The most prominent and most to be regretted of the academic sages was Irving Fisher of Yale - as already indicated, the most innovative economist of his time. Heavily involved in the market himself, he too surrendered to the basic speculative impulse, which is to believe whatever best serves the good fortune you are experiencing. In the autumn of 1929, he gained enduring fame for the widely reported conclusion that "stock prices have reached what looks like a permanently high plateau." (A Short History of Financial Euphoria, John Kenneth Galbraith)
Back in December of 2005, David Lereah had this to say:
David Lereah, chief economist at the National Association of Realtors, expects home sales next year to be the second-best in history. He called the recent slowdown a "tapping of the brakes" on a red-hot market. "Home sales are coming down from the mountain peak, but they will level-out at a high plateau, -- a plateau that is higher than previous peaks in the housing cycle," Lereah said.
Sure, nominal homes sales are likely to fall to a "plateau that is higher than previous peaks in the housing cycle" due to a significantly larger population and a larger 2nd home market. However, if one looks at residential construction as a percentage of US GDP there will be no 'high plateau."
Unlike the post 1929 stock market collapse, the US is NOT headed for a depression type situation in the next few years. A recession? Yes. A depression? NO.
Just like Irving Fisher, David Lereah also owns speculative shares, in the form of multiple condo units. The parallels in history are really fascinating.
Posts
Happy Bash David Lereah Day!
ReplyDeleteIsn't it obvious that the rampant growth in the number of real estate "speculators" is proof enuogh that the slide down the mountain will be severe, deep and long term?
ReplyDeleteJust a thought :) Good stuff keep posting
What level do you think will cause a recession?
ReplyDeleteA 10% drop in housing prices alone is enough to cause a recession. You are talking about taking something like $5-$6 trillion in value out of the real estate market, given that the total value of residential real estate in the US was about $50 trillion in 2002.
Most of that is going to come on the equity side, not the debt side.
So, you are going to pull $5 trillion out of the wealth of the nation? The Nasdaq crash of 2001-02 pulled out about $4 trillion (the total market cap of the NASDAQ at peak in 2000 was $5.4 trillion).
At a 25% reduction in prices, you are talking about pulling $12.5-$15 trillion in wealth out of the country. That's the equivalent of every stock on the NYSE going into bankruptcy.
That would cause a depression. That means you are eating cat food. You can't afford a house because you don't have a job. And blogging ain't going to pay the rent.
So I take it you think that prices are going to go down less than 25%, right?
"So I take it you think that prices are going to go down less than 25%, right?"
ReplyDeleteNationally? Yes. Prices will fall less than 25%.
In bubble markets? Prices have already fallen in some of them. From here on out, I expect inflation adjusted prices to fall between 20% to 55%. These are places like Phoenix, Fresno, Miami, Washington DC, Boston, Las Vegas an many other metro areas across the US.
Ok.
ReplyDeleteLet's take the extreme. What would lead me to sell a property a price that is 55% lower than it "current" value?
Make the math easy - I own a $500,000 townhouse in the DC area. I put down 5% equity - $25,000, and have a $400,000 first trust at 5.5% and a $50,000 second trust at 7%.
I pay $2271 on my first trust and $332 on my second trust. Call taxes and insurance $500 a month, and I pay $3100 per month.
I have $20,000 in other savings.
I work for the government at a decent level - say $100k per year - and my after tax take home is $5,500 per month. Given that the government is kind enough to rebate me $600 / month or so on my interest and taxes, I can pay my mortgage and have $1,900 left over per month. Not great, but not shabby. That pays for my food, utilities, my SUV, gas, and a couple of Nats games a month.
Now the bubble bursts. The house I bought at $500,000 is now worth $225,000 (55% less).
I have two choices - I can sell at $225,000 and bring a whopping $225,000 to closing, which I can't possibly do. Or I can sit it out in the house with negative equity.
Let's say I find a job elsewhere and I *need* to move. I could sell. But I can't bring $225,000 to closing. I can rent the place for $1100 per month after the market has crashed. Luckily for me, in my new town, called "Ceterus Parabus," I can rent the same kind of place I currently own for an equal $1100 per month.
Question: do I ever put my house on the market for 45% of the price I bought it for?
OK.
Different scenario.
