August 17, 2007

The most important paper you'll ever read in your life - CEPR's "Midsummer Meltdown: Prospects for the Stock and Housing Markets.”

Folks, you must, I repeat, YOU MUST, not only read this paper (go to link and hit the PDF) on the US housing and mortgage meltdown from Dean Baker and the CEPR, but you must print it out or send it to anyone and everyone you care about. You owe it to yourself to read the whole report, two or three times if you need to.

Yes, some people still won't get it. Some people will refuse to listen. Some are corrupt and don't want the truth getting out. And many folks out there are just too dense to understand (supply? demand? huh?). But at least you will have tried. And you will have prepared.

Here's some of the key points from this paper - the most well written, thorough, explanatory and shocking expose I've ever seen on the US housing bubble and crash - and just think, this cancer will spread around the world... Get ready.

* Total loss of wealth with the collapse of the housing bubble and stock market will be $8 Trillion to $12.5 Trillion (or more if the crash overshoots)

* Real economists who were warning about the bubble were ignored by the MSM in favor of fake economists at NAR and NAHB

* There is no factor of supply and demand that led to an $8 Trillion housing bubble - and no increase in rents to justify it.

* Inventory of unsold homes is 50% above the previous record - and the inventory of vacant units for sale is more than 100% higher than the previous record, while rental vacancy rate for owned units is soaring

* Homeowners are not prepared for a sharp drop in housing prices - and will enjoy a much less comfortable retirement than they had anticipated

* Median Price reports during the meltdown will be deceiving, as mortgage meltdown decimates the affordable home buyer pool, skewing median purchase price in favor of more expensive homes - Case Shiller index only good gauge available

* Very severe recession coming, pension shortfalls, and annual consumption drops of $415 Billion to $950 Billion

28 comments:

Melissa said...

Keith,

There's one part that I don't understand. As a builder, you can't build these houses at cost for much less than 10-15% under what they sell them for (in markets like Georgia). One change over the years is that other countries in the world are now experiencing building booms that are driving the material costs higher. In the future, people will want new homes and those homes will have to sell at a price above the cost to build. Is there any allowance in these predictions for a reduction in building material expenses?

Anonymous said...

http://www.cnbc.com/id/20283499

Why High Prices?
Posted By:Diana Olick
Topics:Interest Rates | Housing | Real Estate
Sectors:Financial Services

I'll admit it; I don't get it. The National Association of Realtors reports that prices in the nation's housing markets are rebounding. They're still in the negative, down 1.5% nationwide in Q2 2007 from a year ago, but apparently fewer markets are in the negative than in the two quarters before. The NAR's economists call it "flat." Not to mention that they show sales are down 10.8% in Q2 2007 from a year ago.

Here's what I think you don't see in the Realtors' numbers: what kind of houses folks are purchasing. With all the trouble in the subprime mortgage market, guess what? Subprime borrowers aren't buying houses, and those were the lower-priced houses. So what's left? Rich folks -- and that therefore skews the number of homes being sold to the higher price range (remember, they only get the price stat when a home is actually sold).

Now here's the concern, and don't get on me for being all pessimistic, because I'm just talking facts here. These numbers are for the second quarter of this year, before the most very recent hit to the "jumbo" mortgage market (any loan over $417,000). Now if folks trying to get a jumbo on a more expensive home can't get it, and I've already spoken to a few who can't, then that's going to skew the numbers yet again.

formosan80 said...

What a great report! I have passed it along to many people. Anyway, thank you Keith for all of your great work. After things starting crashing down, I got a rare "You were right, honey" from my wife. Only the second time in 6 years.

mrmx said...

"Very severe recession coming, pension shortfalls, and annual consumption drops of $415 Billion to $950 Billion"

one of the phrases I like is "peak capital" or the idea that as we move to "boomers being in hibernation," they don't produce any economic output yet want part of remaining pie.

fun, fun, fun till her daddy takes her tbird away!

