patrick.net

Initially, it will be bad. A lot of people will lose their shirts and demand that the goverment (meaning "other people") bail them out. Considering how many people are employed by RE right now, it will be pretty ugly.

Money will be withdrawn fast from that market and credit (for everything) will tighten up. Even with high rates, banks will be hesitant to lend.

After a while, though, investors will be sitting on a pool of uninvested money. Slowly, but surely, the purse strings will open and investing will happen in sectors where there is real productivity and growth (companies that actually make something) and prosperity lies in that direction.

That is why a RE crash is good for the economy in the long run. In RE, nothing new is being produced; there is no real innovation. It is just a bunch of people paying each other ever-increasing sums of money and believing that they have actually grown rich. That is why I believe the current bubble is worse than the .com bubble, because in the latter, we can all agree that the Internet/Web is a real innovation and the good companies there have survived and grown.

Unless the federal government penalizes the prudent by forcing them to pay for the follies of the homebuyers, a RE crash will creative destruction.

Recent additions to the Housing Bubble Glossary:

NEOs (Negative Equity "Owners"): Homedebtors who owe the bank more than what their property is worth. Also see: FBs, Homedebtors, Speculator/Flippers, Sheeple. Coined by Owneroccupier.

Buyer-User: Industry term, coined by Mike Dwight of Frontier Homes, for someone who buys a home to actually (*gasp*) live in it. An increasingly rare and endangered species in California.

Peter P,

Please approve my comment in moderation --thanks.

I think it will be a quick fall when unbridled optimism turns to fear. Many factors will add to this. No buyers, higher interest rates, flippers unloading inventory, recent buyers stretched from their ARMs adjusting, unsold listings adding up, all these along with the normal reasons for seeling a house. Within 1 1/2 to 2 years it will drop 30-35%. The Fed will use their blunt tool to try to control the fall and raise interest rates a bit. Prices stay low for a while a, once again, start winding their way up the charts again...only this time, in a more normal climb, in keeping with the fundamentals.
I don't think that we're heading for a depression. I think we'll get a different President by then who may actually act like he cares about the people of this country. That will help consumer confidence and when apperciation is again growing, so will spending grow.

I hate to say this, but the gloom and doom crowd has some very logical arguments. I have very little knowledge of economics, close to none, so relying on pure logic here. Based on the arguments presented, I really do not see how we can avoid dollar getting devalued, inflation increasing, and economy remaining in slump for years. Due to the secondary MBS market participants being foreign countries, the effects will be global.

Apart from the theoritical benefits of letting economic cycles play out, there may be some benefits to my IT jobs scenario. If US$ devalues, outsourcing to India may become less attractive. I would love that scenario for my own job. And if that happens, companies may not mind increasing the salary with inflation. Right now the salries are at best stagnant.

See, I love to find some optimism, although I admit, the pessimistic arguments are very convincing.

I am also intrigued by the PPT idea. Hope someone writes a good fiction based on that. A possible whistle-blower getting killed in a car accident would be a good opening.

Seriously, seems like we will hear a lot of sad stories for next 2-3 years at least. I definitely won't have any sympathy. I remember what I told my wife in 1999. "I don't care about stock market crash causing people to loose their money, I am worried about the adverse effect it will have on my job". (For the record, this opinion of eventual crash did not stop me from loosing money in stock market.) But I really hate it it when stupidity of others cause me pain.

It’s back to sack lunches of tunafish on rye.

Not O-toro on rice? It is part of a tunafish. :)

Bang! Bang! Bang! Three shots ripped into my groin and I knew this was the biggest adventure of my life.....By 2010, with urban unemployment at 37%, civil unrest had broken out in Philadelphia and spread to every major U.S. city. City parks and National Guard armories were the only refuge from fire storms. At the urging of Secretary of the Interior David Lereah, President Hillary ordered 430,000 troops to return from Iran to stem the tidal wave of anarchy that engulfed the nation. Acting on reports of a brisk black market trade in silver, gold and platinum coins on the west coast, Congress banned the private ownership of precious metals. During the Sentate debate (2011-2013) over a new plastic dollar, the Euro became the de facto currency of the United States.

I am also intrigued by the PPT idea. Hope someone writes a good fiction based on that. A possible whistle-blower getting killed in a car accident would be a good opening.

