patrick.net

In the late 70's and early 80's there was high inflation but wages rose in step so everything panned out without too much difficulty all things considered.

This time around its likely that wages will not rise anywhere near as fast as the rate of inflation or even not at all while everything else gets more expensive. And its not just gas or cars you have to consider, its the price of healthcare and schooling which are also out of control and quite frankly unaffordable for many if not most already. They are also both not counted in the rate of inflation, neither are gas or food prices either BTW.

At the same time you have to consider the persistent high unemployment and underemployment, that last one is far more insidious IMO to the health of the economy since most people don't give it much thought.

I think that what all this means is that eventually housing prices will be driven below the long term trend line for a while. Perhaps significantly so. Or maybe we'll just end up with a long period of depressed home prices a la Japan, once they hit bottom prices could stay there for decades.

Its really impossible to be certain at this point but the latter option is what I think is the most likely one. I tend to be fairly pessimistic though so fair warning.

If there is wage inflation in making then why are the states and fed in red ink all these years? High unemployment and wage inflation to go along with it does not fit well at all. Those people who lost their high paying jobs are working for quite low so how can there be wage inflation? Huge credit approval like a mortgage in these circumstances has to be toughest challenge for the banks. Only way current home prices can be sustained is if the rate goes down to 3% of something, otherwise it will keep going down.

bubblesitter says

Only way current home prices can be sustained is if the rate goes down to 3% of something, otherwise it will keep going down.

Yeah, if houses start dropping, rates will fall to 3% or so... Even as low as 2% in Japan... The government is committed to dragging this thing out. We found a great deal on a house.. and it was appraised for $30K over asking and we got closing costs covered. Sure, we could lose all our downpayment.. but we have a nice buffer that I feel pretty comfortable with. And the house is affordable on my income alone.. wife's income is savings. Could we buy it in a year or two for 10-20% less? Maybe, maybe not... All I know is I feel very lucky we weren't in a position to buy in 2007! We missed the first 40% drop... could it drop a total 60% sure... but anymore than that really feasible for an extended period of time?

Any fast drop of 20-25% drop would trigger a huge bounce off the bottom... Now 5% drops every year for another 5 years... possible... But you only live so long....

bubblesitter says

If there is wage inflation in making then why are the states and fed in red ink all these years?

Because wage inflation isn't in the making and is being prevented by the gov. Do you not notice how certain members of the gov. keep attacking unions for being overpaid and recieving benefits that the general population doesn't get anymore? Wages are still being driven down as we speak. The amount is relatively small, maybe 1 or 2 percent per year, but that adds up after a while and its been going on for years. At the same time the cost of everything else has risen much more, so wage earners in general are poorer.

bubblesitter says

High unemployment and wage inflation to go along with it does not fit well at all. Those people who lost their high paying jobs are working for quite low so how can there be wage inflation?

Because if wages aren't going up there can be no inflation? What do you think QE is supposed to do?

bubblesitter says

Only way current home prices can be sustained is if the rate goes down to 3% of something, otherwise it will keep going down.

Rates could go to 0% and prices still couldn't be sustained vs. wages. Dropping them that much would of course produce another echo boom, but it would fade just like the other one did.

Ultimately either prices have to drop lots more or wages have to rise lots more or those 2 things have to meet the middle somehow. Rising wages are not in the cards though, labor has little to no political power in the US anymore and the gov. is now effectively "of the 1%, by the 1%, and of the 1%" so they will continue to pursue polices that improvish the population while making the rich richer.

Los Angeles Renter says

Any fast drop of 20-25% drop would trigger a huge bounce off the bottom… Now 5% drops every year for another 5 years… possible… But you only live so long….

It'll drop faster than that I think, but even then your "you only live so long" is a pretty bad reason to buy a house in any market. In the end its just a house. Its a glorified box to live and put your crap in. Don't get suckered by the whole "American Dream" bullshit and believe that for some reason you haaaaave to buy one.

If it makes financial sense then great, if it doesn't stay the hell away.

Didn't the latest wage reports just show a 1% drop in salaries?

Every month of so somebody does a post on this topic. It's completely wrong. Too damn tired to reply much so I'll just pick some low hanging fruit:

4. as we continue to devalue our currency our homes become cheaper to foreigners with cash

Yes, but why would a foreigner WANT to own property here. There are certainly the uber-wealthy that own multiple homes around the world, and being able to by a penthouse in Manhattan for a discounted rate certainly holds some appeal, but we are talking about a very small part of the housing market here, and only in very select markets.

