View Full Version : Housing Bubble Correction Update: Here comes the jobs crash (Part I)
http://www.itulip.com/images/offcliff.jpgHousing Bubble Correction Update: Fasten your seat belts, here comes the jobs crash (Part I)
The housing market has fallen hard but it's not time to buy, no matter what you hear. Depending on where you live it's time to decide if you can afford not to sell before prices go lower, or grin and bear it. The choice depends on your likely future employment prospects and where you live.
In our first major update in our series of housing bubble forecasts since 2006 that began with our August 2002 Yes, it's a housing bubble (http://www.itulip.com/qc082002.htm)analysis, we delve into the next phase of the housing bubble correction: regional housing price crashes caused by rising unemployment and falling incomes, especially in any state that has a poorly diversified economy not tied to energy or food production. The rate of growth in unemployment in some states may shock you, but our analysis turns up some positive surprises as well.
Professional traders use the phrase "catch a falling knife" to refer to the impulse of the misguided over-eager trader who jumps into a collapsing market to buy what he or she believes are distressed assets only to find that the crash was only starting. Just like the tech stock trader who didn't heed the warnings (http://www.itulip.com/GlobeArchiveJanszen.htm) and bought stocks in December 2000 after the NASDAQ plunged nearly 50% from its 5,049 apex, but before the market collapsed the rest of the way down to 1,172 in 2002, if you buy a home today you can expect significant additional price declines. But you wouldn't know it reading Ben Stein.
In this week's column, the perennial FIRE Economy mouthpiece had this to say about real estate:"The best bet usually is what has gone down the most, and that, for now, is real estate. I got a letter from a thoughtful reader saying he was going to wait until real estate had reached its all time low before he bought. But how will he know? And how rarely does he find a home he truly loves? Even when home buyers buy at the top of the cycle, if they love their homes, and if they can hold on, they always end up delighted.
"Yes, there will be news saying housing will not recover THIS TIME. But in fact, except in really depressed areas, housing recovers EVERY TIME and goes on to pass its prior record. The real story of real estate, as my brilliant money manager friend, Phil DeMuth, says, is of failing to buy, not of staying away successfully.
"The plain fact is that you don't know when real estate will be at bottom until it's too late. If you see a home you love, buy it now if you plan to be in it a long time. And know that the headline writers want to whip you up and make you crazy about the economy. They sell fear. Stay calm and stay well to do."
The key phrase here is the one that Ben throws in to cover his ass should anyone be silly enough to take his advice: "If they can hold on." Back in 2002 when we published "Yes, it's a housing bubble" Ben Stein insisted that no housing bubble existed. At least he's consistent.
Our readers ask, With these huge declines in major housing markets, isn't the worst over? No. All the decline we have seen so far has been the dissipation of asset price inflation created by too much housing credit chasing too few homes between 2002 and 2005. In the manner of all asset price inflations prices will continue to revert to the mean – then overshoot.
The overshoot in this bubble case will occur as housing prices once again correlate to regional incomes and employment as they have for a century before the housing bubble, except for the post WWII period when pent up demand sent prices reverting to the mean but in an upward direction.
Home prices fall whenever and wherever unemployment is rising and incomes are falling, and now that the recession is starting to produce unemployment, home prices will follow falling incomes down.
If you are in a region that is vulnerable to rising unemployment during this recession it's time to sit down with the calculator or a spread sheet and do an honest analysis of what might happen if you, your husband or wife, or both, lose one or more sources of income. Can you, as Ben says, "hold on"?
http://www.itulip.com/images/residentialbubbleprices2002-2008.gifHousing bubble review
The trouble with weather forecasting is that it's right too often for us to ignore it and wrong too often for us to rely on it. - Patrick Young
What Young said about weather forecasting applies to economic forecasting in spades. Let's do a quick review of how we got here so you can judge whether you should pay any attention to this analysis, our sixth housing bubble update in four years. To the left is a graph that shows housing market value nationally during the six year 2002 to 2008 period when we provided our previous housing commentaries. Note that value is back where it started in 2002.
