patrick.net

Actually, we (certainly I) have talked about this topic.

Housing is being pummeled at an amazing rate. In fact, at a never seen before rate. For the Bay Area we can see the guessed-at 50% price decline after a total of 3-4 years. Wow. And yes, at that point housing will be held down becasue interest rates will be high. We have no Volcker in site, and I wonder if Obama or McCain have it in them to chase rates into the double digits. Perhaps they will be forced to? Certainly the massive entitlement spending is now indexed to inflation. Inflation goes way up and we have to run the printing press to pay everyone social security, medicaid, unemployment, etc.

In theory, homes can change hands on equity, but at least 30% of the market will not be able to do that.

Of course, a ton of people see this. It is why so many homes are selling now. Get out from under your massively depreciating asset, put your cash to work, then jump back into housing later.

Best case scenario is America comes up with something to sell to everyone. Cure for Cancer would be nice. Cheap power would be great. Cheap desalinization. Food at better-than-competitors rate.

I disagree with one of the articles that state that the middle clas will be under-represented after its loss of wealth and the current 'pay-for-representation' politcal model. The fact is, the rich are a massive minority and deep recessions/depressions ALWAYS come with boosting the tax rates on this segment. You can count on this.

Long term housing prognosis remains unchanged. Most markets settle to equilibirum in 2010-2011 (35% nationally, up to 50% here in Bay Area). Slight declines to flat prices persist for a very long time after that - say a decade. During that period it is very hard to buy a house as interest rates are so high most transaction will occur with massive down-payments. Boomers elect to keep their jobs and stay in their homes given their 'loss of wealth'.

A rise in interest rate may actually cause housing prices to go up temporarily as people try to get in before it is too late. Asset pricing has more to do with psychology than affordability.

Peter P.

Like Buffet says: Markets in the short term are voting mechanisms, in the long run, they are weighing mechanisms.

In the short run, interest rates can have a timely effect on local prices. In the long run, it's all about affordability. You can only cheat it for so long before income must pay for expenses.

Chuck Ponzi

One of the inflation hawks at the Fed has resigned. www.nytimes.com/2008/05/29/business/29fed.html?_r=1&scp=1&sq=mishkin&st=nyt&oref=slogin

Larry Kudlow (yeah, yeah, I know) over at NRO has this observation.

Federal Reserve governor Frederic Mishkin announced plans on Wednesday to step down from his post after only two years in office. Of course, nobody knows exactly why. After all, these guys never talk — at least not until later. (See Scott McClellan.)

The difference between the 1980s and today is the Adjustable Rate Mortgages. From what I've seen from the Federal Reserve so far this year, propping up housing prices and preventing foreclosures seems like priority #1 for them. In that case, when will they ever be able to raise rates? ARMs are being foreclosed on en masse even with today's low rates.

Hyper-inflation seems like a real possibility in America for the first time since the Continental Congress.

affordability improving due to price reductions

http://www.realestateconsulting.com/Intelligence.aspx?quicklaunch=true&region=local

Hyper inflation is absolutely NOT possible.

Painful and annoying inflation is possible, and it is already happening.

Sadly, as the World's breabasket, inflation here equels food riots there.

The notion that people are liabilities will become very obvious in the coming years.

I am going to reiterate it again, housing is NOT in free fall. Not in the areas that I am looking at. Whether Oakland or Richmond is in free fall has nothing to do with Los Altos or even San Mateo. Even the more decent parts of Redwood City is NOT in free fall. Nothing west of 85 is in free fall, to my dismay, they hold up very well.

I saw this headline which says CA has gone down by 32% from the peak. Fine, maybe for certain parts of CA. But, if the parts that I am looking at are not falling (in fact they are still inching up very slightly right now), how the rest of CA sinks is really irrelevant.

I am again amazed by how people can scrape up so much dp right now, since the banks are obviously not willing to lend. And please don't blame it on the Chindians alone, if you read the SJMN Sunday paper there are quite a few white buyers in these posh neighborhoods holding up the transaction price.

OO,

There are too many educated families in Bay area with 250K household income. For example my household income is around this. We are renters and priced out of market...

Inflation is really very mild here, we have lots of room to go.

Yeah, once in a while you get slightly annoyed by $20 here, $50 there, but nothing is really annoying enough to break your back.

If you see me complaining here about inflation, then it will be painful enough. Our monthly expenditure went up probably $400 a month since last year, but if I am serious about cutting back, I can easily find a few places to get my $400 back. Until inflation is impacting American monthly budget by $1,000 or more, I'd call it quite contained.

