I like people who point out the obvious, like Jim Willie at Financial Sense. Why? Because so many people have either lost their minds during this housing stupidity, or are now just simply lying, that a little brutal honesty is called for.
Here's my stab at a line. Feel free to take a shot yourself.
This worldwide housing ponzi scheme and crash will be the most significant economic event of the past 100 years, or the next 100.
How's that?
Here's Jim:
The biggest housing bull market (12 years since 1993) will be followed by the greatest housing bear market in the modern era. It has been launched in descent.
Economists miss three critically important and powerful factors since they choose to act like banker apologists, promotional pitchmen, corporate marketing agents, brokerage harlots, bogged down by wishful thinking, inhibited by preservation of their own continued paycheck.
1) Ripple effects slam business niches operating closely to housing, which is unavoidable since such a large supporting cast assists in the acquisition, construction, selling, and financing of homes. How can a large object like housing fall without affecting neighboring objects in its proximity? It cannot.
2) Momentum effects are very difficult to gauge in the financial world, where physics plays a valid role in a somewhat hidden nature. How can a large object like housing reverse course without a tendency to remain in backward motion? It cannot.
3) Feedback effects guarantee that each quantum step down ensures a reaction from observers and passive participants who are pressed to respond. How can a large object like housing take a jump down in price appreciation, a jump down in sales volume, a jump up in inventory, and a jump out of the lax lending room altogether without inviting a secondary reaction? It cannot.
December 10, 2006
Just stating the obvious - get ready for the "greatest housing bear market in the modern era"
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34 comments:
The bubble always bursts, but look at the stock market a few years ago. The Dow, S&P and other indexex, aside from the NASDAQ, have all recovered after a big decline.
Housing dropped a lot several years ago before the recent bull market.
The declines in housing values will be greatest in areas of the East and West Cost which had the biggest rise.
housing is owned with massive leverage by the majority of americans. home equity withdrawals drove a fake economy and now must be paid back since the equity was fake.
nasdaq stocks were owned by a small percentage with 50% leverage at best
apples and oranges
"The Dow, S&P and other indexex, aside from the NASDAQ, have all recovered after a big decline."
So what's your point here, that housing will also recover after a big decline? That is probably true and a little obvious, but a better question would be over what time horizon and with what effects on the macro economy. I think that is Jim Willie's point is that something as big as residential RE can't go into a large decline without tremendous ripple effects throughout the economy. A bunch of leveraged speculators and first-time stock newbies getting spanked during the dot-bomb and losing some of their play-money and savings is one thing, but having 70% of American households #1 primary asset and primary "wealth" creator over the last several years drop precipitously is quite another.
"Houses were,
and are still overvalued, but the
drop will be limited by demand."
You sound like a REIC apologist when you make statements like that. The Realtwhores had us believe that the huge run-up over the last several years was all about "demand" and their simply wasn't enough "supply" Now we know that this was a flat-ass lie as there is currently a huge inventory overhang and the HB's are still completing tons and tons of projects that will add much more overhang that there is no REAL demand for (ie not speculative flipper demand.) The whole thing was just a huge Ponzi scheme and had everything to do with trading up to increase your leverage and/or buying multiple properties and/or tons and tons of funny-money thrown at a bunch of people that had no business buying RE in the first place.
Also, those that believe this bust will be limited to Cali McMansions should ask some folks in Denver or Dallas or Detroit what their thoughts are about the current housing market.
I happen to also believe that the housing market is about to collapse, but I'm not sure that the collapse in the price of housing will last long. I tend to think that the gov't has printed enough paper money and will continue to do so indefinitely and that over the long run, the value of the dollar will fall faster and further than the value of housing. In other words, a tangible asset like a house might end up being worth a lot more worthless dollars than it is today.
I have a couple points to make about the article and the blog posts here:
(1) The Dow, S&P, and NASDAQ are equity indexes that can move in fairly liquid fashion. Even then, there was a 3-year period from the peak to the trough of these indexes. By contrast, depending on what data you use, we are a MAXIMUM of 12-15 months into the decline of real estate prices.
(2) The real estate market cannot do a full correction until the subprime borrowers who never should have owned a home to begin with are sent out the door and not allowed to return. The derivative instruments that are being used to hedge these mortgage securities have given investors a false sense of security that will come back to haunt them.
