patrick.net

Housing never built wealth. Housing captures rents. The inventors of Monopoly captured this quite well.

Either you instinctively understand the following chart, or you are not equipped to understand what is happening.

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

The shape of the graph is disconcerting, but I don't fully understand it.

It seems to me you need to compare this to graphs of houshold net worth to understand whats happening.

MY parents bought a house in 1950 for 21,000. IT was sold in 2005 for 850,000, and in an area where it has held value (actually with improvements it is estimated to be "worth" over 1 million now).

Observations:
There is an inflation component.

The increased slope (so to speak) that occurs in the early 80s might be attributable to the change toward two main wage earners per household.

But the next change increase in "slope", the one that occurs in the late nineties might be attributable to pre-millennial exuberance. It should not have continued, for 8 or so years.

The increasing rate of increase from 2002 - 2006(?) is just bizzarre, I guess that's the worst part of our housing boom.

This graph might be just as good at telling us when things are back to equilibrium. That is, housing "values" getting back to the green line, might correspond with houshold debt in the other graph getting back to a line that fits the 1983 to 1996 period.

Unless housing meets the green line by the green line going up drastically. In that case the other graph is somewhat independent and doesn't come back to the 83-96 line.

yes, it's the hyperbolic nature of the curve that is the problem : ) The national income was much more linear . . .

As for the 1983+ part, there's a couple of things there: rates were dropped from 17.5% to 10% from 1981 to 1986, and in 1983 the baby boom was aged 23 to 37, entering their peak borrowing years.

The late 90s inflection is more difficult to understand. 1999 was certainly bubbley in the SF area, but that shouldn't move the national statistics so.

The nation did move into full employment in the late 90s, which was evident in wage growth:

http://research.stlouisfed.org/fred2/series/AHETPI?cid=11

so I think it's arguable that wages fed the 1999 household debt increase, but debt increase fed the 2005-2008 wage increase.

ie the jump in national income 2002-2008:

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

was largely fed by the Greenspan free-money policy of 2002-2004, and then the housing bubble of 2004-2006, plus a bit of help from the national debt moving from $3.5T to $5T over this period thanks to the Bush tax cuts:

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

at any rate, the takeaway I get from the household debt graph is that it should be at $10-$12T, not $14T.

This correlates with the $4T bad debt number that has been bandied around

http://www.ritholtz.com/blog/2010/07/chart-of-day-4-trillion-hangover/

S&P 500 1993 to 2000.

The stock market doubled from 1995 to 1998. Tripled if you take it to 2000, Turned out we don't have flying cars or live like the jetsons here on the other side of that magic number.

This is what I call pre-millennial exuberance. It certainly effected household borrowing and spending habits. Not to deny wage growth, but this was huge.

Troy says

This correlates with the $4T bad debt number that has been bandied around

IF inflation had continued and housing had gone up a bit more (not that that would have been good) rather than dropping precipitously, then that bad debt number would be much lower. That's why I say that I don't think that graph tells the whole story. But I agree.

I know, inflation could not have occurred enough to justify the housing increases.

Inflation needed to have occurred, and even up to 2007 it would have been natural to expect higher living costs to push up wages in a repeat of the 1970s, but people (including me) forgot that the 2000s were not the 1970s.

The 1970s featured China being a Maoist (literally, LOL) chaotically closed kingdom with Red Guards and the PLA engaged in running battles, Mexico a backwater not a full NAFTA partner, unions before being gutted by 12 years of Reagan-Bush (and another 8 by the center-right Clinton Administration), a trade surplus not horrendous deficit, and the top 5% owning a lot less of the pie than they do now. Oh yeah, and no internet to remove much friction WRT offshoring and outsourcing labor to cheap English-speaking countries like India and the Philippines.

AFAIK, the wage-price spiral of the 1970s was not debt-driven Zimbabwe inflation. Certainly government debt was held close to level in real terms. I guess the 70s were a very mild Weimar event (the Nixon shock + union wage negotiating power).

Thank you for bringing this inflation angle up. This was totally part of my thinking in the 2005-2006 period, that wages were going to eventually inflate to match the new housing reality, mitigating any Japan-style crash.

Where I went wrong was not understanding the temporary boost employment was getting via $40B/month of cash-out HELOC/refi activity, and the scale of the outright mortgage industry fraud as exhibited by the Serin crime spree of 2005-2006.

