patrick.net

"Then leave!"

I don't live in Fremont. I was replying to littleworried's post.

The early 70s stagflation was preceded by a credit bubble larger than todays in terms of % of GDP, btw.

Where is the data for this? I mean I'm not an economist, but what I do know is that never before in history have people overused credit. We didn't have the negative savings rate like we are having now. We didn't have all these different toxic loans, we didn't have people buying with "no money down", with closing costs worked in. We didn't have house prices doubling or even tripling in such a small timeframe. We didn't have people stretching to buy a McMansion just because they thought "the bigger the better". Manufacturing was the only type of job that was being outsourced. Americans got used to making alot of money in high - tech jobs and they aren't used to going backwards. The younger generation got used to believing that their wages were going to keep going up so they can borrow as much as a bank will lend them and their future salaries will be able to bail them out. It is VERY different today then it was back then. How could you possibly compare?

I don’t live in Fremont. I was replying to littleworried’s post.

He is a troll. Don't waste your time with non-sense!

allah,

what's funny is that your original statement was that ALL that matters for rents is supply and demand. I assume you know admit that statement was incorrect, given that you are arguing macroeconomic history.

i am data driven. aggregate national income accounting components such as savings rates, gdp, debt, etc. are all available in time series from various government sources. www.bea.gov is a great place to start.

*now admit

what’s funny is that your original statement was that ALL that matters for rents is supply and demand.

Where did I say that?

I said:

Rents are controlled by supply and demand.

What that means is that when there are more places for people to rent and fewer renters, the renter has the luxury of moving to the one that is cheaper; That is all I said as far as supply and demand. This is common sense. The coming recession will certainly help make that happen.

Anyway, you could supply all the data in the world, but the most strongest force is psychology. The same psychological force that drove this market way up is going to drive it straight down into the ground, and then some.

The finacial health and the ability to borrow huge amounts of money are just the tools available. It is the psychology that determines whether or not they will use them as well as how. Combine that with major stupidity and you have a disaster waiting to happen. Now you know why they make it harder to get a gun.

The most common sob story I hear:

FB: "Duh, I can't afford my payments on my ARM. The payments went from $1700/month to $3300".

Reporter: "Why did you get an ARM?"

FB: "It was affordable, the monthly payments were reasonable"

Reporter: "but didn't you know the rates were going to go up"?

FB: "Duh, nobody told me that an Adjustable Rate Mortgage Adjusts".

I know what supply and demand mean. S&D does not control rents [prices]. It is a factor. Your very own arguments invoke other factors relevant to real rent prices.

Anyway, you could supply all the data in the world, but the most strongest force is psychology.

So this is your belief. Except where supported by data -- and there is an enormous amount of data relating to behavioral economics -- your assertions are no better than throwing a dart or reading the stars.

I want the same thing you do. The difference is I admit that it may not turn out according to my best laid plans.

HARM,

Thank you for that about NIMBY and SMUG--and esp. for the link to the Housing Bubble Glossary--I had no idea there was such a thing.

Best,

Nik

I know what supply and demand mean. S&D does not control rents [prices]. It is a factor. Your very own arguments invoke other factors relevant to real rent prices.

Ok, it's a factor, then you admit that it does control rents.

z = x * y;

x and y are both factors. If either of them change, then so does the product z. x and y control the value of y, do they not? I rest my case.

So this is your belief. Except where supported by data — and there is an enormous amount of data relating to behavioral economics — your assertions are no better than throwing a dart or reading the stars.

Data is important and current data supports my argument. My data and your data take different forms. Yours are numbers, and mine are actual people in serious trouble who have finally admitted that they made a very stupid mistake. I know how people think and I know what people do under certain circumstances. My predictions are much better than throwing darts or reading stars. Look at all the articles that are out there now, there are even video feeds. This itself is strong current data. The stories were much different a year ago. I told you before, the numbers provide the tools, but the psycology of people cause them to act. It was herd mentality that drove this market, "get in now before it's too late". Now it is "get out now while you still can". Numbers can only do so much, once you have the stampede running for the exits, there is nothing you, I or the FED can do to stop it.

