patrick.net

Garth,

I realize you addressed this to Randy b/c he started it but where do I even begin?

Obviously realtors, lenders, appraisers, mortgage brokers, builders and part time employees at Home Depot all have a stake in this and would be perfectly happy to see this wonderful "economic engine" keep humming along!

Other than playing patty cake with int. rates doing penny ante hikes for about two years signaling to even the most oblivious among us what the FED's intentions were so each specuvestor could time his exit?

Other than playing a shell game with listings to show them as "New on the Market" when they in fact had been trying to sell them for over six months?

Other than appraisers "hitting the numbers"?

Like I say, where to start?

Randy-

I have worried about that too. I don't know much about economics, so I have no opinion on the tools that the government might use to engineer a soft landing.

However, I do know two things. First, government moves slowly. If they intend to enact some kind of RTC-type bailout scheme and begin buying up defaulted mortgages at pennies on the dollar, this will take a long time to propose, pass, and implement. If Joe Flipper's sheriff's sale is 82 days away, the relief will come too late for him.

Second, government bailout schemes tend to promise much and deliver little. "Disaster relief" after an earthquake or a flood pretty much consists of giving you a low interest loan to fix your house, not a cash subsidy. I can see a government bailout of housing involving similar unappeal terms. Maybe the government will offer to extend the term of the mortgage on your McMansion to 50 years or something. A lot of people will just bail on their homes if this happens, much like the New Orleans refugees who have decided that they aren't coming back.

Finally, this problem may simply be too big for the goverment to solve. I can't see the government, say, doubling the size of the national debt in order to bail out the Boomers. This is possible, but strikes me as unlikely.

Still, I really know nothing about economics or the tools that the goverment can use to manipulate the economy so I would be interested to hear your thoughts.

Finally, and I know that not everyone here will agree with this one, I don't think that karma will allow the Boomers to escape their just desserts. Some twice-divorced 50-something driving an SL500 with hair plugs/breast implants and living in a McMansion -- this person will not escape paying for his or her sins. I just know it in my bones.

I believe that should read "smoking hole"

Garth,

The levers are relatively simple: liquidity and credit standards (which are largely related to liquidity and velocity).

Hyperinflation need not be the outcome, just some moderate inflation, even if accompanied by recession/low growth -- stagflation, this would reduce the risk for creditors allowing them to continue to extend weak credit in a low rate environment. Continual tightening and loosening by the Fed over say 25 years, add in a couple of minor but significant cyclical (not secular) bull stock market trends, and a slow erosion of what is the "accepted" unemployment rate, and you have a long-run soft landing.

The main ingredient is that the Fed can dramatically impact the base-component of the discount rate that all the creditors use to determine their risk-management formulae. If money is easy, then you can afford to write risky loans. In fact, you can't afford _not_ to write these loans.

Who are the powers-that-be? I don't believe in conspiracy theories. WE are the powers-that be, in that we don't vote and those who do elect (either purposefully or out of ignorance) legislatures and executives who are aligned with these intentions.

Joe Schmoe,

Five to One baby

One in Five

no one here

gets out alive!

Okay, I know this is basic stuff, but the discount rate is what the fed charges the member banks?

Do they also somehow regulate the money supply by buying and selling government securities? I really am new to all this.

While we're at it, what is the federal funds rate? Send me a bill and I'll charge it to my continuing education account.

I guess I could easily sum up my worries as this:

Stagflate Our Way Out of the Housing Bubble

Benefits:

* Least destabilization, economic and political
* Least disruptive to largest voting classes, especially generational voters
* Spreads costs of correction out over entire economy
* Spreads costs of correction out over a long time, at least 2 gens of workers

Drawbacks:

* It's not really the right thing to do
* Lets the most irresponsible escape Karmic justice
* Rewards minority-interest voter behavior
* Solidifies current power political power base and structure

The Problem:
* All of the Drawbacks are Benefits to a certain class of people.

I think it was you who pointed out Bulgaria and other Eastern Euro countries a while back as similar to low-price areas in the US."

Of course, some high-growth areas such as (obviously) Prague, and less obviously--Estonia, Lithuania, Latvia, are experiencing effects of a bubble--despite income disparity to the West.

DinOR,

Its interesting to hear you say that everyone has a "vested" interest in seeing the housing bubble continue up in a 45 degree angle. It's like a real estate person saying, "no one wants to see prices decline". Well... anybody who is interested in buying in the next several years doesn't want this to continue. Of course I am not clumping you in with the "realt-whores". It is sobering to hear someone on this blog say this. Perhaps in your terms, the FED, banks and homedebtors want to see this continue to go up. It does feel like "the powers" that be are trying very hard to engineer a soft landing.

Lets the most irresponsible escape Karmic justice

Don't worry, no one can escape Karmic justice.

nomadtoons2 Says:

"If you have to live off of your parents, then something is seriously messed up with the system."

