patrick.net

The ideal ‘end’ is that housing just stays flat or goes down 5% while my salary catches up to home prices.

MarinaPrime, looks like we now have the same ideal scenario. Perhaps we should have sushi. :)

Mortgage rate is rising faster and I have expected. Our ideal picture looks dreamy.

Since I believe housing prices in the Bay Area are overvalued by 35-50%, depending upon the specific area, I can only hope for a soft landing in the "prime" areas. Because the HB is primarily psychologically driven it is likely to deflate very quickly once reality starts hitting people in the pocketbook.

My script proceeds:

* Prices level off, even post nominal gains in some areas -- but below inflation meaning real price losses.

* Realtors(tm) cheer and gloat about how wrong the bears and bubbleheads were. The NAR starts running a series of ads lampooning tin-foil hat wearing bubbleheads and letting people know that "it is always a good time to buy".

* The economy continues to chug along, inflation continues to tick up, unemployment goes down, salaries go up. Life is good.

* But the Fed has to raise rates again and again to keep inflation in check.

* ARMS start resetting. People with 100+ LTV start discovering they are upside down since they've been losing home value against inflation/rates for a couple of years without knowing it. Foreclosures up. Inventory up.

* MP comes to Patrick.net and provides evidence of bidding wars and 1-Haha over listing 850sqft condos in the Marina. Life is good.

* USA Today runs a headline "Soft Landing for US Real-Estate". On the same day the Economist runs a little noticed article about serious macro risks to an accelerating collapse. Although referenced and talked about on Patrick.net it gets lost among the now 1000s of TrollBot postings attacking the site.

* Within 6 months the WSJ runs the headline "West Coast Real-Estate in Free Fall". Sub line is "Is the East Coast Next?" Bay Area prices in non-prime areas fall by as much as 20% in 6 months. Harder hit LA and San Diego fall by nearly 50%.

* Within a year the Bay Area prices correct by 35-50%, with a few areas posting only 15-20% nominal losses. San Diego is the main story in CA, with all but a few areas exceeding 50% losses. Sacramento is a close second. Prices collapse on much of the East Coast, however with DC being hit by far the hardest. Interestingly, NYC and surrounding suburbs fare reasonably well losing only 15-20% with some areas actually posting small gains.

* In a scramble to pin blame for the fiasco somewhere politically expedient, Congress enacts the REECC -- Real Estate Exchange and Credit Committee -- modeled after the SEC and empowered to set and enforce harmonious regulations for the real-estate industry. The FRESB -- Federal Real Estate Standards Board -- is also created to set standards for the industry and is controlled by a wide array of stakeholders outside of the direct real estate industry.

* The NAR, in reaction to new regulations, begins mandatory re-licensing of all agents and brokers nationwide. Rumors begin to surface that upwards of 95% of all existing agents are unable to pass the more rigorous tests. At the same time PWC, KPMG, and DT all announce creation of RE Audit practices which will provide the mandatory public audits of all RE businesses transacting more than US$39.5M per year or US$10M per any quarter.

* HaHa is able to buy a home in the Bay Area with 1HaHa per year salary and just over 1HaHa in the bank. He comes to Patrick.net -- now a time capsule preserving a transcript of the past many years of lunacy -- to let the few remaining readers know his good fortunes. Peter P offers to buy him sushi.

To: Randy H

The scenario is sublime but true. You forgot to add; After these agencies are created, rules will be ignored through the greasing of palms.

A recession will do that faster than a decade or more of stagflation.

Unfortunately, these two things are not mutually exclusive. In fact, short recessions are normal during protracted stagflation.

I personally don't see much alternative to stagflation regardless of whether the RE bubble is a hard or soft landing. I do not think a deflation/depression will be allowed willingly, nor do I think it should be allowed. Inflation for all it's terrible consequences is far better than deflation and depression. Like has already been said, those who wish for depression do not understand that for which they are wishing.

it will all end in tears...

My prediction: the govt will swoop in and help everyone by clever affordable housing schemes and a new New Deal deal - in fact it will be called the New New Deal Deal. Every young person struggling will be helped in proportion with their need. Inflation will be headed off at the pass simultaneously, due to incredibly adroit economic management by the infinitely wise Fed. George Bush will show even more interest in the plight of the people than he does even now, which is hard to believe, I know - that's compassionate conservatism for you - they keep on giving til it hurts. There will be no more drugs or poverty either. Meds will be free.

OT.

A few threads back a troll came here and claimed that there was a development in South San Jose for 900K or so, 5B3BA. So I got all confused and thought he meant a development in Gilroy. So I apologize here for the confusion, it is in fact in South San Jose.

Today I drove by this development on 101, it turned out that this place is right next to the interexchange of 85/101. I was literally shocked when I saw the development, because I have never seen anything so CLOSE to a major freeway (3 lanes each way). It is practically within 50 feet of the freeway with NO sound barrier walls, NO elevation, and if you know that part of the landscape well, it is on the east side of the freeway among the bald mounds with absolute NO vegetation. Of course one should not forget the multiple power lines presiding right over the development.

