patrick.net

Allah, Over the long run real incomes do grow, but 50% will take several decades at least.

From a financial perspective it is better to not buy if prices are falling. I have been an investor for about 30 years. That is one of my rules – never buy while prices are falling. Wait for the bottom. Of course, it is not easy to know when the bottom has arrived. Ditto for the top.

There are good methods for confirming once the point has passed. Many people have prematurely called this housing decline. However, I believe that it has actually started in most places.

A year ago I was convinced that the housing market was not yet at the peak. By March of this year I decided that the summer of 2005 would be the most likely time for the peak -- with a modest probability of continuation until 2006.

As prices rise wages rise so people can still buy the same things over time, it just appear in the short term like things are getting more expensive.

Wages have been rising historically, but not anymore....wages are shrinking, mainly due to outsourcing......and this will only get worse in the years to come....Companies figure they can maximize profits by having the work done overseas for pennies instead of dollars.

. For consumers the key will be the speed at which inflation hits and whether they can adjust their income to keep up.

Seems to me inflation is self regulating in the age we are in........things get more expensive, consumer gets paid less........consumer spends less......companies lose profits.....companies layoff workers............consumers spend even less.......you can see what this leads to.........and the fact that most americans are leveraged to the hilt with debt and have zero savings, this vicious cycle will only cause more defaults on debt. You cannot compare any other time in history to today because there are way too many differences!

Allah, Over the long run real incomes do grow, but 50% will take several decades at least.

Exactly! ...and that is why house prices will fall tremendously!

Allah, We are in a time that is different in many ways. Collectively, we have more debt than ever, more income than ever, and more wealth than ever. It is to be expect, of course, that more borrowing will come with more defaults, unless the rate of defaults declines.

The wage pressures cause by global competition are definitely limiting incomes for those whose jobs can be performed in far away cheaper places. Ultimately the currency exchange rates should cause this cost advantage to diminish. However, the USD is the main reserve currency of the world, and this makes the dollar less sensitive to such trade pressures. So the pressure will continue.

Interestingly, while wages for the bottom half of earners has been under pressure, those whose jobs are not very exposed to lower cost foreign competition have enjoyed strong real wage increases in recent years.

We have a situation where the averages or median income statistic does not tell the whole story. The median is not moving much, but half of the people are enjoying gains while the other half are losing ground.

While the underlying fundamentals of the market move slowly, the market prices can (and often do) move quickly as peoples’ expectations about the changing environment fluctuate. Psychology is always an important market factor. It tends to accentuate market cycles, as people move in a herd mentality. Even without speculators and flippers we would see clear cycles in housing prices. This would happen even if interest rates and incomes were stable over time. Of course, the cycles would be milder if these factors were all more stable.

All in all life is pretty good in America. We have a lot to be thankful for. We live in an era that has been generally charactorized by rising real living standards. Today most of the world is also on this prosperity path. True, some of their rising prosperity comes at the expense of jobs here. Even so, for the U. S. and the world as whole the trend is rising living standards.

The following link is a report on the cost of living in the U. S.

http://www.dallasfed.org/fed/annual/1999p/ar97.pdf

Zephyr writes:
Girgl, I share your view on the importance of education and the determinants of success for a society. The U. S. remains in the lead on economic strength, but greed and stupidity (especially stupidity) can damage it. Our tax policies and the strength of our currency are making foreign locations more cost effective places to operate.

Zephyr,
I feel very strongly about education, not the least because I have a few children in middle and high school age, and came to realize that unfortunately, even in the best public schools in one of the most highly educated areas in the U.S., you get what you pay for (or if you take property tax into account, you don't). Very disappointing.

I am convinced (through anecdotal evidence only, though) that the academic standards for high school education here in the U.S. have decreased a lot in the last couple of decades. And by god, low they are these days.
One more anecdote: In my daughter's high school newpaper, an exchange student from Tunisia is quoted stating that school in her home country is much more challenging, is far ahead and offers many more classes.
Think about it. Tunisia.
I have hard evidence for exactly the same statements about school in a few European countries.

What really, really gets me is the widespread complacency about this.

Especially when it's coupled with anger about loss of jobs in the U.S. or the fact that, for example in the S.F. Bay Area, people cannot live where they grew up because of immigrants who can bid higher than them.
In addition, I experience myself that it's hard to hire technical talent into well-paying jobs these days because there ain't so many qualified and willing folks out there.
Then, there's the articles in the news that state that companies all over the U.S. are having serious problems finding qualified replacement workers for retiring baby boomers.
Hm. I see more outsourcing on the horizon, folks.

I know that no one wants to hear that, but I wonder when people start to connect the dots and panic. Seriously.
These things cannot be fixed painlessly in a few months with the stroke of a pen on some stupid populistic law with a stupid populistic title.

