patrick.net

i agree with you about affordability and that 3x can be higher for higher income.
but that by itself is not very meaningful.

i can afford a $2000 pair of shoes, would I pay that much? never. since i'm all about value.
my personal opinion is that mid/higher end houses are severely overvalued.
affordable - maybe. overvalued - absolutely.

just because i can afford something doesn't mean i should buy it.

so you can say a $250k income can afford a $1.25M house. i completely agree.

i think they'd be foolish to spend that much just like it'd be foolish to buy the $2000 shoes.
both easily affordable. neither are smart decisions in my opinion.

Mike, cool now we get into the concept of value and specifically how much it costs to attain that value. Of course, it is sort of subjective as what is valubale to me, you, others and how much I am willing to pay. Your shoe analogy is dramatic as a reasonable person sees no difference between a 200 dollar pair of shoe from a 2,000 pair except for the 1800 in branding.

I have childrens one and 3, so school is really important, the only choice is a great public school such as (Fremont Union, Cupertino, Lafayette) or private school which is probably around 2,500 a month aggregate. From that perspective, school is an incredible value and one that is worth around 300K to me.

Others:

Close access to jobs. Time is of the essense and every minutes count, value??

Safety and community. I know people view rich people as snobby, but I rather live among the rich than the poor, I rather live in community that is owner occupied than renter occupied. value??

Size, I need a minimum of 3 bedrooms and 2 bathrooms and preferably SFH. Admittetly, anything more is not that valuable. value??

Notice these are not just my values, but pretty much values every other resident has, especially those in similar situation as myself. I don't want to pay 300K for schools too, but that is the value set by the market, not me.

So it comes down to great community with great schools, close to concentration of high pay jobs and it must be a 3/2 SFH. Guess what, all my competitors are looking for the same thing and why it is not cheap. Especially since these are also the same places that haven't built SFH in 20 years.

Do you really think some of these values are overpriced given these parameters?

The key difference is how many other people are willing to pay 1.25M. If there are enough people willing and able to pay that amount, then that is going to be the price for all similar homes. It won't come down in value because there are buyers at 1.25M. Affordability isn't likely to change by much, and the number of people willing to pay that amount isn't likely to change much either.

If you base your housing pricing on the last 4 years and then the previous 5 years it's going to look odd. How about 40-60 years. Average things out. Or at least 30 years, the lifetime of many mortgages.

Pointing out housing prices over a 4 year time frame is akin to looking at a 5 minute sampling of a stock price and making a year end prediction from that 5 minute sample.

SF Ace,

People bid up these housing values as you say too high over the years... And in our current economy they are still too high... I understand the value of spending more on housing for a great school district and safe neighborhood. I understand there will always be a premium for housing in some areas over others. My belief is it's just still far too out of whack to be sustainable given current economic conditions, but moving forward who knows... I currently rent in an apartment complex surrounded by 800K-1 million dollar homes... next to a highly sought after elementary school in Studio City. My rent is 1/3 of the monthly payment of neighboring homes on small crowded lots. Sure they get a little more privacy and maybe a tiny yard. But it's not worth the thousands more a month. I get the same benefits of the neighborhood, they get and save those thousands.

LA renter, fair enough, lets reconcile your difference a little bit. so I Presume your rent is 1500 a month vs. PITI of 4,500 or 1/3. Of course if the house was bought in 2006, the cost is a lot higher than a house available now.

principle is about 700 for a new mortage and more for a more established mortgage.
income tax benefit is probably around 1000 a month, so ITI is around 4500-1700 or 2,800.

so 2,800 for SFH
vs. 1,500 Apartment

My understanding is there is a big value difference a SFH and apartment and there is a big value difference between 3/2 and 2/1, especially in kid friendly neigborhood as you described. You didn't give me enough facts to help me determine the difference betweeen the SFH and apartment, but as you can see, the gap is not as wide as you think.

Some people have great rental deals so I understand it's hard to give that up.

SF ace says

A million dollar house probably rents for anywhere between 3K to 4K in SFBA.