The other reason would be for investment purposes, like commercial real estate. But a weak dollar means nothing, since the valuation of property is based on rents, and the rents are in dollars.

tts has added some very good thoughts.

Los Angeles Renter says

5% drops every year for another 5 years… possible… But you only live so long….

What? Have you calculated how much is 5% drop for another 5 years on a 600K property means?

tts says

Los Angeles Renter says

Any fast drop of 20-25% drop would trigger a huge bounce off the bottom… Now 5% drops every year for another 5 years… possible… But you only live so long….

It’ll drop faster than that I think, but even then your “you only live so long” is a pretty bad reason to buy a house in any market. In the end its just a house. Its a glorified box to live and put your crap in. Don’t get suckered by the whole “American Dream” bullshit and believe that for some reason you haaaaave to buy one.
If it makes financial sense then great, if it doesn’t stay the hell away.

Sorry, but can not let that statement slide. I'll guess you’re a renter. Fine for you, OK. BUT for some of us with community feelings and a desire to have some roots, gain more than enough satisfaction by owning the home we live in to outweigh the inconvenience of having a paper loss. For some of us it is not an investment that we are looking to flip, it is also not our ATM, nor are we concerned about having to move because we are fortunate, through long term planning, to know we can stay put.

WOC 6705 says

Sorry, but can not let that statement slide. I’ll guess you’re a renter. Fine for you, OK. BUT for some of us with community feelings and a desire to have some roots, gain more than enough satisfaction by owning the home we live in to outweigh the inconvenience of having a paper loss. For some of us it is not an investment that we are looking to flip, it is also not our ATM, nor are we concerned about having to move because we are fortunate, through long term planning, to know we can stay put.

Your statement makes no sense. The possession of community feelings and desire to have "some roots" have nothing to do with owning. In fact, the same emotions can be derived by a renter.

Waiting to buy in a declining market means OP saves X amount of dollars.

In other terms, OP can gain the same emotional satisfaction at a lower price.

tts says

In the late 70’s and early 80’s there was high inflation but wages rose in step so everything panned out without too much difficulty all things considered.
This time around its likely that wages will not rise anywhere near as fast as the rate of inflation or even not at all while everything else gets more expensive.

I agree.

Never-the-less, given that:

1. inflation could push salaries and consequently home prices higher

{Please explain how rising material and energy costs result in higher employee salaries? Higher producer costs put pressure to reduce salaries and benefits, unless prices can be raised. If prices are raised for daily necessities like gasoline and food, then non-necessities like new cars, and tvs will not be purchased. Demand for these products will fall and so will their prices as sellers compete for a diminishing pool of buyers. Further layoffs will occur at these companies to make their quarterly numbers look better. Mortgage delinquencies will rise pushing more distressed inventory on the market. QE3 is then implemented to drive borrowing costs lower and maintain unaffordable housing prices. Federal, state, and local taxes are then increased to fund increasing gaps between spending and revenues. This takes away even more money from housing and prices fall further.

If taxes aren't raised, then federal and state borrowing costs rise with falling ratings. In this case, either government services must be cut, government salaries and benefits must be cut, or bond holders will not be paid.

Alternatively, QE3 is not implemented, mortgage rates rise to market price commensurate with borrower risk profiles (plus 200-300 basis points). In this case, housing prices fall another 20%, and strategic defaults increase driving down prices another 10-20%.

And how will rising health benefits affect employer ability to increase wages? We have experienced no net increase in real wages in the last decade. Global wage arbitrage will simply move jobs overseas before a stagflationary, 70s-style, wage-price-spiral occurs.