Osman said...

Again...what's next?

a - house prices collapse in nominal terms only
b - house prices drop in real terms only (i.e. inflation)
c - both

If you come to B or C, that we're going to see significant inflation, you may want to revisit the idea that renting is a better option than buying, especially when buying for the long term with a FRM. Running the numbers repeatedly, I've found that even if my local market goes relatively flat, buying wins out when ownership periods extend beyond 5 years.

Obviously, the situation will vary by market. But you should do the math yourself before jumping to a conclusion on housing and how it relates to your personal financial situation.

p.s. If you'd like a copy of my buy vs. rent model, which includes plug and play appreciation/inflation variables, let me know and I'll make it available.

Osman said...

pg. 17 sums it up nicely.

The actual macroeconomic impact of the unwinding housing and stock bubbles will depend on the time period over which it takes place. As with the growth of the bubble this will depend largely on psychological factors. If homeowners come to believe that house prices will continue to fall in the future, then many will try to sell their homes sooner than would otherwise be the case. Similarly, potential homebuyers will be more hesitant to purchase houses if they believe that they will continue to fall in price. In addition, lenders will be far more reluctant to make money available for home mortgages if they believe that there is a high risk of default.
For these reasons, it is easy to envision scenarios in which the housing bubble unwinds rapidly. However, if expectations adjust more slowly, and homeowners continue to believe that house prices will in general appreciate through time, then the unwinding may take much longer.


Given the historic stickiness of housing and people's perception of value, I'm firmly in the long unwinding camp. That points to a decline in real prices but not necessarily a large decline in nominal prices, if any (depending on local market). All of this, in turn, suggests a hard look at the buy vs rent economics.

Anonymous said...

Excellent post. Thanks for that.

By the way, I am a "real" economist and for five years forecast that the mortgage bomb would go off, and NOBODY WOULD LISTEN. Not clients, not prospects, not newspapers, NOBODY.

I'll tell you why: America has become, essentially, a socialist culture. Very few Americans understand anything about the free market. To them, "economics" is just politics that promises them a free lunch.

It's friggen' hopeless in the U.S. The coming depression will make the last one look like camp Snoopy.

But Americans won't understand that until they're complaining about their Food Ration coupons...

Agent #777 said...

Please don't plan your life around anything that the people at the CEPR have to say.
I don't know why Keith did not link the article previously on this site to the CEPR, but please see where we ripped apart their incredibly simplistic Mortgage Calculator:
http://www.cepr.net/calculators/calc_housing.html

They may or may not have some good points, but I refuse waste my time reading it due to the tool at this link.

rcochran said...

Anyone who reads the Mogambo Guru, The Daily Reckoning, Financial Sense Online, The Prudent Bear...already knows this stuff, Keith.

Just so ya know buddy, you were actually quite late in predicting all of this. There are plenty of folks who beat you to it by a long shot. But by all means, keep up your self-congratulatory drumbeat. You do happen to be right, and you do get it.

Mark in San Diego said...

"But we put in a KOI POND!"

True story of a young couple who became intoxicated with their housing wealth. . .Airforce guy and his wife moved to Travis AFB (near Sacramento) in 2000. . . household income 70K - bought a 200K house in a development of 200 like homes. . .by 2003, their house was worth 350K, and they took 50K HELOC and put in a Koi Pond, bought a new Honda, etc. . .by 2004 the house was worth 450K, and he bought a 95K Porche with another HELOC, in 2005, the house was "worth" 600K, and they refinanced, and took out 100% of value . . .spent like drunks with their new California Wealth. . .2007 - guy gets a forced transfer to East coast - put the house on market for 650K in March . . .now wife is in Calif trying to sell the house - amount owed 600k. . .similar houses are listed for 499k (and not selling) . . one repo house just sold for 350K in neighborhood. . .wife reduced price to 599K and is trying to arrange a short-sale. . .and she said, "our house will sell faster because we put in a Koi Pond.".. . .

we All know how this will turn out - lender - Countrywide of course!!!