I'm the same guy living in the same house, with the same salary. But - God Bless America - the bubble bursting only cost me 20% of the value of my house. So now my $500,000 house is worth $400,000. If I sell it, I would have to bring $75,000 to closing, which I might be able to suck up under the right scenario (loans from mom and dad, etc.), but it wipes out my $20k in savings. What incentive do I have to sell?
You can rinse and repeat the same scenario if I have to move - I rent my old place, and rent a similar place in Ceterus Parabus. But in any case, I avoid bringing $75k to the table. I'd rather bleed on a monthly basis - which I can afford - than try to make a payment I can't possibly make. (Sure, I could get an unsecured loan, but I would be acting irrationally - choosing a higher, unsecured interest rate for a lower, secured interest rate).
In either case, my house doesn't go on the market for sale. It's simply a matter of being forced by economics NOT to sell my house.
Now if I lose my job and don't have any income for a long period (e.g., 6 months, the length of my personal savings), maybe I declare bankruptcy. But I probably do that ANYWAY even if my house is still worth $500,000.
And mind you, while this boom was going on, we had a new bankruptcy law passed that is so hostile to personal bankruptcy that most lawyers would tell you to suck it up if you could.
You can raise the fact that a fair amount of homes owned by speculators. But they need to bring money to the table at closing, too. They have similar calculations, if not more painful ones.
Sooooo, wrapping up, let's call me "SUPPLY." At increasingly lower prices, I am more and more unwilling to put my house on the market. Now let's call the buying public "DEMAND." You can't buy my house for 45% of what I bought it for, because I won't sell it to you.
What we will wind up with is an EQUILIBRIUM PRICE at which I will sell it to you, and that ain't 20% less than the price I bought it at last year. It may be 5% less, but it ain't 20%.
In the end, lower prices go, the less supply that will hit the marketplace. So while you think that the market needs to be repriced 20% lower in some hot areas, the market is probably going to put on the brakes somewhere lower than 20%.
So who sells at a 20-55% reduction in value? I guess only the people with extremely high equity in their houses.
The only question is - what percentage of sellers are those that COULD sell their house for less than 80% of its value? If those people are the only sellers - and you'd have to get data on how many homeowners fall in that category - that supply will dry out soon enough, and what you'll get is a relatively stiff bounce from the "bursting" of the bubble.
In any case, I doubt that you'll see any kind of indefinite reduction in prices of 20-55%.
I could be wrong, but that is how markets are made. You think one way, I think another.
(Mind you, the Fed jumps in and lowers interest rates before we get close to a 10% decrease across the board. Bernanke knows where the economy's bread is buttered).
>> Happy Bash David Lereah Day!
ReplyDeletedamn - I thought it was BURY DL day, not bash DL day. ; )
Thanks - I'd hate to show up with a shovel, when a baseball bat's required. : 0
>> You can't buy my house for 45% of what I bought it for, because I won't sell it to you
ReplyDeleteAnd yet you, SUPPLY, did sell it at that 45% in the past, in many, many long-lasting episodes - Houston, Anchorage, OK City. And that's just US examples in the last 30 years - widen your perspective in terms of geography and markets (stocks and Tulips come immediately to mind) and you'll find lots more examples.
Personally, I don't know what will happen - I suspect prices will stabilize for a long time, and let inflation bring house prices "down" but I don't dismiss the other possibility (the one that's happened many other times).
Since we are all the way back to this argument: "not everyone makes 100K per year" lets ask some relevant questions.
ReplyDeleteIf your household income is less than 100K per year:
1) what is your line of work?
2) how old are you?
3) are you married?
4) what is your educational level?
YES, all of these things will affect your perspective. If you are a 25 year old, unmarried clerk at Barne's and Noble, with a B.A. from Strayer in Marketing and Communications, then you cannot afford a house.
Hey, it happens to most everyone in their 20's RELAX!
And yet you, SUPPLY, did sell it at that 45% in the past, in many, many long-lasting episodes - Houston, Anchorage, OK City. And that's just US examples in the last 30 years
ReplyDeleteOK, Houston, you have a problem.
http://recenter.tamu.edu/data/hs/hs280a.htm
I see a decrease from a high average price of $105,500 in 1983 to a low average price of 79,700 in 1988. In nominal dollars, that's a 24.4% decrease. Adjusted for the local Houston CPI, it's a 32.8% decline in real dollar terms. Not quite the 55% decrease you suggested.
