patrick.net

For those convinced we still have a lot of downside left, keep in mind that we’re now completing year #4 post peak.

Immaterial IMO since housing is *the* major component in most everyone's cost of living and not some side investment. It is primarily driven by area after-tax incomes [edit: and availability of credit] and is not just some commodity like oil or gold. While modern economics has tried its hardest to disguise it, land is the third factor of production, alongside capital and labor.

Japan real estate fell from 1991 through 2006. Land values were bid up past affordability and have slowly adjusted to what the market can realistically bear -- this is natural since the production cost of land itself is approximately $0. Land prices would be lower than now but for Japan's ZIRP and the availability of 2.5% fixed financing.

This is not to say that we won't see raging inflation this next decade and it's certainly possible that Walmart will be paying $20/hr in 2019. I'd have a shocked face, but what happened this decade sure shocked the hell out of me already.

ghpacific says

Almost bought a foreclosed home in a rough neighborhood. A friend said “Remodeling a house is easy, remodeling a neighborhood is hard.” Smartest words I ever heard. Passed on the house.

That was beautiful!

BTW, the price chart for gold is a little off.

The previous bubble peak price for gold was about $850 per ounce on January 21, 1980.

The long decline started the next day.

Anyone who owned gold during the following 20 years lost real and nominal value at a rapid pace. Even with inflation the price of gold fell like a rock for years. So much for gold being a reliable currency or store of value. It is neither.

"...real estate exhibited the standard 5 year run-up."

Housing prices increased from a bottom in 1996 to a peak in 2006.
By my count that is about 10 years.

Real estate price declines usually last for about three years.
However, the 1990s decline was about six years.

I guess the trick in fitting the 500% ratio is to pick the baseline value that supports your case.

I haven't been to Germany in years. Count me in. Anyone else from the blog going to Oder? I figure we can all stay in Frankfurt. I wouldn't advise swimming in the Oder. Far too cold. Not to sure we can spot the gullible liberal constituent, but we could at least have a picnic.

500% is probably a reasonable rule of thumb for a typical bubble.
But it certainly is not perfect. And picking the "baseline" is not clear in every case.

But the key point is correct - that bubbles cause prices increase by multiples in a short time.

Ok. But for the info to have value you need to use a baseline that you could have recognized at the time. Thus enabing you to buy in before the bubble. Setting an arbitrary begining date by subtractracting from the subsequent peak is something that will nothelp you.

Graphs and charts dont usually get me too excited but these are very very interesting. Possibly these point to psychology of people and how they get carried away. Could be why they have the same pattern. It might be even more interesting if we go back longer than 30 years and chart other bubbles in different ranges of time.
Say between 1910 to 1930

For example, with housing prices in LA and SD counties, I have found that bubble peak prices tend to be roughly double the previous bubble peak, and roughly triple the preceding bottom. This is very crude, but it has useful value in guestimating the future price trend.

Obviously, there are many factors that should influence the actual result. But this rule of thumb kind of works. But it is dangerous to rely on such simplistic ratios.

Bubbles reflect a very basic nature of how nearly all people make investment decisions.

They invest based on momentum, track record. That is to say, they invest in things that have already proved that they are going up. So the more the item has gone up the more convinced people are that it will go up more. And the faster it goes up, the faster they rush to get in on it.

Their exuberance blinds them to the risk, as the crowd rejoices in the easy money.

Bubbles are very profitable for those who get out in time.

To paraphrase Warren Buffet:
Be greedy when others are fearful, and fearful when others are greedy.

So when the crowd says you can't lose, it is probably about time to start selling.
When the crowd says it is a bad investment, it is probably time to start buying.

P2D2 says

That could be true for your area. But people near big metropolitan areas do rent homes

I think it's more of a West Coast thing. I've lived in Midwest and East Coast cities and people don't rent houses very often. But it does seem to be common in CA.

Its because of prop 13

marko says

if we go back longer than 30 years and chart other bubbles in different ranges of time.
Say between 1910 to 1930

Or 1610 to 1930.

http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds

Yes. You can trade the crash. That requires a very brave bet, as it is easier to be right about the ultimate outcome than it is to be right about the exact timing. You could lose a lot of money waiting for the crowd to stop their exuberant run.

As Keynes once said:
Markets can remain irrational longer than you can remain solvent.

I prefer to bet the long side only, sell at or near the top, and then watch the destruction from a safe distance.

How about these bad boys?

Here's the Sugar Price

And Cocao

More charts showing that commodoties are on a run.

General inflation will not be far behind.

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

In the SF Bay Area we been in a 10 year long RE bubble, we peaked in Q1 2007.
So thats only 3 years.. but a long way to go.