The fact is that cost-push inflation is deflationary (in contrast to demand-pull inflation). The FED, Treasury, and Congress have all been pushing on both the fiscal and monetary ropes the last few years with predictable results. We are still at high unemployment levels, and will remain there for the next decade based on current policies. We have 13M unemployed and are creating a net 100k jobs per month (take away 125k for population growth). This means it will take 130 months to create enough jobs for the 13M unemployed = 10.8 years!}

2. higher interest rates should be needed to slow inflation

{wrong kind of inflation. FED is right on this... Inflation is not the issue. The economy can not possibly sustain high rates of inflation for very long. There are already signs of economic slowing. The issue is high levels of household/government debt. This constrains investment and spending. By forcing the rates lower through QE1, QE2, etc. the FED is hoping to roll over the debt from weak hands to stronger ones. The problem is that low borrowing costs encourage buyers to take on more debt than they otherwise would. When the market eventually returns to normalcy (7-8% 30yrFRM) today's buyers will incur 25% real, if not nominal, losses. I read recently that FHA mortgages are assumable, meaning that the loan can be transferred to a new buyer at the original rate. If this is true, then this would shift much of the interest rate risk from the buyer to the government.}

3. those higher interest rates would make homes more expensive thereby holding prices down

{No doubt. See above. Sometimes the price is too high even at 0% interest. It's the price, stupid. Let's say that I bought a new Mercedes for 50k. Would you pay me 100k for it after 10years? Even at 0% interest? Of course not!

Why is a 40 yr old house any different? Houses depreciate the same as cars, just over a longer period of time. Eventually, the entire house must be torn down and rebuilt. Either all at once, or a little each year. The land value generally stays about the same in inflation adjusted terms, but the structure depreciates over a 27.5 year period according to the IRS.}

4. as we continue to devalue our currency our homes become cheaper to foreigners with cash

{Yes, but so what? Look at this from the perspective of a foreign investor. Let's say that you can now buy a 100k house for what used to cost 150k in their currency. They buy the home for 100k and rent it out. They get $550/mo. in rent 100k/(12months*15:1 price-yrly rent ratio). They translate that back into their currency. If the dollar continues to fall, then they will receive less and less euros, yen or yuan back each month. At the same time, property prices are also falling. Far better to buy in a rising property market, or at the bottom. Also, the strengthening foreign currency (in this case US dollar from a Chinese perspective) would mean that more and more yuan would be generated from US rental income thanks to a stronger US dollar.}

Does anyone have any thoughts as to where we will likely go with home prices?

bubblesitter says

What? Have you calculated how much is 5% drop for another 5 years on a 600K property means?

Well, I'm not really in the market for a $600K property... my market was $300K-415K....(Interest rates get bumped up on all homes over 415K even with 20% down traditional loans).....

My opinion is the ONLY way prices are going to drop 25% in the next 5 years.. on the under $400K home market in California Coastal markets is if interest rates rise significantly. But then "monthly payments" will still hold the same...A $400K home at 4.75% interest and a $300K home financed at 8% interest, both with 10% down... roughly equal the same monthly PITI.

Overall though.. Monthly payments are going to be about the same for anyone buying a home in the next 5 years that is financing it. If you are an ALL CASH buyer.. then taking a chance that prices will come down further might make sense.

I don't have a clue what is gonna happen in the over $400K housing market... But there seems to be a solid bottom forming in some communities. I just made sure to a choose a community with solid to great schools that already dropped 40% from the peak... And with a monthly payment I can afford on my income alone... wife's being all savings.

WOC 6705 says

I’ll guess you’re a renter.

Nope. I own. And by own I mean paid off no mortgage ;).

WOC 6705 says

BUT for some of us with community feelings and a desire to have some roots, gain more than enough satisfaction by owning the home we live in to outweigh the inconvenience of having a paper loss.

Owning a home does not provide a sense of community or roots. Those are things that people and perhaps most importantly your family provide, you cannot buy those things or buy into them, you have to earn them and constantly work at them to keep them. Owning a home is at very best a placebo for these things and will never measure up to the real deal.

The U.S. is going to be as expensive as Europe... without the low cost health care and post-secondary education. Stagnant wages, dropping US dollar (after this current blip up ends), rising cost of oil, food and all things imported. How many people will be able to afford a house at today's prices? House prices will eventually have to come back in line with what people can afford. And best get used to foreigners buying up and renting out the neighborhood as their currencies appreciate versus the USD. Canadians experienced this in the 90s and unfortunately it completely changed the fabric of our cities.

i'm a believer in rising wages.

Recently turned down 2 jobs offers due to salary being too low. Looking at my expenses and rising costs I calculated something like the 1st 2 hours of work each day I would strictly be working for gas money to cover the commute.

Eventually wages will need to go up if companies expect to hire anyone.

