Monday, June 14, 2010

Savings gluts


Ben Bernanke would be very disappointed with all of you. (...OK, 99% of you.) In the poll I ran on this blog last month — "What sparked the housing bubble?" — Ben's pet theory of a global savings glut came in dead last. It even lost out to "There was no bubble." For shame!

Old polls are displayed in the sidebar. Just scroll down.

57 comments:

  1. It is frightening that this idiot still has a job. In the dictionary under the word incompetent should be his picture forever immortalized.

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  2. The rule of thumb is that you should not buy a home that is more than 2.5 times your income. Those who didn't follow this rule are now losing their homes.

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  3. 2.5 is the smart number. Banks decided that 3-4.5 was acceptable. I'm amazed at the number of people who now think that 3-4.5 is a reasonable number. Like you say, they are the ones loosing their homes now.

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  4. I'm not a fan the current budget poll on the US budget. The choices leave out any nuance in how cuts or taxes should be implemented and the devil is definitely in the details. And instead of "don't balance the budget" I think a better choice might be, "don't address long term debt growth". An annual "balanced budget" isn't a necessity if we keep debt as a % of GDP reasonable.

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  5. Boom Boom Bernanke, poor guy. Wrong about most stuff and confused about the rest. Reminds me of High School!

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  6. What your home should cost in relation to your income depends on the interest rate. If the interest rates are 20%, I doubt you can even afford 2.5 times your annual income.
    Also, Monday morning quaterbacking is easy. Essentially, one should buy a home if one can afford its payments even at the cost of cutting all other discretionary spending.
    The question is then was it a good investment? The answer being as we all know, yes if it goes up in price and no if it does not.
    Hundreds of people I know made millions buying and selling homes they could not afford. Others have lost most of their savings buying home that went down in price which they can afford but have never the less woped them out.

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  7. "Others have lost most of their savings buying home that went down in price which they can afford but have never the less woped them out."

    Explain to me how they were "woped" out buying an affordable home. Of course if they lost a job or had other extenuating circumstances that would be the cause. But how does one get w[i]ped out buying a home 2.5 times their income?

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  8. If the interest rates are 20%, the home prices will be adjusted to meet payment ability.

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  9. I would love to see interest rates of 20%

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  10. Historically the Fed has not raised the Fed Funds rate until unemployment drops significantly. Based on the the Fed's own forecasts of the unemployment rate and inflation, the Fed will probably not raise the Fed Funds rate until late 2011 at the earliest.

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  11. nonpartisan said...
    I would love to see interest rates of 20%

    Yeah, that would be a great way to drop housing prices while simultaneously destroying the economy. I'd LOVE it.

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  12. "Yeah, that would be a great way to drop housing prices while simultaneously destroying the economy. I'd LOVE it."

    So would 30 million seniors who are destroying their savings and don't really care about flipping houses.You can always come up with an excuse NOT to do the right thing.

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  13. If mortgage interest rates were 20%, inflation would probably be 15%, so the effect of interest rates on home prices would be minimal.

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  14. kahner said...
    I'm not a fan the current budget poll on the US budget. The choices leave out any nuance in how cuts or taxes should be implemented and the devil is definitely in the details.

    Do you know how complex the poll would be if I tried adding every nuance that satisfied everyone? I think when you're looking for nuance, you're looking for a free lunch approach to reducing the deficit. Keep dreaming. The poll was intentionally designed to only allow general votes on big items. I didn't want people to say we should reduce the deficit by "cutting welfare" or "cutting pork" (both being minuscule percentages of the overall federal budget).

    kahner said...
    And instead of "don't balance the budget" I think a better choice might be, "don't address long term debt growth". An annual "balanced budget" isn't a necessity if we keep debt as a % of GDP reasonable.

    If you haven't noticed, poll options are space constrained. Furthermore, while you are technically correct, the federal government is so wide of that mark that your point is academic.

    The problem I see with the "don't balance budget" option is that it doesn't give timing options. Keynesian theory says that during a recession we should be running a large deficit.

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  15. "James said...
    If mortgage interest rates were 20%, inflation would probably be 15%, so the effect of interest rates on home prices would be minimal."