Moreover, that is the average house price sale in Houston. My data source does not have MEDIAN home sale price going that far back, which would be more meaningful. If you look at later data, the median price is a good 20% lower than average price. My guess is that the high end of the Houston market was hit much harder than the low to middle part of the market, and the real decrease in the median price was far less than the average price. That is consistent with a specific economic cause - the end of the Texas oil boom.
So if the oil boom we are having in the DC area fades, I think, yes, we've got a problem.
But in a time of stable to increasing employment in the DC area, less of a problem.
Anchorage? Oklahoma City?
Both "busts" were also in the 20% range. And both were also oil patch cities in the mid 1980's.
I'm not sure what you can prove with OKC, Anchorage and Houston of the mid-1980's. Give me some median home prices in those areas, and I'll consider the evidence more thoroughly.
Good chart here, by the way...
http://www.fdic.gov/bank/analytical/fyi/2005/021005fyi_table1.pdf
widen your perspective in terms of geography and markets (stocks and Tulips come immediately to mind) and you'll find lots more examples.
Tulips? Wow, that's digging out a 1000-year storm irrational market. And, I guess, you couldn't live in your tulip if you got caught in the downturn. Mind you, the tulip craze featured 7,800,000% price appreciation (that is not an exaggeration), not 100% appreciation. I'll sell my own house well before I get 78,000 times what I pay for it. But that's just me, SUPPLY talking.
http://www.stock-market-crash.net/tulip-mania.htm
Oil patch and tulips? That's all you've got?
Not everyone who bought in the DC area has a secure 100K a year job with the government- many of those SFH abd Townhouses have been bought with little money down or interest only mortages- by those in the private sector. So equity is small to zero- and job secuirty is no guarantee.
Not everyone lives in a $500k townhouse, either. Median income in Fairfax Co, BTW, is $82,000. Median house prices are in the $460,000 range. Not too far off from my math, no?
OK, so wouldn't those who bought with zero money down have even less of an incentive to sell and bring money to the table at closing? An I/O is the same - you aren't gaining any equity, so an I/O mortgagor is even less likely to sell than a 30 year conventional mortgagor.
Now, you're real argument is that there are a bunch of ARMs out there that are going to reset at monthly rates people can't afford. But ARMs from the low point of the interest rate curve have already re-set (a close friend had the worst - or best - ARM, a 6-month LIBOR), and while deliquencies and defaults are up, they are not in themselves that high from a historical perspective.
The employment situation. I don't think anyone could deny that an employment crash in any particular market is going to kill housing prices.
But wouldn't that also be the case if housing prices hadn't increased dramatically in the first place? Seems like if your income is $0 per month, it doesn't matter if your home price increase by 80% in the last two years. You can't afford the mortgage at either price.
Here's my own prediction. DC housing prices will fall 5-7% in nominal dollars over the next 2 years at the market shakes itself out, which will be about a 12-15% drop in real dollars.
Remember, what drives the "price" are current transactions. Forclosures will force down prices. In many of the more, established areas, Boston, NYC, DC, etc. there will be owners that do have significant equity build up (they have live there a long time of have even paid off their homes). We tend to focus on the newer purchases and investors and speculators, but a majority of homeowners have build up substantial equity and they are looking to downsize or retire.
ReplyDeleteEven if you are correct with the other scenarios, these owners must and will sell even with >20% drops.
http://westchesterny.blogspot.com
Since this blog is full of bubble cheerleaders, let me take this this opportunity to cheer for the other team: Great posts Anon 6:14!
ReplyDeleteAnother factor to support prices is increasing income. Government workers (Fed, State and Local) have almost guaranteed annual pay raises. (It's big news when the raises aren't as much as expected and a virtual crisis when a locality doesn't have one). A typical 3% COLA raise would support a 10% increase on your resetting ARM. Add in career progression and people are further able to support increasing mortgage costs and avoid foreclosure. People outside the government get raises, COLA and performance, too.
Most people who stretch themselves to make a home purchase, like first time homebuyers, have a reasonable expectation that their incomes will increase.
There are exceptations, and they will be duly noted and posted here as examples of the crash.
Finally, people who would normally sell, but don't want to take a loss and don't need to sell, won't put their houses on the market, reducing supply. This includes people who have accrued equity and won't be bringing money to the table, but don't want to sell for less than their neighbor did last year.
The reduction in supply will support the prices of those people who really do need to sell.
