (fees), mortage folks (fees and commissions), builders, suppliers of raw goods for builders, home improvement stores (check out Home Depot and Lowe's stocks of late), furnishing stores (check out Pottery Barn stocks too), illegal immigrant day laborers, on and on down the line.

That's why many (including the realtors) cry foul about not letting prices tank to "save the economy."

Hope that helps.

I've been thinking of becoming a looky Lew at the pet stores post x-mas for a bubble pop on their largest dog igloo. They have good thermal properties and efficiently reflect back body heat. On especially cold nights I could always invite Fido in to gain more BTU. If this trend catches on a housing recovery can then be posted for '07. #8^))

Either way, the yield curve has been screaming recession for a while now, yet, the economy has ignored to date. What gives?

As I recall, in the past, yield curve inversions generally precede recessions by 6-12 months (or more). So we might expect a recession sometime early next year (?). Of course inverted YCs do not have a perfect 1:1 correlation in terms of preceding recessions (80-85% correlation?), but they're pretty decent as crude bellweathers.

@dryfly,

Yup, this is the real "new paradigm" ...

It makes me wonder. I know Bendover Ben and co. are well aware of the effect of currency manipulation on long-term bond rates - in fact, it's been their "excuse" as to why long mtg rates have been so stubbornly low despite their manipulations of the Fed rate. I wonder if this fact has any significant effect in the Fed's decision to hold rates where they did, to avoid a resultant potentially large yield curve inversion? I know this thinking may be a bit simplistic, but hey, who knows! After all, recession and inflation are in large part determined by investor (as well as average joe) expectations.

HARM,

Excellent post! Let's face facts, most newspapers today are just cover to cover advertisements for the REIC (with an actual article thrown in from time to time!) They 'own' what little circulation these guys DO have left.

Semper Fi bitches!

skibum,

Not simplistic at all! There was a time when the bubble could feed off itself. As dollars made an exodus from the stock market they had to go 'somewhere'? So the uncontrollable appetite for bonds drove prices up, and yields down. More free money for the bubble!

What they never banked on was the fact that they have utterly killed the longer maturities. They are now in fact a totally "seperate" asset class! Attempting to sell 30 yr. paper comes off sounding more like a "crank" call than a sales call.

Add us in too - whoda thunk that making 125K + in Los Angeles would mean having to rent for 6 years?

I thought London had the most insane house prices until I moved here....

In my trawls of ZipRealty over the last few weeks - SFRs around Westside and sth SFV - I've noticed an alarming trend to take places off the MLS, wait a few days and relist them - normally at the same price, or a little higher. Only 3 honest price reductions in the last 10 days (out of about 85 houses I'm tracking). Lots and lots of places becoming inactive too - I guess the sellers are waiting for the mythical Spring Bounce 2007.
Also, all the 'quality' places are either being sold, or taken off the MLS - a ton of McMansions (3000+ sq ft) on 5000K lots seem to be the sole offerings these days.
Please, someone let me know when L.A finally somes to its senses....

SP: You forgot the biggest demographic of all! Baby Boomers who are "living it big" today, relying on their continuously appreciating houses for retirement funds instead of saving. Especially the ones who HELOC'ed away to get themselves a Lexus or put their kid through an expensive university at full price (hint: if you aren't rich and your kid doesn't get a scholarship, they shouldn't be going to Cornell).

I am curious, though. If inflation and interest rates did take off, wouldn't that do a lot to ease the burden on people in my own age bracket, who have gone nuts with credit card debt and large college loans? Now they're paying everything back with inflated dollars, and their life savings and retirement accounts haven't been eaten away by inflation.

I'm surprised mortgage brokers aren't sending out "offers" like this one from VW:

http://www.consumerist.com/consumer/lending/volkswagen-why-not-skip-a-payment-217946.php

HARM said: Many of the long-timers here originally came here because we found ourselves priced out of the market through no faults of our own (like Joe Schmoe & myself) and wanted to understand WHY?

To be fair though, are any of us -really- priced out?

If you really wanted the $800k starter in Mountain View, you could get it. $0 down, no doc.

But... I suppose that's not what people want.

dryfly and HARM :

The "conundrum" remains. I have no knowledge of economics - apart from reading such blogs and some sites like Barrons - but what I find perplexing is that almost all economists are perplexed !

If there was too much liquidity, then shouldn't there be inflation, or at least an increase in the commodity prices ? Oil is way below summer highs, so is gold.

If a recession is going to happen, why is the stock market partying like there is no tomorrow ?

If housing is in trouble, then why are home builder stocks rallying ? (Even before today. Today a bearish analyst became less bearish, and HB stocks took off).

