patrick.net

Greg,

We've beat deflation to death in past threads. Most of those predicting deflationary depression over the past year -- the ones who were advocating buying gold with cashed in 401k's -- have evaporated.

As to mild-deflation, I give it about a 1% chance of happening over the next 25 years. So long as today's new generation of monetary policy makers are in charge there will be no deflation.

Moreover, deflation would require fiscal restraint. You show me any politician of influence who is fiscally responsible and I'll show you the Easter Bunny, Santa Clause, and Peter P's "fate".

I never said these rich people can/will rescue the housing market. I merely try to demostrate that it takes more than a “six-figure saving account” (mentioned by RW) to stay ahead.

Okay, my bad.

Skibum,

That's why you make the big bucks! I can't imagine anyone taking offense to that! Problem solved.

Greg Says:

There will be no recovery from this housing market crash. The boomer generation drove it up and they will drive it down. There are simply not enough of me to replace them (btw I’m 36)

Problem is, when that time comes, most of the inventory glut will be McMansions in the midst of falling apart. The boomers will mostly want to downsize.

People will need to think of housing as a depreciation asset once again.

I'm cool with that.

Well then why are all these $700 plus shitboxes as you call them still selling in the BA??

1) A $800K home requires only a 640K note if downpayment is 20%
2) The first-year minimum payment of a 700K NAAVLP note is less than $2500 (initial, assuming 1.25% start rate)

Since the end of WW II all the people have been trained to think that inflation is normal, well history proves that it is not and this era of constant monetary inflation will come to an end.

US inflation data goes back to 1914. There has been continual inflation for that entire period with the abrupt and unpleasant exception of the Great Depression.

1914 - 1917 saw about 2-5% annual inflation.
In late 1917 it jumped to about 15%
1917-1920 saw very high inflation, nearing 25%
1921-1922 saw mild deflation, over correction from previous inflation fighting

1931-1933 saw the only deflation in excess of "error".

Remember that prior to the Great Depression and Keynes, monetary control was a trial & error process with very little capability to model scenarios and measure effects.

By my measure, that's the better part of 100 years with only three of non-inflation. If you go back to pre-industrial mercantile data you'll find there was out of control (and hard to measure accurately) inflation. Every time new products or rare resources rolled in from colonies the home country suffered staggering inflation (but the colony did not deflate).

Greg,

"as most were never needed anyway" LOL!

Funny! Harry Dent (who's occasionally right) said that more and more homes will become "don't wanters" where surviving offspring on the other side of the country will simply tell the trust atty. to sell mom and dad's FL condo for whatever they can get. They'll be more interested in converting it to cash than holding out for top dollar.

One of the other long term trends he may be correctly identifying is for folks my daughters' ages is that they WILL be confronting a depreciating scenario. This may well be true and I don't see much that can be done about it.

Red Whine Says:

I’ve already started. In the past, I’ve always maxed out my 401k. I’ve now stopped. I’ve started spending this money. I’m going to a Bordeaux tasting tonight that was $250 per ticket. I saw Les Miserables for $100 a head three nights ago.

BIG PIMPIN'

All-

It's funny, I seem to have become the contrarian. I am getting more bearish as everyone else is getting more bullish.

I am now predicting a 60 to 75% drop, at least here in Los Angeles.

Right now I am working on a big email to my friend laying out this prediction in tremendous detail. Will post it tomorrow or the next day if it is finished by then.

But here is an article which contians the key assumption underlying my prediction. Ben's blog linked to it the other day:

http://online.wsj.com/article_email/SB115042445578782114-lMyQjAxMDE2NTEwNjQxMjY0Wj.html

I am quite confident that the market will decline by at least that much, and that all of us will be able to afford a nice place someday. But the question is this: how long do you want to wait? I don't want to rent my POS apartment for another 10 years, that's for sure.

Buffpilot may well have the best idea. I'm getting my professional license in Texas in October. That'll give me about a year and a half to find a job, a house, and move the whole extended family to TX if things don't improve here.

I no longer wonder whether there will be a severe crash. There is no doubt in my mind. To me, the only question is how long it will take. That I don't know.

Greg,

Foreign holders of US debt have little power over US real rates. In fact, they have no choice for the current period to do anything other than hold USD denominated debt unless they are willing to forgo US consumption.

I reemphasize for clarity:

The US derives over 80% of all economic activity purely internally. No other major country comes anywhere close to this. Most US debt is held by countries which depend essentially upon US consumption of their exports, often representing over 50% of their economic activity.