A couple years ago I was dating a Harvard Business School Grad who mentioned that things are really messed up when even the super overachievers she went to Business School with had to get money from their parents to buy a house in the Bay Area. Between the two of us we knew a total of three people that were able to buy homes in the Bay Area without help from relatives, trust funds etc. All three went to work for VC firms after grad school; one was a Arjay Miller Scholar, another was a Baker Scholar and the other was a Kaufman Fellow (basically three guys that are so smart it is scary)...

Fed 101:

I'll leave the history and political structure out; you can use Wiki and read about which Congressional Act created the Fed and all that fun stuff.

The Fed's Levers:

* Open-market operations: Purchase and sale of government bonds on open markets. The Fed does this from a position of stealth, which isn't a conspiracy but necessary to the function of a free market. If anyone could detect a Fed action reliably, then they'd have massive asymmetrical arbitrage power.

The Fed uses this lever almost every day.

* Reserve Requirements: The Fed determines the minimum reserve percent that a bank must hold in deposits, thereby directly determining the money supply. As money gets deposited, and then loaned out (and then perhaps deposited and loaned again), there is a multiplier effect. This is the basics of the money supply. The Fed can very rapidly loosen or tighten the money supply with this lever.

The Fed almost never uses this lever. It hasn't been touched in decades.

* Discount Rate: This is the amount the Fed (acting as the Central Bank) charges to banks for overnight loans. Banks need these overnight loans to maintain their reserve requirements above. Of course, a bank can be hyper conservative and hold surplus reserves, and never need to use Fed overnight loans. A bank like this will go out of business very soon, due to price/fee competition, so virtually no banks do this (but some credit unions do).

This is the infamous Fed Funds Rate that everyone watches. It is the powerful lever that helps give momentum to what the Fed tries to perfect with their Open Market Operations (which affect bond prices).

--

When people talk about the Great Depression, they often like to point to the inability of the Fed to ease the deflation. What they often miss is what the Fed did to Reserve Requirements (by far the biggest Fed lever). In August 1929 the Reserve Requirement was 14%, the Fed _raised_ it to %21 as things got worse. Well, this effectively caused currency-to-deposits to rise from 17% to 41% (because of the money multiplier), and cut the entire money multiplier from 3.7 to 2.3. This was a extraordinary tightening, and a major constrictive shock to the US economy, causing deflation to spiral out of control and unemployment to spike. When FDR came in and the new team opened up liquidity, things started stabilizing almost immediately. The moral: the Fed does have power, and quite a bit of power. It's just not perfect power.

RE: WORLDWIDE NON VIOLENT MASS CIVIL DISOBEDIENCE

This is not going to accomplish anything. You will only annoy people and lose whatever support you already have.

Already zapped it as spam.

Thank you.

I guess a short revisit of rules on my threads:

ALWAYS DELETED:

* Spam
* Personal attacks, including gratuitous name calling
* People who've been banned and come back under a different guise

PROBABLY DELETED:

* Trolls
* Flame baiters
* Jukubots

Best way to not be a Troll is to simply have a conversation. Disagreements are welcomed and encouraged, but only if you are willing to discuss, debate, and converse.

Perhaps we can reprogram jukubots to combat spam. :)

FAB,

"A couple years ago I was dating a Harvard Business School Grad who mentioned that things are really messed up when even the super overachievers she went to Business School with had to get money from their parents to buy a house in the Bay Area."

Interesting observation. Were your classmates were looking at $2M+ properties or much lower priced properties?

Best way to not be a Troll is to simply have a conversation.

And not live under a bridge.

FAB,

I ask because I see this a lot in Shanghai. White collar professional class children heavily depend on their parents (less educated, sometimes blue collar parents) to help buy nice homes that befit their social status.

Compared to SF, urban China is an even harsher environment for upwardly mobile have nots. The rents are also quite high relative to wages, and the young haves basically use their income as discretionary spending until they marry. I have a couple of country born cousins who are making their way in the big city, I tell them it's easier just to migrate to Australia or Canada.

FAB,
To augment your HBS grad observation, if you go over to the young law associate gripe board infirmation.com for the BA, there's an off and on discussion about housing. Basically, young associates, who in big law firms pull in 1+HaHa's easily plus bonuses, are having trouble affording homes in the BA. There are discussions about living in places like Fremont, San Carlos, etc.; not to dump on those places, but a high-end law firm associate should not have to live in those towns simply b/c those are the only affordable places.

re: transnational population diffuse by price.

I think there will be a huge number of rich nation elderly going off to low GDP countries with good weather. That'll probably be the cheapest way to ease the inevitable decrease in medicare and SS benefits (a little inflation and the current CPI ought to do it). These folks can live in gated communities with their fellow countrymen, use fast speed internet and satillite to catch up on TV and new, and it'll be like a 55+ condo community in FL.

Europeans probably don't diffuse because they're not provincial than Americans when it comes to jobs. They also speak different languages and have very regional specific identifications. Moving from France to Italy is probably a much bitter change than for an American moving to Canada or Australia or UK. I'm imagine that the upper strata and the lower strata are most likely to move across borders while the middle class stay put.