Anonymous said...

web site down, does anybody have a cache they can post of the paper?

I wonder if they got too much traffic ...

Helldigger said...

I read the article.

It is not the most important paper I will ever read, but it is a good background and possible future.

It all depends on what happens.

If we get another catastrophic Terrorist attack or a new strain of killer virus spreads, this will look like a stroll in the park.

Imagine a series of simultaneous dirty bombs are set off in the 10 largest metropolitan areas or Allah forbid, a nuclear blast hits NY or Washington.

Imagine if Bird Flu goes airborne without a viable vaccine.

Imagine if some whack job like Ron Paul or Hillbillery Clinton get elected.

A credit crunch is bad, but other things can be worse.

Helldigger

Floriduh said...

"Median price reports during the meltdown will be deceiving..."

They already are deceiving and it has a lot to do with the rampant denial among home sellers and realtwhores. Recently, the Florida Association of Realtors (FAR) announced that the median price of homes in Broward County increased by 1% over one year ago ($382,000 from $377,400 a year ago). How can that be? The inventory is ballooning, sales are miniscule, foreclosures are exploding, the credit markets are restricting, and people are migrating out of Florida. How could the price of homes increase when all this is happening?
FAR is able to announce this price increase because they use the “Median Sales Price” as their measure. Using a “median” as a principle statistic, especially in a slow market is problematic.

First, consider how median sales price is calculated: FAR takes the list of all homes sold in Broward County during a particular month, sorts them in order of sales price, and then picks the price in the middle as the median (50% of homes sold for more than median and 50% sold for less).
The problem with this measure is it merely shows where sales have been most active. When credit markets tighten, the poor are much more likely to be affected than the rich. Therefore, the poor are much less likely to buy homes. This tells part of the story – the tighter credit markets and the economic slowdown is causing less sales activity among less expensive and moderately priced homes.

A slowdown in investment activity also disproportionately affects sales activity among less expensive homes. Investors are much more likely to take a gamble on a two-bedroom townhouse than a 4000 square-foot, five-bedroom single-family home. So, when investors abandon a market, sales activity among less expensive homes slow more significantly.
That's exactly what is happening here in South Florida – expensive homes are still selling to those who are not affected by the economic downturn and the tighter credit markets. At the same time, less expensive homes are no longer getting snatched up by eager investors.

So, what’s a better measure than median sales price? I think that median asking price is a much better measure. Asking prices, although not perfect, tell us much more about the overall market, not just the parts of the market with the highest sales activity.
Median asking price tells a much different story. The median asking price in the Miami MSA (Dade, Broward, and South Palm Beach) fell from $373,475 in June 2006 to $333,500 in June 2007 – a 10.7% decrease. Anyone who follows the local market closely know that this is a much closer approximation of reality that FAR’s claim of a 1% increase.

SeattleMoose said...

This country desperately needs pain and suffering...but from the those "at the top"...precisely the ones who will NOT feel the pain.

It will be all us. As usual the guilty will get away with their millions while all of us lose our 401Ks, pensions, and even SS.

I want a revolution. I want all the fat white maggots who have taken this country down the toilet to get what is coming to them.

Nice dream...but it will never happen. As long as the maggots control the MSM and military we have no chance.

Elections? HA!!! The Dems are gonna field Obama (an Iraq Hawk) or Hillary (a globalist/free trade shill).

We are so screwed.

westchester chick said...

Socialist culture? Don't you mean elitist culture? Socialists want everything to be available to everyone. The people that created the current economic conditions just want things to be better for themselves.

Anonymous said...

"If we get another catastrophic Terrorist attack or a new strain of killer virus spreads, this will look like a stroll in the park."

You mean if the GOP/Shady Government MAKES UP another terrorist event to fool the sheeple, right? You mean another INSIDER JOB to profit from the stupid sheeple, right?