    James, you are WRONG. If interest rates went to 20% it would send home prices tumbling. PERIOD!

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  16. I'm shocked to see people say that 20% interest rates wouldn't affect home valuations in real dollars. I was just as shocked to see interest rates as the #2 reason for the collapse. Plot out the Prime rate and the Case-Schiller. It'll become obvious.

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  17. Well, it still shouldn't shame Ben because the wisdom says that the majority opinion is usually the wrong opinion. History proved that.

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  18. "Alpha Check said...
    I'm shocked to see people say that 20% interest rates wouldn't affect home valuations in real dollars."

    In real dollars yes. 20% interest sends real prices down. In nominal dollars, not so much.

    http://seattlebubble.com/blog/wp-content/uploads/2010/02/KC-Home-Price_1950-2009-nominal.png

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  19. US housing starts fell more than expected in May to their lowest level in five months, as a popular homebuyer tax credit expired.

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  20. Dist. of Columbia median home values -- Adjusted to 2000 dollars

    1940: $78,800
    1950: $87,800
    1960: $75,900
    1970: $81,800
    1980: $136,200
    1990: $158,300
    2000: $157,200

    Source: U.S. Census

    For the 10-year period of 1990 - 2000 prices declined.

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  21. Regarding above, 30 years later (1940-1970) prices increased a mere $3,000.

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  22. james said :" I think when you're looking for nuance, you're looking for a free lunch approach to reducing the deficit. Keep dreaming."

    Why would you think that? Seem like quite a jump to go from me talking about nuance and you claiming i want a "free lunch". There just happen to be many ways to cut spending or increase taxes and they have very different implications and effective outcomes. For example on Social Security you could change the way inflation calculations are made with relation to benefits, increase the age to qualify, remove or raise the cap on the tax or you could privatize accounts etc etc. None are a free lunch, but all are very different. The same goes for each option. So 2 people with extremely different opinions might both say "cut SS" while meaning very different things. So it seems to me this particular topic seems ill suited to a poll, given the limitations of the poll which you cited. I do think its interesting that when I make a mild criticism of the poll you immediately attack my motives as looking for a "free lunch" though. This is the second time you've done something like that and I can't help wonder why you become so defensive/agressive when faced with criticism.

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  23. "Regarding above, 30 years later (1940-1970) prices increased a mere $3,000."

    If these are inflation adjusted (year 2000 values) shouldnt they have not increased in the slightest? Also, why the heck did they double in value in 1980 and 30 years later, not return to the inflation adjusted trend? Weird...

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  24. They haven't returned to nominal inflation adjusted values because the bubble hasn't deflated.

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  25. "Alpha Check said...
    They haven't returned to nominal inflation adjusted values because the bubble hasn't deflated."

    Really? Cause unless the bubble is 30 years old & running, it looks like DC home prices permanently diverged from inflation starting in 1980.

    Even worse, if you were strictly of the "home prices track inflation" doctrine, you would refuse to buy in 1980 as prices were running about double inflation. If you had, you would still be waiting, now, 30 years later, for prices to hit their 1940-1970 inflationary trend.

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  26. You might want to cross check with interest rates. As rates went down, people could afford more home for the same payment. The overall trend is down after a Prime rate peak in the early 80's. The prime rate stayed below 6% from 1930 until the late sixties, peaked in the early 80's, and the overall trend is down. Other than inflation, home prices are closely coupled to interest rates.

    http://www.moneycafe.com/library/primeratehistory.htm

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  27. "Even worse, if you were strictly of the "home prices track inflation" doctrine, you would refuse to buy in 1980 as prices were running about double inflation. If you had, you would still be waiting, now, 30 years later, for prices to hit their 1940-1970 inflationary trend."

    Just proves to me that the whole "home prices track inflation" line is a bunch of hooey.

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  28. First, I've not commented here in ages, and kind of quit reading this blog back in '08 when it was clear that the whole system was finally collapsing. I pretty much thought that signaled that events had borne out the bubble-heads' (like me) predictions and ended the debate. I'm happy to find that James is still keeping the blog going and that there is some place one can find lively debate still going on; of course, this is because, inside the district, the bubble appears to be lingering.