Still, I can see Spain become the Florida of Europe. Jobs aren't concerns for retirees, but low cost of living and good weather always are.

Randy H,

Thank you, Sensei.

Skibum,

I still don't see why these high fliers won't rent. They can live very comfortably renting in the city or nearby suburbs.

I still don’t see why these high fliers won’t rent. They can live very comfortably renting in the city or nearby suburbs.

Premium apartments are getting expensive in the Bay Area though. In SF, a nicer 2/2 apartment (in a complex) can easily exceed $4000/month. It is still cheaper than PITI, but it is getting closer.

Perhaps, as the graphs on the blog portray, rents will go up as some I/O ARM investors try to cling to properties. Or perhaps rents go up because everyone is taking the advice of patrick.net, and thus demand has increased for rentals.

Yes, we were told that many ex-homeowners are renting right now. That should increase demand for 3bd apartments.

But I am quite surprised that rent is nearly 25% higher in Mountain View compared to last year.

newsfreak,

Of course it's not valid to blame all current economic, social or political badness on the Boomer generation, or any other population segment in general. On the other hand, they are clearly the largest aggregate population segment age-wise, and so anything that they do as a group (as much as they do things as a group) has a marked effect on the rest of this country. Yes, percentage-wise there may very well be as many or even more flippers among Gen-X'er vs. Boomers, but there are almost certainly more Boomer flippers on an absolute basis compared to other groups. As a result, people like to pass blame onto them as a group, whether or not it's right or wrong to do so.

Garth,

Nichts zu danken. I am not a Fed expert, by any means. We used to have a few regulars around here who actually have or still do trade bonds and understand the deep mechanics of yields, rates, and Fed Actions. If we can rouse them out of slumber I'll be getting an education too.

newsfreak,

I'm not sure about that, even if a large number of homeowners sell, the supply of housing on the market will be the same. I don't see why it would affect the market too much, they're creating potential rental supply when they sell.

Sorry if this thread sounds like gang up on Boomers. However, boomers do enjoy a significant advantage over younger people. At least you guys had a better shot at buying a house at a reasonable price and didn't have college tuition and fees that are about as much as the income for an average family of four. So if you think this country gave Boomers a bum deal, just imagine the grievances of Gen-Xer and Yers.

newsfreak,

I tried to be careful not to stir up another anti-boomer debate in my OP. As skibum says, there are very real generational factors here, but the real problem is one of income & wealth redistribution and wealth concentration. The issue with the boomers is that their aggregate actions determine the game for everyone. It just so happens that Boomers are also in a high voter participation stage of life (one which will only rise as they age). So, it is very likely in this political environment that *everyone* will vote in their own self-interest, and those with the most votes get their guys into office; just so happens the most votes go to the Boomers, since the Silents (my parents gen) are finally beginning to die off now. [Just for clarity, my gen progression goes: Greatest-Silent-Boomer-X-Millenial; which I stole from Strauss & Howe].

It is still possible to save your own down payment in the Bay Area. My wife saved her half while working as a computer tech by working weekends as a waitress and banking 25% of her take home pay. In four years she had saved enough.

I got my half by selling my stock in a dot.com that had just IPO'd, but it can be done by just being thrifty, living below your means and saving.

One of my co-workers lives in a very nice two bedroom apartment (alone) in Ashbury Heights and bitterly complains that he cannot afford to save anything. He also constantly complains he can't afford to buy a home in a nice neighborhood. I don't bother to point out the irony to him.

Having said all that, we would be hard pressed to afford now what we bought in March 2003, even though our combined income is up almost 50%. And we are both UC Berkeley grads with good jobs.

What ever happened to those RE Macro instruments that were supposed to be released by Chicago Stock Exchange?

http://www.cme.com/trading/prd/env/housingover16250.html

I think that the stock market is in for a tough 20 years, too, as boomers start to liquidate their 401ks and other retirement vehicles.

Does anyone have any hard statistics on how much of the current stock market is held by retiring boomers?

Not meaning to interupt the flow of the conversation here, but does anyone have any insight as to why the forum on CL is so entirely opposite of this forum? I used to go there and you could never get any kind of intelligent conversation in, and be damned if you said anything bad about housing in general. Why is CL so pro-bubble? It doesn't make any sense to me. I just took a peek over there, and it is downright nasty.

I guess it's time to invest in elder care, golf courses, and dealerships of big ass American Geriatrimobiles...and yellow bananas

Here is a brochure:

http://www.cme.com/files/cmehousing_brochure.pdf

I guess it’s time to invest in elder care, golf courses, and dealerships of big ass American Geriatrimobiles…and yellow bananas

I think there is over-capacity in golf courses already.

CL is big-time tragedy of the commons. It reminds me of what the old USENET groups all looked like about 6 months after AOL came on the Internet.

The problem with an effectively unregulated, unfiltered, undiscriminating communication form is that there's no one there to pick out the bad apples, so the who thing just stinks.

nomad,

Sadly, both the hustlers and the fools on CL want to believe RE will make them millions without any work.