Food has a long way to go to make it a pain in the butt for most Americans.

PermaRenter,

well, the thing is, you are making around $250K and you are priced OUT of the market. So who are people who are priced IN the market right now? And are they even slightly worried about their job prospects? What about their ARM prospects, especially if their ARM is benchmarked against LIBOR, not the Fed rate?

And are they even slightly worried about their job prospects? What about their ARM prospects, especially if their ARM is benchmarked against LIBOR, not the Fed rate?

Sometimes, I wonder if we are worrying too much.

All those countries with a semi-pegged currencies to the USD are huring badly by inflation.

Did anyone notice over the Memorial weekend that the US government gave its blessing to OPEC currency unpegging?

My favorite place for gauging the inflation is at Trader Joe's. In the last few years, TJ's price barely moved, even for European imports. For those items that got adjusted upwards, the percentage was mostly around 10-33% over several years. The biggest jump that I saw was on multi-grain pasta, from $0.99 to $1.69. But let's face it, how will 70c break your monthly food budget?

We are very fortunate to have such a tame inflation compared to those countries on the recipient end of OUR inflation. Their food jumps 100-200% within a matter months or weeks.

Treasuries at the Fed are now below $500 billion and TAF remains maxed out (which we already knew from released auction data). Doesn't look like TAF will be shutdown anytime soon as the June auctions have been announced (staying level at $150 billion -- $75 billion every two weeks). Discount window again inched up this week. Non depositories seem to be doing better as the TSLF (as well as the primary dealer credit facility) continued shrinking and should be below $100 billion by next week. As DataQuick likes to say: Indicators of market distress continue to move in different directions.

EBGuy,

did you read a recent article at BW about Fed trying to pay banks interest?

To me, this sounds like very "targeted" printing. Fed pays to banks ONLY to help maintain liquidity (at some point Fed may even "PREPAY FUTURE" interest to member banks), with money that the Fed pulls out of its ass. Ben is trying to come out more specific, "0 leakage" ways to save the banks and fuck the rest of us.

I think the correlation between US interest rates and commodities prices has fallen dramatically since the 1980s. A Vlocker style policy might only affect US internal goods like grain, and not imports like oil and metals.

I've been reading that profits for certain companies has gone up. Corn, oil etc. Maybe they are just using inflation as a scapegoat to raise prices further. Inflation three quartes of the price increase and extra profit one quarter, of the total price increase...

PermaRenter,

28% of 250k is 70k per year available for mortgage interest payments: far more than you need to carry a $1M fixed-rate IO mortgage at today's low rates. What do you mean you can't afford a house? You're qualified to purchase at $1.25M (incl. 20% down) even under the most conservative lending standards.

Pleading poverty with and income of $250k -- that's just B.S. You're not buying now because you think you'll get a better deal in a few years time. Or you're saving up for a down payment, which shouldn't take very long with that kind of income so long as you don't blow it on SUVs, plastic surgery, children, or other expensive indulgences.

On the other hand, those of us expecting heavy inflation are happy renting ~$1M of someone else's depreciating dollars while we live in a house we (sort of) "own" with no landlord or nearby renters to deal with. So what if real home values are down 40%? By the time we sell, the real value of $1M will be down at least a far...perhaps much further.

@dw. You are right, but you could do a better job of timing it. Real and nominal home prices are falling now. If the fed raises rates, nominal prices will continue to fall. If you have the means, it would then be a good time to buy in cash. A better way to play your game is to convert your down payment to swiss francs and just wait out the inflation until the fed starts raising rates. After several months of high rates breaks the back of most prospective homedebtors, you jump in with your cash offer.

Patrick,

Thank you. Your article links today were excellent (5/30/08)!

I cannot remember the last time I read something that was as well written as Richard Fischer's speech on our entitlement problem.

The Economist is great as is the Saint Luis Fed research.

Andrew Liveris at DOW is well spoken and quite correct.

Mish has found a precedent (where is Dennis?) showing Judges don't believe banks didn't know they were being "lied to."

Everyone keeps thinking we will see economic recovery in the secnd half this year. Um, no. Ballooning deificits, rising inflation, and the world's lack of desire to fund American debt will spike interst rates to comsumers as well as to the Fed government. Don Perata was interviewed yestrday where he announced a 18-22 billion dollar problem shortfall in the CA budget. He stated we run out of cash in august. In short, the ENTIRE state of CA goes the way of Vallejo if we don't sort out our spend/tax problems.

Things look as prickley now as any time in my life. We need more Fischer's to step foward and plot a course.

