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FRED
06-20-06, 01:39 PM
While listening to a Gang of Four (http://www.amazon.com/exec/obidos/ASIN/B000B5QWO2/wwwitulipcom-20?creative=327641&camp=14573&adid=10D42MJ9VZF9P6FQ0WEZ&link_code=as1) MP3 on my iSlave (http://news.bbc.co.uk/2/low/business/5079590.stm), I'm reading a spate of stories that cover recent housing bubble developments sent by readers. Time to check our Housing Bubble prognostications.

A housing bubble decline is a relatively slow process. We've been reporting on it since August 2002. Long time readers of iTulip.com can be forgiven for losing patience with the whole thing.

The Economist has been covering the housing bubble for about as long as we have. A few samples...
<small>
July 13, 2002 - A house-price correction is on its way (http://tinyurl.com/zhnjk)
May 29, 2003 - Why property markets suffer from bubble trouble (http://tinyurl.com/el4tt)
June 3, 2004 - Inflated house prices pose an even bigger risk to the world economy than oil (http://tinyurl.com/g66v6)
June 16, 2005 - The worldwide rise in house prices is the biggest bubble in history (http://tinyurl.com/agn3g)
June 8, 2006 - Several housing markets are vulnerable to higher interest rates (http://tinyurl.com/z9gpt)

</small>Zooming in on the time scale to cover just the past couple of days, here are a few examples.

Homebuilder Confidence Declines to an 11-Year Low (http://tinyurl.com/od2z8)
The boomer bust (http://tinyurl.com/lohu5)
Sellers' New Math (http://tinyurl.com/l9sbs)
Not feeling at home with risk (http://tinyurl.com/pzcaw)
Shelter Mags Losing Momentum (http://tinyurl.com/okc9x)
Foreclosing on the American dream (http://tinyurl.com/pctq5)
Even foreclosure hawks hurt by sagging real estate market (http://tinyurl.com/nd8ab)
Home Construction Projects Down (http://tinyurl.com/rmj8l)

The media system is not designed to communicate long, drawn-out processes like the decline of the housing bubble. (Or an Influenza Epidemic, but that's a topic for another day.) The media system is about reporting events or strings of events. To add value, I've tried to focus on the dynamics, such as in the 2004 piece (http://www.itulip.com/forums/../housingnotlikeequities.htm) that explains that housing bubbles end in illiquidity vs crashing the way liquid asset markets like stock markets do. Housing bubbles don't die, they just fade away.

For those of you just tuning in to iTulip.com, here's how we see the housing bubble going down: Slowly and for a long time. So long and slow, your clothes will go out of style faster than a housing bubble "pops" and clothing styles will change many times before the next real estate boom.

In the attached analysis, most housing markets in the U.S. are at Step B and pretty much on schedule as Step B happens in 2006.

Housing Bubble Correction Prediction (http://www.itulip.com/forums/../housingbubblecorrection.htm)

Here are the Top Five types of homes that are likely to be "in" as the housing bubble gradually fades out.

1) Smaller homes
2) MacMansions sub-divided for rental to multiple tenants
3) Well insulated homes
4) Homes in climates where heating and A/C costs are lowest
5) Homes with short commuting distances to secure industries* or near public transportation

Used to be that owning a home in a town with a good school system was a safe bet to hold property value. To achieve the same level of education quality for the kids, you pay higher property taxes on more expensive property to fund good schools or you live in a town with a lower tax base and worse schools and pay for private education for the kids. Same difference. But I suspect that with changing demographics, as older citizens of high tax base towns become the majority they are going to start voting down high property taxes. Schools will suffer and property values will decline more in line with property values in towns with lower tax bases. Layer onto that a general economic slowdown that will depress tax receipts and continued high energy cost "taxes" for heating and commuting and you have a prescription for declining housing prices in places like the suburban Northeast.