A very quick search on craigslist for 3br or larger homes in Los Gatos, Saratoga, Cupertino, Willow Glen, etc. puts rents at approx. $2500 to $3000. You are close but a bit high, IMHO.

The real question people face is if I make 200K, am i better off renting for $3,500 or buy a similar place for $1M based on current environoment. Considering that ITI net of income tax benefits is around 3K after 200K downpayment.

I understand what you are saying here and agree to a certain point. However, the question is really "Am I better off renting for $2500 - $3000 or buying a similar place for $1M (or more)?" The lower rent range puts a bit of a squeeze on your number crunching, but I give you the benefit of the doubt because I realize one should factor in the full financial picture, which would include any tax benefit. Of course, I believe the tax break on home ownership has historically declined since its inception and with the ever dwindling tax base our federal, state, and local governments are facing, a further reduction or possible elimination of tax break for home ownership isn't out of the question. So, potentially in the long run, your tax break basis may turn out to be a non-factor in determining whether to purchase a home.

Also, the kicker assumption in your analysis is that people have $200, $300, $400K, etc. in their possession with which they will use as a down payment. I do not believe that the average SF Bay Areaian is much of a saver. Really, how many people making $200K a year are going to put away $100K+ of the a year for 3-5 years instead of buying the latest ipod, car, or whatever. This is the Bay Area man!!! The land of consumption. My point? People my have enough income to pay $2500 - $3000 a month in rent, but they don't have the down payment to buy the comparable home and convert the rent payment to a mortgage payment.

People don't have the capital they did even two years ago much less 10 years ago. Unless wages go up or people start living a truly frugal lifestyle, housing prices at current levels is unsustainable.

pkowen says

I’ve rented the same place for 3 years, and other than the washer/dryer (which are fine, if old), it is pretty heavily upgraded. The owner paid nearly $1 million in 2006, and we rent for well under 1/2 the nut. We are thinking of moving to something cheaper because there is so much available that is just fine, for less.
I’d estimate landlording on the peninsula is a losing proposition, unless you inherited the house and have been sitting on it for 20+ years. You certainly can’t get anything like positive cash flow without major capital outlay (think $500Gs at least), and I think there are better returns on your capital elsewhere. All the negatives noted here are of course possible, so all I can say is do your research - and, “you don’t get what you deserve, you get what you negotiate”. I have pretty high standards and as a good tenant, I just walk away from ‘crappy’.

That's part of the problem. There's no cashflow so that rental you're in isn't really a rental. It's certainly not a sustainable situation for your landlord. Eventually you'll be asked to move.

toothfairy says

pkowen says

I’ve rented the same place for 3 years, and other than the washer/dryer (which are fine, if old), it is pretty heavily upgraded.

That’s part of the problem. There’s no cashflow so that rental you’re in isn’t really a rental. It’s certainly not a sustainable situation for your landlord. Eventually you’ll be asked to move.

Really? Have you met the landlord? Know about their finances? This person put down $500G and I'd say she does break even on my rent. Not a good investment in my estimation but I am not worried about being asked to move.

pkennedy says

Second, there are few people like Warren Buffet who can beat real estate in the markets.

There are few people like Warren Buffet that can make as much money in Real Estate either.

He bought his Laguna Beach, CA vacation home for $150,000 in 1971 and is currently paying around $2,200 per year in property taxes on a home currently valued at around $4 million thanks to California's Prop 13.

He sold another home he owned in Laguna Beach for $3.5 million in 2004, which he also bought in the 1970's. Perfect timing on buying and selling, give or take a couple of years on both transactions, but overall...it was a home run!

Warren Buffet can make more in the stock market and business side than he can in Real Estate, that is why he doesn't buy land. He only owns minimal property, and that is for living in.

3.5M isn't much money to him, and it wasn't an investment. My guess is that it was around when his wife passed away, or when his children stopped using the place. As he's stated in many writings. He doesn't need 8 homes, but 1 home and a private plane is nice.