Our Housing Bubble Update: Housing Bubbles do not end like stock market bubbles, December 2004 (http://www.itulip.com/housingnotlikeequities.htm) update warned readers that when the housing bubble eventually collapses, the housing market will become illiquid – sales will stall out and the market will seize up. We didn't want readers to expect that prices were going to collapse as they did in the case of the stock market bubble that we warned them was about to end in March 2000. Unlike housing markets, stock markets are highly liquid. The illiquidity of housing at the start of a market decline drives the psychological dynamics; before home prices can fall first sellers, who expect a return to bubble appreciation rates to which they have become accustomed, wait for the market to "recover." It takes them about a year to figure out that it is not going to, then a bit more time to finally get their heads around the idea that they are going to have to sell at a lower price than they originally thought. Our warning was primarily aimed at investors who could not afford to get stuck with a property, especially poorly capitalized home flippers.
This 2004 forecast was confirmed in 2006 during the early stages of the housing crash as in this Boston Globe story (http://www.boston.com/realestate/news/articles/2006/10/08/fear_and_anxiety_in_the_housing_market/) about home sellers coping with a dearth of buyers.
The second update, Housing Bubble Correction Update, Fifteen Years to Revert to the Mean, December 2005 (http://www.itulip.com/housingbubblecorrection.htm), laid out a seven step process, A to G, of the eventual correction. The article was originally posted on the AlwaysOn Network, an outfit based in California. There it was greeted with deep skepticism as hundreds of AlwaysOn members, mostly based in CA, commented that it could never happen. At the height of the housing bubble one out of 100 employed Californians worked in the residential real estate industry – as a broker, mortgage lender, appraiser, and so on. Home price appreciation peaked in mid 2005 at the time of our "It's a top" update.
We are three years into the housing bubble correction process we defined, at Step D.Step D: Three years into the decline, marginal home buyers will learn what owning a home really costs, versus renting when housing prices are declining and jobs are more scarce. Rent is a fixed cost, whereas home ownership presents many variable costs, including increased interest payments on ARMs, and rising tax, insurance, and energy costs. Also, upkeep for the average home typically costs five to ten percent of the price of the home, annually. As prices fall, homeowners will have less access to home equity loans. Many will not be able to afford repair and maintenance expenses. Homes in some neighborhoods—and in some cases, entire neighborhoods—will begin to look neglected, further depressing prices.Here we underline energy costs in our 2005 forecast because a serious increase in energy prices and its impact on housing prices was not widely expected. We forecast it because we expected ongoing dollar depreciation in the wake of the housing bubble collapse.
The Step D forecast has been confirmed by a number of stories about abandoned and neglected properties, such as the article Atlanta ticketing real estate agents for run-down properties (http://www.ajc.com/metro/content/metro/atlanta/stories/2008/07/09/atlanta_real_estate_agents_foreclosures.html) today.
Our third update Dancing, Booze , and Overpriced Housing, June 2005 (http://www.itulip.com/forums/showthread.php?t=606) asserted that the top was in. That forecast was confirmed a year later by home price appreciation data.
The last update Housing Bubble Update: Geographic Regions Cascade, March 2006 (http://www.itulip.com/housingpriceregionscascade.htm) explained how asset inflation correction combined with rising fuel prices was due to hit rural areas harder and first before urban areas. This was confirmed by stories like this one (http://www.vermontguides.com/2008/07-jul/REmarket.html) about Vermont home buyers avoiding locations that require long commutes. One of our members reported an early instance of the phenomena in High Commuting Costs Push Rural Property Owners Past the Tipping Point, June 2006 (http://www.itulip.com/forums/showthread.php?t=106).
That's the review. What's next?
Next housing bubble correction stage: The jobs crash
On a national scale, housing will continue to decline in line our 2005 forecast for at least another five years, and in some regions prices may not recover for decades. But not all locations will decline as much as others will nor in the same manner. In this update we explain the likely dynamics of regional housing market declines in some detail to help you assets the macro-economic risks to future home values to your state. Note that within states there are always islands of home price appreciation even in the worst of times, such as in Cambridge, Massachusetts or near other areas where high education levels that determine high paying jobs, regionally higher incomes, and good schools support real estate prices.