^ I know that chart well. I was FOB in the south bay in mid-2000, and saving for a downpayment for the first two years. Then I caught a layoff and became a spectator 2003-2004. Thanks to reading CR from 2005 I knew we were in the end-game. I thought a repeat of the 1989 spindown was the minimum, and once I learned about Casey Serin in late 2006 I knew things were going to just blow up, due to all the outright fraud.

Down here though, I think GOOG and AAPL are distorting things a lot to the upside. The SCV was subdivided out a generation ago and all the convenient places are built out as much as they're gonna be. As long as prices are falling more than my annual rent I'm a happy renter, but I'm going to have to buy sometime!

Bap, this is obviously not the first bubble built on leverage. The final burst of most stock market and commodities bubbles is a combination of institutional leverage and J6P enthusiasm. That final stage of the rocket usually requires the banks to loosen up on their lending standards, but most do because their advisors see the bubble as a "can't lose" proposition.

For those who love bubbles, I recommend reading some Nassim Taleb. He's made billions betting for black swans, because they happen more often than people are willing to admit.

Happy to report that the admission rates for H1N1 at my hosptial are WAYYYY down, not sure if we even had one this week! Keep taking care of yourselves, wash your hands!, stay home if you are ill, and vaccinate if available to you.

"Is this the first bubble built on (almost enitirely) debt?"

Debt has been a major factor in many bubbles - perhaps all of them.

Tulips: 60x in 3 years.

That's 6,000%

...or about 1,700% per year.

Now, that's a bubble!!!!

well ... damn, then fixing the easy-debt issue wont help end the bubble cycle ... or will it?

IQ testing for borrowers ... and voters? lol. But, seriously, will demanding full recouse loans, including debters prison, help end bubbles?

"But, seriously, will demanding full recouse loans, including debters prison, help end bubbles?"

Only to the extent that the borrowers believe they might lose money, and have other significant assets that could be put at risk by the recourse. I suspect that the fools who thought that the easy profits were a sure thing would not have been concerned about full recourse.

We forget (actually, never educated so), but non-recourse loans were established by law with the aim of curbing industry abuse of the public rather early in the 20th century.

The theory was that putting the risk on the banks would result in better loan underwriting. It worked, until industry took over government in 2001 and the dogs were again allowed to run wild.

Heh, maybe that's where "Capitalist running dogs" comes from : )

"We forget (actually, never educated so), but non-recourse loans were established by law with the aim of curbing industry abuse of the public rather early in the 20th century."

The change was made after the abuses during the Great Depression, when banks would forclose and sell the property to themselves (or a related party) for a minimal value, while still holding the borrower on the hook for the remaining loan amount (loan deficiency).

The law was a consumer protection law in California, and various other states have also adopted similar laws. The idea was to protect the consumer. I doubt that the state legislators cared much about any effect on loan underwriting. The problem they were solving was abuse of consumers by mortgage lenders.

Bank underwriting quality has slipped during each RE boom over the decades. Then the lenders become more strict again after each meltdown. It is a cycle in loan underwriting.

But the recent bubble was the first time that the mortgage lending was financed mostly by loans sold 100% to unrelated investors. And financial market was a limitless source of funds.

With the lender no longer retaining the loans, they soon focused on the fee income from the volume of loans, rather than the risk of the borrower.

In addition, the underwriting process became much more formula driven and credit score driven, through automated underwriting programs and the standardization of underwriting criteria.

Selling the loans to third parties as a standard procedure created a moral hazard. It became someone else's risk. This moral hazard led to not really caring about the risk, and the exuberance of easy money started a gold rush to originate and sell as many loans as possible.

The investors who bought the loans grossly underestimated the deterioration in underwriting, and would buy almost anything because they thought the risk was minimal. Everyone was blind to the risk, and just wanted as much as they could get.

Government did not control the underwriting process before or after 2001.
It was always controlled by the balance between greed and fear.
And for a few years the loan "underwriters" had no fear.

If you can rent it for $635 and it's really only $60K, I'd say it's a bargain. Buy it.

on a scale of 1 to 10. area: 1 close shopping: 1 schools: 3 crime: 1 demographic: 1 age of infestructure in that area: 1 The only way a place in that area stays rented is renting to welfare folks. If the place does not qualify for Section 8 you will not get much for rent. And Section 8 gaurentees gangsters and/or drugs in the house. In this area you will really be scrapping the bottom of the renter pool. And they can not, and will not pay +$600 a month to live in south side Merced if they earn their money working. See if the Merced SunStar police calls are searchable. That area is called south side. Any street number lower than "16th" and any street letter between "B" and "V" and any street off of W. Childs. There was a sattelite police station put in over there, but it's not staffed like you may think. It is the absolute worst area in Merced City limits. Call the police station and get a second opinion. The Laughboro area is next worst. But, if you live out-of-area and dont care who you rent to and what kind of situation they create for the neighbors and area, then you may be ok to buy this place and have tax-payers pay your note through welfare and Section 8.