It's possible for people to make money in the stock market, but buying land is much more of a sure bet for most people, even if it doesn't offer the same returns, it's fairly safe and stable. It can be utilized and provide a good retirement home as well as a good place to transfer wealth from generation to generation. For the average person, it's a good investment.

"A very quick search on craigslist for 3br or larger homes in Los Gatos, Saratoga, Cupertino, Willow Glen, etc. puts rents at approx. $2500 to $3000. You are close but a bit high, IMHO."

Your methodlogy may be flawed as well as I have no assurance that a craigslist search of 3br or larger homes in those places marketed on Craigslist are those that average 1M in market value. I still maintain that a million dollar home rents for 3K+ in the SFBA.

"Also, the kicker assumption in your analysis is that people have $200, $300, $400K, etc. in their possession with which they will use as a down payment. I do not believe that the average SF Bay Areaian is much of a saver."

Yes for 80% of the population, people are pretty much paycheck to paycheck, the other 20% of the working adults, they have more wealth than you think. An avergage mid manager working at Saleforce.com, VISA and hundreds of other similar companies for 5 years is probably sitting on around 100K-250K in stock options. I know cause my friend who transferred to work at Saleforce.com was given that amount as a sign on and is valued around 200K alone and does not reflect additional ESPP bonus subsequently. The executives are exponentially more. Well, the 20% of the people with the wealth is also the people that most likely buys in Cupertino, saratoga and Menlo park.

SF ace says

“A very quick search on craigslist for 3br or larger homes in Los Gatos, Saratoga, Cupertino, Willow Glen, etc. puts rents at approx. $2500 to $3000. You are close but a bit high, IMHO.”
Your methodlogy may be flawed as well as I have no assurance that a craigslist search of 3br or larger homes in those places marketed on Craigslist are those that average 1M in market value. I still maintain that a million dollar home rents for 3K+ in the SFBA.

I must be lucky then, since my $1 million place rents between $2500 and $3000. Exactly as stated.

SF ace says

“A very quick search on craigslist for 3br or larger homes in Los Gatos, Saratoga, Cupertino, Willow Glen, etc. puts rents at approx. $2500 to $3000. You are close but a bit high, IMHO.”
Your methodlogy may be flawed as well as I have no assurance that a craigslist search of 3br or larger homes in those places marketed on Craigslist are those that average 1M in market value. I still maintain that a million dollar home rents for 3K+ in the SFBA.
“Also, the kicker assumption in your analysis is that people have $200, $300, $400K, etc. in their possession with which they will use as a down payment. I do not believe that the average SF Bay Areaian is much of a saver.”
Yes for 80% of the population, people are pretty much paycheck to paycheck, the other 20% of the working adults, they have more wealth than you think. An avergage mid manager working at Saleforce.com, VISA and hundreds of other similar companies for 5 years is probably sitting on around 100K-250K in stock options. I know my friend who transferred to work at Saleforce was given that amount as a sign on and does not reflect additional ESPP bonus. The executives are exponentially more. Well, the 20% of the people with the wealth is also the people that most likelt buys in Cupertino, saratoga and Menlo park.

I suppose we could be splitting hairs, as I can't really take issue with a lot of what you are saying unless I get really nit picky. I believe you are right about the average mid-manager income and bonus, as I know someone at salesforce too. The interesting thing is that the person I know at salesforce makes great money but spends it all on a million dollar home, new cars, private school for the kids, vacation cottage, electronics, etc. That same person told me recently that all the available income was going toward "lifestyle" and NOTHING WAS BEING SAVED!!! Not even for retirement!!!