Banks want price stability in a perfect world. Actually not perfect stability, or else they don't make any premiums. Banks earn premiums because they understand inflation and can hedge it better than borrowers.

Banks will take mild to moderate inflation over deflation. Deflation hurts banks worse because they cannot stimulate borrowing in a deflationary environment, and because they earn little on their lending. Banks can try to account for inflation by hedging with various instruments.

Well then why are all these $700 plus shitboxes as you call them still selling in the BA??

Ok, I'll bite...
Because the people currently buying them (a group that is getting smaller and smaller by the day, if sales & inventory figures mean anything) believe "it never goes down".
Because they are, by and large, the few remaining clueless stragglers terrified of being "priced out forever" and will do whatever is necessary to avoid this (they believe) cruelest of fates.

The correction/crash is already underway, even though it is not yet showing in lagging median price data. I do, however, agree with those who say it will takes years to fully play out, as cash-strapped FBs hit the wall on serial refinancing & HELOC-ATMs.

I don't completely agree with Peter P that the $2 Trillion in ARM resets 2007-2008 will be a total "non-event", given the massive level of specuvestor involvement --as DinOR & SQT remind us-- 40% of "demand" in 2005 alone. Though it won't be a sudden one-time event, this will undoubtedly hasten the crash in the near future, along with other factors (rising rates, the job market, mass psychology, flat-to-declining appreciation, possibly tighter lending standards, etc.).

Who else thinks SB, SLO and evirons are in for a hard landing? Like Surfer-X said, there are only so many rich guys to pump up these coastal markets forever.

Raises hand, MeMeMe.

Well then why are all these $700 plus shitboxes as you call them still selling in the BA??

They aren't. Back to Craigslist for you trollboy.

To your points about rich areas getting hit hard, I have unconfirmed report that Pebble Beach has seen 3 foreclosures this year while there were 0 in the past 25 years.

(maybe someone who knows the foreclosures data sources can verify or disconfirm this)

Well then why are all these $700 plus shitboxes as you call them still selling in the BA??

If they are new, nice, and within Google's orb of influence.

trollboy, whoops, sorry, Hellboy. Does your outfit sell MBS? Hmmmm. And if so, when the excrement collides with the cooling device, how much will you loose?

Interesting.

Joe,
I read that article too. It's mostly stuff that' been touted before, but I definitely agree with the thesis. As I've said before, if what you're particularly looking for is a McMansion built in the early 2000's at firesale prices, you'll be in luck in about 10 years.

The buyers of our bonds won’t tolerate inflation. Who do you think runs our country ? debtors or creditors ?

You know the old joke about debtors, right? "If I owe you a little money, it's my problem. If I owe you a lot of money, it's your problem."

If they stop lending us $$$, our interest rate soars, our economy tips into a major recession and brings down all of the export dependent economies with it. Our creditors are the on the losing end of this game. Not only do they have to tolerate the inflationary loss, they have to suffer the expected drop in the dollar when the game comes to an end. In the meantime, they have to keep forking over $$$ to make the game end gently.

I don't think the Asian Central bankers care. All the $$$ was made by their masses tolling 20 hours per day in sweatshops. Four legs good, Two legs better.

I actually think that upper middle class areas (the kind that everyone here seems to want to live in) will get hit hardest of all! This may sound like wishful thinking, but I do believe it.

Think of it this way. Think of a house in a blue collar neighborhood like Palmdale that is selling for $300k. A young blue collar family can probably qualify for a mortgage of $150 to $200k without much diffficulty using the 3x family inome rule. So there is no affordability-based reason why the $300k house would fall below $150k. It might go lower for other reasons, such as location, a bad economy, etc. But at $150k, it is at least within the reach of most first-time buyers.

Now consider a house in an upper middle class neighborhood. All of my older coworkers live in houses that cost between $900k-$1.8mm, with the majority in the middle to high end of that range.

At current prices, I cannot afford to buy one of those houses at all. Nor could I afford to buy it if the guy in the next office's house was "slashed" to $750k. It's going to have to go a lot lower before I am able to afford it.

This is why I think that upper middle class areas will actually be hit HARDER by the crash. This appears to be contrary to what happneed in previous crashes, but it seems inevitable in this one.

I don't know why this is -- maybe upper-middle-class houses were pushed even higher by the speculative bubble because upper-middle class people have more money to speculate with; maybe it's becuase the value and earning power of a college education has shrunk over the years.

But I think the nice neighborhoods will be hit the hardest.