Some Case-Shiller math for SFO:

Index is now at 168.38. This is down 3.53% MOM for a March after a 5.04% decrease in Feb. The YOY is down 20.23%. The peak to now is down 22.89. My model of roughly 1% decrease per month for the year isn't working well if we keep seeing months like this.

I am keeping my nominal 4.5% annual increase in home prices as this is still the typical wage inlfation. I will only change that once real inlfation forces wage inflation.

Bumping my model to 1.25% per month (15% decline per year) brings us to equilibrium in Dec. of '09 which means with winter pricing and overshoot, early 2010 is now a liekly target.

However, macro effects loom large. If CA tries to balance its budget by increasing the corporate tax (causing business flight) or increasing the 9.3% bracket to a higher rate, housing will fall faster and deeper as budgets are strained bytax burden. This is certainly true at the Federal level.

The math certainly looks spooky - but there are lots of ways the data fibs.

Pleading poverty with and income of $250k — that’s just B.S.

Anyone who is wage-dependent (250K or 2.5M) is poor. Accept that.

Totally O.T.

I just bought a new car with a check from my HELOC. With the way the dollar is devaluating, I would think imports would be more expensive in the near future. The HELOC rate is around 5% (lower after tax), my loan amount is pretty small, so if the rate jumps I can probably just pay it off. The past few years bonuses have been good, and we've been putting almost all of it towards the mortgage (not very smart), so finally I say f*ck it, if you can fight them, join them.

Which car?

BTW, what do you guys think about the up-coming Hyundai Genesis? It looks like a big and safe car.

So what if real home values are down 40%? By the time we sell, the real value of $1M will be down at least a far…perhaps much further.

I presume you believe that despite a fall of 40% in house prices, wages will inflate and your salary will increase more than enough to cover the nominal loss?

If wages do not increase, it does not matter that prices for oil based/imported/transported goods inflate and "cheapen" that million bucks. Owning a big mortgage on a declining priced house along with stagnant wages is a recipe for trouble if you need to sell before the morgage is paid off.

dw,

Whether $250K p.a. income is sufficient or not depends upon the source of that $250K. If it is interest income from a giant pile of Treasuries at 1-3% and there are no other liabilities, then I would agree that it is unnecessary hand-wringing to fret over a $1.25M house. On the other hand, any employee paid that much would be foolish to count upon that income stream lasting for three decades. Job volatility is much higher these days, and the higher the wage, the fiercer the competition for those positions that yield such wages. There are some mitigating factors, however. If you are good at sales, or own a business, or have some unique niche or competitive advantage (a "moat" in Buffett-speak), or all of the above, for example. Those types of factors give you some discretionary leverage and control over your income.

The prevailing income conditions today make a 30-year financial commitment involving a 28% DTI problematic for a plurality of wage earners. A low savings rate makes it even more difficult for the statistical norm wage earner to weather temporary income disruptions. Even 12-18 month foreclosure processing timelines are not sufficient to stem the ever-rising tide of foreclosures. Which seems to indicate to me that the entire REIC has been engaged in what amounts to a giant vendor financing scheme where the vendor is fully aware of a very high default rate, but is willing to absorb that for the short-term cash flow. Where "short-term" in this case is about 3-5 years. And the "vendor" gets a bail-out from the taxpayers.

Mish has found a precedent (where is Dennis?) showing Judges don’t believe banks didn’t know they were being “lied to.”

I highly recommend the post at CR, which is where Mish picked up the story. Basically the judge threw the book at a "state income" HELOC lender who was trying to go after a couple filing Chapter 7 bankruptcy. The house had already been foreclosed (by the holder of the first) and the the judge basically told the lender "you'll get nothing and like it". Here's one of the key statements from the decision: In fact, the minimal verification required by an “income stated” loan, as established by the Guidelines, suggests that this type of loan is essentially an “asset based” loan. In other words, the Court surmises that the Bank made the loan principally in reliance on the value of the collateral: i.e., the House.

cb,

I am reading that people are still able to take out car loans at 5.5%, 48 months.

I am going off buying a new imported car too, paying back worthless USD at 5.5% over 48 months? I am in.

The Cadillac CTS looks pretty good:

http://www.iihs.org/ratings/ratingsbyseries.aspx?id=309

Perhaps GM is going better now.

OT...

The foie gras prohibition in Chicago has been repealed!!! Hopefully, California will follow suit.

http://consumerfreedom.com/pressRelease_detail.cfm/release/236

Rejoice!