I know this is only one person, but I fear that this is the way most Bay Areaians live today, which is risky. 10 years ago one could live like that and go to sleep at night believing thier ship would come in the next day. Most of the time it did. Today, however, that type of belief just seems foolish.

pkowen says

Vain says

hooch_raider says

This is kind of what’s wrong with the bay area. Some people have very low standard of living expectations compared to much of the U.S., and they push up prices while pushing down quality of life overall. I’d say there is value to having Grandma, Grandpa, Mom and Dad nearby, but not ON TOP of you. In other places I have lived, people who want that buy a little ‘compound’, and these aren’t rich people. Sometimes the compound includes trailers but at least they are outside of earshot. Maybe it’s a cultural thing. But my WASP upbringing makes it unthinkable to live in 1000 sq ft with 6 people. I am always amazed how people in the bay area can live in such squalor and think they have the good life. Good for them I guess.

pkowen,
Sounds like you're comparing yourself to a different demographic than the typical buyers nowadays.
The living standards that you describe, that you refer to as squalor, are more like the wide open spaces of the Big Sky West to persons who dominate the buying demographic nowadays.
After our Fortress communities become as overcrowded and uncomfortable as places like Mumbai or Shanghai, then houses won't seem like such a good value proposition any more. But we're not there yet, so these are like the wide open prairie for the time being.

There are always people who live pay check to pay check, spending on a "lifestyle" but there are also many who invest and save wisely.

The lower income people have very little choice, other than to live check to check. They can change their lifestyles only so much.

The more wealth someone has, the more options they have. If your friend has bought "any" property, then at the end of 30 years, he'll have something saved. It might not be enough to maintain his life style, but he'll have something.

Remember, it's the "horror" stories that are passed along, not the boring ones. "So-and-so worked the same as everyone else, paying down his mortgage and now lives a retirement of an average retired person" - that isn't as interesting as "so-and-so bet the entire farm on google stock and made out like a bandit!" that will pass from mouth to mouth over and over.

sybrib says

pkowen says

Vain says

hooch_raider says

This is kind of what’s wrong with the bay area. Some people have very low standard of living expectations compared to much of the U.S., and they push up prices while pushing down quality of life overall. I’d say there is value to having Grandma, Grandpa, Mom and Dad nearby, but not ON TOP of you. In other places I have lived, people who want that buy a little ‘compound’, and these aren’t rich people. Sometimes the compound includes trailers but at least they are outside of earshot. Maybe it’s a cultural thing. But my WASP upbringing makes it unthinkable to live in 1000 sq ft with 6 people. I am always amazed how people in the bay area can live in such squalor and think they have the good life. Good for them I guess.

pkowen,

Sounds like you’re comparing yourself to a different demographic than the typical buyers nowadays.

The living standards that you describe, that you refer to as squalor, are more like the wide open spaces of the Big Sky West to persons who dominate the buying demographic nowadays.

After our Fortress communities become as overcrowded and uncomfortable as places like Mumbai or Shanghai, then houses won’t seem like such a good value proposition any more. But we’re not there yet, so these are like the wide open prairie for the time being.

Yeah, well, I can see what you mean. I believe you, I am just astounded by how little taste or aesthetic sense people here have. You don't need a ton of space to live well, make it beautiful, but cementing the front yard, that's a bay area (or perhaps CA) phenomenon. I've mentioned before, had a RE agent show me a brand new town house, he could barely speak a word of English, and advised me, "you cut in half and rent out". Yeah, sounds great, I'll just go get some 2x4s and drywall and start livin' da life. At the risk of sounding Xenophobic, those 'dominating the buying demographic' may well ruin this area. "Call someplace paradise, kiss it goodbye!"

The lower the interest rate, the less housing will cost.

The higher the interest rate, the less housing will cost.

An avergage mid manager working at Saleforce.com, VISA and hundreds of other similar companies for 5 years is probably sitting on around 100K-250K in stock options.

In other words, they are potentially sitting on ether -- or better yet, a Whoopie Cushion. Witness Enron.

It doesn’t usually work this way.

The only example I can think of when it didn't was the seventies, and that was quite a different scenario than the one we presently enjoy.

zzyzzx says

That and crappy single pane windows.

God, don't get me started! All the energy conservation steps you would take if you owned the property and lived in it, are NOT things a landlord wants to pay for. Maybe they'll give you a few CFL because they saw them on sale at Costco, but that's it. Double paned windows? Forget it!