If mortgage rates are dropping - even the 30 yr fixed - then why will there be a "crash" ? And that gets me back on topic. If the 30 yr fixed rates keep dropping, the correction is going to drag forever. I will definitely reevaluate my position if 30 yr fixed gets closer to 5%.

The most important thing I have learned from this blog - paradoxically - is debt is not all that bad if you can comfortably service it.

So Randy, I would specifically thank you for this, forget calling for your head.

Max,

What is USA M3 these days? I can't seem to find that data anywhere!

Paul

StuckInBA,

As for commodity prices like gold and oil, we may be off the highs but I would just call that volatility. In other words, check again in a few weeks!

Paul

"To be fair though, are any of us -really- priced out?

If you really wanted the $800k starter in Mountain View, you could get it. $0 down, no doc.

But… I suppose that’s not what people want. "

SP - yes - I really am priced out!

I want to be able feed my family too -

@ dryfly

Thanks !

Dryfly,

Excellent analysis!

Let's also not forget that probably the most reliable way to determine if housing prices are way out of line with "fundamentals" in any region is to compare monthly carrying costs if you bought today (PITI + maintenance + Mello-Roos/HOA - MID) vs. going market rent on an equivalent/comparable property. If MCC is a lot higher than rent (NI/cash flow) a property can generate, it's dicey.

The beauty of using rents (not incomes) to determine relative "bubbliness", is it allows for regional variations in home prices and demographics. In CA, the long-term average incomes-to-price ratio is much higher than for the rest of the country, and has been for decades. Likewise for high-density "destination" cities and places with lots of NIMBY building restrictions, regulations & high taxes (HI, NYC, Boston, Miami Beach, etc.). Obviously, cities will almost always be more expensive than rural areas, whether buying or renting. However, rents can show whether or not that area's RE is just "normal-expensive" or 'ridiculous-expensive".

The old rule-of-thumb is spend no more than 100-120X monthly rent. Using cap rates is another rents-based calculation method, and many long-term investors won't buy properties with cap rates below 10. But of course, you also need to consider other factors like overall interest rates (high rates = > opportunity costs of not investing your money elsewhere vs. lower rates), and as Randy likes to call it, the "utility premium" of owning over renting, which varies from person to person.

Right now in most CA cities, rents generally cover around 30-50% of MCC, depending upon your location. This gives us some idea of how much they need to correct long-term. Exactly HOW they will correct (inflation erosion vs. nominal price drops) or how long it will take, of course, is still anyone's guess.

However, Let's not forget that balancing the price-to-rent equation to balance solely through inflation would almost certainly require wages to rise significantly. Why? Simple: people can't take out HELOCs, 2nds or cash-out Refis on their apartments. They have to pay the rent with cold, hard cash. All the funny-money loans have basically allowed home"owners" to devote 100%+ of their income towards the "real PITI" by indefinitely deferring both principal & interest. Colossal shell game. Try THAT with a rental.

There is a limit to what % of their total net incomes families can devote to rent because they must also eat, drive, wear clothes, get medical care, raise children, use energy, etc... Hint: it's less than 100%.

SP - sorry, mouse not scrolling properly and I'm skimming so thought it was you, instead of eburbed

I want to be able feed my family too -

Oh... well if your family is the kind that eats food, you might want to live somewhere else.

http://www.burbed.com/2006/11/23/how-to-save-20-on-your-groceries-for-thanksgiving/

Wow.

So after a glass of port (ok 2), and a bowl of tobacco, I decide to read the blog. Here are my conclusions:

1. There are some smart people that post here

2. They are completely fooled into thinking they can predict the future.

3. They are relying on historical data when we are in a climate we haven't seen before.

4. surfer X likes flacid penis

5. Arguments for a specific point are almost always "proven" by a sound but narrow focus logic

If someone can actually build an argument from ground up, as to why this is a bubble, and what will happen in the next 3 years, then I challenge thee. I'm talking about a real argument. Not one that focuses on one single economic indicator or phenomenon, not an anecdote, and not a reference to another vague and insubstantial thread on this blog. Not even a surfer x style "go suck your own cock" post.

My mind is open to be converted. I am your quintessential guy "on the fence". Convince me or your viewpoint is $hit.

bring it.

@Fuzzy Math,

You win!

It’s a new paradigm, and everybody who doesn’t buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.

Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.

This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.

thanks for a nonargument HARM. You are proving my point.

Where in my question did I claim housing will increase at 30% a year?

