patrick.net

pkennedy says

@thomas.wong1986
Sounds good, population is increasing, we agree!
As Zephyr said, the US population is growing. California is growing right along with it. It has outpaced much of the US for a long time, even if it slows down, it’s still growing.

I hardly think two people boinking last Saturday nite or a Suturday nite 10 years ago will have any impact on what your thinking of. Increase in population isnt going to drive housing, it will be jobs, jobs and more jobs.

People need housing. More people need more housing.

Thomas, It is the combination of population and jobs. Population increases the need for housing, and jobs increae the ability to pay for housing. These are fundamentals.

Overlay that with sentiment. Fear is holding the market back right now - just like overconfidence drove the silly bubble a few years ago.

You do know who Novellus is and how long they been in SV ? one by one jobs walking away....

ACCOUNTANT at NovellusLocation: Tualatin, Oregon (Portland, Oregon Area)

Type:Full-timeExperience:Mid-Senior levelFunctions:Accounting/Auditing Industries:Semiconductors Posted:April 28, 2010Employer Job ID:6715BRJob Description
Novellus Systems designs, builds, and services manufacturing equipment that is used in the production of semiconductor devices, or chips. We are the backbone of the tech revolution. As one of the top ten global semiconductor equipment companies in the world, our systems are essential to producing fast, complex, powerful, and cost-effective chips used in the latest cell phones, computers, MP3 players and HDTVs.

JOB TITLE: Senior Accountant - Corporate Accounting & Reporting

PRIMARY RESPONSIBILITY:

We are looking for a highly skilled and motivated senior accountant within our Corporate Accounting and Reporting Group based in Tualatin, Oregon

pkennedy says

People need housing. More people need more housing.

Brilliant!!!! who said engineers cant count!

I don't see "bottoms" I see graphs, and trends that are driven by the macro picture.

The upward glide on the left side of the curve was clearly aided by the increasing cheapness of the cost of money.

This gave the market upward momentum, which was continued by the 2001 & 2003 tax cuts & credits, and the rise of IO and suicide lending available to all takers, 2004-2007.

Casey Serin, the last Greater Fool was found in 2006 and his collection of suicide mortages finally blew him (and his lenders) up in 2007, heralding the top so clearly evident in that graph.

The inflation bugbear was taken off the table by 2008 as everything started collapsing upon itself. In early 2008 the PTB responded by raising the FHA limit to $729,750 (wow!), and printing $1.25T of money to reload the mortgage market 2009-earlier this year.

This and the 4 ~ 5% interest rates arrested the fall as the cost of money made purchasing the incoming distressed inventory a no-brainer for people with no brains and/or who wanted to roll the dice.

Yet the slope of the housing crash remained the same until second quarter 2009

http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009

The $8000 tax credit became effective 2/09

The PTB threw what they had at the problem and managed to halt the spiral. This is normal. I'm no major EW proponent but it's clear that nothing moves down in straight line anyway, though housing is pretty sticky so that decline from 2006 to 2009 took me by surprise, I can tell you.

If the market follows the example of the 1990s, we go flatline from here while interest rates creep upward.

I was in Japan at the time but from the graphs

http://research.stlouisfed.org/fred2/series/MORTG/

http://research.stlouisfed.org/fred2/series/CASTHPI?rid=171

I see that rates really didn't "creep upward" in the 90s; there was loose policy coming out of the '91 recession, but the RE market was f---ed and didn't respond (since .mil jobs were leaving the state), and the RE market remained f---ed through 95 as monetary policy reversed as the overall economy got moving again, partially thanks to the rising trade and trade deficit in China coupled with the new efficiencies of big-box retailing.

California became happening as the dotcom bubble brought billions and billions of bucks into the state. LA was kinda behind the times until 2000 or so (condos were still cheap in Irvine when I was looking there in early 2000) but there was full employment in the valley in the late 90s, and apartments were getting real scarce in mid-2000 when I arrived in the south bay.

If there’s a bond crisis however, all bets are off and homes might be at 2006 levels in 5 years or less.

Either we live on different planets or we have a different understanding of how economics works and what state the world is in right now.

Lending is f---ed now. 2009 saw more money go out of mortgages than be put in by new borrowing. This is not just recessionary this is Depression economics.

If there's a "bond crisis" everything will be f---ed and we'll be lucky to retain our current semi-functioning constitutional gov't let alone be able to offer GSE funding of mortgages at anything under 10%.