I think the "PPT" is just the market itself, which does amazing things.

Remember price changes are caused by expectation changes, not necesarily fundamental changes.

The bad news first. This will be very disruptive, very painful. Expect crime rates to pick up (this is no fun!). So if you are renting, make sure you are renting in a decent neighborhood, transitional neighborhoods will be trashed again. we are not only dealing with a housing bust, we are dealing with unwinding of many structural problems this country has refused to face for years, the flight of industries, the poor public education, the increasing divide between the rich and poor, plus the medicare, SS timebombs...

Then the good news, precisely because of the scale and scope of this upcoming bust, this will be the swiftest RE bust there is, because Americans, unlike the Japanese, have no savings to fall back on, so the process of holding out cannot drag on forever. This is a blessing in disguise, let's just bit the bullet and get it over with in the next 5 years, instead of 15 years. Let's get the currency to reflect its true worth, let's cut the stupid consumers from their credit line so that we can all get off our butt and do some real work instead of pimping houses to each other.

There will be so many unemployed RE agents that Snoop Dog should be able to produce an excellent Realtorsâ„¢ Gone Wild.

Let's also try to be positive. A great nation will not go down so easily.

Let's perhaps imagine how this country can benefit.

ps Says:

Ravi Batra, Professor of Economics at Southern Methodist University and author of the book ‘The Crash of the Millennium’ believes “we are going to have an inflationary depression and when that depression comes, high ticket items, along with oil, raw materials and farm products (i.e. commodities) could experience a serious deflation while the cost of services and imported goods will keep rising.

Yes!

I interview Dr. Batra on my radio show here in Phoenix a few months back.

He coined the term, "jobless recovery."

Pop!,

the problem is whether you believe in a deflationary depression or inflationary depression. Every day goes by I am more of a believer of the later camp. The reason being, deflation happens when the supply of money shrinks, like the last Great Depression, because US government couldn't print gold (USD was gold backed). This time around, even HeliBen himself admitted that US government could "print" itself out of trouble. If you read his previous published papers, which I did, it is very consistent that the thinks the BIGGEST reason for Great Depression was we didn't pump enough money supply into the system. Guess what he is going to do when the economy comes to a halt? Print, print, print.

Not only that, we have been on the money-printing route for many years under the Great Maestro Greenspan, at an annual rate of 13%+. In a word, we have gotten used to printing. The worst part of it is, not only we are printing, Euro area, AUD, CAD are all printing, just not as fast as us. Therefore, the excess supply of money has to go SOMEWHERE, that somewhere is not sitting around in failed banks or institutions earning 2% interest when the Fed starts cutting rate again.

USD is in fact a propped up currency we know that, the world knows that, especially the japanese and Chinese know that. They have been talking about how to exit the dollar position "gracefully", meaning avoiding stampede on the way out. But since everyone is thinking this way, the stampede is going to happen one way or another, I just don't know when. SInce USD will be devalued, therefore our depression will be inflationary, everything we import will be more expensive (btw, what do we manufacture these days?)

Pop!,

for financially strapped people who don't have an asset to protect, I don't think they should get into gold, they should take care of their cashflow problems first. Gold at the later stage will become highly speculative, and if you don't set up your position carefully, you may be very much adversely affected psychologically at least by the wild swings in metal price. For example, just a month ago, gold shed 5% in one day, it shed 10% in a week. So I generally don't recommend people who are heavily in debt and live from paycheck to paycheck to get into gold. On top of this, carrying gold yields no interest, no dividend, so the only reason you do it is because you want to protect value through a history-tested medium.

However, if someone already has some substantial savings and asset, gold is the only 3 hedges I can think about that won't get wiped out in the upcoming crisis. Another hedge is real estate, but it is already so out of whack with people's income which is always the foundation of realty value. The last hedge is oil, which is also called the black gold. However, oil cannot go too high or alternative energy will come out faster replacing it, therefore the upside is limited, unless you believe in peak oil. But if peak oil is to happen, I think we as a civilization have more to worry than protecting personal wealth.

I think almost all of the infrastructure in the US is in pretty bad shape and a WPA project would be a logical make work type situation.