    Just proves to me that the whole "home prices track inflation" line is a bunch of hooey.

    So, I really take issue with this, and I think the census data pretty well demonstrates that. However, it's simplistic to suggest that the equation for arriving and housing prices is a single-term equation. Yes, if all other things are equal (ie, no other terms in the equation change), then housing prices track inflation - specifically, wage inflation. When easy and cheap credit supplements wages (by increasing their leverage) it's just like wage inflation: and housing prices bubble up. Clearly, you have at least two terms in here now: wage inflation, and the interest rate (leveraging) factor.

    There are other terms though - demographics is a big one. If population is growing, then demand grows. DC was steadily declining in population over the period covered above, up until 2000, when it started to rebound. There is certainly a new demand from DINKS, Hipsters, et al, deciding to choose 'urban' living over new construction out in the 'burbs. How sustained that is (as they marry and have kids, later in life than their parents), remains to be seen. There may be a fundamental shift away from the 'burbs back to the urban core, but I'm betting the DCPS says no to that.

    The other big, big factor is the overall economic health of a region. If the local economic engines decline, population and wages decline. Government - whether by federal employees or "private" contractors (hard to consider taxpayer funded enterprises "private"), is not declining and neither are those wages. That certainly enables DC to remain more stable than other areas of the country (about the only part of "it's different here" that's remotely convincing).

    Still, in both of these cases, prices are dependent on wages, and without the cheap and easy financing leverage, it's difficult to see how you sustain a high income/price ratio. Opting for that ratio is only a win when you count on price inflation (see '02-'06) to offset it.

    I think DC's solid employment picture has kept it from plunging like CA, GA, AZ, NV and FL. Although the supply of greater fools is pretty much endless, the supply of mortgages for them is not. Today's super-low rates are a reflection of drop-off in demand (qualified borrowers).

    It's gonna be interesting to see what happens in the next six months now that the gov't interventions have played out - and I'm delighted to see people like Lance on here - I'm looking forward to another bite of schadenfreude.

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  29. Montpellier, excellent write up. I too am waiting to see what happens in DC/NOVA. I think the home values have appreciated at a rate that isn't supported by wages. Most of the private contractors and government workers make between 75,000 and 140,000, but the homes price as though that demographic is making 140k-190k. Either that, or my math is all wrong. It seems like if you want a house (2+bed 2bath) that's in decent shape the prices are still north of 500k for stuff that's reasonably nice.

    One other factor that pulls home prices away from the inflation rate is the downpayment requirement. 20% down slowed the rapid rise up the property latter. 100% financing esp coupled with an interest only loan allows someone to purchase a house significantly larger than the 20% down, payment at 30% of monthly income rules would allow causing home prices to inflate significantly faster than wage growth.

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  30. Montpelier, i agree with most of what you said except "Today's super-low rates are a reflection of drop-off in demand (qualified borrowers)."

    I don't believe that mortgage rates are down due to a decrease in qualified buyers. My understanding is that mortgage rates are mainly determined by the MBS market yields, which in turn are driven by a broad set of macro influences.

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  31. kahner - one of those "broad...macro influences" is the demand for MBS products...demand (qualified borrowers) relative to supply of money. There are other macro factors (MBSes are, now that we are back to FNM, FRE, FHA secondary market lending guidelines, seen as safer than many other places to park money), but the demand/supply are a huge part of it.

    Alpha Check - I'm watching a couple of the newer inner neighborhoods - DC only - the more recently gentrified (see CH, Petworth, Shaw/14th) - where I think the bubble is more obvious than say, Woodley, Archibold-Glover, Tenley. In many, many cases you are talking about silly housing stock - Wardman Row houses - for >$500k.

    Let's say you have a two-earner household, at $100k each; that gets you to a $500k house at reasonable ratios, but if you've got to pay for private schools on top of that...well, it gets spendy. Now consider that prices in NoVa and MoCo have fallen quite a bit, and there are public schools you can use and larger housing, for the same price or less....

