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EJ
06-01-07, 04:30 PM
http://www.itulip.com/images/murray.jpgGroundhog day in the housing market

Economists' reactions to the latest housing market news makes me feel like Bill Murray in the 1993 movie Groundhog Day

In case you never saw the movie (http://www.imdb.com/title/tt0107048/), Murray plays a weather man who is sent to cover a story in Punxatawney about a weather forecasting groundhog, which he refers to as a "rat," for a fourth year in a row. Classic Bill Murray sarcasm conveys his frustration about having to cover the cutesy story again. His producer and love interest is played by Andie MacDowell.

On awaking the next day, and each morning thereafter, he finds that it's Groundhog Day again, and again, and again. He finds himself doomed to spend eternity in the same place, seeing the same people do the same thing every day. He experiences the same events over and over. Everything happens the same way. The waitress at the local diner has the same conversation with Murray and spills a cup of coffee at the exact same moment each day. To Bill, the repetition is maddening, but to the waitress and other people in his day the events are new each time. Here's the trailer.



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<embed src="http://www.youtube.com/v/l4TYRLjpjYI" type="application/x-shockwave-flash" wmode="transparent" height="350" width="425"></object>

Last few years, talking to most economists about the housing market has gone like Murray's conversations with MacDowell in Groundhog Day. Events unfold with maddening predictability, yet to most economists they are new and fresh... every single time. We've been having the same conversation, with minor variations, since August 2002 when iTulip was one of the first to make the case (Google search claim verification: housing bubble 2002).

August 2002

We said: Yes. It's a Housing Bubble. (http://www.itulip.com/qc082002.htm)
The historical average for the cost of a mortgage is 25% of gross income. That's what the banks used to recommend, before they got desperate for households to sell mortgages to. In bubbly real estate market like Boston's today the average mortgage has reached 44% of income. That's a housing bubble. Period.

Why is income growth rate versus price a valid measure of a housing bubble? The out-of-whack relationship between income and price reveals the disconnect between price and risk in a housing market bubble the way the out-of-whack relationship between P/Es and price do in equity market bubbles. An indication of the top of a bubble is a change in the tactics of sellers as they run out of buyers. In the case of the stock market bubble, we saw the marketing of equity product in more and more rarefied packages, a mutual fund marketed to women, for example. An example is Women's Equity Mutual Fund (FEMMX), a fund that's holding it's own well, by the way. In the case of the housing bubble, the sellers are banks and mortgage companies. When they start running out of mortgage buyers, they naturally start selling mortgages to more and more people who are less likely to pay them back.
They said: A Boom but no Bust (http://www.msnbc.msn.com/id/3072587/)

After watching their stock portfolios disintegrate over the past two years, homeowners can be forgiven for wondering if perhaps housing will be the next bubble to burst. Home values in many places have risen at a quickening, double-digit pace in recent years, and a few economists warn darkly that a collapse in housing is not only possible but likely. Yet the vast majority of analysts see little reason for concern, and history is on their side.January 2004

We said: Housing Bubbles Are Not Like Stock Market Bubbles (http://www.itulip.com/housingnotlikeequities.htm)
If you're looking for the housing bubble to end like the stock market bubble, you'll be surprised. Housing bubbles may run on the same fuel as stock market bubbles, excess money from the Fed, but they grow and collapse according to a different set of functions and dynamics.They said: Freddie Mac: No Housing Bubble (http://www.fool.com/personal-finance/home/2004/07/30/freddie-mac-no-housing-bubble.aspx)

Amy Crews Cutts, the deputy chief economist at Freddie Mac, argued that there is no housing bubble in the U.S. today.January 2005

We said: Housing Bubble Correction - Ten to fifteen years to revert to the mean (http://www.itulip.com/housingbubblecorrection.htm)

Housing bubbles don't collapse suddenly. They go through a long series of self-reinforcing deflationary stages that typically last five to seven years. Given the extreme and unprecedented nature of the current housing bubble, I expect a ten- to fifteen-year downturn to follow this boom. The government will step in with all manner of supports and bailouts along the way, similar to those that created the bubble in the first place, so the exact trajectory of the decline is impossible to predict. Here I estimate how and over what time period the decline may occur.They said: No Housing Bubble Trouble (http://www.cato.org/pub_display.php?pub_id=4243)
The start of each year is prime time for economic pessimists, who try to persuade us terrible things are about to happen. A perennial favorite is the "housing bubble" about to burst, with a supposedly devastating impact on household wealth. This has been repeatedly recycled since June 2002 by bearish economic forecasters like Ed Leamer of University of California-Los Angeles and Stephen Roach of Morgan Stanley.

