May 01, 2007

As housing implodes, "new economy" myths cave in too

Good paper at Kitco - here's a couple "new economy myths" that the housing crash exposed:

House bubble claimed as valid wealth:

Rising property values and associated home equity growth is a legitimate form of wealth generation, a viable foundation for the New Economy. In promoting this concept, Greenspan resembled a hedge fund manager, not a central banker. In fact, many expert financial analysts have compared the US Economy to a grand hedge fund, since so many shared characteristics are evident and identifiable.

As the housing crisis and the mortgage debacle have begun to unfold, we know better now. The reluctance shrouded in deep denial testifies to the desperation to maintain the myth. The mortgage lender burial ground now contains some Alt-A and borderline prime lenders, which undercut claims of no contagion. Next is the damage to commercial lenders, who employed the same ditzy lending practices with 0% down payment and slim documentation methods. In fact, the debacle in progress qualifies as a potential 3-SIGMA event to trigger derivative accidents.

US Economic dependence upon housing is ok:

The main source of fuel for the US Economy was derived from housing jobs and lending institution jobs, with spending based on home equity extractions. This is a nightmare design.

Such a design succeeds until the bubble retreats, or even stalls. The historically validated concept of business investment leading the pack has been discarded in favor of a reckless dependence upon a housing and asset bubble (like stocks).

A bigger perspective reveals that the US Economy has grown dependent upon a bond bubble which extends to housing, whose size is 20 times larger than the tech & telecom bubble in 2000. Both were destined to burst.

The current bond bubble bust is still in the initial stages of unraveling in a mounting crisis. Note how the spring housing recovery (another careless mythical construct last autumn) has already been discarded, yet it served its purpose in market levitation at the time. We have another two to four years at least in the housing & mortgage collapse. Consumers will be affected as surely as night follows day. No myth of constant sunshine is likely to emerge.


Hayley said...

There's a great comment in one of Roubini's papers (one of the few we have access to, I'm so pissed at RGE montior, you can't access the content unless you're affliated an institution).

But I digress....

Anyway, he states that this "investment" in housing is (paraphrasing) the largest investment in non-productive assets in US history.

Think about it, billions and billions locked up not in factories or productive, job producing assets, but in seas of McHomes.

RayNLA said...

HA HA...

Now tell me how the consumer is going to go out and buy a new HUMMER every other year. And who will keep Nordstrom, with their $300 Blue Jeans in business. And how can Circuit City meet shareholders demands when no one is lining up to buy the latest Plasma HDTV? Not to mention who will tip the waitress at The Cheesecake factory.

Forget about the Resession, fear the DEPRESSION! Not only will it be telivised it will be Pod-Cast.


Anonymous said...


I know Month over Month comparisons for the most part are meaningless & that the MSM & REIC are latching onto them every chance they get as "proof" that everything is fine in RE. But what do you think of a Month over Month comparison where one of the month's is the last month of the winter selling season & the second month is the first month of the fabled spring selling season. Shouldn't activity be on an uptick? And if its not and instead is down 5% Month over Month & 10% Y-O-Y. I'd say its the harbinger of the Silent Spring of 07 where everyone is forced to admit the fact that we are headed down, hard & fast in the housing sector.

Yet, not a whimper from the spin doctors. They know this spells trouble w/ a capital T!!

Adam Smith said...

Yup, that's something that people fail to understand: a home is not a means of production (like a factory) to make products; it IS a product, built by the construction industry.

So once it's completed, it doesn't PRODUCE anything in turn, aside from providing shelter (Which clearly IS a necessity, but NOT a product to be sold unless the home is to be used as a rental).

In fact, the house becomes more of a drain, an expense, if even a luxury expense so someone can enjoy the "pride" of ownership in his little castle.

Oh, let's not forget the only industry these sky-rocketing prices have supported is the financial industry that has built up around housing, as more and more money is locked up in a non-productive asset. Yes, the bank LOVES for you to be locked into an expensive loan for the next 40 years.

And of course, EVERYONE needs to have the granite countertops, the fine subzero frig, etc. So let's run that sucker sky-high, eh?