    I'm just not persuaded that many of these new "up and coming" neighborhoods make sense. They made excellent sense in '02-'03, when you could get in for a lot less. I think the supply of DINKS interested in the strictly urban lifestyle is limited.

    Your comment about down payments is spot on and yes, it's another important term in pricing - the smaller down payment is another form of wage leverage.

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  32. In REALTOR-speak(tm):

    wage-leverage=="affordability"

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  33. Montpellier,

    Yeah, I'm expecting to see the borderline new neighborhoods collapse to some degree.

    Overall, I think the modest contraction coupled with tighter lending standards will be a drag on home prices, even if everything else is equal. I'm hesitent to get into a market where a 5-10% drop in price is 25-50k drop in cash. I'd rather see the drop in cash values first and then buy while I think the market will be flat instead of falling.

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  34. Montpelier, yes, supply and demand is a factor, but more influential are broader economic conditions since investors can easily more money to any other investment of similar risk. MBS sales are not occurring in an economic vacuum. Just like any bond, its treasry rates, inflation expectations and risk that drive prices and yields across the fixed income market.

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  35. There may be a fundamental shift away from the 'burbs back to the urban core, but I'm betting the DCPS says no to that.

    Two things: congestion and gentrification.

    The very poor are increasingly being priced out of the city--particularly on the periphery of desirable neighborhoods. Not to put too fine a point on it, but *that* is the problem with DCPS--and the reason for every other type of bureaucratic dysfunction in DC.

    Meanwhile, there are about 6-10 very good elementary schools on Capitol Hill now--a decade ago, there were what? 2? 3? The same process is bound to happen in areas like Adams-Morgan and Columbia Heights as the projects close, and Section 8 housing converts to market-rate, and the DC's reputation improves.

    The second factor is the insufferable regional traffic congestion. For many younger folks (and older DINKs) who work in the city, moving out is not an option. Where are you going to move? Anything outside the city, and you've bought yourself an extra 1.5 hour commute.

    You could be right that the a house in DC is the same as a house in MoCo or NoVa--I'm betting not, but we'll see.

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  36. @ Alpha Check:

    Most of the private contractors and government workers make between 75,000 and 140,000, but the homes price as though that demographic is making 140k-190k.

    Is that 75-140 household income? Or the salary of individuals? I have yet to meet a single-earner household in middle-class DC.

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  37. I meant as individuals. I also wasn't really talking about "middle class" DC. Considering that median income is more like $60k, and that's median household income.

    http://quickfacts.census.gov/qfd/states/11000.html

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  38. Montpelier, welcome (or I should say welcome back).

    I too am glad to see some signs of life back in this blog. Its getting boring ridiculing Nonpartisan and Noz for their permabear views.

    Anyway, care to join us in predicting where case shiller prices will bottom for the DC area? Currently it is at 175 or so.

    I say we may reach 150 at worst, but 160 is likely the bottom sometime between now and 2013.

    Noz says we hit 135 by 2013.

    NonPartisan says we hit 100 (or worse) by 2013.

    Care to make your predictions as well? Nothing really at stake, other than to laugh at those who are wrong. However, if you are looking for "another bite of schadenfreude", heres your chance to join in.

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  39. Also, please do not misinterpret the tone of my post above. While I have utter contempt for Noz and NonPartisan for what are completely nonsensical views, its obvious from your comments you have a good understanding of fundamental factors that dictate prices.

    Thus, while I think I disagree with you in terms of what happens to prices, im not sure (we may be expressing a similar result, just in different terms). The only way to be sure is if you give us a numerical value that we can all see and judge for ourselves whether it proves correct or not.

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  40. Wow, contempt for me? Hmmm...wonder why. I feel the exact opposite of you - probably because you will help end up making me look very good - as you get flamed...while you WAL!

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  41. Hi Partisan - yeah, I'm not sure I'm ready to make a prediction yet. I will readily admit that things have not fallen nearly what I expected even now. I'm seeing a lot of "shadow" inventory in the neighborhoods I'm looking at, so we'll see. I am definitely not calling for 100, but I need to think about that a bit more.