Now just south of it within 1/4 mile, there is this very major power station taking up acres and acres of land in east Coyote, and the power station sits comfortably within the vision of the future residents of this development.

Let's forget the price issue for a while. I am not sure if I will live there even if the developer PAYS me 900K.

6. Scientists discover that bad investment judgment was a dominant gene. To prevent its threat, all specuvestors were forceably sterilized.

hmm, alternatively, there will be a cultural revolution, and all realtors, landlords, gurus and lenders will be demonised and held up in show trials, to be executed as traitors, without mercy or exception. The landlords' assets will be distributed to the next generation. Future generations of realtors and lenders will lose parts of their anatomy if they are caught in usury or telling pork pies about property. (Landlords and gurus will have been abolished.) Parents will take their children along to the executions to teach them a moral lesson and give them a sound whipping when they get home to reinforce it. There will be no more drugs or poverty. Meds will be free.

Whatever to come, as long as it happens fast and we can all fast forward to the next few chapters, it is ideal.

Iran is no threat to the US nor does it harbor any relations with Al qaeda. Its all propoganda by the Govt to keep the people from thinking too much about Iraq now that that poor country is headed for a civil war.

I will be looking forward to the day when China dumps the US dollars which will be followed by other countries.

Or Tammy-Faye Bakker’s contribution to Theology.

hmm, she is exceptionally well regarded for her contributions to cosmetology as well... What a polymath! TFB for prez...

RP,

not next to the exit, if you are going south on 101, just past the 85 merging point to your left. You can't possibly miss it, it sticks out like a sore thumb. I am not sure the address is in South San Jose or Coyote, but who cares after all.

Phil,

china won't dump US dollars. It cannot afford to, as long as the government is in control. However, China may spin out of control when situation over there rapidly deteriorates due to a sharp divide between rich and poor caused by bad social policies and rampant corruption, plus slowing job growth due to overseas protectionist pressure. The reason why China has to sustain the breakneck growth is because if it doesn't grow at least 7% a year, it cannot generate enough jobs to absorb all the idle labor force churned out by the shrinking arable land and state-owned enterprise, and social stability may be at stake.

So I never question the intent of China to support USD, I question their ability.

I forgot to mention, I want this bubble to blow up while Bush is office. He needs to eat his own shit.

"Inflation for all it’s terrible consequences is far better than deflation and depression." - Randy H.

But deflation does not mean depression (historically, some of our most prosperous times were during periods of deflation). We want to reward people's thrift, not punish them for it. America, now more than ever needs to save more and spend less. It's the fear of inflation that is causing another bubble in the commodities market.

I agree Iran is not a physical threat to the US, but it is ruled by people who are ideologically anti-US and it has the potential to cause an economic threat by disrupting oil supplies through the Gulf of Hormuz.

so what. bad luck.

actually, oz could do quite well selling uranium to the iranians... i'm all for unfettered free markets. level playing field. free trade. all that kind of thing...

i think you should just let the market sort everything out - to actually refuse to sell to a willing customer would be teleological interference with 'the invisible hand' and the neoclassicals will tell you that's bad...

ps Says:

"I agree Iran is not a physical threat to the US, but it...has the potential to cause an economic threat by disrupting oil supplies through the Gulf of Hormuz.

Gulf of Hormuz?

You mean Gulf of Hormel Chili, right?

Owneroccupier:

I'm originally from S. San Jose. I know where you're talking about.
Unfricken' believable they'd build so close to that power station.
There's better areas as you go south.

This thing can't end good.

DS,

Since John Howard's government also support American actions in Iraq, what country's flag do young Australians place on their backpack when they go abroad?

Phil,

We're just screwed generation wise. On the bright side, my boyfriend luuuuvs his DV-R. I guess the ability to do 30 second skips thru the Apprentice make up for all the economic injustice perpetrated against us.

My fantasy scenario would have to include the end of the global fiat money system that caused this all prior asset bubbles.

Can someone give me some wordpress privileges. I probably won't start threads or regulate, but I'd like to correct some of my more aggregious grammar/spelling errors in future posts.

Michael Holliday,

More unfrickenbelievable is this developement is almost sold out! Must be some out-of-state investors, I can't quite figure why any buyers from here will even bother with such a power-station view lot.

South of Coyote is actually quite nice, Anderson Reservoir has an overflow and we drove to see the waterfall. It's quite comforting to see lots of orchards and farmland down south still remaining untouched, thanks to the visionary Williamson Act.

Exactly - the wisdom just radiates from every particle of your being.

isn't this a metaphor for the RE market tho? when i suggest the govt should actively control land prices, everyone says there will be blood on the streets, the govt is incompetent and corrupt, etc. when it comes to dealing with alleged threats overseas, the US govt is a paragon of virtue and competence, it's totally in control, all smart guys. pull out all the stops, spend billions on weapons and wages, no problem. you can interfere all you want with overseas countries when we don't like 'em, just don't interfere with deranged markets at home...

what country’s flag do young Australians place on their backpack when they go abroad?

canadian.

no, i dunno, don't think they're patriotic enough to plaster flags all over the place, that's a sign of insecurity and low breeding over here... (these days, sticking a US flag to a backpack would be like painting a target on it!) i think the canadians only stick flags on their packs because they're worried someone will overhear their accents and assume the worst... besides, australia only committed a few hundred troops, you would have to choose to backpack thru syria or something to get into trouble with an oz flag. best bet is not to bother with sticking on flags too much and try to blend in with the locals, less likely to attract any attention that way...