Booo, run sheeple, the terrorist made up bogeyman is gonna get you. He's hiding under the bed....meanwhile Bush and the GOP leaves the borders wide open. Wow, they are so concerned about security that 9-11 happened under their watch and they never got Bin Laden. No doubt Giuliana will be elected with some many clueless hicks and stupid people in this country.

Let it go, Cramer is partying on CNBC right now because the Fed bailed out criminals and sticked to the honest taxpayer, once again.

RE Investor said...

My opinion on the papers' content is that it is generally common knowledge. The problems that are cited - for instance, the MSM only covering the bulls during the Stock bubble and the RE bubble is the whole problem with the MSM. They only cover what their advertisers make money on. IE: If the Market is booming (RE or Stock) they are going to preach to the choir and reenforce that because that is what the people want to hear. Likewise, I saw during the 2000 bubble crash and now during the RE / Credit Market Crash, all you hear is how bad housing is and how the stock market will go down for years. Face it, if you want accurate financial advise, listen to NO ONE but YOURSELF. Study everything - both sides, and then decide for yourself. And DO NOT listen to the politics, listen to the "guys in the back of the room". By the time the guys in the front of the room are talking, the event has already happened.

Just what my experience has taught me....

Anonymous said...

Since when did socialists want to help everyone? You have Kim Jong Il in North Korea and Fidel Castro in Cuba. The people of those countries are among the poorest in the world while their socialist leaders live lavish lives in huge mansions.

RE Investor said...

"There's one part that I don't understand. As a builder, you can't build these houses at cost for much less than 10-15% under what they sell them for (in markets like Georgia)."

You are right, and eventually that fundamental will catch up. Until then, builders just won't build because the materials will cost more than what they can get for the house due to supply and demand. The builders have screwed themselves in to a corner. Even the owner of an existing home is in better shape than them. Existing owners at least have location advantage (some) and they don't have to rebuild their homes at a new building material / labor rate. All they need is to wait until the value comes up to where they bought for their area. New builders have to wait until the new homes sales price (usually outlying sprawl area) is worth enough to consumers to justify building cost, sales cost, land cost etc. That could be a while considering that oil prices probably are not going down (appreciably) any time soon, and local governments having been burned already by lax permitting hitting their property tax roll will make it very expensive for future builder profit. Add in that people like living near city centers and commercial usually does not build in new areas until a critical mass is achieved and new builders are in for a long road.

Anonymous said...

I own $250K home outright... and have been thinking about the following trade.

Get 1st mortgage 30 fixed and extract $200K; invest as follows:

50% in gold ETF
30% in silver ETF
20% in puts on CFC

any thoughts?

Minimum Wage said...

I have never had any hope of buying a home. I have no stocks, no bonds, no mutual funds, no T-bills, no pension, no IRA, no 401(k).

How is this "most important" to me?

Paul E. Math said...

It's worth noting that the publishers of this paper, the CEPR, can boast not one but two Nobel laureates on their advisory board. Both Joseph Stiglitz and Robert Solow have Nobel prizes in economics and sit on the advisory board of the CEPR.

The substance of this paper is not terribly groundbreaking but it is yet another highly credible source that has correctly identify both a real estate and stock bubble.

Anonymous said...

osman,

I think you're correct that if you wait 5-7 years, that $300k house will certainly come back in nominal terms, but as you're making payments on that $300k house, your neighbor will pick one up at $180k.

The price stickiness is only when homeowners are selling. Wait until the banks start selling.

In 1992, working for a bank's REO department, we were selling condos in nice areas for 12k. Land and commercial properties were marked down 50, 60, and 70%.

Anonymous said...

«I have never had any hope of buying a home. I have no stocks, no bonds, no mutual funds, no T-bills, no pension, no IRA, no 401(k).

How is this "most important" to me?»

Well man, indirectly -- 70% of US citizens are homeowners, and a much larger percentage of voters are. They vote their mortgages. What they vote affects your pay, your welfare, everything. They are a powerful interest group, and, their interests are very different from yours.