And the same scary story has proven handy for policy wonks who abuse it to rationalize their agendas, such as lecturing the Fed to keep interest rates too low or lecturing Congress to push tax rates too high.

Although the overworked analogy between housing and tech stocks sounds dramatic, it is quite preposterous. "The downside of this [housing] bubble," said Mr. Roach last month, is "potentially far worse than that of the equity bubble. Really? June 2005

We said: Dancing, Booze, and Overpriced Houses (http://www.itulip.com/forums/showthread.php?t=606)

The housing bubble is reaching absurd, bacchanalian heights, which can only mean one thing: it's getting ready to collapse.They said: Housing Bubble -- or Bunk? (http://www.businessweek.com/bwdaily/dnflash/jun2005/nf20050622_9404_db008.htm)

I don't foresee any national decline in home price values. Freddie Mac's analysis of single-family houses over the last half century hasn't shown a single year when the national average housing price has gone down. The last consistent drop was during the Great Depression, when the unemployment rate got up to 25%, or five times the level we're at now. - Frank Nothaft, chief economist, Freddie MacMarch 2006

We said: Housing Bubble Correction Update - Geographic cascade effect (http://www.itulip.com/housingpriceregionscascade.htm)

After a year or so, broad regions covering metropolitan areas out to rural areas that experienced real estate bubbles will experience simultaneous price declines. The extent of price decline in any area will depend on several factors, but most importantly the diversity of the local economy. A local economy that is dependent on one or two industries, and especially one or two employers, is vulnerable to significant housing price declines. They said: Is the Real Estate Market in Bubble Trouble? (http://realestate.yahoo.com/Real_estate_news/columnist/kendra_todd/Is_the_Real_Estate_Market_in_Bubble_Trouble.html)

You can't go anywhere without hearing people talk about "the real estate bubble." Such talk drives me to distraction, and I'll tell you why. It's because there is no real estate bubble. Bubbles are for bathtubs.http://www.itulip.com/images/REfictitious.gifJune 2007

Here we go again, with our first major update to our housing bubble analysis since March 2006, Fueling the FIRE Economy - Part III: Impact of Disappearing Fictitious Value ($ subscription) (http://itulip.com/forums/showthread.php?t=1397). Using the Fed's Flow of Funds data, our analysis indicates $12 trillion in fictitious value has accumulated in the US housing market since 1997 when the pre-bubble stage of the housing bubble started; the hyper-growth bubble stage lasted from 2001 until mid 2005.

How will most economists react to our most recent housing bubble analysis? Groundhog day all over again.

We say:
All asset bubbles are mean reverting, including the housing bubble. All $12 trillion will disappear, eventually. The only issue is how quickly, and how much in nominal versus real price declines.
They will say: Housing Bubble or Slow Deceleration of Housing Market? (http://www.mortgagenewsdaily.com/1182006_Housing_Market_Crash.asp)
Freddie Mac and its Office of the Chief Economist took on the doomsayers in its January 2006 Economic Outlook released late last week and concluded that the housing bubble is not going to burst. We say:
A total of $5 trillion in fictitious value disappeared from the stock markets in two years from 2000 to 2002 during the collapse of the stock market bubble. We project a ten year mean reversion process for the US housing market as the fake $12 trillion dissipates, or slightly more than $1 trillion a year on average.
They will say:
Huh?
We say:
The reversion of the housing market to the mean will occur as a combination of nominal and real price adjustments as the dollar depreciates. To dissipate all of the fictitious value, the 20% to 30% nominal price correction in US homes predicted by Robert Shiller (http://usmarket.seekingalpha.com/article/30564) will occur along with a 40% depreciation of the dollar.
They will say:
What?
We say:
New asset bubbles will develop as a result of government policies designed to reflate the US economy, which we predicted in October 2006 (http://www.itulip.com/forums/showthread.php?t=550) was due to fall into recession by Q4 2007.
They will say:
Nuts! Bubbles are accidents, they can't be predicted.
We shall see. As usual, you heard it here first.

iTulip Select: (http://www.itulip.com/forums/showthread.php?t=1032).The Investment Thesis for the Next Cycle™
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Andreuccio
06-01-07, 06:25 PM
Classic movie. One of my favorites. One small quible: Andie MacDowell is not the waitress. I believe she was his producer.

FRED
06-01-07, 06:40 PM
Classic movie. One of my favorites. One small quible: Andie MacDowell is not the waitress. I believe she was his producer.

Wups. Thanks. Fixed it!

jk
06-01-07, 08:50 PM
one of my favorite movies too. and the analogy is apt.