"tangible asset like a house might end up being worth a lot more worthless dollars than it is today"
Nope, this point has been made repeatedly but inflation will only work on an asset like housing if there is also substantial WAGE inflation (ie 1970's, Weimar Republic, etc.) to support cash flow. Do you know anybody that has seen any wage inflation in their paycheck since 2000? I sure don't.
chris g: excellent post.
It is not a good idea to over extend into real estate. Empty space you cannot rent out will not yield a return. There was a time when homes sold for 15 times annual rents. Then came the new economy. Real estate was supposed to do it all. Sometimes it was only a write off and expensive overhead. If a person only owned a primary residence the risk was less than if one speculated into second homes in what are now soft markets.
Part of the real estate recovery is contigent on other parts of the economy recovering also. Jobs were being created, population was being created faster. One cannot afford real estate if one does not have a job. If one needs cash after losing a job, one might turn to selling off the real estate.
I think this article makes a good point - housing is going to drag everything down with it. We are looking at a vicious cycle.
Housing was 40% of growth over the last several years so as housing shrinks it actually has a negative impact on growth.
Growth that didn't come from housing came from the consumer and the massive amounts of illusory home equity that they withdrew in helocs and heloans. 'If' house prices continue to stagnate or fall then that takes mindless consumerism out of our economy as well.
With the economy experiencing these strong drags the fed will be tempted to lower interest rates as was so effective for old Greenpan. But rate reductions will reduce the value of the USD and make everything we import, which is actually everything, more expensive, ie: inflation.
Inflation can only be fought off with higher interest rates, which would further choke this struggling economy.
Welcome to 'the catch-22 economy'.
Here's one of my prediction... during the true RE bust, 2008 to 2012, there will be minimal upward pressure on rentals except in perhaps some bifuricated upper middle class zones where deadbeats (and bankrupt) types won't be tolerated by those who're relatively well off (financially speaking) and don't want to live next to potential burglars.
Lemme axe you all a question. If you had a chance to go back to the peak of the last housing bubbles and buy would you? I'm talking 1990ish. I know I sure as hell would.
How about buying the stock market right beofre the 1987 crash? Or how about buying right before the 1997 Asian crash? Again I sure as hell would since I'd be up a lot now.
Yes, prices are falling now. They have been falling for a year or so. They may very well fall for another year or two. They will hit a bottom and just like all other markets from housing to equities to gold to coffee will go back up. 10 years from now the cycle will happen once again and a new bubble will be bursting except that the median price won't be $220K it'll be $300K and today's $500K studio condo in Miami will look like a bargain.
And no I don't work in the RE industry. I agree that a lot of people who do are sticking their heads in the sand or lying through their teeth. But you all are doing just the same except on the other end of the spectrum. In another thread someone said an 80% decline is coming, give me a break dude. Not even the NASDAQ dropped 80% from it's peak in 2000 and that was about the biggest bubble that ever was.
You need to get a grip come back to reality boys and girls.
"some bifuricated upper middle class zones where deadbeats (and bankrupt) types won't be tolerated"
Many bubble sitters will qualify for this type of housing since they've protected their credit scores from stupid things like toxic loans, HELOCs which never get paid, foreclosures, etc. Others, however, will be living in once gentrified slum dwellings with the rest of the riff-raff of society. Good luck to them.
:But you all are doing just the same except on the other end of the spectrum.
I guess you didn't live in Texas during the mid 80s oil patch bust. What happened was that people had to move, in mass, to find work in other cities but were forced to carry some ~20% negative equity for a decade. The difference back then was that national incomes were still high, relative to housing costs so it was possible to pay a mortgage in Houston, while renting a place in StLouis for a new job. Today, most people have lost their flexibility and will be driven to bankruptcy a lot faster than back then since mortgages are like $3K per month vs a monthly take home pay of $4.5K for a sub six figure professional.
Anonymous said...
Nope, this point has been made repeatedly but inflation will only work on an asset like housing if there is also substantial WAGE inflation (ie 1970's, Weimar Republic, etc.) to support cash flow. Do you know anybody that has seen any wage inflation in their paycheck since 2000? I sure don't.