/\ /\ Interesting analysis. What do you predict for housing values if interest rates are taken down even further?

One major component that strangely gets overlooked in this type of debate is the ongoing erosion of middle-class incomes. This was less of a factor in the eighties; in the nineties, we had access to cheap debt as a stopgap.

If we somehow really have reached the bottom as you believe, (and I do not believe), then it seems the very best case scenario is that the market will country lane along the bottom for years to come unless we witness some serious reversals of fortune where median salary stagnation/diminution is concerned.

pkowen says

toothfairy says

pkowen says

I’ve rented the same place for 3 years, and other than the washer/dryer (which are fine, if old), it is pretty heavily upgraded.

That’s part of the problem. There’s no cashflow so that rental you’re in isn’t really a rental. It’s certainly not a sustainable situation for your landlord. Eventually you’ll be asked to move.

Really? Have you met the landlord? Know about their finances? This person put down $500G and I’d say she does break even on my rent. Not a good investment in my estimation but I am not worried about being asked to move.

nope I dont know your landlord but 500k down heavily upgraded house and the rent just breaks even? whoever bought the house it doesn't sound like their intention was to keep it as a long term rental.

SF Ace,

Why do you spend an extra 5 letters to make perfectly fine "method" into "methodology?". When I see (or hear) "methodology" instead of "method" I usually also smell b*llsh*t. See that word "methodology" in the WJS alot.

ha. great post sybrib.

I think housing is headed up regardless.

Eventually, yes - but your analysis brushes a lot under the rug in the meantime. Just for starters, whenever markets overshoot, they always over-correct. Since that hasn't been allowed to happen - thanks to aggressive policy measures drafted to prevent that very phenomenon - I think the real opportunities still lie ahead. The pendulum does not swing hard in one direction only to stop in the middle.

It might move sideways for a few years like it did in the mid 1990s, but there’s too much money in the system for prices to decline below the 2009 bottom. Instead of broke and desperate to find a place to live, we have Americans fretting about the market and wondering if they will have to rent for a little while before their credit is cleaned up enough to buy again……..while drinking their $5 coffee at Starbucks and talking on their $80 a month iPhone.

There's a rather big difference between discretionary creature comforts/poverty salve like lattes & shiny toys and tying up your cash in a thirty year mortgage on an overvalued residence.

I often tell people my tenants could easily afford the mortgage on the home they live in, if they only had the credit.

Aren't the credit requirements for an FHA insured loan something like 580 for the flagship 3.5 down loans?

I have tenants paying $2000 a month rent in a house with a mortgage that costs me $990 a month @ 5.5% no less. Oh sure there are taxes and insurance and upkeep and I paid 20% down…..but is there any doubt that this family would prefer to buy if someone would loan them the money? At twice the price even?? Sure they would. This is HUGE pent up demand and no one is accounting for it.

I don't disagree that there's a kind of muscle memory among most Americans when it comes to which pit to throw their money into, but I suspect that stagnant and declining income levels and the (rational) fear thereof are much more of a factor in housings ongoing correction than dinged credit ratings damming a surge of eager buyers. If it was just a matter of credit waylaying all of this supposed money on the sides, you would see some model of lender emerge that specialized in making loans to those people. Anything to relieve the pressure!

As an aside, I also sense a certain level of disenchantment toward the conventional wisdom of home ownership setting in among the the younger helots of the middle class. My hope is that they will seek something more fulfilling to do with their daily crumbs than shackle themselves with mortgage debt. Leave that jazz to the old & wasted!

Austinhousingbubble says

One major component that strangely gets overlooked in this type of debate is the ongoing erosion of middle-class incomes

Austinhousingbubble says

a certain level of disenchantment toward the conventional wisdom of home ownership setting in among the the younger helots of the middle class.

My partner and I are 30. We are "middle class" in lifestyle, education, profession, and living standards (though not in mentality or values, which is I guess what was once termed "bourgeoise"). Homeownership seems like a ball-and-chain. We like to move around; we have no attention span and get bored easily. Yeah, MTV made us this way. All (yes, all) of our friends are this way, too. But like attracts like; so there's no evidence in that.