DemonD
06-01-07, 09:05 PM
Another great article. It absolutely makes me livid nowadays how the MSM just lets the government float by on the "official" numbers which always get revised downward. I think finally the tidal wave of housing is turning to the point where even the MSM can see the big fist of the housing bubble right in their face.

Ishmael
06-02-07, 01:31 PM
EJ:

One of my favorite movies also. Funny, I made reference to the movie in a similar manner the other day. Every day is ground hog day.

Having lived through one of these bubbles burst in the Oklahoma/Texas oil patch in the early 80's I was also fairly vocal about it from the gitgo. People would look at me like I was a nutjob. Had a fellow CFO tell me about 2 years ago, "John, when you first started talking like that I thought you lost your mind, but now I have started hearing other people say the same thing." The weird thing is you would think other finance people would be intune with it but they are not.

However, talked to John at my dealership (customer service rep) and he was right there. Why, he is Greek and always watching the dollar/Euro ratio, good sense of history and understands totally what is happening, but still has not realized the impact upon himself. Expects his house to not fall in price.

The only matter I would disagree with is your graph shows housing to settle back on the trend line. Usually the downward side of the bubble will overshoot the trend line downward along the lines of an equal but opposite reaction. Maybe slightly less.

Why, you might ask? Well, the first reason is the loaning of money to buy a house practically dries up. All homes have to be bought in near cash transactions. You look at the loss of value and you just made a large number of financial institutions insolvent. During the Oklahoma and Texas bust homes dropped from $50,000 and $60,000 down to $8,000. Only people who had cash were purchasing the homes.

Maybe you are accounting for this with the 40% devaluation of the dollar. Personally, I thing it will take that to just get the engine restarted, but the problem with a dollar devaluation is oil prices move in the opposite direction of the dollar. Oil would go to $100 a barrel and where would that put the economy.

As they would say in the UK, we have a sticky wicket here!

itulipfan
06-02-07, 01:58 PM
EJ:

One of my favorite movies also. Funny, I made reference to the movie in a similar manner the other day. Every day is ground hog day.

Having lived through one of these bubbles burst in the Oklahoma/Texas oil patch in the early 80's I was also fairly vocal about it from the gitgo. People would look at me like I was a nutjob. Had a fellow CFO tell me about 2 years ago, "John, when you first started talking like that I thought you lost your mind, but now I have started hearing other people say the same thing." The weird thing is you would think other finance people would be intune with it but they are not.

However, talked to John at my dealership (customer service rep) and he was right there. Why, he is Greek and always watching the dollar/Euro ratio, good sense of history and understands totally what is happening, but still has not realized the impact upon himself. Expects his house to not fall in price.

The only matter I would disagree with is your graph shows housing to settle back on the trend line. Usually the downward side of the bubble will overshoot the trend line downward along the lines of an equal but opposite reaction. Maybe slightly less.

Why, you might ask? Well, the first reason is the loaning of money to buy a house practically dries up. All homes have to be bought in near cash transactions. You look at the loss of value and you just made a large number of financial institutions insolvent. During the Oklahoma and Texas bust homes dropped from $50,000 and $60,000 down to $8,000. Only people who had cash were purchasing the homes.

Maybe you are accounting for this with the 40% devaluation of the dollar. Personally, I thing it will take that to just get the engine restarted, but the problem with a dollar devaluation is oil prices move in the opposite direction of the dollar. Oil would go to $100 a barrel and where would that put the economy.

As they would say in the UK, we have a sticky wicket here!

Agree with your points. It is odd that finance people seem as clueless as everyone else. They ought to know better, but they do not.

On the overshoot, the Fire Economy piece EJ refers to goes into that in detail as what all bubbles when they collapse. I'm sure that's true, but the question is we're betting not just on the bubble horse but the rider, and over 10 years the riders are sure to change. Hillary Clinton has already said she has a wealth re-distribution program in mind if she's elected. Funny but iTulip has been talking about a populist getting elected since 1999 if the bubble turned out to cause wealth inequality, with pressure to create trade barriers to protect jobs, etc., wage trade was opened to hold down inflation. So not just higher oil prices but higher everything prices, if we get that rider.

Then there are the new bubbles we have to get or the whole system implodes. Curious what the guesses are on that. What's in the pre-bubble stage? EJ says alt energy but that look bubble phase to me already.

If we do get the new bubbles, then the housing market may not crash so bad at all.

don
06-02-07, 02:12 PM
Ethenol has to be one of the more nefarious bubbles we've seen coming. A scam from start to finish. The new crop figures are truly attention getting. It will certainly feed the inflating-away gambit. And, of course, the usual transfer of wealth via the fed conduit of subsidies unlimited. To see this coming, unfolding, and eventually collapsing gives new meaning to depression!