Yup. Tx is on my list too. It is one of the few states that's has negative growth. "b-b-b-but It's tx!"- my friends say. I say " so what." Cali residents can tell me how gosh-darn lucky they are, living in such a swell state. But in a few years I'll be the one reclining in a hammock in my own yard, in a house I will have already paid off. So yes- it WILL be in TX, but at least I'll have other things to bitch about, like those nasty Christians instead of those nasty hippies, or those nasty schools, or those nasty pollution clouds, or those nasty RE prices.

Buffpilot,

Thanks! I remember you from the housing bubble discussions on the Washington Monthly blog. Texas was just an idea in my head back then, but the more I actually take a serious look at it, the better it seems.

There are plenty of affordable places in Middle America, but Texas seems to be the most affordable by far. Also, and more importantly, Texas is still growing. Things are happening there.
Rust belt cities are affordable, but there does not seem to be much of a future in most of them, especially if you are a young person and aspire to bigger things.

Just take 2 married immigrant engineers. $250k combined income easily.

Depending on vintage though. People who graduated after the bust have not been so lucky. People who graduated before 2000 have mostly bought already.

Wage is more sticky than housing prices.

This is why I think that upper middle class areas will actually be hit HARDER by the crash.

I also suspect that "prime areas" may get harder than "meat and potato" nabes because status is very seductive, and social climbers may pick an I-O loan over a fixed if it gives them better scenery or bragging rights to their circle of friends.

Whatever surfer-x, I was on this board way before you ever showed up with your profanity laced tirades. I’ m in the same boat as most other people on this board; frustrated with California in general and with BA RE specifically. So save you venom for Marina Prime or some other REAL troll.

Sorry, but you didn't answer the question, for completeness sake, does your outfit sell MBS and how much will you lose when RE tanks.

Well then why are all these $700 plus shitboxes as you call them still selling in the BA??

and just for further clarification

Re: “Am I missing something, because to qualify for a 650K note you need to make in the high 190s or so. HaHa’s bullcrap notwithstanding, how many people are making that much coin? Not many.”

Well then why are all these shitboxes as you call them still selling in the BA??

So according to you and HaHa, everyone in the BA is making 150+. Sorry, but this plather has gone way beyond annoying

What do you call a poorly built stucco house, one built with one purpose, to flip in two years exactly for profit? Your bullish attitude smacks of someone with something too lose, ie a troll. You seem to think that the amazing increase in BA real estate is somehow bouyed by increasing prices and sales. Simply not true. Furthermore do profanity laced tirades bother you and your imaginary friend?

Again, just for clarification, what portion of your business is derived from selling folks MBS? Oh sorry, that's mortgage backed securities.

Also (more on this later) there really aren't that many two-income "power couples" out there.

Think of all your friends from work. Are they all married to people with an equal or greater income? Most of my friends aren't; their spouses have ordinary jobs, there is only one professional even though both the husband and the wife work.

Moreover, a good many two-income couples become one-income couples when the kids arrive. My wife is a lawyer too, for instance, but she does not work.

Second, not everyone manages to keep earning a high income. One of the spouses might decide to start their own business, or get a government job, and either one of these things generally involves a significant pay cut, at least initially.

Yes, the two-income couples are a force in the market. But I think the impact these people have on prices is easily overstated.

On the subject of erosion/destruction of the middle class --especially in California-- I think it's important to make a distinction between the current credit bubble and longer term demographic shifts, regardless of where your convictions lie:

1. Historically recent (and temporary?) massively pro-credit/debt expansion policies on a national level:
--(since 2001) Fed's extreme easy-money / negative real rates policy.
--(since late 90s) Historically unprecedented levels of GSE and private mortgage risk-underwriting (MBSs/CDOs).
--(since 1997) Tax incentives that reward RE speculation ($half-million 2-year 2nd home capital gains exemption, 1031 exchange liberalisation, etc.).

2. Longer-term demographic/political/economic shifts that have been occurring in CA and border states over the past 2 generations or so:
--Massive influx of uneducated, low-skill, quasi-slave labor immigration mainly from S. & Central America with high birth rate.
--Net out-migration of working and middle-class Americans (being replaced by new poverty class immigrants).
--NIMBYist anti-development politics and mentality, resulting in artificially constrained supply in CA, UBLs, "greenbelts", longer commutes, etc.

Both sets of trends correlate highly with higher housing prices and lower affordability, but the latter are longer-term (and possibly permanent) demographic shifts, while the former may not be.