You apparently don't understand how tapped out the middle class and below is right now, and how little power J6P has negotiating his wages from The Man.

You have this naive understanding of economic history, that the 70s wage-price spiral can repeat itself even though everything is different now.

Japan is the model, if not G.D. I.

This decade was *supposed* to be the decade we got our house in order in preparation for the Boomer retirement wave hitting in 2020. The leading contingent is turning 64 this year, and Peak Boomer production was 1955, aged 55 now. If you don't count the interest OASDI is "earning" on that filecabinet of unmarketable bonds it holds, the SSTF is now in actuarial deficit and will remain so for the remainder of our lives unless payroll taxes are raised again, and I fail to see how raising payroll taxes is good news for home prices.

Medicare is an unsolved $100T problem, we're spending a trillion (!) a year on military BS, we've got 99-week unemployment that people are still falling out of at the end.

But yeah, 2006 prices are possibly just around the corner because wage inflation is coming if the wheels fall off and the engine blows up.

Pull the other one.

The real estate market was in the doldrums in the early 1990s because of the excessive inventory of homes from the previous bubble. The Resolution Trust slowly released those properties into the market, mitigating the severity of the decline, but prolonging the agony.

Today we also have an excessive inventory of homes from the recent bubble. They are being steadily released into the market, keeping prices down. But the process will not take as long this time.

Japan is not the model. The problems of Japan are very different. They have no population growth, shifting to actual population decline. So housing is in a permanent oversupply. When supply exceeds demand, prices fall. Even with low interest rates.

We do have fiscal mess in our government finance. It is a rapidly growing problem now, and will develop into a real burden by the 2020s when the retirees are more numerous.

Along with boomer retirement will come a labor shortage, leading to real wage increases.
The bad news is that taxes will go up faster than real wages.

Zephyr,

Sorry, but I almost laughed out loud when I read your comment. Are you serious?

In California, unemployment is way up and is contuning to climb.

No job= no money + tighter lending standards = no buying houses.

There won't be a labor shortage.. Business will continue to do what they are doing now...hire cheap labor in other countries.

Housing market is going down and will go down for many years.

Sorry to bust your bubble. : - )

davidgrove says

Housing market is going down and will go down for many years.
Sorry to bust your bubble. : - )

Sorry to burst your bubble, but housing is NOT going down right now. In the future, who knows, but in the present it is going up.

David,

Don't worry, your comment does not worry me. Your feeling is understandable given current conditions, and popular sentiment. But that is temporary. Job markets and the economy are cyclical, and do change. We have had comparably high unemployment several times before in my lifetime. It swings back and forth between high and low unemplyment. And it will happen again. Demographic and macroeconomic analysis supports my view.

A common error that many people make is to think that market direction will not change. This is the mistake that bubble buyers made during the housing bubble. They thought prices would keep going up, or at least not decline. But it is a cycle that alternates between rising and falling.

Today, many people are making the same mistake that the bubble buyers made - only in reverse. They think the prices will keep going down or at least not rise. They are just as wrong as the bubble buyers were.

Every single one of us colors the information we hear with our own past experiences and future desires. Everyone "talks their book" as it were. You can see the change here with members who were bearish on housing suddenly switch when they bought a house. It could be that they caught the bottom in their area and they made the right call. But at the same time they are looking for validation that they made the right decision.

For me it's quite simple. Where I live (mid-peninsula, SF Bay Area) it is still cheaper to rent than it is to buy by historical measure. Current price/rent ratio is at 22 in my neighborhood and it should be less than 17. So until that ratio comes down, I'll keep renting and keep stashing away extra money into savings. If it never comes down I'll just keep renting or move somewhere where prices are in balance.

"1. buyers credits to stimulate buying
2. FED buying MBS’s to keep rates down.
3. Foreclosures delayed due to attempted workouts, and banks being overwhelmed.
4. 50% increase in homeowners not paying their mortgages in the last 12 months, 100% in 18 months.
5. California/City budgets all must be cut, bad for jobs, bad for housing."

All very good points. Very difficult issues.
But these are all temporay issues.
We have seen similar things in every down cycle.
They do get worked out.
The world is not ending now.

I am seeing Zephyr's point. Sometime, maybe not now, the crash will reverse itself, and it would be very easy and very human to continue to believe the truth that has worked for so long, to believe that real estate is going down, and to utterly miss seeing a very real upward trend.