As asset bubbles end, so do the fortunes of the money men who work the wealth in those markets -- and 99% plus I know are in fact men. In the dis- inflationary Go-Go Years of the early 1960s we had tech stock bubble No. 1 and the Corporate Gun Slingers. In the inflationary 1970s we had commodities gurus like the Hunt Brothers and Jim Sinclair getting rich in silver and gold. In the 1990s we had the Internet Bubble that made VCs rich. In the early 2000s, low interest rates made paper millionaires out of many home owners, and made hedge fund managers rich on government guaranteed bets on bonds and currencies. This too will come to an end. As Greenspan warned in November 2004 (http://tinyurl.com/hpsl6), "Rising interest rates have been advertised for so long and in so many places that anyone who hasn't appropriately hedged his position by now obviously is desirous of losing money." No mystery who he was talking to.

Usually we don't have seamless transitions from one asset bubble to the next as we had when shifting from the stock market bubble to the hedge fund and housing bubbles. There are usually down times between bubbles when hardly anyone's making money. They're called "recessions" and "depressions" and the modern version (http://www.itulip.com/forums/../newdepression.htm) is a strange beast.

Fashion helps us all adapt during these periods. I caught the tail end of the hippie movement in the late 1970s. In college, a bunch of us lived together in a run down house. We took turns making bean chili and other cheap meals with food we bought at the local co-op where we also worked one day a week to keep costs down. I drove a car made out of the engine of one and the body of another. A weekend with a rented A-frame and we had them together in no time. Total cost of cars plus A-frame rental: $650. Lasted four years.

We didn't respect money grubbing capitalists. We were anti-materialist. Clothes? Crap.

Fact is, we didn't have any choice. We weren't born into wealthy families. Even if we did aspire to wealth there was little money to be grubbed. The Help Wanted section of the local Boston Globe when I got out of college in 1980 was ten pages of tiny ads for jobs like selling art to office building managers, straight commission. Things were looking up in Japan, though.

Thinking of ourselves as hippie kids felt a lot better than as the downwardly mobile middle class kids we were, struggling through Volcker's recession on the tail end of the post Vietnam War the stagflation.

At the time, Gang of Four came out with their classic "To Hell with Poverty/Let's get drunk on cheap wine" on the album Return The Gift (http://www.amazon.com/exec/obidos/ASIN/B000B5QWO2/wwwitulipcom-20?creative=327641&camp=14573&adid=10D42MJ9VZF9P6FQ0WEZ&link_code=as1). Maybe it'll be the theme song for iTulip.com as we head into the coming downtime.

Peter Cochrane said, "We now have two classes in our society: those who will spend any amount of time to save a little money and those who will spend any amount of money to save a little time."

It will be interesting to see how we all adapt. Maybe we'll all settle for being a bit poorer financially for a while, in exchange for more time to hang out with friends and family without the stress of financial success competition, at least until we recover from the excesses and blunders of the previous era and move on to the next boom. Or maybe that's romanticizing things, as nearly 50% of iTulip.com visitors think we'll have a draft by then (http://www.itulip.com/forums/../cgi-bin/vote.cgi?view=1150506553), and the track record of the community is good.

In any case, we watch the transition together.

Sincerely,

Eric Janszen

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BK
06-20-06, 02:36 PM
I disagree with your premise that the Schools will go down hill when Tax Payers start saying 'No' to School Systems insane demands.

If childrens ability to learn was directly tied to the Money spent - then why do the drop out Rates continue to be 30% and more in our Big American Cities???? We spend a lot of Money in our Biggest cities and it has made much of an impact. Big Government does everything for you - but, nothing well.

Children do well when their parents are interested and involved in their education. That said - Not every child will succeed Academically- not every Kid needs to go to College to be a success - Richie Grasso did OK inspite of not attending College ;-)
"Its for the Children" is ALL ABOUT More MONEY and Benefits for over paid Teachers.

PS: My Mom and Dad were Public School Teachers

EJ
06-20-06, 02:56 PM
We're talking apples and oranges. You're talking about the correlation of education spending and quality of education. I'm talking about the correlation between local taxes spent on education and local property values. Agree the correlation is likely weak in the first case but there are plenty of studies to show the latter correlation is strong.