***************
I sure do. In Jan 2000 my salary was $62,500. Today it's $107,000. Factor in bonuses, 2000 was about $70K and 2006 should be be about $125K.
My wife graduated from college in 2000 and her first job paid a whopping $34K a year. Today, a year after graduating from business school she makes just under $100K including bonuses.
So yea, I'd say we both experienced a little wage inflation.
still say, we held n.y. real estate (the great vampire state) for more than 12 years , that would not sell at a quarter of its tax assessed value, which we gladly? sold at a third of its tax assessed value, to avoid paying what was a tax equal to 15% of that sale price, every year. that was a troublesome investment!
My 2001 salary was $92K/yr, today it's $105K/yr. Not much of an improvement but it's better than being underemployed or being stuck in a ~80% travel job.
No I didn't live there, but I am familiar with what happened there. The story was nothing more tha was a one mill (oil) town that saw it's mill close down so to speak. Difference was that it wasn't a small town of 10,000 in Ohio but Houston so it got a lot of attention. That was not a housing bubble story it was a lesson in what happens when an economy is not diversified enough economically.
Look at other big housing collapses of the era; Boston in the early 90s, LA in the mid 90s. Both tanked hard and both shot right back up.
See this for more, with the exception of oil patch cities, all booms were followed by some downside only to be followed by an even bigger boom.
http://www.fdic.gov/bank/analytical/fyi/2005/021005fyi_table1.pdf
QUOTE:
I guess you didn't live in Texas during the mid 80s oil patch bust. What happened was that people had to move, in mass, to find work in other cities but were forced to carry some ~20% negative equity for a decade. The difference back then was that national incomes were still high, relative to housing costs so it was possible to pay a mortgage in Houston, while renting a place in StLouis for a new job. Today, most people have lost their flexibility and will be driven to bankruptcy a lot faster than back then since mortgages are like $3K per month vs a monthly take home pay of $4.5K for a sub six figure professional.
::Look at other big housing collapses of the era; Boston in the early 90s, LA in the mid 90s. Both tanked hard and both shot right back up.
There were more white collar jobs that were location-centric than today. A lot of non-defense companies stayed in LA and same for eastern Mass. However, if you compare Boston from the '80s to today, you'll find no DEC/Data General, no Polaroid, no John Hancock, and no Gillette; these were America's top corporations at par with a Japan Inc of its time. So you see, the macro conditions are changing for the worse.
Sure, the pharmacists, experienced RNs, independent wealthy a/o entertainers, hedge fund types, bankruptcy lawyers in any city will do fine, however, while collar work, in general, can move from one locale to another in a heartbeat which is what differentiates this time period from the past.
Anon 8:39:53, that's not wage inflation, dude. The only way you would be experiencing wage inflation is if you and your wife were both in the same jobs, with the same level of responsibility, now 6 years later - is that the case?
Your wife now has 6 years of work experience and an MBA - her salary has gone up due to the increase in value added due to her experience and education. That is NOT wage inflation.
You have to ask yourself, what was a person with my education and experience, in my role, being paid 6 years ago? We know from the empirical data that, on average, it was about the same as it is today.
Most of the jobs created the past five years were in housing/real estate
Now they'll all be going bye-bye, plus even more
massive job losses plus the end of a ponzi scheme with leverage = yes, it is different this time. And not in a good way
My wife graduated from college in 2000 and her first job paid a whopping $34K a year. Today, a year after graduating from business school she makes just under $100K including bonuses.
So yea, I'd say we both experienced a little wage inflation.*****
Good for you ass clown. I think the anon was considering the average working stiff, not you and your suck ass wife.
any idiot who says you should buy here at the near-peak and just ride out a storm doesn't understand that life is unpredictable.
that great job you have today to make those big mortgage, homeowners, tax and furniture payments? Well, that could go poof in a second
Your spouse could leave you or die.
A hurricane, earthquake or tornado could hit your town
I could go on and on. Bottom line is it makes zero sense to buy a home today, when you could buy or build the same home for cheaper in a few years. No sense.
Anyone who tells you otherwise is in REIC on commission, or a fool.
::being stuck in a ~80% travel job
That's the job of the future, a gypsy white collar professional which will actually pull the rug from under housing as a long term investment for much of the bubble zones in the country.
keith said...