People have so over-reached on affordability to get the nicest house they can afford, they rarely have any resources left to equip the home with furnishings, add landscaping, etc, etc. Know how many houses rely on lawn furniture inside?

But once it's built, installed? And once the equity has been tapped out? You mean there's no more equity to tap out to get a new car (see the headlines on flagging auto sales). You mean, no equity for new furniture or plasma T.V. (see the headlines about flagging furniture and T.V. sales)?

Damn, it's a good thing we've been exporting all of our jobs to China, as now we'll now all be able to spend more time enjoying our fancy new homes when unemployed.

For the next 40 years (if you're lucky), or until the ARM kicks in (if you're not).

Anonymous said...

but the guy that took a loan of 10 times the ammount of my bank deposit using it as colateral on his house by my bank and a cluster of govt "help" agencys, let me earn in seven years in relation to inflation 4 percent, and is trying to sell it to me for a profit of 250%, seems dam productive to me, if he can find another sucker.......

Anonymous said...

Among mathematicians, sigma is a term used to describe how unlikely an event is, whether it's an earthquake or a hurricane or a stock market crash. A 2-sigma event, for instance, is two standard deviations away from the norm. 96% of all events fall within the 2-sigma boundaries. A 3-sigma event is even more unlikely: 99% of all events in a given area are less than 3-sigma.

So to imagine a 5-sigma or 10-sigma event is difficult to even conceive. Yet history shows that such events happen a lot more often than the normal bell curve would dictate. This is called the fat tails phenomenon.

Even though high-sigma events are not expected, they do happen. The stock market crash of 1987 was a 22-sigma event. The assassination of the Archduke Ferdinand that started World War I was at least a 10- or 20-sigma event, yet it happened. Many other examples could be given.

In my opinion, the U.S. and the world is on the precipice of a series of high-sigma events in the financial, energy, ecological and infrastructure spheres in the coming years. This prediction can be made because the systems in these areas and others have become so overstretched—and thus extremely fragile.

Because nature presents periodic stressors to all systems, a system that becomes increasingly fragile will sooner or later collapse, as we see in everything from the break in the New Orleans levees to the fall of the Roman Empire.

Once a system has become fragile, its collapse can be brought about by even a seemingly minor event. And because everything has become so interconnected these days, a trigger in one area could fairly quickly trigger high-sigma events in other fragile areas. A real energy crisis would soon become an economic crisis. And an economic crisis would soon impact the ecological and infrastructure dimensions.

It's all interconnected: A crash in the dollar—quite likely at some point given our vast current account deficits—would probably trigger a collapse in the bond market. A collapse in the bond market, in turn, would surely trigger a collapse in the stock and real estate markets, and so on. And because the U.S. economy is so gigantic, a financial implosion in the U.S. would affect the entire world.

All of this must surely sound very depressing. Yet my effort here is not to depress, but simply to present things as they might actually be rather than how we might wish them to be. If this picture is true, perhaps we can bring some clear-sightedness to our situation and our efforts.

GenX said...

I have been reading this blog since I got the heads up from Business week. It has been one of the only places that has kept a legimate eye on the Housing market..I invest in the stock market and cashed out recently at above 13,000 and went short through Powershares Etf's ..However the market seems to keep rising with the fact that everything is turning up bad news..When is the reality going to strike that there is no Spring Selling Season..That there are no tenants for these overpriced rentals..The Wall Street elite are so far removed from everyday life its almost comical. Another quote from CBC today was Erin Burnett said that actually there has been more outflows of money from mutual funds since this run over 13,000 that the retail investor isnt buying " of course Mark Haines changed the subject. Wall Street wants to pawn these overpriced shares off to Joe sixpack..When is the market going to realize that inflation for everydayfolks is out of control? I went to an auction the other day any hardly anyone showed up.Nobody has any money yet the entire economy keeps spending according to CNBC. When is the mainstream media really going to show the effects of this Housing Horror? When will the real numbers show that the housing market is crashing..Personally in Florida I believe prices are about to head south 50 percent.. The stock market has been up 20 out of 23 trading sessions..Even tonight on the show fast money on CNBC they said the last time this happened was in 1929..My question to HPers is it different this time?LOL.or is History doomed to repeat itself?

Anonymous said...