It was a real Potemkin economy, 2004-2006. Trillions of REIC fraud, just about as bad as Japan got in the 80s.

marcus says

When healthcare, college tuition, energy and or food go up independent of wages, that in no realistic way supports housing going up

healthcare inflation benefits healthcare providers, tuition . . . educators, energy . . . oilmen, food . . . farmers.

it's supposed to be one happy circlejerk with enough spread of the "inflation expecations".

But this requires a labor force with bargaining power over wages, something not enjoyed currently, partially because we've integrated our economy with cheap labor regimes and not fully worked through the repercussions of this.

The green line probably represents government statistics of inflation, which as we all know tend to underestimate true decrease in purchasing power of the dollar. So I think it is reasonable to assume that housing prices did not rise as much faster than inflation as this graph represents.

So while inflation was a huge factor in the increase of housing prices over the past 35 years, credit was the other. In fact many economists assert that credit is inflationary. Some of that credit is used to purchase goods like houses, which others use to purchase oil, food. All three of these things have risen faster than wages in the past 30 years or so.

AdHominem says

So while inflation was a huge factor in the increase of housing prices over the past 35 years, credit was the other.

I wasn't really thinking about credit being a cause (or not). What I was considering is that if asset prices and household net worth (and presumably incomes) went up as much as household credit did, then it wouldn't be a problem.

Unfortunately, when the bubble burst (stock market too somewhat), and net worths went down, debt did not, except by the amount of defaults and repayment. Which brings us to our current situation. We are significantly poorer than we were.

Troy says

so I think it’s arguable that wages fed the 1999 household debt increase

130B+ fed from investors (rich people) into the Technology section fed wages and jobs on SF BA and Boston Region. See PWCmoneytree.com for details.

Troy says

Oh yeah, and no internet to remove much friction WRT offshoring and outsourcing labor to cheap English-speaking countries like India and the Philippines

No internet is righ, But from 1988 to 1993 we scrapped our SV mfg and moved hundred-thousand Semi, Diskdrive, and other tech jobs to Philippines, Singapore, Thailand, and other "Asian Tiger" nations. Latter sold to China and Taiwan companies. Today its Engineering to India and China. Those same former Philipine semi plants are now making Solar panels.

marcus says

We are significantly poorer than we were.

Actually "we" never were as wealthy as we were told/believed. The bubble was real but it was full of air. Empty of any true or lasting value. Couple that with stagnant or decreasing household incomes as we have now. If we don't see deflation in housing prices we'll see a lot of vacant houses in many parts of the country. Maybe wealthy retirees can afford property in bubble areas and will prop it up for awhile. But eventually even they will have to sell to the next generation. A generation with more debt than any previous generation.

AdHominem says

Actually “we” never were as wealthy as we were told/believed

Maybe true, but net equity in homes and retirement accounts is down quite a bit from 2006 or so. I think previously I used the term household net worth, where a total value of household assets (homes, retirement accts, all other assets) might have made more sense. Then from that, subtract credit, which hasn't dropped by all that much.

So, when I say we never were as wealthy as we were told/believed, is it hard to understand that what I mean is that the "value of household assets" quoted in 2006 WAS NOT REAL/REASONABLE?

Those values where a ghost, a mirage, a hologram, whatever you want to call it, but not real values reflecting accurate and honest stores of value.

True, I agree. Of course even a market realistically valued/priced can not withstand too many people exiting at once (that is overly negative perception or psychology) which is one of the ways a market can become undervalued.

I don't think and probably most people here don't think we are there. Not that we will be necessarily.

Zlxr says

Also, credit used to be hard to get. Most of you probably won’t remember, but we used to have Lay-away where you put down a payment on something and the store put it in the back room and let you make payments. When you paid in full you got to take it home.