Most of the jobs created the past five years were in housing/real estate
-----
Really? Any data on this? I keep reading that only jobs being created these days are at McDonald's. Or is it that none of you have a clue about anything?
It is so funny reading this stuff. Do you guys also believe black helicopters are out there in the desert training for the NEW WORLD ORDER takeover?
Keith said...
any idiot who says you should buy here at the near-peak and just ride out a storm doesn't understand that life is unpredictable.
----
Boy you are dense. I didn't say you SHOULD buy now. I said that if you do, it will most likely be OK long term.
Paul Smith said:
You have to ask yourself, what was a person with my education and experience, in my role, being paid 6 years ago? We know from the empirical data that, on average, it was about the same
------
Any data on this? I know, I know the economy oficially went into a dpression the day St. Clinton left office, but can you enlighten me with some data supporting your claim.
Here are a few examples from the BLS that say otherwise. Same job # so same education/skills needed. I don't know about you but to me 15-20% higher is not "about the same".
Median wage for:
Engineer (BLS# 17-0000)
2000: $25.99
2005: $30.73
18.2% higher
Accountant: (BLS# 13-2011)
2000: $23.12
2005: $27.89
20.6% higher
Physican Assistant (BLS# 29-1071)
2000: $29.17
2005: $34.17
17.1% higher
Mechanic (BLS# 49-3042)
2000: $16.73
2005: $19.74
18.0% higher
I agree with the last post, many jobs did see increase in hourly compensation. Many didn't, usually industries being exported, but even entry level saw higher wages.
I remember when they opened the fist In & Out Burger in Phoenix about four years ago now(?) and they were offering $9.75 an hour to flip burgers! A far cry from the minimum wage. I'm sure in 2000 they'd have been lucky to get $6.50 an hour. I imagine that wage hasn't risen much since but is due to rise if the minimum wage is raised as that will bump everyone up by at least a dollar to keep parity.
Medical jobs? In 2000 a nurse at our hospital was making $20-25 an hour, now $28-40 and more if contract (and not counting any shift diffs), Radiology went from (entry level) $16 to $22 and for mid level $19 to $28, and upper level $25 to $35 where I worked. CNAs even saw their wages rise from about $10 an hour up to $15-16 an hour.
My salary between 1995 and 2005 tripled. My wife's pretty much stayed stagnant. She is a paralegal and her firm froze wages and haven't raised them in ten years. They give a one time cost adjustment in January but that is based on a frozen wage so in reality each year that stipend decreases in value. The only thing that made up for it (or they would have lost a lot of workers) is their year end bonuses, which usually was between 10-15% of their frozen base wage so taking both of those items into account she saw a 15% raise over ten years, which is a lot lower than if they just increased their base wage each year as the cost of living allowance would have compounded on each raise.
All that in mind, I'd rather go back to 1995 and make less money and have paid less for a house even with a little higher interest rate. At least in Phoenix in the mid-90s you could buy a nice Central Phoenix home for as low as $54,000 (small historic in up and coming neighborhood) to $140,000 for a pretty nice home. Adjusted for inflation, if we trust the normal calculators, that would only be $170,000 for a nice house in Phoenix instead of $350,000.
Of course they now say incomes are rising faster than inflation. Hard to believe, maybe government propaganda like the employment numbers and job growth. Still, the US economy has proven pretty resiliant and I've been listening to "It is the end of the world" economics for 30 years, which makes one a little more skeptical than some people on this site.
If the Yen carry is a major part of the problem, and isn't that part of what economies do, export inflation? Then just as the high costs of California housing are exported to other states (and the process seems to have always been fast rise, correction, export costs, race ot the next level. I think the excessive bubble in Japan is still being exported via the Yen carry trade how else can you explain how their economy didn't collapse?
So many places so much more expensive...gosh, a devalued dollar more than those places being expensive maybe? In HK a jewish friend of mine says people routinely pay between one and two thousand US as sq ft and that is after their 60% decline. The markets don't make sense anywhere.
I said:
Most of the jobs created the past five years were in housing/real estate
Anon realtor troll to lazy to research or think said:
Really? Any data on this?