(Or is that recession? Or is it a softlanding? That would make for a good iTulip contest. Naming the next Ministry of Truth's word spin on our economic malaise.)

jk
06-02-07, 02:22 PM
Then there are the new bubbles we have to get or the whole system implodes. Curious what the guesses are on that. What's in the pre-bubble stage? EJ says alt energy but that look bubble phase to me already.


the main candidates in other discussions on this board are: alternative energy, and infrastructure. i would suggest industrial and agricultural commodities as well. infrastructure in particular looks like a great option - "let's rebuild america!" that could cover everything from bridges, tunnels and highways to glass fiber, satellites and wimax. plenty of pork to spread around.

spunky
06-02-07, 02:28 PM
People arent as clueless as you think; they are dishonest and simply go with the friggin heard. I dont know about bubbles, I just think the economy will be further fueled by the government while the liars of the MSM continue to say how great the free market is , blah blah blah :rolleyes:

Give the farmers time to convert to different bio fuels. Their entire exsistence for generations has been beans, corn, wheat. It takes time to change they way they think, plant : the equipment is expensive, and the storage facilities arent equipped to store, say sugar beets. I would rather see the farmers getting the payouts than the war monger defense contractors. I live in Indiana though, so I am biased.

bill
06-02-07, 06:56 PM
the main candidates in other discussions on this board are: alternative energy, and infrastructure. i would suggest industrial and agricultural commodities as well. infrastructure in particular looks like a great option - "let's rebuild america!" that could cover everything from bridges, tunnels and highways to glass fiber, satellites and wimax. plenty of pork to spread around.


I agree

http://itulip.com/forums/showthread.php?p=8414#post8414
http://itulip.com/forums/showthread.php?p=8463#post8463
http://itulip.com/forums/showthread.php?p=8983#post8983
http://itulip.com/forums/showthread.php?p=9032#post9032
http://itulip.com/forums/showthread.php?p=9586#post9586
http://itulip.com/forums/showthread.php?p=10239#post10239
http://itulip.com/forums/showthread.php?p=10161#post10161
http://itulip.com/forums/showthread.php?p=10126#post10126
http://itulip.com/forums/showthread.php?p=10045#post10045
http://itulip.com/forums/showthread.php?p=10675#post10675
http://itulip.com/forums/showthread.php?p=10775#post10775
http://itulip.com/forums/showthread.php?p=10846#post10846

The Infrastructure PE Group on the move setting up the next bubble.
http://www.thecarlylegroup.com/eng/news/l5-news3323.html

Rajiv
06-02-07, 07:27 PM
Give the farmers time to convert to different bio fuels.

You should also read

<a href ="http://www.energypulse.net/centers/article/article_display.cfm?a_id=1478">Peak Soil: Why Cellulosic ethanol and other Biofuels are Not Sustainable and a Threat to America's National Security - Part I</a>

<a href ="http://www.energypulse.net/centers/article/article_display.cfm?a_id=1479">Peak Soil: Why Cellulosic ethanol and other Biofuels are Not Sustainable and a Threat to America’s National Security - Part II</a>

<a href ="http://www.energypulse.net/centers/article/article_display.cfm?a_id=1482">Peak Soil: Why Cellulosic ethanol and other Biofuels are Not Sustainable and a Threat to America’s National Security - Part III</a>



Part 1. The Dirt on Dirt

Ethanol is an agribusiness get-rich-quick scheme that will bankrupt our topsoil.

Nineteenth century western farmers converted their corn into whiskey to make a profit (Rorabaugh 1979). Archer Daniels Midland, a large grain processor, came up with the same scheme in the 20th century. But ethanol was a product in search of a market, so ADM spent three decades relentlessly lobbying for ethanol to be used in gasoline. Today ADM makes record profits from ethanol sales and government subsidies (Barrionuevo 2006).

The Department of Energy hopes to have biomass supply 5% of the nation’s power, 20% of transportation fuels, and 25% of chemicals by 2030. These combined goals are 30% of the current petroleum consumption (DOE Biomass Plan, DOE Feedstock Roadmap).

Fuels made from biomass are a lot like the nuclear powered airplanes the Air Force tried to build from 1946 to 1961, for billions of dollars. They never got off the ground. The idea was interesting – atomic jets could fly for months without refueling. But the lead shielding to protect the crew and several months of food and water was too heavy for the plane to take off. The weight problem, the ease of shooting this behemoth down, and the consequences of a crash landing were so obvious, it’s amazing the project was ever funded, let alone kept going for 15 years.