That said, we continue not to buy because it does not make sense for us. A home identical to ours just went up for sale down the street. Buying it would more than double our housing costs and lock us into a financially troubled school district in a financially troubled state for a very long time. Since we are happy where we are, and since we actually do save the difference in cost, we are much more comfortable letting our savings grow toward an ever-larger down payment and maintaining a larger range of possibilities for our family. Eventually, one of two things will happen: either the cost of housing will come down to a level that feels good to us, and we will buy; or we will continue to look at other locations that might work better for us and take our money and skills there to buy a home.

In just the last year or two, I have seen several houses on our street bought and foreclosed within the same year. The people who would like to live on our street--largely lower-to-middle middle-class families--cannot afford the average home price for this neighborhood yet. The people who can afford to live on this street don't seem to want to buy here. So it goes. I would rather be a renter than get in over my head.

I am open to the possibility that we might be wrong about real estate prices dropping or staying flat. And I am cool with the possibility that we might get locked out of Bay Area real estate forever. Because buying in right now would be bad for us financially and emotionally, and I would rather be a happy renter, or a happy homeowner somewhere else, than miserable here. So, based purely on our own perspective, I am not big on the idea of housing going up. But I am OK with the possibility that it might.

@Eliza

If you read what he said, the bottom has mostly come and gone, but it will be fairly flat for years to come as things work themselves out, and inventory is flushed. You've still got a few years before any price increases could really dampen your abilities.

People who move in/out within a year had some other issues. Perhaps they were renters who were used to spending all the "extra" cash they had. But something major has to happen for someone to move in, screw up, blow through all their savings and move out. They obviously didn't have a 6 months emergency fund!

Eliza says

I am seeing Zephyr’s point. Sometime, maybe not now, the crash will reverse itself, and it would be very easy and very human to continue to believe the truth that has worked for so long, to believe that real estate is going down, and to utterly miss seeing a very real upward trend.
That said, we continue not to buy because it does not make sense for us. A home identical to ours just went up for sale down the street. Buying it would more than double our housing costs

This is a common analytical mistake -- I made the same thing in 2000-2001 when my housing costs were $750/mo and decent pre-GOOG-IPO condos in/near Los Altos were still under $350K. I shoulda bought anyway.

The rent vs. buy decision will rarely make sense in any given point of time. There is an immense number of very wealthy forces that comb through the market looking for anything that will cash flow or close to it, supporting the high end, because everyone expects the history of the 20th century to repeat in the 21st, where every 20 years rents doubled.

When making the buy decision you've got to first NOT count principal repayment as a cost like rent to the LL. Then you should factor in the tax benefits (less the $11,400 standard deduction).

I don't know if RE is going to go up or down from here.But I do know it will respond to larger macro forces, and these macro forces are very different compared to the economic history of any time period in the past you care to name.

tatupu70 says

Sorry to burst your bubble, but housing is NOT going down right now. In the future, who knows, but in the present it is going up.

That was the point of my posting the graph with 30-year rates overlaid. Shoulda also put the $8000 tax credit overlaid too I suppose.

Rates on a 15-year mortgage are under 4.5% and a 5/1 ARM is under 4%. If wage inflation is coming any time this decade, buying now will NOT be a bad decision since paying down these mortgages will be a walk in the park compared to rents.

But it's important to note that the macro picture is still out there as a force, even though Fed intervention was papering over the problem with the historically low interest rates.

San Jose just announced they need to slash tens of thousands of jobs. Regardless of what they do a lot of sh-- needs to happen this decade to return to any good times.

We need to raise taxes & cut spending, increase health insurance contributions, devalue the dollar more, all the while being on the flipside of Peak Oil and with OPEC with the whip hand in setting price as the 2.5 billion people of China and India collectively try to replicate the American standard of living as it was in the immediate past.

This is not your grandfather's recession. Well, it is my grandfather's, he was born in 1911 and I'll let you do the math on that.

Zephyr says

Job markets and the economy are cyclical, and do change

We've gotten used to the cycle since the postwar, a sharp recession every 10 years and then everyone gets back to work.

I think there's an argument that things are different now. The 2001 tech recession was only stopped by the massive SIX TRILLION over-investment in housing, which pushed a lot of debt but not much new actual produced means of production (ie fixed capital) or labor skills into the economy.

It's my thesis that the 2003-2006 so-called recovery did more damage than good, and we're collectively behind the eightball more now than we were in 2002.