Dennis Rodkin, “How Does Your Town Rate?” Chicago (March 2003); Walter Updegrave, “How Real Estate Really Builds Wealth,” Money (June 2003); “Your Home’s Value,”MSN, houseandhome.msn.com/selling/yourhomesvalue.aspx. <!--[if !supportEmptyParas]--> <!--[endif]--><o></o>
Tim Simmers, “Good Schools Boost Property Values by 10 Percent or More,” San Mateo County Times (August 19, 2003).
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Kenneth W. Edwards, The Homeseller’s Survival Guide (1995).
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Lisa Barrow and Cecilia Rouse, “Using Market Valuation to Assess Public School Spending,” NBER Working Paper No. 9054 (January 2003).

Wallace E. Oates, “The Effects of Property Taxes and Local Public Spending on Property Values,” Journal of Political Economy (Nov./Dec. 1969).
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William A. Fishel, “Homevoters, Municipal Corporate Governance, and the Benefit View of the Property Tax,” National Tax Journal (March 2001).

Here's a blog (http://www.affordablehousinginstitute.org/blogs/us/2006/04/enlightening_se.html) that has a fair amount of recent info about this.

BK
06-20-06, 04:30 PM
The towns with good Schools HAVE ALWAYS been the towns that then More Affluent prefer and are more likely to be educated.....therefore value education, and be willing to over-invest in education. Remember, well- educated and wealthy - doesn't not necessarily mean wise when spending money. The author of "Fooled by Randomness" makes the great point that in our society often equate wealth with sound financial knowledge.

Look around the the Boston Area....Brookline, Belmont, Lexington, Sudbury, Weston,Wellesley, Newton, ...have any of these towns ever been un-desirable places to live?
My Grandmother bought in Belmont in 1929 - she bought a McMansion center entrance colonial because it was a desirable town.
Most desireable towns with good schools and high property values - never had a major textile or other Mills and have a lower quantity of poor folk. No former Mill housing and large low rent district to attract poor people who are likely to have a lot of other problems (that make education difficult) besides low funds.

EJ
06-20-06, 07:12 PM
Fair enough. I know plenty of wealthy people who are good at making money but know nothing about finance -- what to do with it -- and wisely leave money management to others. The rest of your point is a complex socioeconomic discussion. The point I'm driving it is as that as the population ages in places like Lexington, since you mention it, voters are less likely to keep doing what they did here in Lexington last week:

"Lexington, MA voters approved all six sections of a tax levy this week, which will provide an additional $4.2 million in local funding to protect and preserve essential services in their town. The election outcome is a huge success for Lexington Stand for Children members, whose incredible efforts in partnership with the local campaign supporting an override saved the town's schools and services from severe cuts.

"In Massachusetts, the tax levy limit passed in 1980 as Proposition 2 1/2 can be exceeded only if a majority of residents voting approve an override. By supporting the entire override this week, Lexington voters delivered the majority of the $4.2 million levy - $3.27 million - to the town's public schools. This funding will control class sizes; restore foreign language, art, music, and physical education programs; and save special education tutoring and other programs essential to students and staff."

LEXINGTON (MA) STAND FOR CHILDREN HELPS WIN $3.27 MILLION FOR SCHOOLS (http://www.stand.org/NewsStand/061004.asp)

Lexington will spend 62.5% of its $131M 2006 budget on education, or $82M; about 7,500 per housing unit and per household, $9,700 per family.

Cheaper than sending your kids to private school (http://school.familyeducation.com/finances-and-money/private-school/29622.html): "This year, they'll pay a whopping $31,000 for tuition and an additional tutoring program."

And as the studies previously posted show, supports home prices.
--
Wikipedia says: "As of the census (http://en.wikipedia.org/wiki/Census)<sup id="fn_GR2_back">GR2 (http://en.wikipedia.org/wiki/Geographic_references#2)</sup> of 2000, there were 30,355 people, 11,110 households, and 8,432 families residing in the town. There were 11,333 housing units.