Biomass fuels have equally obvious and predictable reasons for failure. Odum says that time explains why renewable energy provides such low energy yields compared to non-renewable fossil fuels. The more work left to nature, the higher the energy yield, but the longer the time required. Although coal and oil took millions of years to form into dense, concentrated solar power, all we had to do was extract and transport them (Odum 1996)

With every step required to transform a fuel into energy, there is less and less energy yield. For example, to make ethanol from corn grain, which is how all ethanol is made now, corn is first grown to develop hybrid seeds, which next season are planted, harvested, delivered, stored, and preprocessed to remove dirt. Dry-mill ethanol is milled, liquefied, heated, saccharified, fermented, evaporated, centrifuged, distilled, scrubbed, dried, stored, and transported to customers (McAloon 2000).

Fertile soil will be destroyed if crops and other “wastes” are removed to make cellulosic ethanol.

“We stand, in most places on earth, only six inches from desolation, for that is the thickness of the topsoil layer upon which the entire life of the planet depends” (Sampson 1981).

Loss of topsoil has been a major factor in the fall of civilizations (Sundquist 2005 Chapter 3, Lowdermilk 1953, Perlin 1991, Ponting 1993). You end up with a country like Iraq, formerly Mesopotamia, where 75% of the farmland is a salty desert.

Fuels from biomass are not sustainable, are ecologically destructive, have a net energy loss, and there isn’t enough biomass in America to make significant amounts of energy because essential inputs like water, land, fossil fuels, and phosphate ores are limited.

jk
06-02-07, 09:11 PM
You should also read

Peak Soil: Why Cellulosic ethanol and other Biofuels are Not Sustainable and a Threat to America's National Security - Part I (http://www.energypulse.net/centers/article/article_display.cfm?a_id=1478)

Peak Soil: Why Cellulosic ethanol and other Biofuels are Not Sustainable and a Threat to America’s National Security - Part II (http://www.energypulse.net/centers/article/article_display.cfm?a_id=1479)

Peak Soil: Why Cellulosic ethanol and other Biofuels are Not Sustainable and a Threat to America’s National Security - Part III (http://www.energypulse.net/centers/article/article_display.cfm?a_id=1482)

think that depletion of topsoil will stop anyone?

Rajiv
06-03-07, 12:38 AM
think that depletion of topsoil will stop anyone?

Not at all! As shown by the efforts of ADM to get Federal subsidies for the aforementioned boondoggle. The long term costs to the planet will be very high. But that cost will be borne by somebody else - so why not live <a href="http://www.thefreedictionary.com/live+high+off+the+hog">high on the hog</a> while I can!

spunky
06-03-07, 06:58 AM
Thanks for the links.

Pilot Fish
06-03-07, 05:42 PM
I'm still not convinced, although I'm willing to be, that Alt energy or infrastructure will be the next "bubble". However, it does set up an interesting question about the definition of a bubble. In the '90s, they blew up the valuations of dubious dotcom companies that would never make a penny of net profits. In this decade, they created trillions of dollars of "fictitious value" in residential housing (now they may be trying a rerun in the equity markets but that's another story). Most would probably agree that both cases were a serious misallocation of capital.

Suppose then, that significant capital was directed towards alternative energy and it actually produced positive, beneficial results (as opposed to boondoggles like corn ethanol). That would actually be a good thing, right?
Now valuations of the public companies or commodities associated with such an effort might significantly overshoot "fair value"; just like the '90s companies that were actually viable like Cisco, Oracle, Intel etc.. But would that alone make it a bubble or should the title of bubble be reserved for serious misallocations of capital?

Regarding infrastructure, as I said before, I'm not sure that a country that doesn't "build shit" anymore is in dire need of a massive infrastructure upgrade. On the other hand, if there was big money to be made, it's no stretch to imagine the big money boys imposing an infrastructure upgrade on the country whether it needs one or not. But lets be generous and assume that an infrastructure upgrade would result in tangible future benefits to the society and the economy. The same question would apply.

So should we only designate something as a bubble when it results in serious misallocation of capital with no lasting benefits or is it simply any cycle that causes certain asset valuations to get over-stretched to the upside, regardless of the outcome?

Rajiv
06-03-07, 10:25 PM
The kind of asset bubble economy has also been termed a "Negative ROI Economy" by Catherine Austin Fitts. See <a href="http://solari.com/learn/articles_risk.htm">the Tapeworm Economy</a>

Darin
06-04-07, 12:36 AM
Another great article.