What if we simply have more people than jobs, thanks to NAFTA and wide-open merging of our labor market with India and China. Clearly their wages will be going up over time, but I think it's possible wages will meet in the middle. This does not bode well for current RE price levels!

The future is unknowable and it is very likely that the PTB will continue to throw everything they can at the housing market to try to keep prices from falling more. They have a very large set of options they can try, but every one they do puts us more in the Japan camp.

Japan experienced a beat-down from 1990 through 2003. I was there for most of it and saw how it works first-hand. Rents in Tokyo now are where they were when I got there in 1992.

Japan is not the model. The problems of Japan are very different. They have no population growth, shifting to actual population decline. So housing is in a permanent oversupply. When supply exceeds demand, prices fall. Even with low interest rates.

What's happening in Japan is the hollowing out of the rural areas as all the young people pick up stakes and move to the cities. There's oversupply of housing in the cities no doubt, but if you take out immigrant hispanics, the US population pyramid looks a lot like Japan's.

Even if the demographics are different thanks to immigration, the problems of Japan are NOT very different to us. Their labor market too has been utterly clobbered by economic integration with China. They've luckily got a language impedance problem with India so integration with the Indian tech labor market is relatively less.

Japanese banks put their customer's money into way too many bad loans 1985-90. We had millions of Casey Serins that banks found to replicate that behavior.

As far as households go, Peak Debt here in the US was Q308 @ $20.2T. This is up TEN TRILLION from $11T at the end of 2001.

We're not out of the woods after just one year of unwinding, just as Japan wasn't out of the woods in 1992 or the US was out of the woods in 1931.

What happened in Greece... stays in Greece.

This may sound cold, but it really doesn’t matter what 90% of Americans spend their money on. They own so little wealth that their actions are irrelevant. What matters is what the aristocracy decides to do....Who’s going to stop them?

Perhaps Zzzax, The Living Dynamo?

Real personal consumption spending bottomed in Q2 2009.

Debt Held by the Public

01/01/2009 $6,369,318,869,476.54
03/31/2010 $8,290,068,831,046.49

two trillion dollars of deficit spending in 15 months.

That is $18,000 per household of just deficit spending, and that's not even counting the $1.25T expansion of the Fed's balance sheet aka QE.

In 2000, Federal receipts were $2.0T and outlays were $1.8T.
In 2009, this was $2.1T and $4T, LOL.

You pump $4T through an economy -- $36K per household -- and you're going to get some voom.

Hello Zimbabwe, tho where we're gonna get wage inflation is something of a mystery to me . . . at least Zimbabwe's labor market isn't wide open to India, China, and Mexico's, unlike ours.

This is not to say I discount the inflationary case. Everybody wants it, and where there's a will there's a way. I'm just curious how it's going to happen, and when, and how we'll be able to get the wage growth that Japan failed to get in the 90s, having done to ourselves last decade pretty much what they did to themselves in the 80s, which was throw trillions of dollars of borrowed money into pipe-dream land values.

The RE buying binge of the 1980s happened in the US as well as Japan. We threw trillions into the pipe dream of land values in the 1980s as well. And we also had a RE bubble at the same time. The bubble burst at the end of the decade, and led to serious RE problems in the early 1990s. But after the bubble burst Japan followed a policy course similar to our 1930s path and got a result similar to our 1930s result. The US policies in the 1990s went the opposite direction and got a much better result.

INFLATION

Government spending must be paid for. If the government does not collect enough tax to pay for its spending then it must get money some other way. One way is to print money and spend it. This is something that governments normally do (in at least a modest amount).

As long as the economy grows as fast as the domestic money supply there is no inflation, and the government gets the real value of the growth. However, if the new money exceeds the growth in the real economy, then prices must rise to balance the money with the supply of available goods. The process is slow and messy.

If the government uses debt to finance its spending, and if it can make the payments on the debt without printing money, then the deficit will not cause inflation. But it is hard to accomplish this when the deficits are large. So the likely outcome is that taxes must rise, or inflation will rise. People resist taxes so printing money is easier for politicians to do.

In addition, we benefit from world demand for our currency to use in trade unrelated to the US. Any growth in this demand for US currency has a deflationary effect. So when the world economy and trade in US dollars grows, we can print the appropriate amount of money and spend it overseas without increasing the money supply in the US. Part of our trade deficit is the export of dollars for use in world trade.

@Troy,
you are correct, but that view is not popular because (in my opinion) it brings into focus the political issues that the liberal/progressive/biased media is trying to ignor.