    I think calling a "bottom" in 2013 is early, and I think 160 assumes a lot of bubble inflation gets baked in. that's not unheard of - see the 1980 bump, which was certainly a reflection of the 70s inflation. The difference though is that the 70s wage inflation was baked in; real wages have not increased, and now de-leveraging is a bitch.

    I think you know, by your very challenge, that my schadenfreude and yours will not coincide. Nice bait though.

    Alpha Check - I think the problem with using "median" is that it does not reflect the real nature of changes in the market - the population mix may be shifting and with it, the housing transactions. That is: the housing market may be comprised solely of upper-50% earners, while the bottom 50% are none, and are being pushed out of the city...which brings us to..

    Gentrification and Congestion: these are certainly the idea. My block (well, my GFs, I own property in the hinterlands of Virginia) has shifted in the past five years - she was the first gentrifier on her block, which is now almost 80% gentrifiers. Prices have more than doubled in that period. Incomes have not. The mix of incomes has. There are families, but it's an open question if they remain. The level of crime, trash, and "urban" nuisance (noise from the halfway house group home next door, for example) have remained more or less constant.

    Yes, the DCPS' problem is their demographic mix. It is not unions, terrible teachers, or far too many highly (over) paid administrators, although all of those things are true/real as well. Gentrification only "fixes" this if parents enroll their kids and get involved. I think it's an open question still, but I'm not optimistic: how many parents - even gentrifying do-gooder, public school advocate parents (see: Chelsea Clinton, Sasha and Melia) decide to use their children to fight their battles? Not so much. This is not to slam DCPS or the kids they serve - I've been a PS teacher, and I know the kids and the school are grappling with hard problems which are not solved TFA "Blackboard Jungle" enthusiasm or Standards based testing.

    Congestion...I have to admit: I'm kind of shocked/stunned at the 30-45 minute reverse commute the GF endures living in DC!. To be sure, parked out on 66 for 2 hours each way is worse, but still...I think this is the single most persuasive argument in favor of a real, fundamental shift, but even then...

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  42. Concur on median. Not my choice to bring it up. I was focused on what is probably the top 30-40%, before "middle class" was brought up. Considering that the home ownership rate is roughly 60ish%. Median income isn't as important as the distribution of the top 30-40% of earners.

    As a side note, I think people need a expectation adjustment, as the middle 50% of earners don't make what people think of as "middle class" wages.

    This is part of my theory though. I was astonished when I looked at the real information on income distributions. The real data do NOT even come close to reflecting what we see everyday at the mall, or driving around town. What we see makes us believe that middle class is 100k (individual), when that's pretty far from the truth.

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  43. Montpelier - I understand your reluctanct to make a prediction. Schadenfreude is a bitch. Take my friend NonPartisan for example.

    It was just over 1 year ago during this epic thread where I came into existence as "Partisan".

    http://bubblemeter.blogspot.com/2009/05/case-shiller-price-index-march-2009.html

    Here is the salient discussion:

    MAY 2010
    ++++++++++++++++++++++++++++++++++
    NONPARTISAN - Nominal bottom will be back to baseline of 100, or even less with an overshoot....This is one bell-shaped curve that will be respected.

    __________________________________
    PARTISAN - there is nothing, I repeat nothing in the data to suggest that we go below 140...

    Current futures market has us hit bottom at 160 - meaning David is being a bit generous saying we will hit 140-150 range, but not outrageous. Regardless... there is nothing that supports a nominal value of 100.

    __________________________________
    NONPARTISAN - How about I rephrase as follows: Prices will return to nominal 1997-98 levels.

    __________________________________
    PARTISAN - disagree again. If everyone is going to 1998 levels, places like DC need to go to an immediate, much more severe downturn, places like atlanta need to immediately turn to flat and places like detroit need to shoot upward... In the end, there will be some winners (DC which will never sniff 1998 again) and some losers (Detroit which will take years to recover to 1998 prices).

    __________________________________
    NONPARTISAN - Well, time will tell. However, if other markets are in fact already in the mid-1990's range, then I feel even more strongly about other areas following suit. The "It's different here" philosophy is a pile of crap....