And the big one is the massive amount of derivatives floating about. The threat they pose may well be the single biggest reason to own some precious metals.

Anonymous said...

housing is the largest investment in non-productive assets in US history.

right! and I was arguing on a left leaning blog today that the left needs to stop wanting "disposable income" because "capitol" is much more important.

I was also postulating that housing allows the fed to pump money into the economy since most of it will become trapped in housing...

Anonymous said...

When will bonds rates go up? It's like the market isn't a market anymore. Will the rates ever change?

Anonymous said...

Maybe real estate is simply experiencing a "buyerless recovery".

Rememeber the term "jobless recorvery" coined following 9-11.

Anonymous said...

BWA HA HA HA HA!! DOW is breaking records every day. S%P is at 1500. And you idiots are screaming like it's the end of the world.

It's damn near impossible to get a reservation at a decent restaurant on a Friday night. Mmmm hmmm just like 1933 indeed.

You wingnuts need to get out of your momma's basement sometime and see what the real world looks like. Trust me, it's a lot different than what your blog buddies tell you.

Anonymous said...

As a wingnut (as reference was made)could the writer explain to me and others on this blog, where is the money coming from that support all these Friday night eat-outs?
The average joe's income has been in the dumps so IT'S CREDIT MY FRIEND the same medium that kept the housing afloat, not a great economy!

Anonymous said...

"It's damn near impossible to get a reservation at a decent restaurant on a Friday night."

Another factoid that you have pulled from your unwiped ass!

Anonymous said...

"Among mathematicians, sigma is a term used to describe how unlikely an event is, whether it's an earthquake or a hurricane or a stock market crash."

Could you please write more along these lines and recommend books or articles with more information on this topic?

I should have taken more math and less literature.

Anonymous said...

As a wingnut (as reference was made)could the writer explain to me and others on this blog, where is the money coming from that support all these Friday night eat-outs?
The average joe's income has been in the dumps so IT'S CREDIT MY FRIEND the same medium that kept the housing afloat, not a great economy!

Dude just because you make minimum wage and have to borrow $20 from Visa for a Chili's meal don't assume everyone else does too. Renters crack me up.

westwest888 said...

Well then I ask you, what IS a productive asset? Classical economics don't apply here, so leave guns and butter arguments at the door. We're a service economy you jackass. The only productive assets are telephones and computers. The investments capital markets make in these projects enable our population to grow into the INFRASTRUCTURE that these booms build. Global Crossing, Qualcomm - hugely overbuilt. The result? Cheap universal broadband for everyone and enough data capacity for at least the next 20 years. Skyscrapers in the 1980s being bought speculatively by the Japanese resulted in plenty of office space for our service economy to grow. Trillions of square feet of office space and trillions of square feet of real estate built in the 2001-2005 are ready for the next generation to step up to the plate and move in. Our standard of living HAS increased and we needed new houses. "We could have built a sewing machine factory with that granite countertop money" doesn't apply here, bud. Maybe in Manila?

If you're really twisted you might say that the increasing term and scope of household debt are market forces pushing back the retirement age to 75 or 80, which is a beautiful thing because it didn't require Congress to pass a law. John Q. Taxpayer isn't going to foreclose because then he'll lose the Hummer and won't be able to go to Outback tonight, as the jingle dictates. He'll simply pile it on the back end, and that's one reason why we have the most resilient economy in the world. Everyone deals with change and it's business as usual. You might be in debt, but you still have and can find gainful employment and live your life. You just can't STOP working, which is why our GDP is so high.

Now that I've handed it to you with all the trimmings, let me say that I am a renter in Northern Virginia. 4 of my closest friends and myself split about 40% of my landlord's carrying cost I/O (interest only). That's about $500 a month with utilities for my piece of a 3 level McMansion once valued at around $950,000. I check out real estate the way I check out women I don't know - not too seriously with no intention of commitment. I don't want to tie up my money or make my banker friends in NY rich, so I stuff about 30% of my income in tax deferred and tax advantaged retirement accounts. It's not like I need to save for a down payment, so who needs to be liquid? If we go into the great depression the IRS will let me withdraw from these accounts without penalty. So I'm ready either way.