^ another recent innovation was tranched CDOs, which converted a stunningly large percentage of risky seconds into AAA-rated investments.

This is why I assert prices were pushed to their heights not by the activity of the Fed 2001-2003 but by the inactivity of the Fed 2004-2006.

Problems cannot be solved by the same level of thinking that created them.

The financial market guys were full of innovation, finding new ways to slice and dice the mortgages and repackage them into securities of varying content and complexity. They thought this reduced the risk by mixing and spreading the pieces around, and by layering the risk into sequenced traunches (slices).

From what I could tell from talking to these guys at the time, they really did believe that this made sense, and that it did reduce the risk. They had statistics and models made by math geniuses to prove the validity of the concept.

While I never thought it would turn out as badly as it did, I also never bought into their models and arguments.

But the rating agencies did buy the story and gave AAA ratings to most of the pools of doggie doo mortgages sliced into those mixed, layered traunches. Of course, every doogie doo pool had a few small layers that were sopposedly taking all of the risk, and those traunches did get lower ratings, sometimes as junk.

Everyone was so intent on moving the money, and so blind to the risk that their only real concern was increasing their volume of the stuff. And increase they did.

Like they say, be careful what you wish for.

If we can follow the logic of the tinfoil hat crowd, the downswing in reported h1n1 cases are a result of the republicans/conservatives somehow fixing the numbers. There never was a problem with h1n1. See, what happened was the world leaders got together, decided that they needed a diversion to the economic crisis crippling our world, so they came up with a pandemic that killed little children (the ones that kill old people don't look as cool on the posters). But President Obama didn't play - he decided that, if they were going to create a pandemic, he would withhold the vaccine and therefore control the world. But THEY (you know, THEY) saw it coming, and paid a bunch of people to not go to the ER with the pretend symptoms of the non-existent threat to all of us. Those SOB's are always one step ahead of us, damnit! Now, all they have to do is kill Dustin Hoffman's character and the scenario is complete.

"I doubt GLD is falling below $100. I think we go sideways for 2 weeks tops. Once we’re past New Years, it will double in 6 months.

The safe way to play this bubble is to wait until the second peak after the bull trap, then short the hell out of the gold market in every way possible. That way if I’m wrong, there’s no danger."

Maybe I need some clarification here. Is your position now that Gold bubbles and then collapses before the dollar severely drops off a cliff? And if so, what happens after your hyperinflation call?

How about Silver as well?.

@ellie,
you need to rent Ghost again and watch how Patrick Swazeee does it.

TOT, who plays who in the movie of you writing this book? Wayne "The Rock" would be a pretty close Bap33 match. And my woman should be Ashley Judd. It should be rated "R". Anyways, who plays who?

Ashley would play me. Her hair would be blonde with roots badly in need of touchup.

You - the Rock? Hmmmm...interesting. Of course, I wouldn't be the Ellie you've grown to love & loathe if I didn't point out that his name is "Dwayne," not Wayne...

So who plays you in the movie, tpb? And who would do the soundtrack? I hope it's someonce cool like Don Henley or someone like that. When you're scouting locations, I'd be happy to travel on your dime to check it out for ya.

Ya, I'm a giver.

Bap33 says

Wayne “The Rock” would be a pretty close Bap33 match. And my woman should be Ashley Judd. It should be rated “R”. Anyways, who plays who?

Yeah and Ving Rehms plays me, and Ted Danson plays Obama.

It would defiantly be a Tom Waits/Kanye West colaberation sound track.

Well we chose Tom Waits, we aren't quite sure why Kayne keeps showing up at the studio.

I'm telling you .... my woman IS really close to Ashley Judd .. only mine is shapped much better, and she likes me - a great quality. Me as The Rock is not the stretch you may think .... just need some grey hair colored and more cardio and sit-ups. If it's a musical you may want to have me played by Arron Tipon, but only after a heavy workout routine and a hair cut.

btw, why take just one side of a hedge? This situation is so unpredictable already. It's impossible to tell if inflation expectations are already built into the gold spot price, or if there's too much leverage in play, or if there's more dry powder on the sidelines. It's easy to just box the price +/-15 to 20% with options, on the theory that it's going to make a big move one way or the other. What I would find suspicious is if gold stabilized at this particular price point. Why take a 20:1 payoff bet in one direction, when it's possible to take a 10:1 payoff bet in both directions (essentially betting the magnitude but not the sign)?

Brand says

It’s easy to just box the price +/-15 to 20% with options

Exactly which options? Maybe I'll try it.