Just take 2 married immigrant engineers. $250k combined income easily.

Ahhh Robert Campbell and the power of myth. The vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast vast majority of engineering do not, I repeat do not make this kind of coin. Sorry but it is the truth. Just like looking at your car and deciding that because you drive a BMW everyone does. Besides when you roll down the prominade there are plenty of BMW's thus proving your point that most people drive BMWs. The salary surveys simply do not support the propoganda of high engineer salarys. Companies simply cannot afford to pay the average engineer 150K.

Pretty intense thread.

I was in self-doubt till the beginning of this year. I thought there was bubble, but I was about to give up. There was enough theory on this and other boards about why the house prices should correct. But there was no evidence in real life that I could find. Zilch. Nada.

Now I see evidence of the beginning of the crash all around me. I see the change of psychology. I see change of tone in RE agents speak. Not only I see high inventory, I see price reductions, and house not selling even AFTER the price reductions.

This is exactly playing according to the script. What else do people expect ?

vast vast [lots of snipping] vast vast

oooh, pretty word patterns!

I am sick of hearing guests on CNBC claim that we're in a buyer's market. It makes me want to spit.

They've just spent two years jacking up prices. If that's not a seller's market, I don't know what is.

I'll know a buyer's market when I see one.

This is exactly playing according to the script. What else do people expect ?

It is happening. I just do not want everyone to be too excited over the coming correction. It will come. We should be smiling. But we will save the laugh for later.

Just for clarification, when people on this blog speak of engineers and their high salarys they mean:

1) Mechanical Engineers
2) Civil Engineers
3) Chemical Engineers
4) Electrical Engineers
5) Materials Engineers
7) Petro Engineers
8) Aerospace Engineering
9) Biomedical & General Engineering
10) Environmental Engineering
11) Computer Science & Software Engineering
12) Industrial & Manufacturing Engineering

Give up? Ok the answer is 11) Computer Science & Software Engineering, if working the current "hot" area and are willing to work 60+hrs/wk, and 4) Electrical Engineers if working the current "hot" area and are willing to work 60+hrs/wk

Red Whine Says:

The choice is obvious. Spend and enjoy. When you buy a memory by going to a show, taking a weekend trip, etc., you have “banked” something that cannot be deflated into non-existence. It was — and hence cannot be un-done.

True, but what if the government invents a memory-wiping device? They could then sell us a device for recording/restoring our memories (to protect us from the government's own memory-wiping device), which of course would be enormously expensive --requiring a negatively amortizing adjustable-rate 50-year loan. Of course, finance capital would be no problem --China, Japan, Korea, et al will gladly loan us the money by purchasing MBS (Memory Backup Securities). :twisted: :lol:

At least Intel is honest, "how many hours do you expect", reply "plan on 50, sometimes it's less and sometimes more".

This at least I can respect. Other sweatshops forget it. Not working 60+ then you'll get the crappy projects and your work will get taken away and given to those willing to "pull their weight". Whoops, what's that? A revolving layoff, not to worry, they only get the "dead wood". Nice. Enjoy our cool aid are we? Wake up fools, your lifestyle sucks, do you even know what lifestyle means? No fool it isn't driving your leased 5 series to your cube farm and participating in weekly blame sessions.

But we will save the laugh for later

Yes: at least one satisfying cackle reserved for that once steely-eyed flipper, who's now chasing a cigarette blown down the street. :twisted:

They’ve just spent two years jacking up prices. If that’s not a seller’s market, I don’t know what is.

I’ll know a buyer’s market when I see one.

Buyer’s Market: When used by a Realt-Whore®, this means a housing market with exploding inventory, plunging sales and sellers that refuse to negotiate on price.

Red Whine, kindly recommend a nice red in the 2-300 price range, aged, with a long tail and subtle tannins.

You like clarets.com?

>>Buyer’s Market: When used by a Realt-Whore®, this means a housing market with exploding inventory, plunging sales and sellers that refuse to negotiate on price.

Well, I'll agree that all those conditions are met, and that the sellers may indeed be miserable because they've taken a second mortgage and spent it on the good life.

But just because the seller is miserable doesn't mean a buyer would be happy.

While it is big fun thinking of the boomer hoard when the lights get flicked on and they realize that the 24 yo trophy wife has turned into a 50yo hag, the simple fact of the matter is they are likely to be too coke'd up to even care.

Peter P Says

It is happening. I just do not want everyone to be too excited over the coming correction. It will come. We should be smiling. But we will save the laugh for later.

Can't argue with that !