Who buys a house in Oakland?

Former Govenor Gearald R. Brown.

Who buys a house in Oakland?

Former Govenor Gearald R. Brown.

z = x * y;

x and y are both factors. If either of them change, then so does the product z. x and y control the value of y, do they not? I rest my case.

Ok, if we're going to get technical then the form is:

y = c1x1 + c2x2 + c3x3 + ... + cixi + err

x1 .. xi are not independent variables because there is inter-correlation.

As for supply & demand, those are each reduced to an input price equilibrium, which itself is a ranged estimation. We don't know the elasticity or dead loss in the s & d equation, for example. Worse yet, the amount of elasticity is itself directly affected by the amount of true real income the buyer (renter) has, which has little to nothing to do with either supply or demand but with macro factors.

Your evaluation ignores two important aspects: (1) the relative weightings and sensitivity of the inputs and (2) the dynamic nature of the system itself. In reality such systems when evaluated deterministically are extremely complex and produce a wide variety of non-intuitive results.

Randy,

I also do not like any arguments based on "it's different this time". But was there any previous credit bubble ? What happened at that time ?

If there was no such credit bubble, then isn't it really different this time ? There is a first time for everything/ And every first time is "different", as it has no precedent.

y = c1x1 + c2x2 + c3x3 + … + cixi + err

What are c1, c2, c3 and cixi or should I bother to ask? C1x1 will always be C1 so the first constant is redundant.

All I know is that if money is tight (such as during a recession) and I'm renting an apartment for let's say $1500/month, and the exact same apartment right next door has been vacant for several months and the landlords is crying, "please, please rent my apartment, I beg you. I am going to lose everything, I will give you the apartment for $1200/month". I know that I'm not even going to have to think a second about taking him up on that offer. Eventually, my previous landlord is going to be begging someone to take up at least some of his slack and that will only happen by being competitive and lowering his price until equalibrium is reached which usually results in some landlords losing the property because they can't lower there price anymore and still afford to keep the property, yet can't get someone to rent it because there is a cheaper unit available.

Look at what happened just a few years ago when people were buying up houses left and right. The landlords were lowering their rent and offering incentives such as 3 months free rent and a free laptop computer, free cable, etc. This is a direct result of supply vs. demand as many renters became owners (actually ownees) and fewer people rented pushing up supply. It will happen again when the recession hits and people share rooms and stuff like I mentioned above.

allah,

I don't disagree with your qualitative observations. And they are relevant. They just have to be considered along with quantitative and fundamental aspects. Otherwise they are just anecdotes.

What are c1, c2, c3 and cixi or should I bother to ask? C1x1 will always be C1 so the first constant is redundant.

The "1" "2" "3" etc. are subscripts denoting sequence.

First Constant * First Ind. Var + Second Const * Second Ind. Var and so on.

Another factor is the McMansions that people wanted but now seem to have realized that they weren't such a good idea and now cannot sell them.

I am guessing that some of them will be converted into multi-family housing thus increasing the rental supply side since noone wants to live in them.

Random1,

We at Patrick.net welcome contrarian or unconventional views as long as they're presented without inflammatory racial or sexist slurs, or gratuitous insults. We are not the P.C. police and do not censor unpopular views that are presented in a mature, reasonable manner and provide some evidence/data to back them up.

I can and will remove those posts that I deem inflammatory and/or baseless, in order to prevent flame wars from developing, which tends to drive away quality posters.

If you have something important to say about the racial/demographic makeup of Oakland and how this has or has not contributed to the local crime rate, please feel free to re-state your position in a mature tone, and then present some data to back it up. Thanks.