At the risk of being branded a "5th Columnist", I think SFWoman has understated the infrastructure problem. Much of the infrastructure of the US is so fragile, weak, and underapitalized that it is truly terrifying.

Most Americans do not realize that most of our critical infrastructures are only marginally better than many 2nd-world nations. Not all of this is our fault; we have a very old infrastructure whereas Europes was rebulit in the last 50 years (due to war devastation), and the richer developing nations got to start off with better technology sets.

But things like our energy distribution infrastructure, our transportation infrastructure, our port-of-entry infrastructure are scary enough. Add in education, health-care, emergency services, and it's enough to keep one up at night.

But then again, one does not raise government investment capital without a source of government revenue. I'm not going to hold my breath. Maybe we can outsource our electrical transmission grid. I'm sure somewhere there's a foreign investor willing to operate it for us. It's not like electricity is a strategic resource or anything.

I think the current price is cheap in the long term, the way to look at it is through oil/gold ratio. Currently oil/gold (how many barrels of oil an ounce of gold can buy) is at a historical low, either oil should come down or gold should go up, and we know that oil won't come down. OPEC just announced yesterday that they "expect" the oil price to float between high 50s and low 60s, which established a floor pricing for oil. I won't challenge OPEC's ability to defend oil price at this point with Iran bourse coming online.

The reason why oil/gold ratio is so important because oil is the basis of our worldwide economy, and it serves as an ultimate gauge for the purchasing power of gold, which should be relatively constant throughout history. I can't stress enough, gold won't make you rich, unless you trade futures and options, which I don't. If you become "rich" through longing gold, perhaps you are well-off to begin with. There are many oil/gold, other metal/gold ratio charts on the web and you can certainly google them.

Having said so, I think in the short-term, 550 is a bit overbought. I expect it to retract further to somewhere around 520, and I plan to add more at that point, but I am certainly no prophet so the wishful scenario may overdeliver (drop below 500) or may not happen at all (blow right through to the next high). I can certainly understand the angst of building a gold position only to see it lose 5% the day after, which happened to me when I first built my position 2 years ago. I was under water for 4 months. So be psychologically prepared that the path will be bumpy.

dna,

my answer to you is very simple. Houses have to be bought by the masses, and if the salary of the masses don't rise along with the true inflation (the money pumping speed), who will be able to afford a home? Do you see salary rising in line with home price? I certainly don't. I wish my paycheck went up 30% a year in the last 3 years, but my home did. If people of my financial situation don't have enough income to support such a home, you think Larry Ellison will care for my 1965-rambler home when it eventually becomes a 20M dollar home going at the current rate of appreciation?

Warren Buffet doesn't need 20 homes, maybe he has that many vacation properties, but he certainly doesn't need 200. The rich Americans can only buy so many homes. So unless these extra money to finds a way to end up on Americans' paychecks, we are in a real estate bubble.

dna,

Fundamentals will always act as a mean regression attractor. That means, as Owneroccupier says, when things get out of whack -- like affordability is now -- then they will eventually correct.

The correction could take a long, long, long time; or it could happen pretty quickly. I tend to think it will be sort of fast, but longer than many would like. Understand that the longer a mean reversion takes, the more painful for everyone (even if better for the overall economy). Imagine a 50 year future where residential RE barely returns *official* inflation + population growth. What would this do to the current system of ownership and wealth in this country? Think the top 1% control everything now? Just wait until after 50 years of sluggish RE price movements. This is why most self-interested people cheer for a clean correction shock.

Let me play devil’s advocate and explain why there may not be a housing “bubble.” First, a true bubble is not something that is overpriced by 30% or 50%. It’s something overpriced by 300% to 500%, or even more. Think of tulips, dot coms, gold in the 80s. These were all true bubbles.

Where was this "true bubble" figure picked from, in terms of a real-life example for real estate? Current housing costs reflect "true costs"? Really, how would one go about proving this? Anyone here can check the pricing increases in their town since say '99 and decide for themselves whether this reflects "true costs". For myself, I've seen a 250-275% increase over that period. Not to mention, bubbles just might have different pricing effects on disparate items, such as tulip bulbs, stock, and yes houses.