    __________________________________
    PARTISAN - the fact that you are resorting to memes "its different here" is just sad...

    Bottom line is this, stop with all the god damn memes suggesting "its different here" isnt true. The fact of the matter is EVERY PLACE IS GOD DAMN DIFFERENT!

    _________________________________
    PARTISAN - Sorry but I cant help myself. I still cant believe you went back to the "its different here" meme. In the DC area median household income grew 30% in the last 7 years. Pretty fantastic growth - maybe the highest in the nation.

    By contrast, Detroit median household income went DOWN -1.3% over the last 7 years....

    That sure looks DIFFERENT to me. Doesnt it to you? If you agree that it is DIFFERENT, then why wouldnt we see DIFFERENT results in pricing? OR do you believe fundamentals dont matter?

    _________________________________
    NONPARTISAN - prices will of course stay much higher in DC compared to Topeka and Detroit. But they are still going back to 1990's prices, respectively. Bell shaped curve will be completed.

    __________________________________
    PARTISAN - Nonpartisan - with all due respect, you just dont get it. Simply repeating the same thing doesnt show much of an acumen for debate. Perhaps you want to advance an argument for why areas that had massive income gains are no better off than areas that had income declines. You will find we are willing to entertain outside the box theories so long as they are intellectually honest.

    That said, repeating bubble mantras wont cut it my friend!

    ________________________________
    NONPARTISAN - well, maybe because the FIRE economy is burning to the ground, and anyone with deep pockets (defined as >250K/year) is going to get them picked by Robama Hood. Bottom line is that these "massive income gains" carry as much weight as bubble mantra. The reset button has been pushed. There is no safe harbor, IMHO. Time will tell. I WILL BOOKMARK THIS POST AND RELOOK IN MAY 2010. Good luck!
    +++++++++++++++++++++++++++++++++++


    Hey NonPartisan, since you are here, why dont you tell me, tell us all, what have you learned since May 2010?

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  44. I have learned that it is definitely possible to kick the can down the road

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  45. Yep, and all the while, incomes in DC have continued to grow. So what does that tell you about the eventual shape of the "bell curve"?

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  46. It tells me that short term fudged data, such as your above statement, are irrelevant.

    And that can kicking has definitely eradicated the bell curve - it will not complete itself, but rather way overcorrect on the downside - so that the curve, over many years, the curve will look like a sine-wave.

    So, effective now: bell curve is gone - sine wave is the new paradigm

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  47. Partisan -

    I read your may exchange back in May - I've been lurking again for a while. I really didn't have a solid objective basis for making a prediction then, and I don't yet. Frankly, I don't think either of you two do either, the pissing match notwithstanding.

    Kahner is right about larger, macro trends well above and beyond the local scene influencing things - strongly. I think we could be tipping into a double-dip in the broader economy and all bets are off. DC proper may not have plunged as quickly as I expected it to, and as many other areas have (just outside the beltway - part of the DC MSA), but that may be attributed to short-term distortions rather than any exception to fundamental trends. There is a lot of shadow inventory, and a lot of distressed property.

    In just our block, there are four houses in limbo - one contract that's been dragging on for almost two months now (I'm betting it falls back out), one foreclosure that's been in limbo (and vacant for over a year), one bubble-buyer who is already 10% ($50k) below their '06 purchase price (and no nibbles) and an almost identical unit right next door for $10k less, with no nibbles. On the other hand, I watched another nearly identical home, further from metro, actually gain slightly - a flip, for $525k.

    I'm not willing to make an index call because I don't really have a sound basis for making one - and as I've already admitted: I would have bet we'd be a lot further along the decline than we are now. Volume is way way off (as I would predict as a doomer) and prices are sticky, but eventually, as foreclosure processing (not Trustees Sales notices) picks up, prices will fall, absent real wage inflation.