IMHO, this is housing crash related. Posting today’s SJMN news article …

Killings ripple across much of Bay Area

hmmm, only inasmuch as failing to provide a social guarantee of affordable housing will produce anomie. could just be a cultural swing in MO for gangstas. these guys are certainly not middle class struggling with mortgages or high asking prices... altho maybe disposable income is lower so nobody's buying drugs and they're getting frustrated ;)

this plan calls for bringing in family members and giving them strongly worded warnings as well

right, like 'please ask your son to stop killing people, it's against city ordnance'. i like how they propose to locate and follow exactly 100 violent people as the solution -- i would have thought actually investigating crime scenes and arresting people who kill people would maybe be a good thing...

Randy,

I think a stagflation scenario would depress rent prices. First by depressing demand - stagflation mean people making the same wages but have everything they need go up in price = less money for housing. Stagflation also increases supply by forcing many home owners to let out rooms and basements to make ends meet.

If you want to talk high inflation (above 20% a year) then we're in a whole other ballpark. But if that situation ever occurs (and I certainly hope it does not) periods, then I agree with you. But in that case, we should have plenty of warning and pick up some good deals off of the ARMed FB carcasses.

Can I ask, if you get a FRM in the US for 30 years at, say, 5%, does that rate get reviewed over time, e.g. after 3 or 5 years, or are you guaranteed 5% for 30 years?

littleworried,

If a $150/month rent rise (which may be technically impossible in CA to start with) is enough to get you to buy and double your costs. Then why don't you do us a favor and go do that. I for one can do without the internal monologue of an illogical troll.

As a Maltusian of some sort, I must oppose any quantitative (as opposed to qualitative) immigration scheme to support an economy. That just smells like a pyramid scheme.

I will reconsider this position when someone figures out a way to turn us into energy beings living in cities powered by a couple duracell batteries.

Or at least cracked cold fusion and built economically viable floating cities in the sky/ocean...

Some parents in China would happily give their lives if that would help establish their kids into a prosperous life.

hmmm, isn't that logic a bit off?

1) i don't think it would be a prosperous life, it would be a one-off sale with quickly spent proceeds.
2) do parents really value their kids lives more than their own? how will the kids survive if they lose a parent if life is really that hard? surely the logic defies itself.
3) the law recognises every individual's right to safety and security of person, and the recognition of personhood -- this would completely usurp that. the whole legal and welfare framework, in the west at least, revolves around it.
4) it would be too tempting to murder strangers or other people to sell to body part sellers, thus starting a kind of thuggi movement in various areas -- thus reducing everyone's safety and undermining the social fabric entirely.
5) some Indian villagers are known to have donated a kidney, and limp along for the rest of their lives without one -- and are run-down and sick from that point on, making them less able to cope with what is already a difficult life.
6) a national economic system in a state of surplus should be able to provide adequately for all who want to participate without resorting to suicide/murder or lifelong incapacitation. the communist dream, in particular, should be more inclined to this view than the capitalist one.
7) apart from the low ethics of the act -- regardless of one's wealth, becoming ill and needing an organ transplant is an act of nature and is just fate and bad luck, paying for organs is a deliberate wilful social choice with all its attendant implications of right and wrong, and needs to be judged accordingly...

I must oppose any quantitative (as opposed to qualitative) immigration scheme to support an economy. That just smells like a pyramid scheme.

this is exactly what 'property councils' want -- they want to prop up their members' property values by immigration if necessary -- anything to keep that property value growth alive -- and they lobby govts for it. they just assume that the immigrants will get jobs in the economy, and they will need to rent of course -- price fixing will ensure they will never be able to afford to buy... talk about vested interests...