From where my company sits in the construction biz, I believe it is far too early to say things are getting better. Only U.S. activity we see hinges around continued Katrina caused work around New Orleans to fix the levees, port work so that people can import more useless junk from China and military projects. Infrastructure work funded by local, state and federal governments is much lower than 3 to 4 years ago even with the stimulus money, as governments at all level are broke. Very little privately funded construction still, as well.

The only bright spot is that many firms are getting big jobs in Central and South America and in the Caribbean Islands.

I think we are 12 to 18 months away from U.S. business picking up.

Zephyr says

But after the bubble burst Japan followed a policy course similar to our 1930s path and got a result similar to our 1930s result. The US policies in the 1990s went the opposite direction and got a much better result.

You really can't compare the two bubbles of the late 80s. Japan's was nuts and it came partially from easy credit and their currency doubling (from 250/$ to 130/$ 1985-1988). "Japan as #1" thesis in the press combined with 40 years of postwar collective sacrifice led to a consumption & RE bubble greater in magnitude than what the US experienced in the 2000s.

Also, you can't compare the last decade to the 80s either. The RTC had to handle about $400B in assets, and the loss was around half that. Painful, but doable. Plus IIRC a lot of the bad lending in the 80s was just commercial, and there wasn't really the home-equity -> cash -> spending -> jobs -> home equity cycle that we saw last decade.

In the US, mortgage lending rose from $150B/yr before and after the late 80s bubble to $200B during 1986-1990 (1987 saw $260B of mortgage lending), about a half-trillion of total lending over the bubble years.

The interest rates regime of the early 1980s was over 15%, and then quickly fell to the 10% level for the latter half of the 1980s, which was a large driver of the real estate boom. Recovery in the 90s was greatly assisted by rates falling from that 10% level to the 7-8% level of most of the 90s.

Now the Bush boom. Total mortgage lending rose from $5.6T in 3Q01 to $11.1T in 1Q08, a debt overhang an order of magnitude greater than the 80s bubble. Also, the price levels of 2006 were driven not by the sustainable 10% interest rates of the late 1980s, but rather the unsustainable suicide lending allowed to go on 2003-2007, where millions of borrowers were allowed to rope themselves into suicide loans designed to blow up in 2 to 5 years.

Throwing what they could at the problem, the PTB have managed to raise the FHA limit to over $700K, provide 30 year money at 5%, expand the Fed balance sheet with a $1.25T in mortgage paper -- ~four million mortgages are now owned by the Federal Reserve (!) -- and hand out $8000 buyer tax credits from Uncle Sam (plus more from some states) on top of it all.

I don't know where we go from here. But I do know how we got here.

I agree that wild and expanded lending was the heart of the problem. And the Fed lowering interest rates in 2002-2005 threw gas on the fire. And the fire was worse this time. So the workout should be more difficult this time. And so far it has been. But not by so much.

It was really bad last time too.
This is not a completely new experience.
Mostly a worse than remembered one.

The 1980s bubble was mostly driven by demography – the boomers buying houses.
Less onerous interest rates assisted the boom.

The 1990s strong economy was driven by the largest generation being in the middle of their working careers. Not because they were great workers, but because there were so many of them working. And there were fewer children to feed. We had a high ratio of workers to dependents. That freed up cash for discretionary spending (like never before).

The 2000s saw the excesses of constantly rising expectations being aided by very cheap credit and cheap goods from overseas. That would be fine if we lived within our means. But we did not. And by spending excessively we drove our markets to bubble levels. And bubbles always crash. And pain always follows.

In addition, rising labor competition from overseas has been eroding our competitive position. This (combined with many of those laborers coming into the US) has undermined the wage levels for most workers. So the average worker has not benefited from the bubble economy.

It will get even more difficult for the average worker in the future. Half the world was starving 20 years ago. To a starving man a job that pays enough to eat well is good enough. Their expectations are much lower than ours. So they will work for less in real terms.

The average American will not work for such a lifestyle. Even our poor live better than the workers in places like China and India. So I expect that even more work will go to the starving poor overseas.

This competition will make it difficult for our standard of living to improve. The average of the world is improving dramatically. But it is the starving poor of the world who are seeing the biggest change in their lifestyles.

The wealth advantage that has favored America (and other developed countries) is eroding. The question is whether we can offset the loss of competitive advantage with rising productivity. So far it has been a very close race.

Our government is now trying to spend its way to prosperity.
This will not work in the long run.
We must produce our way to prosperity.
The more jobs we have in non producing activities the less wealth we will eventually have.