Anyway, I like the U.S., its people and its optimism a lot and have invested in this country by bringing my own education and my rather large family of future tax payers, but I fear more and more that I must pack up and leave at some point in time because it seems the only way to have a decent life and retirement around here is to speculate and/or take advantage of other people. I don't know how to do that, and even if I knew, I would not want to do it. I just know how to do a decent job in my own field.

Let me conclude with saying that I enjoy reading, participating in and learning from this discussion a lot.

Thanks to all of you, and especially to my hero Bull$hitter.

Happy Thanksgiving!

Allah, We are in a time that is different in many ways. Collectively, we have more debt than ever, more income than ever, and more wealth than ever.

What wealth? National savings is zero...actually negative! So it can't be savings............Houses? Can't be those because people own a smaller percentage of equity than ever before in history............ Average credit card dept $9k, and this was a couple of months ago, I'm sure it is alot higher.....so I am not sure what you mean by more wealth.

It is to be expect, of course, that more borrowing will come with more defaults, unless the rate of defaults declines.

Declines? We are just getting started..........lots of ARMs are going to reset next year.

The wage pressures cause by global competition are definitely limiting incomes for those whose jobs can be performed in far away cheaper places.

Yes....it used to be just manufacturing.....now it is technical, even legal services believe it or not........the list goes on and it is only getting worse.

Interestingly, while wages for the bottom half of earners has been under pressure, those whose jobs are not very exposed to lower cost foreign competition have enjoyed strong real wage increases in recent years.

See how you say bottom half...as if there is no middle class, just rich and poor. This is the problem, the middle class is becoming extinct. Really, you can't say that it is half, I bet the percentage of rich people is much smaller. We are not all CEO's,.......alot of us have lost our jobs due to outsourcing.... when your not the one who loses the job, it is very easy to not see the problem. Where did most of these people go? With the big boom in real estate, many have gone into the housing industry (realtors, mortgage brokers, appraisers, contruction, etc.). When these jobs disappear...which will be very soon, where will they go next?

We have a situation where the averages or median income statistic does not tell the whole story. The median is not moving much, but half of the people are enjoying gains while the other half are losing ground.

......again, there's that half and half logic. Who is enjoying these gains in income? The people who are doing the outsourcing! ..and it is not half the people.

go to http://money.cnn.com/ and go to the middle of the page, there is a web video entitled "shrinking paychecks". There is no direct link to it because it is javascript. Check it out.

actually try this:
javascript:cnnVideo('play','/video/business/2005/11/21/sylvester.assault.middle.class.cnn')

Girgl: "On inflation vs. deflation"

Lets not confuse price inflation (as a result of fluctuations in supply and demand) with monetary inflation (when the Fed "prints" more money) - they are two very different things.

If you expose people to low rates of monetary inflation, they can be quite comfortable. But less of a bad thing does not make it good; it just makes it tolerable. And as the Fed turns up the knob on its "printing press", it becomes quite obvious to people that they are being swindled (1970s).

The "whole vicious cycle thing" concerning deflation is a myth. People who subscribe to the myth don't know any better or have an ulterior agenda. In the case of the Fed, inflation is their meal ticket.

Just as an aside, did you know that measured by CPI, the value of the dollar lost >95% of its purchasing power since the founding of the Federal Reserve? Most of that has been since the early 1970s when Nixon took the dollar off the Brentton Woods-style gold standard.

Occasionally, my wife and I walk into "open houses" just out of curiosity. In August, I distinctly remember this one very young realtor we met that insisted (after it became apparent that we were not interested in buying) that prices would not go down (she repeated this several times as we walked out the door).

Well, we just ran into her again at our local Starbucks. She took my coffee order. I don't think she remembered our previous encounter and I thought it best not to bring it up.

It doesn’t’ happen often, but every once in a while life hands you a precious moment :-).

There will be no bailout.

There will be nothing with which to bail.

H.Z. says:
If you agree that it is politically impossible to directly tax cash holdings, inflation does a little bit of that too.

Yes! That's exactly at the core of it. Thanks for this insight.

In the case of prolonged deflation, someone holding enough cash could see his net worth going up without doing anything, nor paying any tax. I doubt you would find that a desirable outcome.

I certainly do not. Deflation makes everything wrong what everybody has learned about economic principles. All of a sudden, it is wrong to buy a house as soon as you can, to borrow money to start a business, or in general, make your money work in any way. Everybody ultimately just hoards cash and waits to be laid off.

Someone said that prolonged bouts of deflation often end in some kind of war because deflation is just so unbearable and hard to stop once it started. War is the ultimate cure for deflation by destroying assets that now need to be rebuilt. Not a desireable outcome, by any measure.