DS,

Oz doesn't have our 30-year product, which guarantees a rate for the course of 30 years regardless of what happens. As far as I know, you guys have something like 5-year fixed or 10-year to the most, but majority of the mortgage taken out in Oz is floated with the cash rate.

thanks, OO

yeah, they wll review the rate after 3 or 5 years, as the banks don't want to get locked into a low interest loan for 30 years, they wouldn't be able to milk you then -- in effect, a FRM mortgage here is like a slow-motion ARM...

allah
Nice link. Thanks.

agreed. if 2 doctors can't afford a single mortgage, what chance is there? now they're apparently running with 2 mortgages -- must be renting the mcmansion out...

there are environmental benefits to occupying smaller houses also, being reduced power/heating /cooling usage in particular.

plus, there was the case of the michael peterson who was convicted of killing his wife in order to retain his 11,000 sq ft place (which she was doing the lion's share of paying off) and paying off credit card debt with a $1.4 M insurance payout - not the best link, but nevertheless:
http://www.peterson-staircase.com/financial_fire.html

astrid Says:

As a Maltusian of some sort, I must oppose any quantitative (as opposed to qualitative) immigration scheme to support an economy. That just smells like a pyramid scheme.

First of all, I have serious doubts about the so-called qualitative immigration. If the quality you refer to is the level of schooling, I'd say the US has been doing extremely well with regard to immigration. We don't need many highly schooled and pompous asses.

Those illegals who are daring enough to seek a better life in US, despite all kinds of risks and adversities, are far worthier than those better schooled or moderately-moneyed smart-asses who are good at taking office jobs but have contribute nothing of greatness to this country. BTW, I am one of those second type, but not smart enough to call myself a smart ass.

Secondly, Astrid, whether you like it or not, these (illegal)immigrants will still arrive en masse. Within 50 years, there will be a hispanic president in US of A. Hispanics are already re-shaping the US pop culture. Sure, the Blacks have done so. But they, as a group, have never capitalized on their cultural domination to win true political power. Hispanics may fare completely differently.

Highly talented people are to be recruited. But they will come if (1) the country has economic might and (2) it is free of persecution. Fermi did some good work with the bomb, so did other imported European phycists. But native-born Americans also contributed their (probably significant) share to the making of the bomb. Other than that, I thought American power (over the rest of the world) was established long before these great European intellectuals arrived.

She can always fool some people. This is the downside of a free market.

I guess that’s what happens when you’re scared.

I guess it's also what happens when you live in an unreflective capitalist market economy where acquisition and profit-taking are held up to be the only worthwhile human value...

Littleworried Says:

"...I believe we are in the middle of big housing bubble and I believe that home values might go down as much as 50% in bay area..."
_____

I'm down with that, bro. I'm down with it. You're cool bro. You coo...

Here, here's a Corona (hands Littleworried a cookie and Corona and pats him on the head).
_____

stcamp Says:

"...The 70’s..it was were it was happening LA - the Whiskey and smoking J’s inside at our table…Returned in 2000 and the grafiti and ugliness was a everywhere…thats all gone and will never come back...Someone said we are driving around trying to find it. No. just the white folks are..no one else got a taste..."
_____

You forgot the Zep.

"...Just the white folks?"

WTF?

I think "the Whiskey and smoking J’s" put the zap on your Boomer head.

Who in their right mind would believe someone that says things along the lines of waiting out the market until a currently listed $750,000 place becomes $550,000? If you believe that you are delusional. That is like believing gas prices will get back to $1/gallon, and Coca Cola will be 10 cents again. Ain’t gonna happen. Life, in general, is and will continue to be more expensive, and real estate is a fact of life.”

They need to publish "Inflation for Dummies", or maybe just require aspiring real estate agents/brokers to take a community college Econ 050 remedial course.

There are so many things wrong with her reasoning that I get a headache even thinking about a refutation.

Now I understand.

http://www.hill-co.com/about/detail.php?aUID=178

Inflation, Rent Increases, Wages, and Stagflation

Modeled from empirical studies of the 1970s stagflationary cycles [Mankiw]:

Wages, like rent, will tend to rise with the progress of inflation and population, even while profits, growth and wealth are falling. However, the prices of subsistence items will tend to increase even faster. Whereas landlords benefit under such circumstances by rent increases that outrun cost increases, labor falls behind.

Rent levels are the largest component of broad-based consumer inflation, and it is considered a leading not a lagging indicator. During both stagflationary cycles rent increased faster than operating costs for landlords. This is of particular note because the two cycles were distinctly different from one another in terms of housing prices, mortgage rates, and the depth of labor-recession.