Since this blog is full of bubble cheerleaders, let me take this this opportunity to cheer for the other team: Great posts Anon 6:14!
ReplyDeleteWell, I think that some people think that there are only two positions: (1) that house prices will go up forever; and (2) that housing prices are in a "bubble" and that the bubble will pop and prices will crash, for example, by 20-55% in the "bubble" areas.
I think there are other positions out there. I don't agree that their is a "bubble" because that metaphor - and calling the housing market a "bubble" is no more than a metaphor - means that it will necessarily pop.
It would be hard for anyone to disagree reasonably with the proposition that, by essentially every measurable data point, housing prices are in the top range of prices historically. By that, I mean price-to-income, own-to-rent, etc.
That does not, however, mean that the housing market must, as a rule, crash to the low range of prices historically. Instead, rents and income can rise to push those ratios to historic norms.
I do believe that the current prices are unsustainable in the short term, and that's why I foresee a 5-7% nominal decrease in prices.
But let me also say one more thing - that prices were too low at the beginning of the housing market boom in DC. I think back to my own purchasing experience in 2000 - when the market was just heating up - and, quite frankly, I could afford nearly everything on the market in very desirable locations. That prices in, for example, Alexandria, were flat in real terms for the 10 years from 1990-2000 is remarkable in its own right, given the long economic expansion of that era.
We are coming from too cheap - I don't think we'll go back to too cheap in a hurry.
Anonymous said...
ReplyDeleteLet's say I find a job elsewhere and I *need* to move. I could sell. But I can't bring $225,000 to closing. I can rent the place for $1100 per month after the market has crashed. Luckily for me, in my new town, called "Ceterus Parabus," I can rent the same kind of place I currently own for an equal $1100 per month.”
Are you the only one thinking “I’ll just rent it out”.
Well “SUPPLY”, why would I rent from you at $1100? I think I’ll rent from the guy next door at $900 or from the guy 3 blocks down for $850. Inventory from people that *need* to move, investors wanting to dump and/or rent and foreclosures will flood the market. You will have to price your rental competitively to get a tenant. And don’t forget, if you move out of the area, that’s another 10% off your cash flow to get someone to manage your property.
A few years ago there seemed to be no end in the run up in prices. Now, there seems to be no end in inventory.
>> Oil patch and tulips? That's all you've got?
ReplyDeleteAs I wrote some time ago, go read some Jeremy Grantham, Edward Chancellor, John Kenneth Galbraith and Kindleberger.
Also find Schiller's latest - the long-range appreciation of housing is 1%.
That's a long way to fall for the recent 20% per year to revert to the mean.
Argument from personal incredulity "I just don't believe it".
That's all YOU've got?
>> Tulips? Wow, that's digging out a 1000-year storm irrational market.
once per thousand years? you're claiming to be some kind of expert on bubbles, and you think the Tulip thing was once per thousand years?
Ummm.. I guess you missed the South Sea buble, the Florida land boom of the 1920s, the Internet bubble, USA 1929, France's John Law episode, and dozens and dozens of others ...
Argument from personal incredulity ... that's ALL you've got?
Oh, and those episodes I pointed to .. Houston, Anchorage, etc ... those 20% (nominal, I note, not inflation adjusted) real estate drops happened
ReplyDelete1. with a healthy (actually, booming) national economy
2. were not preceeded by massive housing booms/bubbles - only business as usual
So what happens if
1. the national economy starts down a recessionary road at the same time the housing boom starts to bust
2. the housing bust is preceeded by a massive housing bubbble.
Well “SUPPLY”, why would I rent from you at $1100? I think I’ll rent from the guy next door at $900 or from the guy 3 blocks down for $850. Inventory from people that *need* to move, investors wanting to dump and/or rent and foreclosures will flood the market. You will have to price your rental competitively to get a tenant. And don’t forget, if you move out of the area, that’s another 10% off your cash flow to get someone to manage your property.
ReplyDelete$1100 is a baked-in crash in the rental market. T'aint no $500k places renting for $1100 right now. Doesn't matter - you can plug in $850 for $1100, as long as I can get a similar rental for $850 in my new home town of Ceterus Parabus, the math still works out the same. (Have you tried the cheese dogs in Ceterus Parabus? Fantastic.)