The latest S&P/Case-Shiller Home Price index tells the national story: massive negative price changes.
http://www.itulip.com/images/homepriceindexMay2008.gif
Note: The housing price correction we have seen so far, shown in the chart above, represents only the loss of valuation created by asset price inflation. Falling incomes and rising unemployment will lead the next phase down.
The post housing bubble deflation period is followed by economic contraction and rising unemployment. Falling incomes and rising unemployment will drive housing prices down considerably further.
Why are falling incomes and rising unemployment bad for housing?
This will be self-explanatory for many of our readers, so we'll keep it brief. When incomes fall, borrowers can't make mortgage payments. Even before recession, sub-prime mortgages were sold to households that did not have sufficient income to make payments even when employed full time at their current job. Some were not able to make the first payment. Now that the recession is here, even low credit risk borrowers who were granted Alt-A mortgages face default.
How many? This chart from the New York Fed (http://www.newyorkfed.org/mortgagemaps/) web site shows, for example, that nearly 25% of all Alt-A mortgage holders in California, one out of four, missed a payment in the last 12 months.
http://www.itulip.com/images/altaCAlatepaymentJuly2008.gif
A mortgage holder who misses a payment is technically in default. While few lenders initiate foreclosure until several payments have been missed, the missed payment in last 12 months metric is a good indicator of borrower distress, and it is rising across the nation even before unemployment has increased significantly. The map above is of Alt-A mortgages – you don't want to see the sub-prime numbers.
Don't let anyone tell you that defaults are limited to mortgages on low cost homes. The map below shows 200 of 629 homes valued at $1,000,000 and up in Orange County, CA that are in foreclosure or are lender owned. Image compliments of CA foreclosure data site ForeclosureRadar.com (http://www.foreclosureradar.com) founded and run by iTulip member Sean O'Toole.
http://www.itulip.com/images/CAforeclosuresJuly2008.jpg
Early innings of future high unemployment
On a national level, unemployment is rising.
ADP shows biggest job loss in nearly 6 years (http://www.marketwatch.com/news/story/adp-shows-biggest-job-loss/story.aspx?guid=%7BE5A76EAD%2D93E4%2D4B9F%2DBF6E%2 D48883AE6B253%7D&dist=hplatest)
July 2, 2008 (MarketWatch)
Private-sector firms in the United States lost 79,000 jobs in June, the biggest loss since November 2002, according to the ADP employment index released Wednesday. Employment in the services sector fell by 3,000, the first decline since November 2002. Job gains in May were revised lower to 25,000 from 40,000 earlier. After adding in some 20,000 government jobs that are created in a typical month but not included in ADP's index, the ADP number suggests that about 60,000 nonfarm payroll jobs were lost in June. Economists surveyed by MarketWatch now expect 40,000 net payroll jobs were lost in June, following a loss of 49,000 in May.
The key leading indicator of future unemployment that we have been tracking since 2006 is median duration of unemployment. The reason this measure is important is that long before employers lay off employees and they start to show up in the government payroll employment numbers as unemployed, employers stop hiring and anyone who is unemployed finds a new job harder to locate. Duration of unemployment is the first measure of employment to rise before a recession and the last to fall after a recession ends.
http://www.itulip.com/images/meandurationunempJuly2008.gif
Don't believe the "recovery" nonsense. We are in the early stages of recession.
We expect this recession cycle will create as much unemployment as the 1981 and 2001 recessions. At the start of 2007 we started this cycle with median duration of unemployment at seven weeks and are currently at 10 weeks. We expect duration of unemployment to peak at 13 or 14 weeks, so we are approximately half way through the process. Most of the unemployment rates we are seeing are half what they will be when they finally peak toward the end of 2009 or early 2010.
Three kinds of states: Energy and Food Price Inflation states, Dollar Depreciation states, and Ground Zero states
In the post housing bubble recession, not all housing market declines are created equal. Some markets are crashing while others are merely staggering. While home prices may fall only another 10% or 20% in some areas, in others prices may fall as much as 80% from 2005 peaks.