Personally, I view homeownership as an endgame; a retirement plan. We only want to buy one house in our lifetime. Maybe that's a foolish ideal, but probably no less foolish than how many others have treated homeownership. We may forego that, however, and retire in Mexico: the only place where our lost middle class's savings will still be able to afford the Golden Years plus a machine gun for self-defense.

'Til then, we'll keep on renting/saving/investing/trucking.

Just because owning a house is more expensive now, it doesn't mean you shouldn't do it. I think you can work around the rental problems, but if you don't want to and have the money to risk, there's no big deal in buying a house. My problem is paying today's prices if you can't afford to lose some of the money or somehow convincing yourself you're investing rather than spending your money on something you want.

@Austinhousingbubble

Actually, the actions taken by the government were designed to stop the pendulum. The momentum of the drop has been stopped dead in it's tracks. Some say we're going up, some say we're going down. The important thing is no one is claiming nose diving numbers anymore, the pendulum stopped.

For us to further correct from our current position will require lots of momentum to get that pendulum going again, since banks and other organizations are moderately secure now, and unemployment seems to be leveling off, and world economics are decently stable, it's unlikely we're going to see that.

Not to mention when you see a pendulum effect the "end game" is the resting point of the actual pendulum, so if we stop it from moving, we in effect stop the massive pull backs everyone was expecting, and settle more into a path with corrections taken into account.

Renting is great if you can get over the mental idea that its temporary. if your landlord is lax about the place or trust you. you can easily start painting, putting shelves on the wall, etc.. pretty soon, renting seems more permanent.

Personally, I view homeownership as an endgame; a retirement plan. We only want to buy one house in our lifetime.

I think that's the ideal mindset, really. I would much prefer to live in a community built upon that sensibility than the move-up money-for-nothing gang.

Actually, the actions taken by the government were designed to stop the pendulum. The momentum of the drop has been stopped dead in it’s tracks. Some say we’re going up, some say we’re going down. The important thing is no one is claiming nose diving numbers anymore, the pendulum stopped.

That's just it -- the government drafted radical if dubious housing policies to try to circumvent the inevitable, but it's temporary. They've effectively kicked the can down the road until the next bust cycle, though probably not even that long.

No, they stopped the momentum. There is no more pendulum effect. The prices went to where they should have and stopped. Without momentum, prices will neither go crazy up or crazy down.

No, they stopped the momentum. There is no more pendulum effect. The prices went to where they should have and stopped.

They didn't 'stop' anything - they've slowed it down. Visualize a giant rug (spun from the fibers of your future tax dollars) thrown over a manhole cover. You still fall, but it takes longer. Again, unless there are radical permanent changes to housing policy that recreates the effect of wealth/cheap credit as during the housing bubble, then there's nothing to offset the diminution of middle class incomes. Therefore, housing will just unwind slower.

Without momentum, prices will neither go crazy up or crazy down.

Nobody said anything about crazy up or crazy down. I said the correction has been stalled. Based on the history of all previous asset bubbles, an over-correction is yet due, unless you really think this-time-it's-different.

I guess you didn't even understand what you had written before. You said pendulum, which is a swinging back and forth motion. They stopped that, by stopping that motion the pendulum no longer moves. To make it move, we'll have to have good news / bad news / something happen, we have to build a momentum up again of lots of sellers or lots of buyers to make the prices move. To make it move MORE, we'll need MORE of those actions. As of now, there isn't much happening. Nothing terribly good, nothing terribly bad.

Do you understand why they put the 500 point drop rule into the nyse? http://www.ehow.com/about_5255094_nyse-market-point-drop-rules.html

It's to stop the momentum. Stop that, and to restart it you need more of something. More bad news, more sells happening, more of something. When the market is rushing in a good direction or bad direction, if you break the cycle, it will require a new energy source to start up again. A simple 15 minute break in the stock market does that often. It gives time to think, adjust and plan their next moves.