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  48. And this thought about gentrification or "the shift in income mix inside DC proper neighborhoods": much of that was driven by young, well-educated childless folks who didn't want a commute observing a lot of nice, older (run down and nominally inexpensive) housing stock which was very conveniently located. But here's the thing: with the 'burbs dropping in price, and the city-center prices running up and remaining sticky...that draw is no longer nearly as powerful.

    Oh, and my peak-of-bubble neighbor trying to get out: their child is now ready to start school; that's what is motivating them to move.

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  49. "Nonpartisan said...It tells me that short term fudged data, such as your above statement, are irrelevant."

    Really? Incomes dont matter then? So hypothetically speaking, if 1 million people moved into the area, all making 1 million a piece, it wouldnt matter? The sine wave would still complete?

    Surely you can agree that incomes can permanently move the trajectory one way or the other. I can tell you with absolute certainty that if incomes plunged, prices would too. Why cant you concede the opposite? Why must it always be memes like bell curves and sine waves?

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  50. Montpelier, I agree with you very much on the presence of shadow inventory, I just disagree on its disposition.

    It is fully acknowledged that if it came out in a huge snog, prices would crash. Likewise, if they were drip drip dripped onto the market, prices would stabilize.

    As it turns out, the latter has happened, and now that it has, I dont see the banks changing course now (not so long as MTM remains suspended). Sure, they may eventually try to speed up and dump more. But if they do, and prices start going down again, im sure they will do what they did before and continue to drip drip drip.

    Note, thats why I see there is no chance for any real price increases for years. The long slow release of shadow inventory will keep any real price increases in check.

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  51. "Montpelier said...But here's the thing: with the 'burbs dropping in price, and the city-center prices running up and remaining sticky...that draw is no longer nearly as powerful."

    Agree, the substitution effect will bring more of an equlibrium between close in and far away prices. But as you can surely acknowledge, it can be resolved in one of two ways. The first is prices close in fall, while the outer areas stay the same, til the equilibrium is restored.

    The other is the close in areas stay the same while the outer areas increase in price to restore the equilibrium.

    So far, it appears patently clear that its going to be the latter and not the former. Median prices in PWC, which was hit the hardest is now going up 20% YOY. Meanwhile, in Arlington, where prices declined the least, they are flat YOY. Keep this up for another 6-12 months, and the equilibrium is restored, no price decreases necessary

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  52. @Partisan -

    I think you're engaging in wishful thinking on two scores:

    1) that the "trickle" of shadow inventory onto the market is deliberate and intentional. I think it's the result of banks being overwhelmed. It's not going to stay that way. The death of Mark-to-Market doesn't mitigate this. Eventually the properties go in auctions, even if it is deliberate, and all the interim carrying costs pile up.

    2) that prices are stable close in and we'll return to "equilibrium" by price increases further out. Prices further out are finally starting to come back in line with incomes. Prices closer in are not.

    The point I made before about income leverage ("affordability") stands - and although gov't employee wages are good, contractor wages are not so much. This is why NoVa has been hit sooo hard. There is a limit to the number of people willing to pay >$250sf for the housing that comprises much of the city.

    Here's my question: if the historically anomalous runup of prices from '00-'06 isn't the result of leverage, where did the explosion of the new, wealthy buyers come from who wanted in on the city? That's a huge demand increase...you keep insisting that we're at some kind of equilibrium locally such that these prices should be seen as 'natural' demand...where is that huge increase in demand coming from? Nominal wages in this area have risen, and probably done slightly better than inflation, but they sure haven't matched the increases in housing prices.

    Finally: even with mind-bogglingly low rates (well below the kind of 30 year rates we saw in '05-'06), and with the tax credit, sales volume is barely up. I have always thought the affect would move from outer to inner - it would hit the newest stuff first, moving into the established areas later...but in a way, the gentrified areas are newer, at least as high-dollar areas.

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  53. Oh, and my peak-of-bubble neighbor trying to get out: their child is now ready to start school; that's what is motivating them to move.

    Right, but to address this and Alpha Check's point above there's a pretty simple explanation of they dynamic.

    Two decades ago, they'd be renters. They'd finish their lease, move to Centerville, have kids, and send them to Centerville H.S. (or whatever they call it).