A small number of states are what we call Energy Price Inflation States. The housing bubble left them mostly untouched and now they are benefiting from high energy and food prices. Examples are Oklahoma and Wyoming. These states are seeing either flat or, in the case of Oklahoma, falling unemployment. Dollar Depreciation States benefit from the boom in manufactured exports and/or tourism created by the weak dollar. European and Asian tourists are flocking to New York City, Boston, and other US cities to enjoy stays at hotels and high end restaurant meals at fire sale prices.
What surprised us as we dug into the state-by-state data, as you will see below, is how rapidly unemployment is rising in a few states that were not housing bubble Ground Zero States.
The most vulnerable regions are those where housing speculation itself was a major driver of incomes and employment during the bubble, such as in Florida, Arizona, and California. The next most vulnerable regions are those with poorly diversified economies, which economies are dependent on industries that are taking the brunt of the recession, like autos, such as Michigan. The least vulnerable are areas where energy plays an important role in the economy, such as Texas.
In Part II, we explain which states are benefiting from the unofficial US weak dollar policy, state-by-state unemployment growth, and the implications for housing prices.
Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs crash (Part II) (http://itulip.com/forums/showthread.php?p=40649) is available to iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032) subscribers after July 12, 2008.Shameless pitch for a friend of iTulip: If you are on Martha's Vineyard this summer, you must visit Beetlebung (http://beetlebung.com/default.aspx) where they already live the lifestyle for the post rat race era.
iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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metalman
07-10-08, 04:33 PM
my theory on montana... it's a tourist state and no one can afford to drive or fly there anymore.
Inferred homes’ overpricing (latest: 36%, 43%) from S&P/Case-Shiller indices, real inflation-corrected, have fallen steeply on ca. straight lines for the last 7 months (from 45% and 51%, respectively) -- lines extrapolate to 0% overpricing during 2010. See here (second chart):
http://homepage.mac.com/ttsmyf/Freds_Straight_Lines.html
http://homepage.mac.com/ttsmyf/HomesMISlines.gif
dbarberic
07-10-08, 05:39 PM
Hey... where is a chart for Ohio?
"Ben" Strein..........Bloody Hell he tried to talk up buying the banks and Schiff torn him a new one!
(Try to find the link).
Mike
Hey... where is a chart for Ohio?
Woops. All better.
netdance
07-10-08, 07:04 PM
Our assessment is the energy states, and alternative energy development areas of some states, such as Texas and Silicon Valley in Northern, CA will continue to boom.
I can't speak for Texas, but given that most of the Valley is involved in building either consumer discretionary, or capitol improvements, it's not looking good. Additionally, Silly Valley is ground zero for Alt-A, and most houses are heloc'd to the hilt.
Two years ago, I was talking to someone at the cellular store - it was his last day, he was leaving to become a real estate agent. That was the signal to me that the end was near - just like the pizza guy learning Java back in '99.
Most of the valley's skill sets are not terribly applicable to alt-energy - that boom will probably happen elsewhere. My current bet is Austin.
Otherwise, great article.
Chief Tomahawk
07-10-08, 08:42 PM
I am happy to get a new ITulip piece. Things were slightly chaotic today, what with LEH fending off rumors, Poole saying Fannie and Freddie are insolvent, Dick Bove and Dennis Gartman saying it's time to buy financials, Iranians trying to keep oil prices up by firing missiles, oil surging $6 and the stock market largely ignoring it, etc.
I've got one short at the moment, COF. Something about Vikings running wild during a credit boom asking "What's in your wallet?" makes me think they might take a few hits during the housing decline and rising unemployment.