The surprise would be if this time rents fail to increase or even fall. No one should be surprised or alarmed as rents rise. This is a case where macroeconomic factors -- namely inflationary pressure -- overtakes local market microeconomic factors such as simple supply and demand.

Inflation is cruel and always misread by the general population. Stagflation is even more cruel, but it at least has the saving grace of irritating the electorate. If stagflation starts up, the media will eventually begin broadcasting that fact. It won't be long before the voting public forms lynch mobs.

[Paraphrased from Mankiw, Easterley, and King]

DS,

"Some parents in China would happily give their lives if that would help establish their kids into a prosperous life.

hmmm, isn’t that logic a bit off?"

Their's or mine? Mine are based on quite a bit of first hand observation, a fairly in-depth understanding of Chinese culture and supported from observations of academic researchers who worked exclusively or extensively in China. Unless stated otherwise (like "my mom's friend said "XYZ"), that is how I arrive at most of my seemingly general comments on China.

DS, I've said this time and again, but your discussion format is just scatterbrained and extremely frustrating, since you usually ignore or go completely tangential on other people's initial comments and replies to you.

Furthermore, it gets get a bit insulting for me to have you constantly lecture down to me. I know this stuff very well, I know it on conceptual and everyday levels. While my knowledge is by no means perfect, I'd rather have on-point observations than have you throw back a lot of stuff that have very little to do with my original point.

Having said that, I will answer your first set of questions.

(1) I didn't say organ sale would be a road to the children's prosperous life. Note that I said "lives" and organ sale is usually not a life or death situation. Furthermore, what do you know about the home economy of rural peasants? I can say that many of the peasants do renumerate much of their income towards very constructive purposes, like educating their kids, building family homes, paying for weddings and funerals, and building businesses. (If you want to see how ignorant certain peasants are and how callously their lives have been treated, I suggest you check out the phenomena of tainted needles during blood sales and HIV.)

(2) If you'd talked to people, either in urban or rural China, you will find that many (I never said all, in fact, I said explicitly "some") do. Families have fled their villages to move to harsh hinterlands to evade the birth control police and have extra children. I personally know urban parents who've spent every dime of their savings (equal to 10 years of wages) and sold their family homes just to send their kids to university in China or abroad. Furthermore, such instincts should not be alien to anyone in any society. Haven't you ever seen people dying to defend the rest of their family? Is that sentiment really so hard to comprehend? Especially when you consider (if you were paying attention to OO and GC and my own comments on this board) how family lineal based traditional Chinese society is? One of the most famous of the ancient sage teachings says "there are three unfilial acts, of which being heirless is the greatest."

(3) Huh? I was commenting on the people's mental state. I'm sorry if you did not catch that. The comment was not a direct comment on the running of Chinese society.

(4) I wasn't commenting on the organ trade. Furthermore, while I support a strongly supervised and fair organ market (which would take out the blackmarket on such things), I would be much more troubled by any market without such legal protections.

(5) Organ selling (I don't know where you get the idea that those Indian villagers donated their kidneys. Since their friends and family are too poor to have such operations, those "donations" are almost certainly sales) is dangerous. But so is being run off one's land for failure to pay taxes and so is having children be forced to live a subsistance life because the parents can't afford their tuitions, so (in their mind) is being too poor to marry and continue the family line. These people aren't going in with the alternatives of carefree hippy lives, it's always a life or death set of choices confronting them.

6) And of course, you're totally ignoring the horrendous man made disaster of the Great Leap Forward famines, which was precisely due to push China quickly into a forward phase of Communism. We've had this discussion several times already, in great detail. Conceptually pure Communism goes against human instincts and is destined to fail.

7) "regardless of one’s wealth, becoming ill and needing an organ transplant is an act of nature and is just fate and bad luck"

That's pretty fatalistic, isn't it? Can't that logically be applied to the other sick people or to poor people or to the mentally retarded or the heroin addicts?