I was just speculating that the one long-term force that tilts the system towards inflation and makes deflation a rather seldom occurrence is population growth. If population growth would stop, we'd see deflation and its ill effects more often.

Maybe that's why the pope insists on forbidding contraception :-)

sunnyvale_renter, thanks for the link:
http://www.financialsense.com/stormwatch/2005/1123.html

[snip]
"At some point in time—and I believe it is soon, maybe Spring of next year—the economy is going to slowdown. The consumer is being hit on all fronts. Inflation is chipping away at the consumer’s purchasing power. Wages are falling behind inflation and rising interest rates are raising the cost of debt for most households. The savings rate in the country is now negative and has been that way for the last four months.

That negative savings rate means that the consumer has no cash cushion, if the economy heads south and the unemployment rate rises. The negative savings rate means that U.S. consumers were now spending more than 100% of their after-tax income. At some point the consumer begins to retreat, the marginal homebuyer starts to default, and we are going to have a full-fledged financial crisis on our hands." - Morgan Weld

Article kind of decsribes what I was saying.

Just came across an article about the fact that global liquidity seems to decrease rapidly these days, and why that might create fertile grounds for a financial crisis. Also, surprisingly, that seems to favor a strong dollar. Kinda orthogonal to the inflation/deflation discussion we have here:

http://www.investorsinsight.com/otb_va.aspx?EditionID=229

It's a bit over my head, but you might find it interesting.
Oh yeah, the article says that one of the reasons for the liquidity decrease is that Asian central banks haven't intervened against a rise of their currency by buying USD so much lately.
Isn't that the event that everybody thinks of as the trigger for the "great unraveling of the credit bubble"?

Here's an article that says we're in a cycle of rising inflation->decreasing inflation (aka. disinflation)->deflation->rising inflation.

http://samvak.tripod.com/nm070.html

It gives pretty plausible (maybe too simplistic?) explanations for these cycles and their underlying mass-psychological dynamics.
According to that article, we're at the end of the disinflationary period.

An excerpt:

[...]These conflicting influences allow inflation to remain within a sustainable "band". This transitory phase - from hyperinflation or high inflation to a more supportable plateau - is known as "disinflation". It usually lasts one or two decades.
[...]
The psychological wellbeing and reassurance brought on by disinflation generate demand for assets, especially yielding ones (such as real estate or equities). The more certain the future value of streams of income, the more frequently people transact and the more valuable assets become.

The bursting of an assets bubble generates asset price deflation. The "wealth effect" is replaced with a "thrift effect". This adversely affects consumption, inventories, sales, employment and other important angles of the real economy.
[...]

@HZ: In the case of prolonged deflation, someone holding enough cash could see his net worth going up without doing anything

Sounds a lot like the current housing market...

nor paying any tax.

Oh, wait.

Happy Thanksgiving everyone.

Cheers,
prat

Very interesting article:

http://www.lewrockwell.com/north/north416.html

Girgl says: "... deflation is just so unbearable and hard to stop once it started. War is the ultimate cure for deflation by destroying assets that now need to be rebuilt.".

Sounds like a scary campfire story. :-)

Yes, this certainly is beyond your undergrad course in economics. We are debating different schools of thought. Chances are most economic undergrads are just briefly introduced to these other theories before being immersed into neo-keynesian based theories. These Keynesian theories are morphing rapidly just to try to fit the new realities they consistently fail to predict.

I think Zephyr has come around just a little bit - he's at least admitted that "mild" deflation isn't "too bad". Lol. If you follow through with your recent research on deflation you'll eventually see beyond the popular rhetoric. In the meantime, watch out for the Deflation Boogeyman!

Interesting article Taxpayers bear no risk for new CalHFA loan

Old Scratch just wants a bit of sympathy:

http://tinyurl.com/9gfaj

Cheers,
prat

frank says:
Girgl says: “… deflation is just so unbearable and hard to stop once it started. War is the ultimate cure for deflation by destroying assets that now need to be rebuilt.”.

Sounds like a scary campfire story. :-)

You're right. I've tracked down where I read about the connection between deflation and war. The story is somewhat different, and definitely less dramatic.

Quote:
If [the deflationary phase is] not countered by monetary and fiscal means - a lowering of interest rates, a fiscal Keynesian stimulus, an increase in money supply targets - a monetary deflation might set in.

Unfortunately, these goals are best achieved militarily. War reflates the economy, re-ignites the economic engine, generates employment, increases consumption, innovation and modernization.
-- from here

Please note that the author makes a distinction between a "deflationary phase" and "monetary deflation", the latter not necessarily happening during a deflationary phase.