Great article! Being a Tennesseean this really punched me in the gut but I'm in pretty good shape financially just can't decide what to do with the house. My only debt is my mortgage, I have a downtown loft at about 200k, very little equity in it. I do make very good money and have 50k in savings, a little PM (phys and IRA) but I've thought about ditching the loft before the crunch hits so hard that I'm stuck here. Any thoughts/opinions? I have some family property that I could live in for a few months to weather the storm rent free but I don't want to make a rash decision and settle for 90% of my mortgage...then again I don't want to be stuck in this place for 5 years waiting for prices to correct...ugh! :confused:
I am happy to get a new ITulip piece. Things were slightly chaotic today, what with LEH fending off rumors, Poole saying Fannie and Freddie are insolvent, Dick Bove and Dennis Gartman saying it's time to buy financials, Iranians trying to keep oil prices up by firing missiles, oil surging $6 and the stock market largely ignoring it, etc.
I've got one short at the moment, COF. Something about Vikings running wild during a credit boom asking "What's in your wallet?" makes me think they might take a few hits during the housing decline and rising unemployment.
I need to point out the subtle layers of horror in this commentary below the surface.
Mr. Janszen says that housing prices will fall. GRG55 notes "I'll see it when I believe it." Janszen bashes our brains in with a dozen charts that damn us with evidence of unemployment rising, to overwhelm our disbelief.
The "oases" are states floating on inflation.
One is our President's home state.
Happy days.
Pull the inflation plug and the last remaining pools of growth, cancers to the rest of us, run down the drain.
Elections will sort it out, as gale sorts out a forest fire.
Great article! Being a Tennesseean this really punched me in the gut but I'm in pretty good shape financially just can't decide what to do with the house. My only debt is my mortgage, I have a downtown loft at about 200k, very little equity in it. I do make very good money and have 50k in savings, a little PM (phys and IRA) but I've thought about ditching the loft before the crunch hits so hard that I'm stuck here. Any thoughts/opinions? I have some family property that I could live in for a few months to weather the storm rent free but I don't want to make a rash decision and settle for 90% of my mortgage...then again I don't want to be stuck in this place for 5 years waiting for prices to correct...ugh! :confused:
In Schertz Tx, (north East of SanAntonio) My rental will not sell below market, so I am thankful to have renters in it (for a while longer at least). In this climate, I would advise something I teach my students all the time.
"when in doubt, there is NO doubt"
Translation in your case = sell while you can walk away without losing your a$$.
BTW nothing has moved here for 3 months, NOT KIDDING. (foreclosures are increasing and some are selling at big discounts, but normal RE channel activity is literally DEAD).
Hope this helps.
Finance for home purchases will get very difficult in this environment.
http://www.nytimes.com/2008/07/11/business/11ripple.html
Published: July 11, 2008
But these are not normal times. Within minutes, the price of the companies’ shares was plunging, sending shock waves through the financial markets, the economy and Washington.
Fannie Mae and Freddie Mac are so big — they own or guarantee roughly half of the nation’s $12 trillion mortgage market — that the thought that they might falter once seemed unimaginable. But now a trickle of worries about the companies, which has been slowly building for years, has suddenly become a torrent.
Virtually every home mortgage lender, from giants like Citigroup (http://topics.nytimes.com/top/news/business/companies/citigroup_inc/index.html?inline=nyt-org) to the smallest local banks, relies on Fannie Mae and Freddie Mac to grease the wheels of the mortgage market. Virtually every Wall Street bank does business with them. And investors around the world own $5.2 trillion of the debt securities backed by the companies.
And investors around the world own $5.2 trillion of the debt securities backed by the companies.
I wonder what the breakdown is of who owns what. Foreign vs. domestic and the quality of their respective holdings.
Finance for home purchases will get very difficult in this environment.
http://www.nytimes.com/2008/07/11/business/11ripple.html
A couple revelations we came across in our research. With the buildings owned by several different lenders, an outstanding water bill north of $150,000 and a rough-and-tumble community around the complex, Hale said he couldn't even get an offer with a $12,500 asking price. He has since lost the listing even though he paid the fine.
Hale's also been ticketed for a building at 930 Garibaldi St. and faces a court date in August. Hale intends to fight that one.
Buildings like the ones on Garibaldi and Bolton are scattered around the city but heavily concentrated in communities like Riverside, Vine City, Pittsburgh and English Avenue.