I was told - I think here - about Tequila farmers converting their crops to corn because of the "ethanol boom"

http://www.msnbc.msn.com/id/18926019/

Didn't we used to do one bubble at a time?! :confused:

Once up a time, the cure for rabies was to stick a hair of the dog in the bite. Today, the hair of the dog is a drink first thing in the morning to make sure there is no hangover from the last round of bubbly. I wish more fund managers knew how idiotic it was to get a dog bite then put a dog's hair in it. What ever happend to 2 aspirin?

I'm starting to be truly concerned on a greater level. Between the leveraging in the credit in all areas, the atrocious savings rate, and the national account and trade deficits, I am hoping we don't auger. I have very little faith in the CPI, unemployment, or GDP as helpful data and the Fed really isn't inspiring faith in the banks stability system by being such an unregulatory institution. I think the bond market will know what's happening well before the Fed. :(

The schadenfreude in the real estate market gives me a temporary hollow glee; the anxiety in the overall market quickly trumps it.

jimmygu3
06-04-07, 01:48 AM
EJ,

Thanks for the great article and amazing site. Your insight is always enlightening.

Why wouldn't we use the CPI stats from shadowstats.com, instead of the rigged government CPI average of 3.3? For the period 1997-2007, shadowstats' CPI more than doubles. This would put the theoretical value line at over $20T in '07, leaving only $4T in fictitious value. If you also account for the fact that houses in '07 are 10% larger than houses were in '97, the gap narrows more.

From 1970 to 1980, the average home price went from $23k to $69k, tripling in 10 years. But nobody called it a bubble- we just called it inflation. Is it not possible that homes are only moderately overvalued in dollars, and that it's merely the dollars that are overvalued? Could it simply be that dollar price inflation in all non-asian products and assets is in full swing, carrying housing along for the ride?

I'm not saying there aren't a lot of problems on the horizon for the real estate market, especially for people with houses they can't afford anymore due to foolish loans from predatory lenders. However, maybe the problem of skyrocketing home prices lies more in Washington's reckless monetary policy than with the notion that real estate is trading 100% above the mean.

Humbly awaiting your reply,

Jimmy

sparki
06-04-07, 05:50 AM
danke from germany!

also one of my favourite movies

the best scene that fits also to the title...

murray: do you have deja vu´s...?

warden: i´ll ask in the kitchen......

Ishmael
06-04-07, 12:52 PM
Jimmy:

I believe part of the problem in using the Shadow numbers is the inflation number calculated by them includes asset appreciation in housing.
Which to me makes sense; however, once the bubble starts popping they will have lower inflation numbers.

It strikes me as kind of circular to use numbers with asset inflation in them to deflate the asset. In this case the "official numbers" are probably better.

Ishmael
06-04-07, 03:34 PM
Guten Abend sparki!

Funny quote.

jimmygu3
06-04-07, 06:35 PM
It strikes me as kind of circular to use numbers with asset inflation in them to deflate the asset.

Great point, Ishmael. However, housing is only one part of the CPI, and even if you removed the effect of housing, I think we would still see numbers much closer to 8% than to 3.3%.

Applying the 3.3% rule, housing should have increased 38% from 1970 to 1980, putting a median home at $32k, rather than the actual $69k. Should we not have been preparing for a housing crash then? By this logic, you could have said that every house in America was overvalued by 115%!

A bubble is a speculative mania that bids up the real price of an asset above its sustainable intrinsic value. We certainly have some of that in housing. Inflation bumps up the nominal price of assets by debasing the currency. We certainly have a lot of that, too. My point is that citing $12T in "fictitious value" gives the dollar more respect than it deserves. Houses are real and dollars are fake.

Jimmy

chrisk
06-04-07, 09:56 PM
Nuts! Bubbles are accidents, they can't be predicted.

This was true, according to Greenspan. However, now something has changed: Chinese stocks are clearly a bubble, for example. Just ask Greenspan. (Or better yet, buy many copies of his new tell-all book, entitled "Look At Me, My Speech Impediment Is Cured".)

Ishmael
06-04-07, 10:23 PM
Jimmy:

In response to our question of why not to use the Shadows CPI here is my two cents worth. In general, I think one of the reasons for the difference between the Shadowstats is the cost of housing. The CPI uses the adjusted rental number while the Shadow stat includes the inflation we are seeing in housing prices. Accordingly, you have a rather circular argument that housing prices should not decline because inflation which includes the appreciation of housing prices justifies the price.

Personally, I would think any kind of inflation adjustment should exclude the housing element of it to avoid this circular argument. Weirdly enough, even though I do not accept the official CPI it seems to make more sense in EJ's analysis than the Shadow stats.

Ishmael
06-04-07, 10:51 PM
Jimmy:

Oops, I thought my first post was not there.

