Another Post-Bubble Shakeout
Five and a half years ago the equity bubble popped. Within six months, the US economy went into mild recession, and the global economy was quick to follow.
Today, America’s housing bubble is finally bursting. Is the die cast for another bubble-induced downturn in the US and global economy?
All asset bubbles are alike. Sure, there are obvious differences between equities -- a financial asset -- and homes -- a tangible asset. But to me, the Shiller definition says it all: A bubble is an outgrowth of powerful amplification mechanisms -- both real and psychological -- which create an unsustainable condition whereby “… price increases beget further price increases”.
The rise and fall of the US housing market fits the Shiller script to a tee. House price appreciation surged to a 27-year high in 2005, and as of the first quarter of 2006, prices were still rising by 20% or higher in 53 metropolitan areas across the United States. Both pricing and demand were feeding on each other through classic Shiller-like amplification mechanisms.
As always, the upside of a speculative bubble lasts for longer than you think. But when it finally goes, it invariably unwinds with greater force than widely expected.
That seems to be the way the chips are now falling in the US housing market. Demand for homes is falling like a stone and inventories of unsold dwellings are ballooning -- up 40% for existing homes and 22% for new homes in the 12 months ending July. These are the classic quantity adjustments that set the stage for price destruction -- the endgame of any asset bubble.
So far, home values just seem to be leveling off at still lofty price points. As the bid-offer gap widens in an excess inventory and rising interest rate climate, price declines will come as they always do. This bubble is not different.
In short, for a wealth-dependent US economy, the bursting of another major asset bubble is likely to be a very big deal. And now the US, as well as a US-centric world economy, must come to grips with what its central bank has wrought -- yet another post-bubble shakeout.
October 03, 2006
And now, a note on the housing bubble collapse from a REAL economist (sorry, Mr. Lereah), Stephen Roach, Chief Economist of Morgan Stanley
Subscribe to:
Post Comments (Atom)
14 comments:
That must be an old artcle, yesterday he was saying buy buy buy buy.
yeah, right
Solid piece!
There is your new word for the day Keith, Post Bubble Shakout.
Love it.
Better that capitulate. (;
Roachie has shown some serious schizophrenia lately, alternatively predicting a major worldwide economic crash for the last three years, then suddenly several months ago reversing his position and stating that things can continue on as they have been.
Now, he's back to his pessimistic outlook.
However, Roachie may again be undersetimating the response by the Fed and feds to the housing bust. He doesn't mention such actions that might be taken such as:
1. The monetization/nationalization of Fannie/Freddie (either admitted to or not)
2. Same for Countrywide Financial (who was added to the "Old Boyz Club" of securities dealers, which I assure was no coincidence), which the Fed can quietly buy all the MBS that CFC issues.
3. The creation of RTC II the sequel to take the excess millions of houses and deal them off in an orderly manner.
4. Prop up the banks (who sit on $3 trillion in real estate loans AND $1 trillion in Fannie/Freddie MBS!), via MORE monetization. (Which for the uninitiated out there, "monetization" is a fancy term for "create infinite fiat electronic credits to buy anything the Fed wants to buy"!)
5. Declare a 1930's-style "Debt moratorium for homedebtors.
6. Pass a law that requires all the ARMs to be converted to fixed-rate mortgages--all backed by a newly-issued government bond to back the new mortgages.
7. Crash-lower interest rates to ZERO.
8. Offer outright tax credits to suckers who sign off on new home debt.
Indeed, Roachie, don't get tripped up in your prognostications by linearly thinking that now real estate will just be allowed to collapse with no interference by the 800lb. gorilla.