So, to get this straight, your argument is the following....
-housing cann't continue to rise at 3o % a year
-therefore it is doomed to crash

solid

@Housing Bubble Research,

Save your breath (or is it fingers?). FM is a troll impersonating a skeptical newbie. Re-read his statements. He basically just ignores everything anyone else says, then declares New Paradigm, followed by "bring it". CuriousCat, LittleWorried, WoopAss, Boomtime, whatever... all the same. Not worth the time or trouble.

surfer X likes flacid penis

Wow, if you are going to resort to Sophomoric name calling at least be clever. For instance, fuzzy math has to suck the John's cum out of his mother's corn filled ass with a straw and then sell the sperm in order to afford his interest only san hosebag stucco $hitbox. That's what your patent is in right? Fluid delivery?

A trolling we go a high ho a merrio a trolling we go.

HARM ;)

something else on inflation and interest rates as the topic du hier:

Taming the dragon - Money - Business - Home - smh.com.au

gittins is quite good at explaining econ. and why does increasing short-term interest rates reduce inflation? still want an answer in 1 word or less...

uh oh

US bound for recession, tips RBA board member

AN INFLUENTIAL Reserve Bank board member, Warwick McKibbin, says the United States is heading for recession.

The chairman of the US Federal Reserve, Ben Bernanke, expects a smooth slowdown, but Professor McKibbin predicts a housing-induced contraction will make 'the Fed's job very difficult'.

'I think there will be a recession in the US next year because of the housing market coming off and consumers slowing down their spending,' the Australian National University economist told the Herald."

A US recession would cause global long-term interest rates to drop and encourage central banks to cut official short-term rates.

The pressure for lower rates will increase if, as Professor McKibbin believes, commodity prices are poised to fall.

"I think commodity prices will soften," he said.

His modelling, with economist Andy Stoeckel at EconomicsScenarios.com, shows a US downturn would divert capital from US housing to other markets. A US recession would be offset by a surging China.

A recession would also assist adjustment of the US and Chinese current accounts by weakening the US dollar, lifting US exports and slowing Chinese exports.

Like the Reserve Bank governor, Glenn Stevens, Professor McKibbin is more concerned about persistent underlying inflation than weakening global growth.

However, Chinese growth should not be taken for granted.

"China again is always on the precipice … you hope something doesn't go wrong," he said.

"But there's a lot of adjustment going on in China … I think there's still enough surplus labour that you're not going to get a massive surge in wages in China that's going to cause a global inflation."

Fuzzy Math Says:

If someone can actually build an argument from ground up, as to why this is a bubble, and what will happen in the next 3 years, then I challenge thee...Not...a surfer x style...post.

My mind is open to be converted...bring it.
_____

Scope out any of the innumerable charts that demonstrate significant deviations from the historical averages in housing--a picture is worth a thousand words, not to mention a thousand mathematical formulas.

Then deny what you see with your own eyes, disregard the immutable laws of market physics and go "all in."

In other words, put your money where your mouth is & walk the walk.

FUZZY HAIKU:

Fuzzy Wuzzy was
a mouse. Fuzzy Wuzzy bought
a house...trap. Whap! Squeeek!

"Most of the old regulars on both sides of the argument have stopped participating here"

Really? Google Housing Bubble (hint) we're Number 1!

"Unfortunately, you will now have to wait another 5 years to disprove the more recent crash predictions".

No need to wait another minute. The crash is all around you my friend. The lapping sound you hear is now at your doorstep. If sound personal financial planning involves borrowing the better part of a million dollars with a loan that can never be repaid you Good Sir are counting solely on appreciation. Based on this flimsy arrangement all that's needed for Fuzzball to go belly up is for homes to stop appreciating. We're there. End of game.

True believers in the housing boom have had nothing but the wind at their back up until now. Every conceivable advantage. Heavily subsidized, tax friendly, cheap/free money environment. Not ONE obstacle. Even a natural disaster like Katrina played to their advantage driving demand (and prices) for lumber. We've defended the bubble at all costs, even at the expense of watching our currency become a laughing stock. We've gutted and revamped our entire national financial structure to protect our REIC-based economy. Could we have possibly bent over backwards any further to accomodate our precious bubble?

See? This is why these clowns come back HERE time and again! They won't even try to ply their trade over at Ben's Blog where things have a n a t i o n a l focus! It's forever with their touting the BA and how they don't see any blood in the street? Go over to Ben's guys. "Bring it" over there and tell people in FL, MA, San Diego, Phoenix, Las Vegas and Sacramento all is right with the world.

DS,

I enjoyed your post about "the original hand held GPS"! I'd read a similar article where a Norseman's artifact in the Smithsonian (long thought to be a button or "seal") was actually an early navigation device that with reasonable accuracy mapped the northern hemisphere! I'm told it was moved to a prominent display.

SP,

Your #4 above was subtle..... but hysterical nonetheless!

Dollar sliding against the Euro "more than usual"!

Like...... they didn't think we'd notice or......what?