Historically, housing has been tied to the needs of the end-user, and their ability to pay for it. Any consideration of "true costs" needs to take that into account. If real wages do not closely follow real home prices, then there's truly a cost problem in housing. Personally, I've heard many people talk about residential real estate as if it's capable of generating huge amounts of money, when it really it produces nothing, except potential rent from tenants. In that scenario, a more accurate or "real" price model is suggested by calculating home value by the rental income it generates.

As to the power grid, the power man in Pa told me they could not fix my itty bitty problem, in fact the whole system is in need of repair. The recent years of hurricanes and blowndown trees have been an 80 year event and forced them to fix some poles and wires because they had to.

I've always wondered why modernization and overhaul of the grid wasn't a higher priority. It seems to hit on all priorities: homeland security, energy efficiency and foreign dependence (the grid is terribly lossy), job creation, domestic focus, aesthetically appealing (we could dramatically reduce the forests of poles and wires). And, if solar, wind and/or nuclear are ever to replace fossil to any large degree, then we *require* a very smart, modern grid.

SFWoman,

actually our roads are sort of a national embarassement. My friends from Asia coming here to visit often make a note of how poor the general infrastructure seems. Of course Asia is undergoing a construction boom so everything there is new and nice, and I think they may even end up in worse shape 30 years down the road for lack of maintenance. Still, no excuse for the one of the richest places in the world, California, to be running our infrastructure to the ground. It always baffles me where our state tax went.

OR however, has really nice infrastructure, WA too, most roads are nice and clean, not clogged with rubbish in the divider and laden with pot holes. OR has a much lower state tax, and WA has no state income tax at all. Something is seriously wrong with CA.

Randy H. said "But then again, one does not raise government investment capital without a source of government revenue. I’m not going to hold my breath. Maybe we can outsource our electrical transmission grid. I’m sure somewhere there’s a foreign investor willing to operate it for us. It’s not like electricity is a strategic resource or anything."

Now, I know this sounds absurd, but I think letting a foreign company run our electricity would be pretty dangerous. Imagine all the power going out of the US at one point in time? Wouldn't it severely hamper us in the event that terrorists used this as a means of an attack? I don't think western european or asian country would do this and they are probably the only countries that could handle that sort of job. The thought still doesn't sit well with me.

Scott J

Now, I know this sounds absurd, but I think letting a foreign company run our electricity would be pretty dangerous.

Sorry if I was a bit too sarcastic this morning. I meant to show how very much I think this would be a bad idea.

Here comes a troll. Even I know how to identify one.

They will demand wage increases, most companies will be able to afford to give wage increases because their revenues will be higher due to raising the prices on their goods and services, the dollar will decline (but not crash), outsourcing to foreign countries will cost more, jobs will return here because it will be cheaper for companies to keep the jobs here.

When employees demand wage increase, the company can simply say "bye".

The outsourcing boom has not even started yet. When you have a friend who is actively forming companies to do outsourcing, you kind of know what is to come.

Someone said that it will be a inflationary depression (stagflation), I agree totally. Use your leverage wisely.

Housing price appreciation is not necessarily a function of the rate of inflation. It is mostly a function of real interest rate, wage growth, and more importantly, expectations.

But most of the country will probably see only 10% or 20% declines over the next decade before slowly bouncing back.

True, much of the country may not even see any nominal decline.

The huge doom and gloom picture that so many people talk about is unrealstic unless we experience a very serious terrorist or biological problem.

I do hope that everything is fine. Lower housing costs will increase our competitiveness. FBs be screwed, who cares.

I never understand the argument of why company has to raise wages. If you are a top-tier engineer, top tier marketer, sure, but you pretty much can afford anything you want as a worldclass player in any industry.

If you are just an average coder, you want a raise? There are literally millions of hungry coders in India and China ready to take over your job. You can't afford food? Too bad, get in line for the unemployment check please.

One thing you have to understand is, an average American labor has NO bargaining power in this market. In 1980, China and India plus the entire Russia/East European cheap labor were not available to compete freely in the global market.

Another way American retiree can get by is to bring their money to live in a foreign country. Many Brits are already retiring in Spain, Australia for lower cost of living, Japanese retirees are heading overseas to take advantage of lower cost living, I am sure you will find lots of American retirees in S. America soon. Which again brings up the question, who is gonna buy all these condos???