They will do what the BOJ did and lower interest rates to zero but it is not going to help. GMAC and FMC will do a 6 year loan at zero % for any moron who can fog a mirror and has a paycheck but it still isn't helping the sales of their products. Prices have come down and will continue to come down. When buyers no longer have an appetite for real estate at the prices being suggested, the sales will slow or stop. In the years to come you'll be able to buy a house on the cheap AND get some cheap financing to boot. If you do the math where the interest deduction is concerned, you'll see that you get to stiff Uncle Sam the most on your Schedule A when you have a cheap home price but a high interest rate on your mortgage. If you are going to spend $1000 per month on P/I for your housing, you are better off from a tax standpoint if you have $700 going to interest and $300 toward your principle than the other way around; all things being equal and assuming both situations pay off at the same term. You'll get refunded more of the money you had withheld from your pay for Federal Taxes during the year if a lot of your monthly housing dollars went toward the interest on the note instead of the principle. Cheap price but standard interest rate better than outlandish price with ultra cheap financing in the big scheme of things. Look for reductions in the amount or percentage of interest and/or property tax that can be taken off your taxable income in the years to come as the government tries to rebalance its books.
just because something is tax deductible does not mean you should want pay more of it.
i never understood that mentality.
anon 3:37:20 wrote:
"just because something is tax deductible does not mean you should want pay more of it."
very intelligent comment. i too was wondering about it. it's like putting the cart before the horse mentality.
for example, some small business owners would buy a hummer simply because it's over 6000pounds which qualifies for tax deduction. instead of paying for a hummer, why can't they buy equipments or upgrade them in order to boost productivity? bad business!
Give me a dollar and I'll give you a 30 cent refund... 40 cents... 50 cents???
When is spending a dollar JUST to "save on taxes" a good idea?
The people on these forums spend a lot of time (and rightfully so) talking about fundamentals... ie: Supply & Demand...
yet the "save money on taxes" myth seems the hardest to shake.
my 2 cents
(that I saved by sending a dollar to WaMu ;-)
Here's an irony for you. If you get laid off, what happens to your tax deduction?
Butch:
Precisely! Bernanke has even said as much as "create infinite fiat electronic credits to buy anything the Fed wants to buy".
“Indeed, Roachie, don't get tripped up in your prognostications by linearly thinking that now real estate will just be allowed to collapse with no interference by the 800lb. gorilla.”
Exactly! After recognizing that things are out of whack, Roach, Gross, Prechter, have all predicted linear, logical results. Getting tripped up seems to be the only thing we can count on from them. Remember all the proclamations that P/E ratios would fall to historic norms – or below? Reversion to the mean is inevitable? Well, maybe someday, but these people forecast it imminently. They feel market forces will win out, prudent frugality will return and logic will prevail. Any day now…
A more useful tack would be to anticipate reactions from the Fed and government and decide where best to employ capital based on this. For instance, if the government reacts as you predict, what will be the market counter-action? What about the counter-action from foreign countries? The world economy?
Dow Reaches an all time high
Index Value: 11,739.26
Trade Time: 1:28PM ET
Change: Up 68.91 (0.59%)
Prev Close: 11,670.35
Open: 11,670.11
Day's Range: 11653.06 - 11755.35
52wk Range: 10,098.20 - 11,782.50
:They feel market forces will win out, prudent frugality will return and logic will prevail. Any day now…
The problem is that they're in the same camp as the Gold bugs where the idea of true valuation will hit everyone at the same time, kinda like the Rapture of the Souls for born again types. The problem is that seldom, in a highly manipulated market, are things as they appear. So we could get runaway stagflation or get a makeshift Goldilocks economy with periods of deflation vis-a-vis inflation. I think the latter is more likely.
Believe it or not, you get paid by the US govt. If you don't make enough money, you qualify for an unearned income credit. Crazy as it sounds, it's true. I doubt it is enough to cover your mortgage, but it's something.
++++++++++++++++++
On 2005 returns, the maximum credit can be as much as $4,400 for workers supporting two or more kids. A worker with one child can get up to $2,662 with the credit. And $399 is available to a childless eligible employee....A single filer's adjusted gross income must be less than $11,750 if he or she has no children, $31,030 with one child and $35,263 with two or more kids.
So, in other words, if you don't have children, you're not going to get enough back to pay for ANYTHING....
Post a Comment