On one hand that paper implies that rents are likely to come down soon, and rents are the single hugest problem for minimum wage people. On the other it also implies it will be quite a bit more difficult to find jobs, especially minimum wage jobs, as many of those have been created by homeowner spending.

But also right now homeowners are desperate and scared and will vote for anybody who promises a rescue and cheap easy money, and more immigration to help boost demand for homes and lower low end wages.

Bottom line: unionize if you can. Only with unions minimum wage workers can have a chance to have their interests heard. Make it vote, donate even just a few dollars to political campaigns, and unionize.

Anonymous said...

«I have never had any hope of buying a home. I have no stocks, no bonds, no mutual funds, no T-bills, no pension, no IRA, no 401(k).

How is this "most important" to me?»

Well man, indirectly -- 70% of US citizens are homeowners, and a much larger percentage of voters are. They vote their mortgages. What they vote affects your pay, your welfare, everything. They are a powerful interest group, and, their interests are very different from yours.

On one hand that paper implies that rents are likely to come down soon, and rents are the single hugest problem for minimum wage people. On the other it also implies it will be quite a bit more difficult to find jobs, especially minimum wage jobs, as many of those have been created by homeowner spending.

But also right now homeowners are desperate and scared and will vote for anybody who promises a rescue and cheap easy money, and more immigration to help boost demand for homes and lower low end wages.

Bottom line: unionize if you can. Only with unions minimum wage workers can have a chance to have their interests heard. Make it vote, donate even just a few dollars to political campaigns, and unionize.

Agent #777 said...

No doubt Giuliana will be elected with some many clueless hicks and stupid people in this country.

Let it go, Cramer is partying on CNBC right now because the Fed bailed out criminals and sticked to the honest taxpayer, once again.


Rudy would not be much better than what we have now, but I would hold my nose and vote for him if the Dems "sticked" us with Hillary or Obama. (And the GOP has hicks for supporters?)
I could vote for a Lieberman or a Biden if Rudy is the R candidate, but I will vote for anyone with a record of closing the borders. For me it is the defining issue. But I am sure the Dems will still be bringing the abortion issue to the front.

Anonymous said...

YOU IDIOT! YOUR SO FIRED UP ABOUT GETTING RID OF ILLEGAL ALIENS THAT YOU DONT EVEN REALIZE THAT THEY WILL LEAVE THIS COUNTRY IN MASSES AS SOON AS THE DEPRESSION BEGINS. THEY CAME TO THIS COUNTRY FOR WHAT WE CLAIM TO BE THE AMERICAN DREAM.
THIS WILL BE A NIGHTMARE, IF THE US WERE TO CRACK DOWN ON THE COMPANIES THAT HIRED THEM WE WOULD NOT HAVE HAD A PROBLEM. BLAME THE GREEDY CORPORATIONS THAT GOT US IN THIS MESS. PROFIT FIRST AMERICAN PEOPLE LAST!

Minimum Wage said...

Well man, indirectly -- 70% of US citizens are homeowners, and a much larger percentage of voters are. They vote their mortgages. What they vote affects your pay, your welfare, everything. They are a powerful interest group, and, their interests are very different from yours.

On one hand that paper implies that rents are likely to come down soon, and rents are the single hugest problem for minimum wage people. On the other it also implies it will be quite a bit more difficult to find jobs, especially minimum wage jobs, as many of those have been created by homeowner spending.



Are you saying that homeowners will use their votes to redistribute income UPWARD to themselves from lower-income renters? (Median homeowner income is more than two times median renter income.) Then I guess conservatives should quit complaining about the poor voting for higher taxes.

Rents are soaring in my area - projected to rise 8.5 percent this year and an additional 6 percent next year.

Many minimum wage businesses will do well in an environment of retrenched spending. Discounters and low-end businesses (think McDonald's) will flourish while the high end sputters.