I'm 50 years old so I do remember the Lay-a-way program that I used a few months before Christmas when I was a teenager. You will probably remember when folks could write off credit card interest and car loan interest as well. I remember folks were buying lots of stuff with credit cards because they "needed the tax deduction" LOL. That financial strategy didn't make sense then and wouldn't now........ If I recall correctly, it was President Reagan that removed this deduction when he signed that into law with the tax reform laws of 1986 and the low end of the tax bracket was I think 15% and the top end was 28%. If these consumers were in a 15% tax bracket that means that they were spending $1.00 to save .15 cents. Even today there a lots of people that think it's better to spend a buck to save .28 cents to keep from sending the IRS a couple bucks. I wish the schools would teach basic finance and kill this notion that it's better to spend 1.00 to save .28 cents.........I think it's bankers that are keeping the myth alive telling people to keep paying interest or purchasing items that could be used for work (but really aren't, they just want the deduction) so as to have a "tax write off."

rob918 says

You will probably remember when folks could write off credit card interest and car loan interest as well.

I'm pretty sure that was only related to business expenses.

^ no it was all consumer credit.

marcus says

rob918 says

You will probably remember when folks could write off credit card interest and car loan interest as well.

I’m pretty sure that was only related to business expenses.

Seriously, it was all interest - cars, credit cards, etc...

chrles says

Debt Line

Spam much?

I dunno who the experts are, but this just doesn't seem right.

Most people are horrible at saving money, investing, or running a business.

Owning a house, even if it's a shitty investment, is a better way for them to preserve wealth than just about anything else that they might do.

Yeah, if you actually know what you're doing, housing is a bad way to build wealth, but most people don't know what they're doing.

My dad is now of retirement age. Every one of his friends who owns their home is much better off than those who don't. None of them have any other wealth of note -- the occasional union pension, some social security income, and maybe a tiny 401k if they're on the younger side is all these people have. Those who don't have a housing payment to worry about are doing well; they travel, eat well, and generally enjoy life. The rest are all just barely scraping by.

marcus says

S&P 500 1993 to 2000.
The stock market doubled from 1995 to 1998. Tripled if you take it to 2000, Turned out we don’t have flying cars or live like the jetsons here on the other side of that magic number.
This is what I call pre-millennial exuberance. It certainly effected household borrowing and spending habits. Not to deny wage growth, but this was huge.

Spending on an entire industry - computers - Computers were like a bumper crop when 2k rolled around.

Kevin says

I dunno who the experts are, but this just doesn’t seem right.
Most people are horrible at saving money, investing, or running a business.
Owning a house, even if it’s a shitty investment, is a better way for them to preserve wealth than just about anything else that they might do.
Yeah, if you actually know what you’re doing, housing is a bad way to build wealth, but most people don’t know what they’re doing.
My dad is now of retirement age. Every one of his friends who owns their home is much better off than those who don’t. None of them have any other wealth of note — the occasional union pension, some social security income, and maybe a tiny 401k if they’re on the younger side is all these people have. Those who don’t have a housing payment to worry about are doing well; they travel, eat well, and generally enjoy life. The rest are all just barely scraping by.

Kevin, you make some good points here but I know people who are retired and rent and eat well and generally enjoy life.

marcus says

How did you generate this graph?

marko says

Kevin says

I dunno who the experts are, but this just doesn’t seem right.

Most people are horrible at saving money, investing, or running a business.

Owning a house, even if it’s a shitty investment, is a better way for them to preserve wealth than just about anything else that they might do.

Yeah, if you actually know what you’re doing, housing is a bad way to build wealth, but most people don’t know what they’re doing.

My dad is now of retirement age. Every one of his friends who owns their home is much better off than those who don’t. None of them have any other wealth of note — the occasional union pension, some social security income, and maybe a tiny 401k if they’re on the younger side is all these people have. Those who don’t have a housing payment to worry about are doing well; they travel, eat well, and generally enjoy life. The rest are all just barely scraping by.

Kevin, you make some good points here but I know people who are retired and rent and eat well and generally enjoy life.

There are some, certainly. Most people will retire flat ass broke though, and those who bought a house at least have that.

xlr8 says

How did you generate this graph?

Go to this site, but note some of these are updated, some are not.

http://www.housingbubblebust.com/

If you choose one of the "major metros" under FHFA appreciation tracker, most or all of those are updated.

E.g. when you choose Los Angeles, you get all of socal, with this

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

So, I did not generate it, I copy and pasted it ( actually saved the image as some sort of image file on my computer and then uploaded it to post).

It is good to give credit where credit is due. I'm assuming that site got it here:

http://www.fhfa.gov/Default.aspx?Page=87