Overseas labor will be increasingly more expensive as the US dollar slides with higher inflation.

tts says

Owning a home does not provide a sense of community or roots.

i have to disagree with this. being a renter where you're neighbors are changing every 6 months to a year does not provide the sense of community you get from owning.
In fact not to be rude but to let you know most owners do not like having renters as neighbors.

toothfairy says

tts says

Owning a home does not provide a sense of community or roots.

i have to disagree with this. being a renter where you’re neighbors are changing every 6 months to a year does not provide the sense of community you get from owning.

In fact not to be rude but to let you know most owners do not like having renters as neighbors.

toothfairy says

tts says

Owning a home does not provide a sense of community or roots.

i have to disagree with this. being a renter where you’re neighbors are changing every 6 months to a year does not provide the sense of community you get from owning.

In fact not to be rude but to let you know most owners do not like having renters as neighbors.

Again with the fallacies about renters. Renters don't just up and move every 6-12 months.

And as far as renters being neighbors, you post inaccurate information. Most homeowners don't like some rental situations...multi unit buildings, section 8 tennants, etc.

I highly doubt most people care if the engineer, the teacher, or the cop as their next door neighbor is a renter or debtor or owner.

toothfairy says

Eventually wages will need to go up if companies expect to hire anyone.

In Santa Clara, many HT companies have already moved jobs to lower costs areas. Intel, like HP have many of their jobs outside of Santa Clara County and the State like Oregon and Arizona.
There is no gun pointed to employers head forcing them to increase salaries.

toothfairy says

Overseas labor will be increasingly more expensive as the US dollar slides with higher inflation.

US dollar doesnt have an impact on many foreign subs since they earn and spend in local currencies anyway. The translation of FC to USD is a mear bookkeeping entry. As such FX doesnt impact normal running of foreign subs.

thomas.wong1986 says

There is no gun pointed to employers head forcing them to increase salaries.

Tell that to workers at the Post Office.... Or the random disgruntled employee who comes into work and shoots up the place. EVENTUALLY employers have to raise wages to keep a healthy workforce happy and content.

You treat someone like shit long enough.. they'll snap.

Los Angeles Renter says

thomas.wong1986 says

There is no gun pointed to employers head forcing them to increase salaries.

Tell that to workers at the Post Office…. Or the random disgruntled employee who comes into work and shoots up the place. EVENTUALLY employers have to raise wages to keep a healthy workforce happy and content.
You treat someone like shit long enough.. they’ll snap.

not really.

people that kill people have mental issues. they don't kill because they were paid too low.

thomas.wong1986 says

US dollar doesnt have an impact on many foreign subs since they earn and spend in local currencies anyway.

not sure that I follow. IF im a US company hiring indian workers i need to pay them in local currency. The exchange rate matters.

thomas.wong1986 says

In Santa Clara, many HT companies have already moved jobs to lower costs areas. Intel, like HP have many of their jobs outside of Santa Clara County and the State like Oregon and Arizona.

where's the evidence of jobs actually moving away? I see companies are expanding all across the globe including Silicon Valley. it's not a zero sum game.

1. inflation could push salaries and consequently home prices higher

I don't see wage inflation being likely. As much as we need it, with unemployment so high employers can keep wages low, because if candidate A doesn't take the job there are ten others behind him/her who are willing to take what they can get - even if the salary is mediocre.

2. higher interest rates should be needed to slow inflation

I expect the feds to keep the rates low for the next two + years. As with Greenspan the Feds gut reaction (in terms of recent history) is to keep rates low well beyond the point where a recovery has taken hold. TBTB will keep rates as low as they can for as long as they can.

3. those higher interest rates would make homes more expensive thereby holding prices down
True - but even with low rates homes are selling at a snails pace. Unless there is a rapid shift... a gradual rise in rates wouldn't help, but wouldn't cause a precipitous price drop either... if anything the long slow decline (or stagnation) in house prices will most likely continue.

4. as we continue to devalue our currency our homes become cheaper to foreigners with cash
Small factor... I don't see foreigners flocking at least not in my neighborhood.

Those already on pensions (especially federal pensions) should be forced to give part of their paycheck to women, it is only fair as you benefited from them being discriminated against (never will happen though as your generation currently controls the Congress). There should also be federal investigations into who got married to girls that may have been too young at the time. You should be brought to justice before you can no longer function....

toothfairy says

not sure that I follow. IF im a US company hiring indian workers i need to pay them in local currency. The exchange rate matters.