Yes, this certainly is beyond your undergrad course in economics. We are debating different schools of thought.

Since I don't have any idea about what those schools of thought are, I'll better shut up while the adults are discussing. :-)

Frank, you said: "Occasionally, my wife and I walk into “open houses” just out of curiosity. In August, I distinctly remember this one very young realtor we met that insisted (after it became apparent that we were not interested in buying) that prices would not go down (she repeated this several times as we walked out the door).

Well, we just ran into her again at our local Starbucks. She took my coffee order. I don’t think she remembered our previous encounter and I thought it best not to bring it up.

It doesn’t’ happen often, but every once in a while life hands you a precious moment."

It's sad to see people taking pleasure in the failure of other people's aspirations.

It is also sad to see people, who market themselves as professionals, either shamelessly or out of ignorance, use outright falsehoods to try to sucker people into taking on debt burdens of 700-800 thousand dollars. And there is no shame in calling such people to the mat.

I second that! These new realtors who got into the business just because of the boom deserve everything that is coming to them.

But was she called to the mat? Were her naive statements challenged?

It's true that (like many industries) many people who work as realtors are not sufficiently knowledgeable about the product they sell -- while many are others very expert. Those who make the effort to become expert usually do well. Some do not make the effort, and I agree that it is annoying to see such people chanting such naive misinformation. Often, though, these people just have no sense of history other than the most recent years. So the idea of a real estate decline is unfamiliar to them. There are many honest fools in the world. I take no pleasure in seeing their setbacks.

Allah, Most of these people are just looking to improve their livings standards, and they hear that real estate sales can be a better paying job than what they have. Why do you take pleasure in their setbacks?

Allah, Most of these people are just looking to improve their livings standards, and they hear that real estate sales can be a better paying job than what they have. Why do you take pleasure in their setbacks?

Because they want to profit from the swindling of others. They are no better than people who sell hot merchandice second hand. "I didn't steal it, I just got it really cheap and I am turning it over for a profit".

So sales people are swindlers?

There are many honest fools in the world. I take no pleasure in seeing their setbacks.

It is the setbacks from our mistakes that make us more wise. I take pleasure in seeing people learn from their mistakes so they will not be made again.

So sales people are swindlers?

A great many of them are......but not all.

Do you think we should we paint them all with the same brush?

Treat them all with disdain?

Only the ones that make themselves look too obvious....you don't have to paint them, cause they already show their true color!

Yes, And it's going to get very ugly in some places.

On average, the market balance turned during the summer. This is more than the usual seasonal shift... The cyclical slowing and price declines are just getting starting.

Supply has finally outrun demand by enough to shift the balance, and there is more supply under construction. The effect will be strongest in the condo market.

Want to see a realtor who makes him/herself look obviously honest? Show me one that will put their own welfare behind their promise. Show me a realtor who will sign a contingency agreement that reads "If the value of the property sold falls in value and the buyer is forced to sell for whatever reason, the realtor will pay the difference". I would buy right now regardless of the bubble......but that's never gonna happen is it?

RIC says:
It is also sad to see people, who market themselves as professionals, either shamelessly or out of ignorance, use outright falsehoods to try to sucker people into taking on debt burdens of 700-800 thousand dollars. And there is no shame in calling such people to the mat.

Well, what about the "professionals" who suckered people into $600k debt burdens two years ago? They made their clients money. Maybe only funny money, but it's very real and believable today. Was real estate overpriced in 2003? Of course it was.
How do they know that they won't make their clients money now?

The cracks are showing right now, but the cracks showed in 1998 and in 2001, and the following years, it was up another 20%.

I have a friend who's lived in the Silicon Valley for 30 years. She's not in a technical profession, and honestly thinks every single software engineer in the valley makes millions now or will make millions later. She also believes honestly that real estate in the valley will always go up, if only for that reason. She will advise you to buy now, and that has nothing to do with deliberately sucker you into something to make her some money.
If she had the money, she'd buy herself.

Allah, You expect too much from the realtor. Their job is that of a middleman. They find a buyer for a house, and a house for a buyer. They should also shepherd the deal to conclusion.

If you expect them to be able to predict future price movements for you, you are dreaming. It is certainly unrealistic to expect them to guarantee the profitability of your purchase decision.

Girgl, Thanks for the interesting links yesterday.

RIC, After many years of interaction with many realtors I have come to the conclusion that most of them (like most of the general public) are ignorant of how market cycles work. So, I expect that the realtor in question is far more ignorant than deceitful. Neither condition is good. I agree that in a perfect world such people would not be realtors, but there is a shortage of well-intentioned visionary economists willing to sell real estate. So, we are largely stuck with what we have.