I never understand the argument of why company has to raise wages.

Me neither. Who says that the living standard of a person has to improve or even remain the same? It is all about pricing power.

Without global labor arbitrage, inflation and wage increases do get into a feedback loop. Now that jobs can go overseas easily, we will have stagflation.

Owneroc and Peter P,

Wouldn't a devalued $ make the global wage arbitrage less attractive ?

The salaries in India are reaching saturation point, after increasing at a rapid pace for last 5 years. Indian Rs has already appreciated against the $, from what it was 5 years ago. Outsourcing is not as cheap at it was anymore.

The salries may not increase as much as inflation. But devaluation may prevent complete stagflation. I think devaluation will be good.

1. Keep the engineering jobs from being outsourced completely.
2. If imports become more and more expensive, it would encourage investment into building industires locally in US - as it would make sense to produce things locally. It takes a loooong time for the industrial investment to pay off, but will be good in the long run, and will create productive jobs.
3. Lot of black market, terrorist orgs use $ to finance their operations. For example, Russian arms dealer sell weapons in $ to terrorist orgs. Suddenly a lot of shady folks would be poorer as they have been holding $ bills that are less valued now.

Inflation wiothout devaluation will produce stagflation. But how long can inflation happen without devaluation ?

To BA Or Not To BA, you just demostrated why dollar will not be devalued. :)

that seems counterintuitive….i always thought entry level stuff would crash or at least stop appreciating first since that’s where less leverage would be available.

Wait. What is entry-level in SF? In the silly valley, the lower end appears to be a lot more quiet.

I look for a deflationary depression lasting 20 years. The depression will end with a popular war ala WWII ending the great depression.

For the good side, from the ashes new manufacturing and other technology will replace the crashed and burned economy. Perhaps it will be the age of bioengineering or nanotechnology and/or new sources of energy. This will be a rebirth in America (I hope it will be America) leading the world.

Another benefit will be laws and regulations on lending and derivatives (now $570 tillion worldwide).

SFWoman, I feel that the most vulnerable segment is 500K-800K family dwellings.

Smaller places are frequently occupied by single professionals and they may have the income to support the mortgages for at least a while.

To BA Or Not To BA,

I believe devaluation will induce inflation. In fact, devluation is already quietly coming along, for example, Euro dipped slightly below 1.19 when Fed raised rate a couple of weeks ago, now it is back above 1.2. If you look at charts, the recovery of USD against other currencies is getting shorter and shorter-lived.

Indian or Chinese labor has one advantage against us though, most of them (not all) don't have to bear with a high cost of living. Therefore, we may "demand" a higher pay to make ends meet, while they are freer to drop their salary just to get a job. Most Indian or Chinese white-collar workers can drop their salary by half without jeopardizing their food and shelter, I wonder how many of us can say the same thing. In a sense, yes, a devaluation will help stem the outsourcing, but expect a serious erosion of quality of life going forward. Perhaps we never deserved these Hummers and McMansions to begin with.

so I guess I had it ass backwards then, thinking that higher will oulast lower since higher income can ‘afford’ more leverage…..hmmmmm

Higher income people are less likely to be sheeple. Since they most likely are homeowners already, they are driven by greed, not fear.

When housing kerplunks, I plan to buy two small homes. One for us now, and one for my 13 year old son later. We'll rent one out for a while. When prices climb back up, and you know they will at some point, then my son can have a way to get started in life, or at least a place to live. And Seattledude, I've done a lot of good things in my life, but having this kid is the best thing I've ever done. Don't wat to leave all the child rearing to the sheeple. : )

RE: Housing soufflé

I do not mind. :)

Let's prick it with a fork and pour in some Grand Marnier sauce.

I was pondering the same thought, that it could be possible to make postmodern power towers that were pleasing to the eye.

Aesthetically pleasing, well planned, minimized power towers for rural and gap areas. Buried services in urban and suburban areas. Vaulted services (hidden, but not necessarily buried) whever practical. It's always struck me as odd that there can be neighborhoods with $3M homes (I know, not so odd in today's post-peak bubble) that are blighted by a rat's nest of crooked, overloaded, timber and wire.

And, there'd be no more knotted tennish shoes hanging from the wires and the implicit urban legends that go therewith.