Ummm.. I guess you missed the South Sea buble, the Florida land boom of the 1920s, the Internet bubble, USA 1929, France's John Law episode, and dozens and dozens of others ...
Argument from personal incredulity ... that's ALL you've got?
The "South Sea buble"? You mean the British government-run Ponzi scheme of the 1710's? You cannot compare a government sanctioned fraud to a free market. Do you think the South Sea bubble would have happened without the "sale" of shares to Members of Parliament and the King? There's a qualitative difference between a fraud scheme and a speculatory bubble.
The Internet "bubble" was based on relatively heavily regulated financial securities. As an initial matter, you can't get imputed value from a share of stock (like you can get imputed rent from a real property asset). Second, there is a qualitative difference in leverage. Consider my previous hypothesis; a $25k down payment on a $500k house. I could never, never, ever get that kind of leverage to buy a financial asset. I could put down $250k to buy a $500k house, and I get a margin call if I'm close to exhausting my equity in the financial asset. In any case, 99% of financial investors will never have to bring money to the table to settle a financial asset transaction. And, mind you, the Nasdaq bubble cost the country (and our foreign investor friends) $4 trillion. Since that didn't result in negative equity for a lot of people, the consequences were relatively modest.
Oddly, and as an aside, the Internet bubble would more likely be the cause of the Bay area housing "bubble" more than anything else - that was a wealth driven housing boom more than anything. When you are making new millionaires at a rate of thousands a month, you tend to get rapid increases in housing prices. Supply and Demand.
USA 1929. Another financial asset bubble - albeit without many of the market safeguards in place for the Internet bubble (indeed, USA 1929 generated those safeguards). But the consequences of USA 1929 weren't the Great Depression - that was cause by a worldwide constriction of trade by neo-mercantilist trade policies in Europe and the US. The Depression part of it didn't really start until 1932-33. Milton Friedman would say that the 1929 crash had a role in the "initial recession", but broader macroeconomic factors were at play in the depression. One might argue that the stock market crash had a psychological effect greater than its financial effect - a very small percentage of the population owned stocks in the height of 1929.
The Florida land boom, I would have to study, quite frankly.
Again, I think there are qualitative differences between financial asset bubbles and residential real property asset bubbles. (I distinguish commercial real property asset bubbles, because bankruptcy is a better option for businesses than individuals).
As I wrote some time ago, go read some Jeremy Grantham, Edward Chancellor, John Kenneth Galbraith and Kindleberger.
Also find Schiller's latest - the long-range appreciation of housing is 1%.
That's a long way to fall for the recent 20% per year to revert to the mean.
I guess Schiller is the only economist worth listening to. There's no one on the other side. Hey, Laffer said this great thing about lowering taxes will increase federal government revenues. It must be true, he's an economist! No one takes the other side, do they?
I wonder what Schiller would say about the long-term appreciation of grain prices if he was a late 18th century economist looking at prices from the last 200 years. I wonder how we would laugh at his conclusions now. Bill James would wonder if he is misunderestimating the fog.
I don't believe you can gauge what the long-term price appreciation in real estate housing "should be" given the radical changes in housing finance over the last 10-20 years. I think in 1983, to pick a year (inflation of the 70's had petered out, the economy was emerging from a recenssion), there were too FEW people in the housing market given the relative inflexibility of the mortgages available at that time, meaning that demand was artificially constricted.
Let me give you another argument.
Take the "Is there a housing bubble in DC" graph:
http://mysite.verizon.net/vodkajim/housingbubble/washington.html
I mean, convincing isn't it? Housing prices stayed within a relatively narrow range in real terms, before exploding in the last few years. My God! There's the smoking gun. Housing prices are up 268% in real terms from 1975 to 1995!
But if you overlay the Dow Jones Industrial average during the same period, you will find that, in real terms, the Dow has gone up 471.79% over the same period. By God! There's a bubble in the Dow! It's 200% worse than the real estate bubble! Get him back on the floor and tell him to sell! Turn those machines back on! TURN THOSE MACHINES BACK ON!!!!
And, if you parse the data on the 1975-2005 real estate market, you'll find that real estate only beat inflation in real terms by 3.5% annually during that period. That's a pretty poor inflation adjusted return. If you did that managing a hedge fund, you wouldn't be managing a hedge fund for long.