Our new level of government spending cannot be supported by tax revenues, so I expect the printing press will soon be used to ease the burden. This will lead to rising inflation.

@Zephyr
What exactly do you do? I really enjoy your posts, they always try and take into account several aspects of the economy, not limiting your posts to just one angle.

A couple questions and/or thoughts.

I would agree with you that printing money is a half decent solution. It will mostly hurt countries using the dollar and/or holding it. It probably will to a lesser extent hurt Americans because as everything rises here with inflation, countries that heavily rely on the dollar won't see the full rise, they will just see their net worth decrease compared with their local currencies. How far do you think we can take the currency without causing major international issues? Such as China, they're holding onto a lot of dollars, with no other alternatives. How long before they really start doing something? What might they do, other currencies isn't really viable. Their own currency isn't viable, as that would push it through the roof and destroy growth. Obviously hyper inflation isn't necessary, a few years at a slightly elevated rate would probably offset much of the burden, but how much higher and for how long?

I do think that many of these countries are almost at a tipping point where they will become consumers themselves. Such as china/india. At least china has a full economy from manufacturing up to services setup. The people there are starting to buy more luxury goods, I suspect they will need a few more years of prosperity before enough feel comfortable with the consumer life style. I think it's less likely we will stay ahead in terms of productivity and more likely others will create their own economies requiring higher wages. Our productivity gap is closing because we can only makeroughly a 3% gain every year (average we've seen over decades I believe?) but other countries can look to us and make large improvements year over year by copying us. Of course, the closer they get, the slower their rates become, but eventually the gap will become small enough that cheap labor+their productivity will far far outpace us.

@Troy
I'm betting that much of the wealth is being generated by people who are interested in generating that wealth. The average American isn't interested in sticking their neck out and opening up a business or doing what it takes to run a business. They're happier being a worker bee, with dreams of becoming rich and dreams of using a get rich quick scheme to do it. They spend everything they have, instead of being prudent and saving. The rich can't spend everything they've got, so it goes back into savings, and thus they accumulate more wealth. This is just how the system works. As companies have grown in size over the last 50 years, so has this wealth because fewer and fewer people were needed to run, own and operate these massive organizations.

I dont know why you would need to "double up health premiums" there is only something like 10% of the country without insurance. Obviously doubling up wouldn't be necessary.

Likewise, I saw something on social security needing 1-2 extra % over the coming years to offset the dooms day that everyone is predicting. 1-2% isn't much, which makes me believe this is more hype than a problem.

Pkennedy,

You asked what I do.

I study the macro economy and bet on what will happen.
This has been my focus for about 35 years.
The economy has been my favorite topic for more than 35 years.

More specifically, I am an investor/speculator.
I make my living by betting on what the economy and markets will do.
When I am right I make money.
When I am wrong I lose money.

I have over 30 years of experience in the financial services industry (risking other peoples’ money), including more than a decade of CEO experience running large ($1+ billion in assets) financial enterprises within the Fortune 500 environment. I have retired and do some consulting/advisory work for private equity/hedge funds and an investment bank.

pkennedy,

I agree with all of your observations above except one. You stated that the cheap labor combined with higher productivity will far outpace us. The more likely scenario is that their real wages will eventually climb until the wage gap is closed. So they will at least lose their wage advantage.

As for how far we can inflate our currency, we can go forever as long as the other currencies inflate at a somewhat similar pace. If the dollar loses value relative to other currencies at a fast pace it will cause problems. But if the dollar loses real value, but at a similar pace to other currencies it will not stir shifts in global currency uses.

Troy,

There is no contradiction to my assertion that we must compete with a global labor pool, and the likely expansion of money supply leading to inflation. In fact, the tough global competition will make it more difficult for government to raise enough revenue by taxes. So the incentive to inflate is increased.

10% owning 90% of the wealth is not ideal. But, that does not mean it cannot continue. For one thing you are looking at only one country in the world. During the last two decades (since the fall of the communist system) most of the world has experienced significant improvement in their wealth and well being. The richest elites of the world have also become richer. But, the average American worker has been in competition with the starving poor of the world. Their wage needs are lower, so the world labor demand has shifted away from the average US worker. It will continue to do so until the wage disparity between the US workers and the poor foreign workers becomes much smaller than it is today. Not a pleasant path for the average US worker.