    Now let's look at the current situation: you have young couples who bought houses in DC, rather than renting. For a host of reasons, buying a house tends to be a "stickier" proposition than renting (whether or not they're underwater, they've got an investment in the city).

    A lot of these folks may look at the local elementary school, and move to the 'burbs. But a greater number are looking at the local elementary school and deciding it's fine for K-6. They defer the decision to move "until middle school". But the effect on school quality has had a snowballing effect on the sketchier areas of Capitol Hill and areas of NW.

    Leave aside that many folks are deciding not to have children, or to wait until they're 40 to have them, etc...

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  54. Kahner said...
    "There just happen to be many ways to cut spending or increase taxes and they have very different implications and effective outcomes. For example on Social Security you could change the way inflation calculations are made with relation to benefits, increase the age to qualify, remove or raise the cap on the tax or you could privatize accounts etc etc. None are a free lunch, but all are very different. The same goes for each option. So 2 people with extremely different opinions might both say 'cut SS' while meaning very different things."

    Yeah, but they would all agree on the need to cut Social Security. Whether to cut Social Security and how to cut Social Security are two entirely separate questions. It is perfectly reasonable to ask and answer the first before proceeding to the second.

    (BTW, privatizing Social Security would actually increase the deficit because you would still have to pay out Social Security payments to current retirees while redirecting current payroll taxes to private retirement accounts.)

    Kahner said...
    "I do think its interesting that when I make a mild criticism of the poll you immediately attack my motives as looking for a 'free lunch' though. This is the second time you've done something like that and I can't help wonder why you become so defensive/agressive when faced with criticism."

    I wouldn't call my comment an "attack" on your motives. Nor would I call it "aggressive". You take offense way too easily. Sometimes I do make comments that are nastier than they should be, and I may have done that to you in the past, but I don't think the one that offended you above qualifies. Besides, have you seen how Partisan and Nonpartisan fight with each other?

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  55. yes, i have seen how Partisan and Nonpartisan fight with each other and i don't like. i think its childish and non-productive. Perhaps i took your original response as more of "an attack" than is was meant, but conversations via blog post lack the context clues of a face to face conversation. However, i will stick to my complaint that there is no reason to propose that my motive was to "look for a free lunch" when nothing in my comment suggests that.

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  56. james said "privatizing Social Security would actually increase the deficit because you would still have to pay out Social Security payments to current retirees while redirecting current payroll taxes to private retirement accounts".

    Depends on your time horizon and how its structured. short term deficits would increase but over some period of time they would be phased out for long term deficit projections. Its not short or mediu term deficits that i'm particularly worried about, its long term trends which, under current law, explode debt. and perhaps you would not continue paying out benefits to current retirees at all but just transfer a lump sum NPV of payments for x years into a private account.

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  57. One thought on Social Security:

    Social Security is a government program funded by a dedicated tax. There are two ways to look at this. First, you can simply view the program as part of the general federal budget, with the the dedicated tax bit just a formality. And there’s a lot to be said for that point of view; if you take it, benefits are a federal cost, payroll taxes a source of revenue, and they don’t really have anything to do with each other.

    Alternatively, you can look at Social Security on its own. And as a practical matter, this has considerable significance too; as long as Social Security still has funds in its trust fund, it doesn’t need new legislation to keep paying promised benefits.

    OK, so two views, both of some use. But here’s what you can’t do: you can’t have it both ways. You can’t say that for the last 25 years, when Social Security ran surpluses, well, that didn’t mean anything, because it’s just part of the federal government — but when payroll taxes fall short of benefits, even though there’s lots of money in the trust fund, Social Security is broke.

    And bear in mind what happens when payroll receipts fall short of benefits: NOTHING. No new action is required; the checks just keep going out.

    So what does it mean that the co-chair of the commission is resurrecting this zombie lie? It means that at even the most basic level of discussion, either (a) he isn’t willing to deal in good faith or (b) the zombies have eaten his brain. And in either case, there’s no point going on with this farce.


    (http://krugman.blogs.nytimes.com/2010/06/21/zombies-have-already-killed-the-deficit-commission/)

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