patrick.net

It may make sense to discuss “bubble reform” if there’s some serious collapse, but that hasn’t happened, and all these predictions about massive price drops and foreclosures are just speculation at this point. There’s a tendency here to think that this already happened, is happening, or will inevitably happen....

One thing that’s clear is that housing has become less affordable in many places, in particular on the coasts. Other things have become less affordable as well, such as higher education and health care. In general, I would say that life is becoming harder for the middle class in this country, and I don’t see that changing...

Face,

We are agreed that life is getting much harder for the middle class, and that other costs besides housing are rising faster than incomes. No doubt about that, regardless of how you fudge the CPI numbers.

Nonetheless, housing is rising even faster than healthcare & education, and has been for 5 years or more. We've seen nominal price gains of 200-300% in many areas on both coasts, feuled overwhelmingly by those I/Os, neg-ams & no-docs.

I just don't see how this trend can go on forever. In my mind, a correction/crash is inevitable, in order to bring housing back in line with equivalent rents and supporting incomes (the fundamentals). No, I don't think this will play out in 1 or even 2 years. I don't think nominal prices will fall to 1996 lows, either. But 2002 or 2001 levels is a distinct possibility.

IMO this can be considered a foregone conclusion. As always, you are free to disagree :-) .

Re: Inflation

Isn't the whole idea of the fed raising interest rates to prevent inflation? How much control does the fed realistically have?

Do u guys think high inflation helps or hurts housing prices?

Let’s say inflation goes from 2.5% to 7% for example.

Convential inflation (in which inflation bleeds into wage) will help housing prices. "Inflation" without wage increases wil have deflationary effects on housing because "real" wage is lower.

MP, again, I am talking about middle class housing. Prime markets have their own set of behaviors.

How about a 1% NAAVLP?

Don't they already have those??

If inflation is to rise, I would bet on commodity prices if corporations have no pricing power and stocks otherwise.

How about a 1% NAAVLP?

Don’t they already have those??

I saw a 0.95% Option ARM the other day.

Yes. I was just recognizing your (unintentional?) pun!

Ah, very clever. It was unintentional, but when I wrote in the word 'rate' I had a feeling someone would comment...

0.95% option ARM's. Too scary for me.

What?? Goats don't need to be educated??

I think he has cats.

Apparently not very well educated cats.

Maybe there will be a generational change in the middle class, and a new middle class will emerge.
I’m guessing it will professionals, no children , possibly imigrants, that have a different set of values to current middle class.

That's an interesting thought...I might consider that more of an idealogical class than an economic one. It's about time for a change in attitude towards goods and money. Perhaps because I've also lived outside the US , and I have a different perspective, but I simply can't understand the level of excess the "middle class" in the US aspires to--in terms of housing, clothing, cars...etc. There are necessities--and there's fluff. If you ask me, people are addicted to useless fluff, and it's getting them in trouble. In contrast, I save approx 40% of my take-home pay--plus max. contributions to my 401K. Admittedly, I've taken a different approach than most, but for me it's reassuring, and I hope it catches on.

MP
Do u guys think high inflation helps or hurts housing prices?

Chicken and egg stuff.
It would appear that prices have risen before wages.
Question is, will rates hurt people before wages can catch up?

There seems to be a general recognition that the U.S. is again in a greed fueled buying frenzy, which isn't new. And there seems to be yet another generation that wants it all and right now. But this isn't an American thing, it's a human one. A friend of my husband is currently living in Hong Kong, and he says they are really in the middle of a greed/buying frenzy. He says that wherever you go people are driving ferrari's, lamborghini's etc. etc. He just moved from San Francisco btw, so he's used to a certain level of propsperity. He say's that instead of the ubiquitous Escalade, in Hong Kong it's the ferrari.

Apparently not very well educated cats.

Can't afford to send them to school. :(

They will be illiterate cats. Can't even read Old Possum's Book of Practical Cats.

Pet teeth cleaning is a budget-buster these days! More expensive than sending the cats to Yale.

They do have health insurance though.

Keep in mind, that if CPI up and rates up, then exchange rate up, imports cheaper, local manufacturers suffer.

I think CPI would work fine. I believe (to the contrary of many) CPI is a pretty accurate gauge of general prices.

I tend to agree. Rent does accurately reflect housing cost net of the asset portion.

“KURT S: AMERICAN ODDITY”

(It’s catchy, dont you think?)

Does he keep a cat in his closet?

So let me see if I have this straight. Those who don't think there is a bubble believe that wages will increase due to inflation and that the middle class will continue to be able to afford their ridiculously overpriced sh**boxes? Where are the higher wages going to come from? We've discussed how companies are outsourcing at a growing rate to avoid paying existing wages. My husband tells me that a raising inflation environment is bad for business growth so I'm thinking that doesn't translate into more jobs and higher wages. Where are the jobs and wages going to come from? It think we're at a higher risk of seeing companies downsize in the face of rising inflation. That can only mean few availiable jobs at lower wages. Then where is our housing affordability level going to be?