FYI, Lexington ranked 8th in test scores (http://www.boston.com/education/mcas/scores2004/overall_district_rankings.htm) in MA in 2004.

jk
06-20-06, 10:28 PM
Eric,
You posit that aging populations in prosperous towns begin to vote down, or at least constrain, school budgets. The town will then become less attractive to parents looking for a good school system. But presumably the town will become more attractive to aging boomers who no longer have school age children. It is not obvious to me that this implies relatively lower home values.
The studies you cite are all grounded in the recent demographics of the U.S., with its huge baby boom population looking for education to give an advantage to their echo-boom kids. That is all in the process of changing.
It seems to me we might see values hold in inner suburbs with smaller homes - perfect for aging boomers looking to downsize and an easier commute or, if you prefer, access to downtown cultural institutions, restaurants, etc. The same argument will support values in downtowns, both currently high cost/quality areas and the gentrified neighborhoods to come.
If the population is aging and citizens are thus shrinking their school budgets, why assume that parents of school age children will continue to be real estate price makers?

BK
06-20-06, 10:32 PM
I'll review the research on how spending on Schools support property values... but, my experience tells me that most of the Towns with high performing Test scores have been great places to live for a long -long-long time. Its only evolutionary that they have good performing schools. Many of these high property value Towns have great libraries because they have many college educated Townspeople who value books (same people value education). I will start an effort to document how a quality library supports property values. Perhaps the Librarian Union will fund the effort?? ;-)

Interestingly, when poor Kids are brought out of the Inner City to go to school in Lexington-MA they don't thrive. I recall its been a fairly unimpressive experiment to help poor city kids. Lexington School department never wants to mention those Kids from Boston when they talk about School System performance and high rank or when they go to the Tax Payers for more cash.
I haven't even touched on under funded pensions and healthcare obligations that aren't accounted for in the yearly cost to educate a student in any US Public School.

EJ
06-20-06, 11:30 PM
I'll review the research on how spending on Schools support property values... but, my experience tells me that most of the Towns with high performing Test scores have been great places to live for a long -long-long time. Its only evolutionary that they have good performing schools. Many of these high property value Towns have great libraries because they have many college educated Townspeople who value books (same people value education). I will start an effort to document how a quality library supports property values. Perhaps the Librarian Union will fund the effort?? ;-)

Interestingly, when poor Kids are brought out of the Inner City to go to school in Lexington-MA they don't thrive. I recall its been a fairly unimpressive experiment to help poor city kids. Lexington School department never wants to mention those Kids from Boston when they talk about School System performance and high rank or when they go to the Tax Payers for more cash.
I haven't even touched on under funded pensions and healthcare obligations that aren't accounted for in the yearly cost to educate a student in any US Public School.

Ok, then I'll cut to the chase. Poor kids who come from families that do not value education are under the current system at a huge disadvantage. These families raise kids who fail. Their families don't really want them to succeed because success will create economic and cultural distance. The kids won't need their families anymore. The kids constantly fight the pull from their family: "Come back. What, you too good for us?" A few kids somehow manage to escape from these families -- usually geographically -- and get a shot at doing better. Often someone in the family or outside it -- some agent -- supports their desire to do better and get away, financially, emotionally or "operationally." When these planets align, they get away and succeed.

What role should the State have in this? None. But the State should stay out of the way.

jk
06-21-06, 07:15 AM
i once spent some time looking at education stats from around connecticut. [there was a divisive school budget vote being repeated after an initial rejection of a proposed budget, and i was curious if there were data to support the idea that bigger budgets meant better outcomes.] the data available was unfortunately quite limited. however, i found a dozen towns that had incomes and property values similar to my town. they all had similar outcomes in spite of very different expenditures per pupil. parents' economic [and likely social] class determined outcomes. expenditures were irrelevant [within the range of actual expenditure levels].