For housing, they simply stopped it from crashing and removed all the momentum. To restart it will take an actual momentum.

I guess you didn’t even understand what you had written before. You said pendulum, which is a swinging back and forth motion.

I understand the mechanics of a pendulum, but thanks anyway.

They stopped that, by stopping that motion the pendulum no longer moves.

They didn't stop it; they stalled it; and they cannot stall if forever. Understand?

For every action there's an equal and opposite reaction. Yes, the government has slowed the rate of that reaction (over-correction), however, the policies designed to slow that rate are not permanent, and there is no "terribly good news" as you put it to help offset the effects of the correction when this policy is phased out. They may have manipulated the velocity and even the linearity of the correction, but they have not contained or successfully 'stopped' the correction in housing, thanks in part to the sheer mass of the original problem. They simply kicked the can down the road with the help of the printing press.

To make it move, we’ll have to have good news / bad news / something happen, we have to build a momentum up again of lots of sellers or lots of buyers to make the prices move. To make it move MORE, we’ll need MORE of those actions. As of now, there isn’t much happening.

Make it move. It is moving. Downward. Slowly. As for not much happening - you mean there isn't an asset bubble creating phantom wealth? I agree.

Do you understand why they put the 500 point drop rule into the nyse? http://www.ehow.com/about_5255094_nyse-market-point-drop-rules.htm

l

Rules and the NYSE in the same sentence. Doesn't that look slightly oxymoronic? I really don't pay any attention to that rope-a-dope casino. I'm about 70% cash.

For housing, they simply stopped it from crashing and removed all the momentum. To restart it will take an actual momentum.

Y'know, there's simplifying things and then there's just being simplistic. All asset bubbles over-correct. The rate (momentum) at which they over-correct is not the issue. Again, perhaps you feel it's different this time, but history is not on your side.

Many forgotten what is like as recent as March 2009, when the banks were not even functioning, they were looking into their capital reserve and determined if they can survive, depositers were scrambling to get their money out, DOW went below 7000 and 12 million jobs were lost in a period of 18 months. A mall that was leasing for 18K as recently as 2007 were signing short term lease for 4K (personal situation). Commerical REITS were going bankrupt on purpose to get out of bad deals signed in 05-07. By all accounts, things were falling apart. Low prices lead to more bank failure, which leads to more job loses and even weaker housing, the death spiral if you will.

You can say the fed threw everything they can to stop the death spiral. Most major banks stayed intact, the DOW recovered nicely thereafter and jobs are coming back slowly, although not in the housing related industry. Banks are profitable and their liquidity problems are behind them. Jamie Dimon of JPM puts it best, the economy goes when the bank goes, when the bank tanks, the economy tanks. Well the banks are building a base and so is the country. Sure foreclosures are at historical high still, but it was built-in anyway and kept it from even getting much worse. The fed probably stopped even more millions of homes from going underwater and ultimately foreclosure, interest rates put more cash in the pockets for more people and kept millions off the unemployment roll.

How do you create the same set of scenerio like what happened in March 2009, you can't? We're not going to have any net loss of jobs, banks and business' are positioning themselves for the next five years, not worried about hunkering up. GDP is up, not down regardless of the winding effect of stimulus. 2Q-2010 S&P earnings were just shades off record. BofA is looking to restore dividends. From that perspective, the effect of the economy is more measured and controllable.

It'll take many years to work through all the problem loans and housing excess, but unlike 2008 and 2009 when things were falling apart fast, it'll be work through in an environment that is managable. 2009/2010 buyers are the strongest of the banks portfolio due to incredibly high lending standard and serve as the new base. pkennedy's analysis is spot on.

Of course, something like this is ripe for disagreement.

Unfortunately, for the two lost posters on here, the analogy of a pendulum and housing prices is not quite accurate. If you reach out and stop a pendulum, it loses all of its energy (momentum)

Lost? What I'm suggesting is that the policy enacted to contain the housing correction did not have the effect of reaching out and actually stopping the pendulum. Now, just to belabor the analogy - I don't envision the printing press as a great wind machine creating a draft strong enough to actually slow things down to the point of total stasis as the other poster suggests.