And as for economists who predict regressions to the mean, etc., sure I buy that stuff. Who wouldn't? There numbers look perfect on paper. But you also have to know from the empirical evidence what the true mean is. Don't you recall the LTCM fiasco? There were some brilliant minds - including the authors of the Black-Sholes model for pricing options - who put a lot of money at risk on the principle that, dammit, something had to give and the market had to correct itself.
And then Greenspan had to pick up the pieces.
Oh, and those episodes I pointed to .. Houston, Anchorage, etc ... those 20% (nominal, I note, not inflation adjusted) real estate drops happened
1. with a healthy (actually, booming) national economy
2. were not preceeded by massive housing booms/bubbles - only business as usual
So what happens if
1. the national economy starts down a recessionary road at the same time the housing boom starts to bust
2. the housing bust is preceeded by a massive housing bubbble.
Houston, Anchorage were oil town markets. Oddly enough, those markets prove the exact opposite points. The macroeconomic factors were against the Houston and Anchorage markets in 1980-82 - we had a pretty severe recession in 1982. Yet housing prices peaked in '83 because the local economy was so good, built largely on the Texas Oil Boom of the period (sound familiar, Bay Area people - local economic boom leads to housing market boom?).
Prices only fell when the local economy sputtered. Real estate is much more sensitive to local economic forces than national economic forces.
OK, now let's assume that there was no housing "bubble." Median housing prices in the DC have increased only 1% faster than inflation since 1999. Now a steep local recession hits (let's say the Republicans really do shrink government and drown it in the bathtub). Do housing prices stay level increase because the prior growth has been "manageable" and "not in a bubble"? Or does the same crash occur because all the GS-15's are putting their houses on the market? Seems like supply is the critical factor, whether a "bubble" or "manageable growth" precedes the steep recession.
Repeat to yourself - "Bubble" is just a metaphor. It is not a set of conditions leading to an inexorable result. "Bubble" is just a metaphor. The data are what they are, and the market is what it is.
I meant to keep all my posts anonymous, simply because my blogger ID is, well, associated with baseball-related blogs. None of these posts (and I admit to 5/27 9:11 p.m., 5/27 10:09 p.m., and 5/28 6:14 p.m.). The opinions expressed herein are not those of Nats Blog or its authors.
By the way, I still predict a nominal 5-7% decrease in median DC housing prices over the next two years, something like 10-15% in real terms. That isn't a soft landing, that's a "recession" in housing prices. But I see a crash as unlikely. I think I see it this way - claims of extraordinary price decreases require extraordinary proof.
Excellent posts, anon. Thank you for taking the time to write them.
ReplyDelete"TURN THOSE MACHINES BACK ON!!!!"
And thanks for working a classic big-screen moment into your recent post.
Looking good, Louis.
bryce
“SuperNoVa said...
ReplyDelete$1100 is a baked-in crash in the rental market. T'aint no $500k places renting for $1100 right now. Doesn't matter - you can plug in $850 for $1100, as long as I can get a similar rental for $850 in my new home town of Ceterus Parabus, the math still works out the same. (Have you tried the cheese dogs in Ceterus Parabus? Fantastic.)”
You’re assuming they still serve cheese dogs in Ceterus Parabus and all will remain equal. (what next Dihydrogen Monoxide poisoning?)
“T'aint no $500k places renting for $1100 right now.”
“Make the math easy - I own a $500,000 townhouse in the DC area. I put down 5% equity - $25,000, and have a $400,000 first trust at 5.5% and a $50,000 second trust at 7%......... I can rent the place for $1100 per month after the market has crashed………..”
So you’re comfortable with this type of cash flow? As you’re running back and forth from Ceterus Parabus to DC to fix the leaky pipes for your renter? I guess with these types of plans afoot, we should see a decrease in foreclosures too. Everything’s all patched up and good to go.
No worries man.
So you’re comfortable with this type of cash flow? As you’re running back and forth from Ceterus Parabus to DC to fix the leaky pipes for your renter? I guess with these types of plans afoot, we should see a decrease in foreclosures too. Everything’s all patched up and good to go.
ReplyDeleteMy cash flow living in Ceterus Parabus is no different than when I lived in DC and the equilibrium price for my house was $500,000.
In fact, my cash flow would be the same whether the equilibrium price for my house was $50,000, $500,000 or $5,000,000.
The only thing that affects my cash flow are my income (has nothing to do with housing prices) and my debt carriage costs / other expenses (also has nothing to do with current housing prices).