Answer:
From California:
http://tinyurl.com/ycdtyw
Statewide, the real estate sector created 40 percent of all new jobs last year. The year before, real estate created 40,000 jobs while the rest of the economy lost 105,000 jobs.
Or National:
http://tinyurl.com/yh3tbr
Housing Chill Could Mean A 'Whole Lot' Of Job Cutting
Between early 2003 and March 2006, the housing boom created about 1.2 million jobs throughout the industry, he said. But since spring, he added, employers not only have stopped hiring, they have slashed about 25,000 jobs.
Sure is tough to know what an Anon said or didn't say when they're lost in a sea of Anon's
Here's a hint folks - just click "Other" and type in any user name. You don't have to register
If you're too lazy to do that, just sign a name to your post. Mickey Mouse or Anon #1111 will do
"Engineer (BLS# 17-0000)
2000: $25.99
2005: $30.73
18.2% higher"
Even if you're right about these figures this kind of wage inflation works out to be about 3% a year compounded. A silly question: did housing increase at 3% a year during the same period? LOL. The reason you're not right about the increases is a lot of engineering positions these days are independent contractor status not permanent employees, so all of the benefits like health care, matching 401k, etc. have to be deducted out of the compensation total. Speaking from personal experience here, I had a couple of years where it APPEARED as if I was making much more but it was as an engineering contractor so I had a lot of expenses that effectively cut my purchasing power by the same amount.
For those that are doing the same work with the same education (apples to apples) wage inflation is a myth, especially in high-tech and engineering jobs and also for the ocean of America Joe's in the service sector. This is largely due to the global labor arbitrage of outsourcing to India, China, etc. and corporate America bringing in an army of H1b's to do the work that allegedly can't be done locally.
Guys, there is a reason that the housing bubble happened: liquidity and disposal income for the average person was going down the tubes and the FED desperately needed to ignite a "wealth" (really debt) creation engine in the form of the housing ATM. This wouldn't have been necessary if wages were increasing at a solid rate and there was full employment as the government alleged.
Also, going into a recession (or worse) where pricing power will be difficult, how can wage inflation be expected as a viable option to deal with the housing bubble fallout? This isn't like the 1970's at all where everything (including wages) were rising at 20% a year and housing gains during the period were largely permanent.
Review of Econ 101.
Check BLS number for 2000 and 2005. You are comparing nominal dollars vs nominal dollars numbnuts..... In real terms the average say 17% is about 3% when you factor in inflation and then the kicker--increase in hours worked across occupations. A little data and a little brain--bad combo. I bet you think the difference between a 1% rate of growth and a 2% rate of growth is--1% right you think that? Nah, its 50% and I bet you don;t understand why? Wages in real terms accross most occupations have declined!!!! Just becuase you can download data from BLS do not think you know what it means, clearly you do not.
Yes, the growth rates are based on current year dollars--you can compare a 5 year period and assume that actual incomes are higher. So what if an engineer made 10k in 72 and now his salary for same job has gone up 600%--wow what a marvel. No if you look at analysis by BLS and economists the fact is that REAL incomes have declined about 3% in real terms between 2000 and now. Guess the last poster nailed it--people do not understand real wages or constant dollars.
I'm earning less today then five years ago because I could actually take some vacation back then. Today, I'm expected to work weekends regularly and my management gets on my case if I take two weeks contiguously so my time off has been in basically running errands.
Thank you anon #1111 for explaining how 20% appreciation after 5 or 6 years is actually more like 3% per year, which isn't much. Especially when you consider that the consumer price index (not core inflation, which doesn't count energy and food), because of oil, has gone up like 7% per year in that time period. So purchasing power has actually gone down.
Anon 10:20:49, I'm not a Clintonista - I am an economic conservative. Which means I cannot defend the W. Bush administration either since he has not followed true economic conservative principles. But Clinton didn't exactly leave Bush a lot to work with.
About 10 posts back someone said "WAGE INFLATION" was 0 since 2000.
I gave examples that showed WAGE INFLATION was 20% from '00 to '05.
Now you come back with, well that's not in real dollars. Well no s**t it's not in real dollats, never said it was but the original post didn't either, it said WAGE *****INFLATION***** not real wage gains.
I know I am in the minority here. I expect anything I say to be attacked and twisted. But at least argue the same point throughout a thread huh?
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