I should have stated that they temporarily stanched the bleeding or temporarily dammed the flood. The basic point remains that no force great enough has been implemented (or even could be) to prevent the historical trajectory of every other asset bubble of this magnitude, which is over-correction! Goddamn...

It’ll take many years to work through all the problem loans and housing excess, but unlike 2008 and 2009 when things were falling apart fast, it’ll be work through in an environment that is managable.

How do you propose we will work through this? What will be the driver? Inflating another asset bubble? Perhaps a bond bubble? What about the small business owner? How about unemployment, and the idea that it could take up to ten years before it reaches pre-recession levels? That's also assuming we don't have a bust cycle before then.

We are a consumer nation with an economy that thrives on serial financial bubbles. We had a rare opportunity to regroup post-meltdown...to implement a little shock doctrine in a more reformative and productive manner than it is usually deployed...and we blew that chance. Now we're in for a big fat hangover of debt liquidation and further downsizing for the foreseeable future.

Jamie Dimon of JPM puts it best, the economy goes when the bank goes, when the bank tanks, the economy tanks.

How can you seriously quote that guy as any kind of sage? Besides, is that dynamic really one to rejoice? Wall Street now controls Washington instead of the other way around. As David Stockman - Director of the Office of Management and Budget in the Reagan Administration recently stated in a NYTimes Op-ED, Wall St. owns Washington: "its unproductive trading is extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives." Same old same old.

2009/2010 buyers are the strongest of the banks portfolio due to incredibly high lending standard and serve as the new base.

Define 'incredibly high lending standards.' Do you refer to 3.5 down and a credit score of 580? Or perhaps you refer to the new thousand dollar down loans? I guess that does seem incredibly high in contrast to the NINA loans from 2006.

We’re not going to have any net loss of jobs, banks and business’ are positioning themselves for the next five years, not worried about hunkering up.

Yeah, when you own DC and can mark-to-fantasy, anything's possible. The smaller community banks are less fortunate. Witness: http://www.ritholtz.com/blog/2010/08/fdic-bank-failures-july-31-2010/

Of course, something like this is ripe for disagreement.

It was just a tad bit hopium-tinged...

Have you ever seen a riot start? Or a group of people go crazy? How about during the bubble years of housing, how many times did you hear "You have to buy! you have to buy! it's awesome!"??

When people go crazy, they need a small break to re-evaluate the situation. Once that happens, people start to think rationally. Once they have time to put in corrective measures to block their own problems, they'll feel more comfortable.

*THAT* is what the government did. Stopped everything, gave people time to breath and think.

It gave companies times to implement more safe guards and create new contingency plans, etc.

The selling momentum is gone. There are now investors lining up for houses, WAITING for them to drop, hoping and praying they drop because they've now got credit lined up, moved their wealth into cash where they can buy, etc. If they are there WAITING, it isn't going to happen. There is now a reinforced bottom, and there are feeders there that will gobble anything up if it moves. Because of those investors, momentum to sell will never build up.

pkennedy says

Have you ever seen a riot start? Or a group of people go crazy? How about during the bubble years of housing, how many times did you hear “You have to buy! you have to buy! it’s awesome!”??
When people go crazy, they need a small break to re-evaluate the situation. Once that happens, people start to think rationally. Once they have time to put in corrective measures to block their own problems, they’ll feel more comfortable.
*THAT* is what the government did. Stopped everything, gave people time to breath and think.
It gave companies times to implement more safe guards and create new contingency plans, etc.
The selling momentum is gone. There are now investors lining up for houses, WAITING for them to drop, hoping and praying they drop because they’ve now got credit lined up, moved their wealth into cash where they can buy, etc. If they are there WAITING, it isn’t going to happen. There is now a reinforced bottom, and there are feeders there that will gobble anything up if it moves. Because of those investors, momentum to sell will never build up.

Except in west Oakland