Another, thought is the way CPI is calculated was changed in the middle 80's. In fact most of the adjustments by the Shadow group is to just change the current numbers back to the way the CPI use to be calculated.

I thought Shiller has already shown that home prices have tracked the CPI pretty closely until the middle of 90's.

jimmygu3
06-05-07, 01:34 AM
Ishmael,

You're right that research suggests that housing prices have tracked CPI. Then the government started monkeying with the CPI methodology in order to underreport it and housing has broken away from the rigged CPI, as has gold, oil, healthcare, and education. Housing (including utilities) accounts for 42% of CPI. I find it hard to believe that housing is the only thing pulling that shadowstats number up, creating the circular argument you talk about. Prices are up on everything we can't import from China.

As you can see in the logarithmic chart below, median US home prices rose faster in the '70s and '80s than they did in the '90s, and the boom in recent years only resumes rates similar to the '80s.

http://investmenttools.com/images/re/re_med_log.gif

Again, we are talking about a fiat currency of a country with a massive current account deficit, trade deficit, budget deficit and national debt. We have a Fed chairman who has indicated he'll resort to a "helicopter drop" of money if necessary to keep liquidity available. Why is it so surprising that real assets are rising in price when denominated in this Monopoly money?

Jimmy

WDCRob
06-05-07, 08:33 AM
think that depletion of topsoil will stop anyone?

And, really...what depression would be complete without a Dust Bowl?

Rajiv
06-05-07, 08:51 AM
Again, we are talking about a fiat currency of a country with a massive current account deficit, trade deficit, budget deficit and national debt. We have a Fed chairman who has indicated he'll resort to a "helicopter drop" of money if necessary to keep liquidity available. Why is it so surprising that real assets are rising in price when denominated in this Monopoly money?


From yesterday's <a href="http://kunstler.com/mags_diary21.html">The Clusterfuck Nation"</a>


The longer we put off making these new arrangements, the harder we're going to slam into a wall of reality, and when it occurs a lot of things will shake loose in this country. It will become self-evident that the things we've invested all our wealth in will not retain value -- especially suburban real estate and all the activities related to car dependency, from the interstate highway system to national chain retail. It will also become obvious that we can't base our economy on building more of this stuff.

Our current military adventures in the Middle East, are predicated largely on keeping the old arrangements going. We're in Iraq because we built Dallas, Atlanta, Orlando, Houston, Phoenix, Los Angeles, and Long Island the way we did, and the only way we can hope to keep these organisms going even a little while longer is to keep open our oil supply line to the Persian Gulf. The truth is, these organisms will not survive the oil-scarcer future in the form they're in. The American people need to come to grips with this. No amount of chest-thumping around the globe will change it. In any case, sooner or later we'll exhaust our military and bankrupt ourselves trying to project our influence into these places overseas -- meaning, sooner or later we will withdraw back into our own hemisphere.....

A basic rule of reality is that you can't get something for nothing. Sooner or later the financial sector will have to come to grips with this rule, meaning that that debt is not wealth and the revolving reallocation of debt in the form of credit does not amount to wealth creation. The US will arrive at a magic moment when the full force of this reality reasserts itself, and it is likely to make itself manifest in the collapse of the entity most closely associated the idea of wealth: the dollar. Assets vested in the dollar's legitimacy will follow its fate. The implication is that an awful lot of the presumed wealth held by Americans could vanish into thin air.

Christoph von Gamm
06-05-07, 09:51 AM
http://www.itulip.com/images/murray.jpgGroundhog day, every day, in the housing market

Economists' reactions to the latest housing market news makes me feel like Bill Murray in the 1993 movie Groundhog Day

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and oh what a surprise: Heli-Ben is surprised on the depht of the housing market slump http://money.cnn.com/2007/06/05/markets/markets_nyopen/index.htm?postversion=2007060509
Bernanke weighs on Wall Street
Stocks fall Tuesday on Fed chairman Bernanke's comments of extended weakness in the U.S. economy, a day after the Dow and S&P 500 hit new records.
June 5 2007: 9:37 AM EDT

NEW YORK (CNNMoney.com) -- Stocks sank in the first moments of trade Tuesday on bearish economic comments from Federal Reserve Chairman Ben Bernanke.

The Dow, Nasdaq and S&P 500 all sagged in early trade.

The U.S. economy is set to grow at a sluggish pace in coming months on continued weakness in the housing sector, Bernanke said. Bernanke said housing weakness would be a bigger drag than had been expected.

bill
06-05-07, 10:56 AM
The U.S. economy is set to grow at a sluggish pace in coming months on continued weakness in the housing sector, Bernanke said. Bernanke said housing weakness would be a bigger drag than had been expected.