And, remember, I'm only moving to Ceterus Parabus because the economy is just like it is in DC.
The government $100,000 job will dissapear promply.
ReplyDeleteCars and the people who adore them; suck.
ReplyDelete"The government $100,000 job will dissapear promply. "
ReplyDeletehuh?
"The government $100,000 job will dissapear promply. "
ReplyDeleteYeah, there are only two or three people in the area with such jobs anyway.
About your cash flow analysis - all those previous price drops couldn't possibly have happened, could they? Why would anyone take a 20% shave when your scenario works so well?
ReplyDeleteIn fact, why is there EVER any drop in house prices if the scenario you outline is so do-able?
Are you arguing that a 40% o 50% drop is completely, totally, absolutely impossible?
The 10% drop you claim is not very much - how many sales do you have to do before the RE agent commissions add up to 10%?
Do you feel comfortable telling people to speculate as much as they possibly can, since housing CANNOT drop very much?
Supernova, you should write a couple of op-ed pieces for Japanese newspapers, telling the Japanese how real estate NEVER drops 45%.
I'm sure they'll be happy to hear that.
The current housing situation has a lot of similarities to financial bubbles of the past.
The current situation is NOT like the business as usual boom-bust cycle, which occasionally led to localized 20% dislocations.
IMHO, it's probable that housing prices will fall a little or stay steady for 10 years as inflation eats away at the bubble gains.
AND also IMHO a 50% drop while not very probable. is not impossible.
The current housing situation has a lot of similarities to financial bubbles of the past.
ReplyDeleteThe current situation is NOT like the business as usual boom-bust cycle, which occasionally led to localized 20% dislocations.
It's nice to argue without data, isn't it? I mean, if it feels true, it must be true, right?
Japan is a good example. I'm glad you brought it up.
Now give me some economic data from Japan at the height of the Japanese asset bubble of the 80's. It wasn't a real estate bubble, because all assets were being overvalued.
Do you know that at the height of the Japanese bubble, real estate was going for $139,000 per square foot? That is 280 times the "bubble" price of $500 per square foot in Lyon Park. When prices "crashed" by 90% in areas, they were still getting 13,000 per square foot.
So, if we are going to have a Japanese type of bubble collapse, can't we have a Japanese type bubble first? I mean, if I could get my house to sell for $13,000 per square foot - one tenth of the peak in Japan - I'd never work a day in my life.
By the way, I took a quick look at Schiller's 1% per year theory. He looks at data prior to the FHA in 1934. What a joke. Totally different supply/demand curve.
"It's nice to argue without data, isn't it? I mean, if it feels true, it must be true, right?"
ReplyDeleteIts called "truthiness"; something avowed non-deep thinkers swear by.
If you can get a copy of the audio from the recent White House Press Correspondent's dinner, listen to it. Nice to know that a satirist can skewer a sitting president with him in the room, even in this political climate.
Its called "truthiness"; something avowed non-deep thinkers swear by.
ReplyDeleteAll right thinking people love Steven Colbert.
The greatest thing is that some on the right don't even know that Colbert is satirizing them - they think he's on their side. (Delay even sent out a fundraising letter citing statements made on the Colbert show as supporting him).
>> It's nice to argue without data, isn't it?
ReplyDeleteYou should know.
You claim All the directly relevant data is irrelevant, and only the data YOU want considered is relevant.
How convenient for you.
You want to nit-pick small details of how the housing bubble is different from other bubbles,
at the same time you want to gloss over how the current bubble is far, FAR different than the usual up and down of housing prices in the regular business cycle.
>> It's nice to argue without data, isn't it?
Your technique is even better - blithely ignore the data you want to ignore & cherry-pick other, irrelevant data data that seems to support you.
How convenient for you.
How inconvenient (tragic actually) for those who will lose their shirts if they listen to RE touts like you and throw all caution to the wind.
>> because all assets were being overvalued
All ? Riiiiiight .... Japanese gold bugs will be happy to hear Gold hit all time highs in 1989.
>> What a joke. Totally different
You remind me of the Internet bubble touts - "It's totally different now".
Sure it is.
It's different from Japan.
It's different from Tulips.
It's different from ...........
PS - I bet you told people to shove their life savings into JDS Uniphase in Jan 2000.
I got out of the Internet bust in March 2000, and am now listening to those who publicly recommended same.