Wow, lots of typos on that last one. Got ahead of myself I guess....

Also, there is a good reason why asset prices are not in the domain of CPI. Asset prices are very sensitive to monetary, as opposed ot macro-economical conditions, and therefore are not innate characteristics of the economical development.

I think this is the basis of the bubble.
BUT, what about the people who have bought these assets at high prices.
As a consumer they have locked in high holding (or consumption) costs.
The builders have also generated profits and therefore this should reflect in economic indicators.

What’s the “fluff” that those people are buying? Are we talking about cars? Ultimately, there’s only so much space in a house which puts a natural limit on the amount of furniture, TVs, etc. that you can have…

I don't know..... people seem to have an amazing ability to accumulate stuff. Clothing and jewelry don't require that much space, and women looooooove that. I bet people are entertaining more, so I'd love to see what liquor and food profits are like nowadays. Just a thought.

What’s the “fluff” that those people are buying? Are we talking about cars? Ultimately, there’s only so much space in a house which puts a natural limit on the amount of furniture, TVs, etc. that you can have…

See? A cycle! Once you have exhausted the space of your house because of all the stuff/fluff you need a bigger house. Once you get a bigger house, you need more fluff to fill it up. Sigh...

Crashes in equities are much worse, IMHO.
From what I've read about crashes in the past, equity crashes aren't that bad, where RE crashes are worst.

Reason is that equity crashes tend to hurt the higher income demographic, who can mostly withstand the fallout.

RE crash hurts a broader demographic will alot more people who can't withstand the fallout.

Let's see:

62" Plasma TV: $10000
Escalade SUV: $60000
Lexus Sedan: $50000
Kitchen Remodel: $30000

150K of "middle class" stuff that can fit nicely into any house with a two car garage.

He drove an old Cavalier that he had purchased used. Quite a different story than your average Santa Clara County Realtor in his Acura RL or Escalade.

In Silly Valley, I saw a parked brand-new MB S500 with a open house sign stuck in the leather backseat.

Max, I thought all bubbles represent expectations.

Farther into history, tulip-mania did not crash Dutch Kindom.

I'm not sure if tulip's ever reach the price of a home though.

Equities however represent real income-generating economy, and they represent the most important part of a capitalist economy - expectations.
The price of an equity, both up and down, actually don't control the prosperity of the underlying company. (Except for mergers and takeovers of course).

I am talking about earnings. Equities are the “real thing” because they generate earnings and wealth. Their valuations is the market expectation of the earnings.

Assets, IN GENERAL, do not generate earnings.

I understand that. But an asset bubble forms only when there is expectation of price gains irrespective to the associated cashflow. (rent or earnings)

Price of a bulb routinely reached prices of whole estates at the end of the bubble.

I agree... from what I have read.

Max, what do you think of Joseph Stignitz?

When my son-in-law asks all that, I just tell him to raise his right hand. Things get quiet fast.

Huh

I have often pondered the linkage between equities (companies) and RE.

For somebody to earn an income, a company usually has to be profitable.
The equity would rise. The employee would get part of the profit (wage) and usually put that towards their house. It seems logical to me that equities should out perform the RE market as the primary income producer would be recognised as the bedrock of future RE growth.

I think I read somewhere that generally (In OZ) that shares on average, outperform RE.

Thoughts?

And this is why I believe, asset prices are irrelevant to the real economy.

What about people who have used leverage to buy these assets?

And this is why I believe, asset prices are irrelevant to the real economy. Basically, when asset prices inflate the money is created in the financial sector, when asset prices deflate, the money is destroyed in the financial sector

Second law of thermodynamics:-
Money is neither created nor destroyed.

... Once the money has been printed it is out there, only being brought home by the FED's interest rate.

I have a couple of friends who are DINK's, but are thinking about the children issue. Fact is, they could afford to have kids quite easily. They earn about $250,000 collectively each year. They bought their house well before the market got moving. So what's the problem. Let's see. Jet ski's, BMW SUV, BMW sedan, Oh wait! They decided to sell the SUV and get a mini cooper. They take probably 4 vacations a year, Europe Hawaii-- like that. Now they could have a kid if the wife keeps working, but the wife doesn't want to work. But the wife also doesn't want to give up the lifestyle, so kids keep getting put on hold. See the vicious cycle? They're still going round and round on the issue and ultimately it's going to come down to kids or stuff.

“Money is neither created nor destroyed.”

How about "money as purchasing power is neither created nor destroyed, ceteris paribus"?