[btw, i still don't know why families with children will continue to be the price setters in an aging population. i guess any argument addressing this question will have to start with house sizes, average number of bedrooms, etc]

blazespinnaker
06-21-06, 08:21 AM
"Thinking of ourselves as hippie kids felt a lot better than as the downwardly mobile middle class kids we were, struggling through Volcker's recession on the tail end of the post Vietnam War the stagflation."

hahah. I love that quote.

BK
06-21-06, 08:26 AM
My impression is that Itulips goal is to shed light on the hubris and insanity of these times. The Debt incurred in the name of education and the money spent on an educational system designed in the late 1800's is a financial disaster.

Financing is allowing these costs to soar higher and higher. Bond issuance by States and Towns for new school buildings for K-12. Home Equity loans for the financing of the Harvard education. Hedge funds are the tool of choice to make up for under funded Teacher/State pension plans(costs never included in the per pupil cost of education) .

Liquidity drives up the cost of houses, gasoline, and Education! The more liquid the citizens of your Town the more cash they are capable of forking over in the name of education.

EJ
06-21-06, 09:33 PM
Peace, BK. You are correct. Education has become as much of a racket as health care. The racketification (new word!) of institutions that used to stand for leveling the playing field for all Americans and making sure that in a nation of great wealth, no one goes hungry or without medical care, is absolutely one of the main beefs of iTulip.com. And you can likely trace the transition to the widespread use of credit versus cash to purchase these services.

Jim Nickerson
06-22-06, 02:09 AM
To Hell with Poverty - Let's get drunk on cheap wine.
<O:p</O:p
<O:p</O:p
This thread is about an effect of the housing bubble deflating, and what ancillary events may unfold as it deflates, one of which blossomed here is: what will be the effect of decreased tax revenues (from diminished house values) on local schools? BK (a child of teachers) elaborates on the disparity in education gained among those who may benefit from exposure to education in an affluent environment (? higher property taxes and perhaps more education in the affluent adults) versus those exposed to education in poorer neighborhoods (? lower property taxes and lower levels of education in the adult poor), and how the quantities of monies being spent correlate neither with education gained nor a decrease in drop out rates in large American cities. jk doggedly sticks with the thread by wondering about what may influence the actual prices at which houses may finally settle. BK, for the moment, summarizes that liquidity is the “oil” that greases the gears for increases in costs of houses, gasoline, and education, and that educational debt in the American system is a financial disaster.
Deflating of the housing bubble is undoubtedly an important topic, but the sentiments by the contributors touch on more vital issues I believe, but none venture on suggesting solutions to all that may happen or that is already upon us with regard to education of the masses.
A house is essentially a shelter from certain harshness that can exist environmentally. Most houses in the US have way more than is necessary for survival. If one loses one’s house by bankruptcy or uninsured flood loss, one can rent an apartment, buy a mobile trailer, or live in a tent. Houses are certainly not necessary for survival of individuals in the majority of places. If a house represents most or all of anyone’s net worth, then perhaps such individuals leave themselves open to criticism with regard to living prudently. Whatever happens as the result of the housing bubble bursting is not nearly as important to the longterm future of this country as is the lack education or the poor quality of education of the masses.
There is something wrong with politics in this country, as incredibly evidenced here [url] http://www.itulip.com/forums/showthread.php?t=110[/url (http://www.itulip.com/forums/showthread.php?t=110%5B/url)] if that video is really true which regrettably I expect it is, in local and state governments as alluded to by BK, and if that is not enough watch the national news for a few nights.
Whether the educational failures in this country are due to the ignorance of politicians or the ignorance of the people who elect politicians and school boards, or to the ignorance of the adults who bear and may raise children, in the end if this country is to continue to be one of the better places on the planet in which to be born, grow up, and work, then ignorance of the majority of the population is going to have to be overcome. If it isn’t, then at some point this country will end up in anarchy or being ruled by some despot.
<O:p</O:pBased on what little I know, it is difficult to imagine the majority of Americans being wise enough to simply recognize all, or even some, of the problems that arise from ignorance and as a result take preemptive measures to turn things around. This country has become dedicated to obtaining “stuff,” looking good, being there—doing that, and to hell with everything else. People probably beg, some definitely steal, and certainly many borrow to these ends—the last, borrowing, and its end-effect is a large part of what prompts the existence of a site such as iTulip.com.
BK strikes me as having insight into some of the real issues with the educational system in America. I would like to know what he thinks should be done now to remedy the problem.
</O:p
I personally do not think things will ever get better until things get so bad that there is rioting, looting, much more senseless killing than exists now, and something like an overthrow of the present, rotten political system that has evolved. Hopefully something in the way of a better democracy may then take hold, but on the other hand America may degenerate to totalitarianism. More hopefully, I will be totally wrong.<O:p</O:p