>> So, if we are going to have a Japanese type of bubble collapse, can't we have a Japanese type bubble first?
let me get this right .... all bubbles MUST be identical to a past bubble, otherwise it's not a bubble?
Riiiiight ... So just because Tulips didn't sell on Wall street at the same price they sold in Holland, means there was no telecom/dot-com bubble, right?
Do you have an automatic cherry-picker?
All ? Riiiiiight .... Japanese gold bugs will be happy to hear Gold hit all time highs in 1989.
ReplyDeleteOh, there is special gold that only trades in Japan? I guess all those worldwide trading systems for gold and other commodities don't reach Japan. Gold is not a Japanese asset. Japanese companies and Japanese real estate are Japanese assets.
You want to nit-pick small details of how the housing bubble is different from other bubbles,
at the same time you want to gloss over how the current bubble is far, FAR different than the usual up and down of housing prices in the regular business cycle.
Far different than the usual up and down of housing prices? I think you've got to prove it. Again, the burden of proof for claims that something is abnormal lies with the person trying to prove the abnormality, not the other way around.
Which data are you looking at to prove this abnormality? Because I look at the real estate market from 1989-2006 (from peak to peak) and I see 3.5% annualized real appreciation. That doesn't seem like an unusual figure to me, especially when the Dow and other asset indices have increased at a more rapid rate in their own right.
That prices increase rapidly during one portion of that period doesn't mean the entire period is out of whack.
As for nit picking details about bubbles, let me repeat: In the tulip craze, tulips went up in price by 7,800,000% In the Japanese asset bubble, some real estate was selling for $139,000 per square foot. Those aren't nits, those are orders of freaking magnitude.
We only remember the bubbles because they were so out of the ordinary.
The claim that real estate is in a bubble and it's going to decline in prices by 40-75% in the DC area is an extraordinary claim. It requires extraordinary proof.
PS - I bet you told people to shove their life savings into JDS Uniphase in Jan 2000.
I got out of the Internet bust in March 2000, and am now listening to those who publicly recommended same.
Righhht...you know what my stock picks in 2000 were. And I'm sure you'll provide me with evidence that you got out of the Internet bust in March 2000....
Wow.
ReplyDeleteBubbleheads got one heck of an economics and finance spanking on this thread.
Is it just me or is this the housing blog with the angriest bunch of real estate bulls anywhere?
ReplyDelete"SuperNoVa said...
ReplyDeleteFar different than the usual up and down of housing prices? I think you've got to prove it. Again, the burden of proof for claims that something is abnormal lies with the person trying to prove the abnormality, not the other way around."
The only burden I see is your ARM adjusting and your mortgage payments doubling. Oh yea, and feeding “fritz"
>>> Righhht...you know what my stock picks in 2000 were. And I'm sure you'll provide me with evidence that you got out of the Internet bust in March 2000....
ReplyDeleteNever claimed my picks were publicly documented -
that's specificaly why I wrote "i'm listening to people who publicly recommended you exit nasdaq in early 2000".
www.itulip.com
>>> The claim that real estate is in a bubble and it's going to decline in prices by 40-75% in the DC area is an extraordinary claim.
Please read my posts again. I've never written that that's going to happen. If you read carefully I've written several times that the most probable outcome is no price reductions at all.
AND, at the same time, 50% reductions are not impossible.
I've been pushing caution - that's all. There are parallels with past bubble situations, and divergences from previous normal business cycles.
>>> It requires extraordinary proof.
No, it doesn't. This is consumer affairs and investing.
Rule number one of being a consumer - "caveat emptor", the saleseman (broker) is a liar.
Just like Rule Number one of investing - Don't lose your money, your broker is a liar.
>>> It requires extraordinary proof.
completely, fatally, WRONG. Caution with your money is the STANDARD. It should be the pre-supposition until the broker/salesman/tout proves otherwise.
>> Far different than the usual up and down of housing prices? I think you've got to prove it
uh.... NO.
In case you didn't know, in consumer affairs, the standard is reversed. The one tyring to push the sale is the one required to refute all allegations.
But I suppose a real estate tout in this day & age has to get people to forget "caveat emptor".
PS - Florida flippers are walking away from $80,000 deposits - maybe they followed your advice and thought
"bubble? PROVE IT. this is Florida. Prices will never fall here."
http://globaleconomicanalysis.blogspot.com/