The political government –chartered companies come to the rescue of the housing market rather than let the market run its course. We get government political influenced market manipulation solution.

http://www.bloomberg.com/apps/news?pid=20601103&sid=axfeEvVeLwww&refer=us


The government-chartered companies, the biggest source of money for Americans buying houses, accounted for 46.9 percent of all mortgage bonds sold through April, newsletter Inside Mortgage Finance says.


The companies' political action committees gave $350,200 in donations during the first three months of 2007

Slimprofits
06-05-07, 10:44 PM
The companies' political action committees gave $350,200 in donations during the first three months of 2007.

From 2000 to 2006, Freddie Mac PACs gave $9.2 million combined to the Ds and Rs.

http://www.opensecrets.org/orgs/summary.asp?ID=D000000163&Name=Freddie+Mac

In '04 and '06, the Fannie Mae PAC spent almost $2 million.

http://www.opensecrets.org/pacs/lookup2.asp?strID=C00393520

Uncle Jack
06-17-07, 05:50 PM
Unheeded homes.

http://www.freep.com/apps/pbcs.dll/article?AID=/20070617/BUSINESS04/706170566/1002

Who predicted this?:
Yet with the glut of empty houses -- both for sale and foreclosed -- unkempt properties are increasing in nearly every community in metro Detroit. Instead of homes with neat lawns, trimmed shrubs and bright flowers in place, neighbors and potential buyers contend with thigh-high grass, busted shutters, falling roof shingles and litter, debris and mailers all over the porch, lawn and curb.

Ultimately, that mess decreases everyone's property value.

"If you're not taking care of the house, it is certainly detracting from street appeal, and that is something that could harm any potential sale of the home," said Walter Molony, spokesman for the National Association of Realtors. "It's certainly in the interest of the owner to maintain some presentability so that people will want to go inside."

-snip-

So there's no debate among real estate professionals that any house on the market should be in the best possible shape. And even though their names may appear on the signs outside homes, agents can -- and will -- only do so much.

"When people look at a street and they find foreclosures and uncared-for vacant properties, it decreases the value of surrounding homes -- that is a statistical fact," said Keith Weber, an agent who markets homes in southern Oakland County. "Sure, I'll mow a lawn, and you won't talk to an agent who says they don't. It may not be my responsibility, but it is my reflection."

The problem isn't only here in metro Detroit.

In Sacramento, Calif., for example, thousands of unsold and empty houses are becoming breeding grounds for mosquitoes because of uncared-for swimming pools, garden ponds and yards flooded by broken sprinklers.

Go ahead, admit it, none other than your host, EJ

lb
06-26-07, 10:14 AM
http://www.reuters.com/article/businessNews/idUSN2530849120070626

New home sales lower than expected. LEN had a shitty quarter.

Shares in resedential construction spike on the news (10 am EST):

http://finance.yahoo.com/q/bc?s=^YHOh810&t=1d

EDIT: briefly...

DemonD
06-26-07, 05:39 PM
Homebuilders will be negative eps by calendar year end 2007. Put it in the book. Not all of them will survive the downturn. 2009-10 earliest to go long for homebuilder recovery, likely further out.

Uncle Jack
06-26-07, 07:53 PM
http://www.bloomberg.com/apps/news?pid=20601009&sid=aXDYv12DZNcc&refer=bond

Alt A Loans `Disconcerting,' Jumbos Weaker, S&P Says

Batter up. I believe the next in line is the Alt-A.

jk
06-26-07, 08:01 PM
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+July+2007.htm


But look at it this way: using the current default rate of 7% (3-4% total losses), the holders of some BBB investment grade subprime-based CDOs will lose all of their moolah because of the significant leverage. No need to worry about fictitious 100 cents on the dollar marks here. One hundred percent of nothing equals nothing. If subprime total losses hit 10% then even some single-A tranches face the grim reaper.[emphasis added]

lb
06-27-07, 04:18 PM
Homebuilders will be negative eps by calendar year end 2007. Put it in the book. Not all of them will survive the downturn. 2009-10 earliest to go long for homebuilder recovery, likely further out.
Looks like a short squeeze today.

Tet
06-27-07, 05:09 PM
Looks like a short squeeze today.
I think somebody's got their tit caught in the ringer, more than just squeeze, we've got margin calls being made.

metalman
06-27-07, 06:25 PM
I think somebody's got their tit caught in the ringer, more than just squeeze, we've got margin calls being made.

speaking of tits in wringers...

Fund sued for $57M worth of illegal trades

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070627/REG/70627014/1027/HEDGEFUNDS