Take either Apple or Google, their foreign subs in Japan, China, Taiwan, Canada, or where ever, make revenue from local customers in local currency. Each sub is its own entity. The revenue earned pays salaries, rent, opx, taxes. Not funded by parent with USD involved since its already paid from their local customers in local currency. The FX gain and losses are flux and revaluations in BS accounts from currency.
But no impact on running the business.

toothfairy says

where’s the evidence of jobs actually moving away? I see companies are expanding all across the globe including Silicon Valley. it’s not a zero sum game.

Wow! glad im an old fart! You can look up any SV website and see where they are hiring. Cheaper or more expensive to live in Hillsboro, Oregon and Austin Texas ?

thomas.wong1986 says

You can look up any SV website and see where they are hiring.

just for kicks I checked software job openings at Apple. There are 2 jobs in Austin,Tx and 249 pages of jobs in Santa Clara Valley

toothfairy says

just for kicks I checked software job openings at Apple. There are 2 jobs in Austin,Tx and 249 pages of jobs in Santa Clara Valley

Try the rest... Intel, HP, AMD, etc etc. Your parameter should include all jobs not just R&D.

BTW, what ever happened to the Apple/SunMicro mfg which dominated Warm Springs area in Fremont ?

With all the inflation we had over say two-three decades in SV including higher home prices, why is it local companies HAVE NOT increase the prices of goods and services they have been selling ?

If you could simply tack on higher salaries due to inflation, we would still have mfg. in SV today, but that is not the case is it. Like any other industry we would simple increase prices of goods.

In fact even in software, the selling prices of enterprise ERP software likes that of Symantec and Oracle is below that of some 20 years ago. Oracle v1 Financials $100K in 1990 for med size company vs v12.1 at $100K today, excluding discount. No wonder Oracle went on a M&A buying spree.

If anything we have more deflation in SV than inflation. Every CEO in SV will tell you that is the fact or doing business in high tech.

toothfairy says

I see companies are expanding all across the globe including Silicon Valley. it’s not a zero sum game.

Yahoo transplanted 66 SV jobs to Omaha Nebraska.

http://careers.yahoo.com/jsearchresults.php?pagenumber=3&prev=1&next=&crumb=717LQqvGhW8&sortfield=PostingDate&sortorder=desc&sort=&concept=&action=&submit_x=&totalrec=31&resume=&key=&reqid=&jcat=&city=NE-Omaha&proximity=&datecreated=&submit_x=Prev+15

if it were so easy to just move people to Omaha Nebraska and pay them less money.

I dont understand why there are 249 pages of software jobs that Apple hasn't been able to fill.

This stuff we've been talking about is sort of specific to the bay area.
In general my view on inflation is low inflation and low interest rates while the economy recovers.

when are people going to get it through their heads that electronics (iPads, headphones whatever) have nothing to do with inflation. On a whole they will rise over time with the rest, but there are still so many other factors such as Market saturation and EOL shelf clear-outs that will always drive down the price on a particular model. If you want to see how electronics are effected by inflation look at specialty items such as Leica camera.

The only thing about Americas inflation that is unique is that wages will not rise to counter it and as a whole we are all being shoved into the poor house. Only silver lining imho is less SUV and pickups in cities.

toothfairy says

I dont understand why there are 249 pages of software jobs that Apple hasn’t been able to fill.

Are these jobs real?
Anyone applied them?

danaceb says

when are people going to get it through their heads that electronics (iPads, headphones whatever) have nothing to do with inflation.

The gov. uses hedonics to adjust the GDP/inflation though. So right or wrong you're going to see others bring it up if for no other reason than that they don't know any better.

FWIW I think the _concept_ of adjusting GDP and for inflation based on hedonics has some value but I don't think its something that should be allowed because it makes it too easy for corrupt or incompetent gov. to fudge the numbers any way they like.

xenogear3 says

toothfairy says

I dont understand why there are 249 pages of software jobs that Apple hasn’t been able to fill.

Are these jobs real?

Anyone applied them?

Apple it seems is the only exception to what we have seen over the recent years. But it wasnt like that before. Apple bearly survived going into the 90s. Many many others went under.