Bumping my model to 1.25% per month (15% decline per year) brings us to equilibrium in Dec. of ‘09 which means with winter pricing and overshoot, early 2010 is now a liekly target.

SF Bay Area Case/Shiller Home Price Index Feb 09 futures are now trading at 131.20. This is March/April of 2002 pricing. Yikes!

However, on the credit card end, there is sign of tightening.

I have been applying for 0% APR cards since a year and half ago to delay paying off until the period expires.

The 0%APR promotions are about to expire on my current cards, so I have been applying for new cards for new purchases (balance transfer costs 3% making it a far inferior deal than new purchase). So far, I have acquired 2 new 0%APR cards with promotions well into 2009. However, the credit limits on both cards are significantly reduced.

I've always been able to get $15-20K credit on my old cards, and I don't keep more than 3 credit cards at the same time. The new cards only gave me $7-9K. There were no changes in my stated income and home ownership on the application. Well, unless the banks figure out they won't be able to make a dime on me...

Did any of you watch C-SPAN Wednesday? Mark Zandi made a presentation about housing / foreclosures to the Governors Association. He wants the government to do everything in its power to keep housing prices high - which, as a future homebuyer, I find infuriating. He applauds Fannie Mae and FHA attempt to fill the void left by the disappearance of sub-prime, Alt-A, and no down payment mortgages.

Afterwards, Pennsylvania Governor Ed Rendel had a new bad idea, one I'd never heard before. He wants legislation which would protect the credit scores of those who default on their mortgages.

So if I understand the Democratic plan correctly, the folks who lied about their income and made no downpayment, in the process bidding up housing prices to unaffordable levels, and subsequently didn't even make their monthly payments, will now have 2 options: they can stay in their house with a cram down to current market value minus 15%, or they can walk away without even getting a minor slap on the wrist such as a lower credit score.

On the other hand, responsible folks who make their payments on time will not get a cram-down, but they will get a lower credit score if they don't pay their $50 credit card bill on time.

oo,

I've also seen a sometimes infuriating resilience in the prime Fortress housing market. We're now following things very closely, as in looking to make potential lowball offers. However, we are still seeing significant multiple bid and overbid situations here. I'm talking about Menlo Park and Palo Alto. It seems like there is an endless supply of people willing to plunk down their hard earned cash for places that are still way overpriced.

I've come to the conclusion, which I know others have made before, that prices in the Fortress are not coming down until there are major job losses in the tech industry. Those job losses will be inevitable (normal business cycle, etc.), but even with the overall recession picking up steam, I don't see a real effect here for another 1-2 years.

Another one bites the dust!

http://www.fdic.gov/bank/individual/failed/first_integrity_bank.html

First integrity? LOL

Problem is, housing is in free fall. I suspect what
the Fed is trying to do is create a floor under
housing through inflation, then raise interest rates
to tamp it down.

I think Bill A hit the nail on the head, as a simple description of what's happening.

I haven't posted to the blog in a long time but it's eery how everything is falling into place.

Peter P is right that psychology is a huge factor, but I think it waxes and wanes in severity. I think more and more of today's buyers are looking longer term. The more funny money out there, the more irrational people are. Although, reading a few of the recent news items about "condo vultures" and people who are "bottom timing" and getting burned shows that the element of psychology is *always* at play regardless of market conditions.

skibum wrote:

oo,

I’ve come to the conclusion, which I know others have made before, that prices in the Fortress are not coming down until there are major job losses in the tech industry. Those job losses will be inevitable (normal business cycle, etc.), but even with the overall recession picking up steam, I don’t see a real effect here for another 1-2 years.

I agree, Skibum. I work with guys who are consultants and still clearing $100/hr after expenses. They live in SF and silicon valley. Until the money dries up that's feeding them, those locations just aren't going to see a drop, inflation and whatever else be damned.

When I was shopping for my first home interest rates where 13%!!!!! 1980s something?

When they dropped to 8 1/2% everyone went bananas, including me! the wife and I took the plunge. Being a first time home buyer FHA gave us a break and ONLY required 10% down. The money had to come from our savings account, no gifts, no loans.

They crawled up our keisters with a mag light.
$30 disputed debt had to be paid first. Man, them where the days.

Jobs were really easy to find then and pay was as good (or better after inflation) as now for many blue collar workers. Today jobs either pay crap or just aren't there for the guy w/o a degree. Jobs, gas prices, inflation are gonna keep driving the stake into housing's heart. By the time they start raising rates housing will be flat-lined already.

I need a better job, go sign this petition:

www.AmericansForJobsAndEnergy.org