Actually, I'm not sure what you're saying in this comment. Are you impugning that an organ market is inherently evil? Or that people who participate in an illegal organ market in defiance of a Judeo-Christian system of morality inherently evil?

---> Please don't bother to reply unless you are going to answer the questions I directly posed at you. If your reply turn out to be another rambling bunch of tangential points, I will not reply and your reply will be taken as further proof of what I said about you in my 2nd and 3rd paragraph.

GC,

I can't refute your arguments per se. I guess it goes more into my wishful thinking about negative population growth. I just hate policies predicated on population growth, because I think we're already on the outer bounds of what this planet can hold comfortably and I don't like overpopulation --> genocidal war path that most of history has taken.

As for the qualitative argument. I suppose a strong case can be made that I'm no more useful (that can be said of most people in the legal and consulting professions, as well as realtors and mortgage brokers and sales people and HR and account managers and so on) than a barely English speaking Hispanic pool boy. However, modern technology can make much of the low paying low skill jobs disappear, if these people leave the population. So I'd contend that their leaving would not be as devastating for the US as many have supposed. Further, the "qualitatively" better people would likely have better educated kids - some of whom might indeed be great and most of whom will be able to stay off of welfare.

SFWoman,

That realtor sounds like another person who doesn't understand inflation or indexing purchasing power of current wages. Oh yes, and no awareness of history or news. The RE markets of Japan, Hong Kong, SE Asia, NY AND LA all comes to mind to refute her "never gonna happen" assertion.

Randy,

In case of inflation, I do agree that house prices can go up. However, in the current market - loaded up with ARMed and overburdened FBs, these people will be pushed into default by the high interest rates and tightening lending standards of a high inflation economy before they'll be rescued by higher wages (which lags inflation). Thus, in case of true inflation, there should be a good window of opportunity for picking these carcasses for those ready to buy.

My refutation to stagflation --> higher rents/house prices is the industrial midwest. The wages have been stagnant there while commodities inflation has dropped their real wages. Housing prices there have been stagnant since the 70s.

I took Mankiw's statement to mean that landlords, who have high fixed capital costs but low running costs, will benefit from inflation. That seems almost tautological. The landlords essentially locked up a low interest rate to finance their rental property and reap the benefits of the difference between the real r and their r. Furthermore, high inflation/high interest rates tends to push out potential buyers and force them to rent, once more to the landlord's benefit. If I could borrow money at a low fixed interest rate and use it to buy commodities futures immediately, I would also be more than likely to make money when inflation zooms up.

astrid,

are you talking about organ harvesting from people who've died of natural causes? as in the thing you sign on your driver's license? not sure what your original post was about then. some indian villagers have sold 1 kidney while they're still alive to Westerners yes, for the money. the other points I was making were concerning a 'black market' in organ provision, which are not rambling or tangentail in that context.

Yup. I wish Westerners were less hung up on bio-ethics and Judeo-Christian ideals about what’s acceptable and what is not. Homo economicus is ruled to be unethical by people who have a 2000 year old value system that they’re constantly reinterpreting for the sake of political expediency.

I actually like the idea of a limited organ market. Properly overseen, there’s virtually no downside for any of the players involved. Some parents in China would happily give their lives if that would help establish their kids into a prosperous life.

given the above comments, and the fact that the preceding thread was discussing selling 1 kidney to a stranger and making do with 1 solely for money, what are you saying about 'parents in china would happily give their lives'? given that the sentiment, meaning and ethics are rambling all over the place in that lot, i think my comments were remarkably focused, addressing why a supposed '2000 years of judaeo-christian ethics' might actually be a good thing... if the parents giving their lives is a simple over-statement for effect, there is still the question of making people do with 1 kidney for life when they need 2. 'pure Communism' etc as we've disucssed has nothing to do with the totalitarianism of china, and there's real doubt and greyness over what a 'pure communist' system should look like, vs a market-based social democracy, etc. hopefully 'cia lis' doesn't appear anywhere in that lot...