Re: disrupting oil supplies through the Gulf of Hormuz.
Different Sean shares these pearls of wisdom: so what. bad luck.
Indeed.
PS

if you don't like the iranians, maybe you should be boycotting all oil purchases from them... if you refuse to buy their oil, they won't have any money to buy WMD with...

frank,

My fantasy scenario would have to include the end of the global fiat money system that caused this all prior asset bubbles.

This contradicts your inflation versus deflation stand. Commodity money systems suffer from intrinsic inflationary pressures which cannot be controlled through monetary means.

Not only that, but fiat money has always been the natural evolution of interdependent economic systems. Sometimes even farmers needed horseshoes in the winter, and they didn't really want to carry around large amounts of gold (or certificates equivalent to such). Contractual forward IOUs of grain for horseshoes were fiat money because the government imposed the validity of such contracts.

The culprit of all this is MBS.

When a bank initiates a loan, it should always be mindful of the risk because it will be left holding the bag when the loan goes into default. MBS removes the risk-aversive incentive from the loan initiator and passes that entirely onto the relatively ignorant MBS buyer. How does a MBS buyer decide whether the loan's rating is really reflective of the underlying risk? Historical data, the ibanks looks at the historical default rate, the credit rating of loan applicants and determine whether this loan is safe or not. In the last few years alone, even some subprime loans can be repackaged as "safe" loans and passed onto the market.

The separation of incentives for loan intitiation and loan management is the main culprit behind fraudulent lending behaviors. If I am not going to be held responsible for the loans I initiated, and I get more commission on initiating more loans, what will be the logical behavior?

If lending is loose, then we will have a runaway RE boom. Fed and MBS both have same share of blame in this game.

Let's keep separate issues separate:
US likes IRANIAN OIL
US does not like IRAN

ah, i think i'm beginning to understand now...

hey, i have some antique back-issues of 'Boys Own Adventure Annual' from 1911 if you need a primer on how to do colonial conquest of the savages and whirling dervishes properly... if i put them on e-bay, i might get a record bid from a user called 'dubya'...

ps,

stop with the sarcasm already

:P

The Ha Ha: A Novel

Owing to a head injury he suffered 16 days into his Vietnam tour, Howard Kapostash, the narrator of King's graceful, measured debut novel, can neither speak, write nor read.

how does he narrate the book then? thought waves? :|

I have said this before and I am not afraid of repeating it: You are a genius.

thank you :oops:

that's what my mom used to tell me too...

PS,

same thing happened to me before. Don't put immediately after another sign.

Don't put the larger than or smaller than sign after another sign. Better still, don't put these signs in your message.

Returning,

Stagflation for that period is likely. I agree with that. After that, however, couldn’t we have a recovery? That would put us in about 2013. Couldn’t the economy pick up at that point riding a wave of nanotech and biotech companies? If housing prices fell about 5% per year for much of that time (in bubble areas), wouldn’t this debt bubble be greatly reduced if not eliminated? Why does it have to take 20 years to wipe out the excess of the last 25? Couldn’t it be done in less?

I'm purposefully holding my optimism for later threads. We don't disagree that much. I am bullish on the long-term prospects for the Bay Area (and other areas, and the national economy as a whole).

also, if the ASCII code total of your post equals the first 5 digits of e to the power pi it won't go on either... just a wordpress thing...

The perfect economic storm is very near. It will soon be time to pay the piper. As the pressures from all sides are upon us to repay all our debts, and America has been brought to her knees, there will be only one solution.

An act of congress will pass a blanket bankruptcy bill, forgiving all
Americans of all of their debt.

A new currency will be established. Our new mantra will be: Save money for a rainy day.

Returning,

I agree. However, if the BA continues to be unaffordable with a soft landing scenario, the high RE prices in the BA will drive away the young research scientists/engineers in these emerging (and therefore not yet high paying) fields. The synergy that worked for computers may be lost for the future.

A soft landing scenario may ironically hurt the BA and Boston's long term prospects the worst of all.

Hey Randy,

Not sure how a commodity backed currency would intrinsically inflate. For example, one monetarist argument against a gold-backed currency is that there isn't enough gold to accomodate today's global commerce. Silly argument to be sure but it does make a point that gold cannot be created out of thin-air like today's fiat monies can.

Contractual IOUs are just fine because they carry a cost for risk/time (and ultimately settle in gold-backed dollars). Therefore you don't treat these IOUs exactly like money. You prefer dollars to IOUs, but the decision to accept IOUs instead is yours to make. This is very different than what we have in today's fiat system where you have no say and often no knowledge of the future value of the medium that you must accept - the fiat dollar.

LOL and thanks for sharing.