It is certainly possible that average home values might not increase in real terms over the next few decades. But they will go up in nominal price. It might be entirely due to inflation, just keeping pace with the cost of everything else (ie no real gain). Along the way home prices will rise and fall in a cyclical pattern around the long term trend. And there will be regular future bubbles and busts, as there have been in the past.

High end homes in the preferred neighborhoods will rise in real value as a growing population competes for the best spots. This will be most visible along metropolitan coastlines. It is the affluence of the top few percent who determine the price for those homes. So we could have stagnant real values at the low end along with rising real values at the high end.

The likely cyclical pattern from here is that home prices will be stagnant for 2-3 years before starting a noticeable cyclical climb.

Zephyr says

I have over 30 years of experience in the financial services industry (risking other peoples’ money), including more than a decade of CEO experience running large ($1+ billion in assets) financial enterprises within the Fortune 500 environment.

I doubt a Fortune 500 CEO will come and read a "house price is too high forum".

Most people here are the people who got priced out by the house market and wonder what to do.

Xeno, I look for interesting information in a broad range of places. Mostly I read economics blogs and business news sites. But, with a third of my money invested in CA rental properties, I am interested in the sentiment of renters. As a real estate speculator, I am interested in the sentiment of people who will want to eventually buy. So, occasionally I come to this website to see what people are thinking.

You are entitled to your doubts, but my description of myself is accurate.

pkennedy says

I dont know why you would need to “double up health premiums” there is only something like 10% of the country without insurance. Obviously doubling up wouldn’t be necessary.

There's having insurance, and actually being covered.

"An estimated total of 61 million adults, or 35 percent of individuals, ages 19 to 64, had either no insurance, sporadic coverage, or insurance coverage that exposed them to high health care costs during 2003."

http://www.commonwealthfund.org/Content/Publications/In-the-Literature/2005/Jun/Insured-But-Not-Protected--How-Many-Adults-Are-Underinsured.aspx

61 million is a bit different than 10%. We lower our insurance burden by simply not covering the most expensive cases (speaking in general, obviously people have expensive procedures done thanks to their insurance every day).

The recent reform bill stops recission (dropping people once they become expensive) and also stops the preexisting condition exclusion -- children this year, and everyone in 2014. THIS IS NOT GOING TO LOWER OUR MONTHLY INSURANCE BILLS, LOL.

Whether it doubles them is up for debate, but whatever the cost of the health insurance reform. it's not going to be putting more money in your pockets. Unless you're associated with the medical industry directly or indirectly.

I agree that the reversal of the FICA surplus that is starting now and will continue until the OASDI-held treasuries are sold off (around 25 years from now) is not that big of a deal. But for the past 25 years the FICA overpayments of the toiling classes have helped prop up the overall tax picture. SS is scheduled to rise from $700B/yr now to $1.1T in 2020. That's $400B more in taxation that is going to need to come from somewhere, a burden we have not had to face in quite a while, and one we were supposed to have been preparing for since the 90s.

Zephyr says

There is no contradiction to my assertion that we must compete with a global labor pool, and the likely expansion of money supply leading to inflation. In fact, the tough global competition will make it more difficult for government to raise enough revenue by taxes. So the incentive to inflate is increased.

This is pretty vague. Throwing words like "inflation" and "difficult" around without really digging down into what you're saying doesn't help me much.

Inflation can be a complex monetary phenomenon. The 30 year at 5% right now is telling us something. What, I don't know, either the PTB have their fingers on the scale right now, the market knows something you don't, or space aliens have a mind control satellite helping the Fed out.

Since 2005, assets of the private sector have risen from $37T to $42T, against liabilities of $16.4T and 19.4T. So our net worth has increased $2T in 4 years, I think Uncle Sam should be able to take half of that back. Times are tough and all.

With the S&P almost back to pre-crash levels, looks like the market likes corporate earnings power going forward. The big guys seem to be making money again, as the thread title says, so I fail to see why raising additional tax revenue from our corporate masters is necessarily "difficult".

I, personally, think J6P is due for liquidation this decade so I agree with your general thesis that land values for the middle tier and lower are going to be stable. If the rich are going to be bidding up the price of land in the enclaves, seems to me that it would be better for everyone that they carry a bit more of the tax burden instead.

Kinda stupid to have undertaxed people just bidding up the price of housing all the time, but I guess we'll never learn.