BK
06-22-06, 11:32 AM
I think the best way to improve Education going forward is to cut back on spending on all levels. What am I nuts?

Use the savings to cut taxes for families with children under the age of 10 (or 5 or 6)yrs. Taking the financial stress off parents may provide them with more time to pay attention to there kids and provide their kids with the building blocks for success. Parents are forced to find quick solutions for their kids problems when both parents are working 40 hour/week. The current tax break for child care is a joke - it would help you get care for a hamster.

"No Kids lift behind" is a joke. The reality in life is that we all perform at different levels of skill in different arenas. Spending money to retain kids in school during High school when they might thrive (and be happier) beginning their working life. Schools are love the "no child left behind" effort because it means more money.

Cut spending at the University level - back in the 1960s (I think) people actually talked about that we may be sending to many folks to college. The Apprentice model (not to be confused with the Donald version) that is still used in Plumbing - needs to be expanded to other skilled trades. You can make a great living with a high skill trade. While working as an Apprentice you'll even pick up some skills on how to run a business - sorry - its rare that good business skill are picked up in College. Most sharp business people I have met picked up their Business Sense from a parent.

When you start really budgeting and tightening a money supply - a lot less money gets wasted.

Jim Nickerson
06-22-06, 07:37 PM
I think the best way to improve Education going forward is to cut back on spending on all levels. What am I nuts?

Use the savings to cut taxes for families with children under the age of 10 (or 5 or 6)yrs. Taking the financial stress off parents may provide them with more time to pay attention to there kids and provide their kids with the building blocks for success. Parents are forced to find quick solutions for their kids problems when both parents are working 40 hour/week. The current tax break for child care is a joke - it would help you get care for a hamster.

"No Kids lift behind" is a joke. The reality in life is that we all perform at different levels of skill in different arenas. Spending money to retain kids in school during High school when they might thrive (and be happier) beginning their working life. Schools are love the "no child left behind" effort because it means more money.

Cut spending at the University level - back in the 1960s (I think) people actually talked about that we may be sending to many folks to college. The Apprentice model (not to be confused with the Donald version) that is still used in Plumbing - needs to be expanded to other skilled trades. You can make a great living with a high skill trade. While working as an Apprentice you'll even pick up some skills on how to run a business - sorry - its rare that good business skill are picked up in College. Most sharp business people I have met picked up their Business Sense from a parent.

When you start really budgeting and tightening a money supply - a lot less money gets wasted.
BK: I do not think you are nuts, but then I really do not know you. I don't disagree with anything in your answer, but are you seeing anything you suggested close to coming to fruition?

The sentiment of "No child left behind" is correct. A nation that respects its citizens should have serious concern that those in the formative years get as much education as is allowed by the individuals' IQ or whatever determines the likelihood they can benefit from formal education. It is obvious that the system is not working, but your suggestions will never, I believe, be brought to bear on the problem at least not by choice of any significant group of voters--and as you alluded earlier perhaps the greatest problem with children not becoming better educated is the lack of guidance, encouragement, and infliction of discipline on children by parents who themselves are poorly educated.

One observation I have made is that few in this society change "bad behaviors" until something forces a change upon those who behave badly. I think unfortunately the present degredation of education will follow that model.

jk
06-22-06, 09:51 PM
i thought it was about housing, but apparently it's about education policy. i find the housing issue more interesting, myself, because i can do something about it [at least in terms of my investments].