Troy, I am not describing what I would like to see happen. I am describing what I think is most likely to happen. Politicians almost always run deficits. And when spending surges, taxes will likely not keep up. So the deficits will surge as well. It will be very difficult to pay for the recent surge with tax increases. Therefore the printing press is likely to ramp up.

But I am curious how you could have a problem understanding the possibility of inflation and labor competition happening at the same time. There is always labor competition. And nearly always inflation. A little more of both is not at all contradictory.

Zephyr says

Troy, I am not describing what I would like to see happen. I am describing what I think is most likely to happen. Politicians almost always run deficits. And when spending surges, taxes will likely not keep up. So the deficits will surge as well. It will be very difficult to pay for the recent surge with tax increases. Therefore the printing press is likely to ramp up.

Well, I think Obama's approach at drawing the class warfare line at $250K/year/earner has merit. Separates the wolves from the sheep. (I'll leave the reader to apply their biases to determine who is who.) I don't see any inherent "difficulties" here either politically or economically. Hell, the Bush tax cuts are scheduled to sunset without any action required at all.

But I am curious how you could have a problem understanding the possibility of inflation and labor competition happening at the same time. There is always labor competition. And nearly always inflation. A little more of both is not at all contradictory.

"Nearly always" is a useless assertion IMO since we are in terra incognita compared to past situations. We can apply our understanding and arguments of how the present power structure will generate policy going forward, but other than that I don't think anyone can state with any certainty how events are going to unfold this decade.

In the 1970s the Gang of Four was still running China's economy, what was left of it, back to the state it was in the 19th century. India was not connected to the US labor market via 24/7 satellite and cable communication. Mexican labor was for lettuce picking not VWs and NAFTA industries. In 1975 the baby boom was turning 20 and not turning 55 like this year. The national debt held by the public was $1.5T in real terms not the $8.3T of last Friday. The North Sea oil supply boom was still a decade off. Foreigners didn't hold almost half our gov't debt, either.

http://www.ustreas.gov/tic/mfh.txt

When I think inflation, I think the minimum wage and the COLAs social security recipients get, ie wage inflation. THAT'S inflation.

Price inflation without wage inflation doesn't concern me in the slightest, even tho it does mainstream economists for some reason. This is because I look at real estate valuation as an immense buffer -- it is 20% of our GDP -- that sucks money from us schmucks when times are loose and disgorges said money when times are tight. Mainstream economics IMO simply fails to acknowledge that the present production cost of the existing stock of land and improvements approaches $0, ie real estate is simply not a good like a commodity or a normal product of labor.

My general thesis, which I consider applicable for this decade, is that Income -- less gov't taxes, less mandatory insurance, less energy costs to get to work, less basics like food, less quality-of-life -- ends up in (ie determines) Land Values.

Hold Income constant and raise anything else in that intermediating list of life expenses, and Land Values will go down, eventually.

Government outgo has seen an immense expansion over the past 10 years. Up to $6.5T this year will flow through government -- that is 65 MILLION jobs at $100,000 each (stupendous!). There are three options going forward: cut government spending, raise taxes, and/or raise borrowing. The first two are deflationary and the other IMO doesn't automatically result in wage inflation (see Japan), and the price inflation it can engender isn't necessarily a good story for rising land values, like I said, show me $10 gas and I'll show you hundreds of housing markets utterly slaughtered.

edit: Well, there is a fourth option I neglected: sheer printing. It has a lot of benefits but also some costs; the China conduit from which we get so much of our consumer goods will be constricted, and OPEC will want their customary adjustment. Printing money will certainly result in higher consumer prices but I fail to see how it will result in higher home values.

In 2014 the health insurance reform is going to really start taking more money from our paychecks. This guy:

http://brucekrasting.blogspot.com/2009/11/oct-sstf-report.html and http://brucekrasting.blogspot.com/2010/04/size-buyer-now-size-seller.html

has a handle on the SSTF surplus or lack thereof. Social Security and the baby boomers are now officially a net suck on the general fund. Raising the cost of money for the Treasury and a lot of bad things can happen.

Again, I don't dismiss the inflation hypothesis. For all I know Walmart will be paying $20/hr in 2020. That's not what happened in Japan, 1990-now, but we are not necessarily Japan, no matter how much we try to repeat the mistakes they made.

The ultimate symptom of deflation is local government taking payroll/overall compensation reductions. We are beginning to see the change of course like Mayor Reed (or Newsom) following the example of Michael Bloomberg saying "back atcha" to the unions: let the unions decide, paycuts or layoffs.

Now it is about the union leadership saving face.