Many sit vacant and dilapidated for months as lenders go through the process of taking them back through foreclosure and then putting them on the market.
City officials said they could not estimate how many agents have been cited. They noted the city code gives officers leeway to cite anyone from the owner to someone who has the ability to control or maintain the property.
Frequently the owners of some of the worst properties are out-of-state financial institutions, which can make it difficult to track them down or get them into city court. Real estate agents, though, are local and have their names and phone numbers right out front.
"They are certainly getting a little bit desperate," said Wayne Flanagan, another agent who has been cited and even threatened with arrest. "One [code enforcement] agent told me, 'We don't know how to get hold of out-of-state asset managers. We know how to get hold of you.' The only reason they are fining us is because we are available." more... (http://www.ajc.com/metro/content/metro/atlanta/stories/2008/07/09/atlanta_real_estate_agents_foreclosures.html)
Revelation #2:
http://www.itulip.com/images/clevelandJuly2008.gif
The spike in unemployment in this P/C town is unlike anything on record, at least since the birth of the FIRE Econonomy 35 years ago :eek:
phirang
07-11-08, 02:17 AM
What I find interesting is that while the US is absolutely going to the gutter, commodity prices, especially steel, cement, and fertilizer, will remain HIGH.
I am coming to the conclusion that this isn't a global depression: it's the consummation of wealth-transfer from the US to Asia/Energy states.
babbittd
07-11-08, 03:13 AM
My mother, in a desirable, suburban Massachusetts town, is just a few months away from paying off her mortgage. I've been trying to convince her to sell while some of the idiots in Massachusetts are still buying. Hopefully it is not to late and for her sake, she'll listen to E.J., if not me.
CanuckinTX
07-11-08, 07:23 AM
My mother, in a desirable, suburban Massachusetts town, is just a few months away from paying off her mortgage. I've been trying to convince her to sell while some of the idiots in Massachusetts are still buying. Hopefully it is not to late and for her sake, she'll listen to E.J., if not me.
And there certainly are some idiots still buying. I just spoke to my friend last night who is renting in Huntington Beach, CA after selling his house well over a year ago where they made a very tidy profit. Amazingly, after being so fortunate to dump a house last year, they're getting the itch to buy again and are looking for an ever MORE expensive home than they had because prices are down so they think it's bargain time.
They even got outbid on a house just recently! I tried to tell him once he's way early but you can only say so much before they have to live with their consequences.
RebbePete
07-11-08, 07:58 AM
One kind of state you left out was a "Government Pork Barrel State." Here in central Maryland, 99.44% of the economy seems to revolve around US Government workers and contractors. Outlying areas of Maryland are, instead, agricultural.
How in the world can you estimate the US Governments expenditures going forwards? Will we see a fire hose of money injected into the state economy as US Government-oriented employment spikes up, or will they cut back in the face of rising deficits?
The only other state I can think of that might be significantly dependent on US Government funding would be Colorado.
- Pete
EJ or anyone, some advice/opinions please . . . .
My wife and I are retired, and we've got most of our savings in short-term T-bills and gold. We've got enough to support ourselves for the rest of our lives . . . as long as the value of our savings does not decrease dramatically.
Unfortunately, we expect that our dollars in T-bills will be eaten away by inflation, and we're using gold to partially hedge against that. But we want to diversify and invest in something "real" to reduce losses to our retirement nest egg. We fear putting it all in gold -- too risky to put all our eggs in one basket.
We've considered buying rental real estate, figuring that people will always need a place to live, and that rental rates will remain "real", that is, will probably go up as inflation rises. But we are confused by what seem to be opposing factors . . . housing prices are going down, yet the value of our dollars used to purchase that property is also being eaten away by inflation. So, my question is, will real estate prices will drop faster than the value of the dollar? If this were the case, it would seem to be better to wait a few years, and buy later . . . even though our dollars would have less purchasing power.
Another conundrum is that we can get low interest rate loans now . . . and we can keep enough cash socked away in T-bills to insure that we can pay these loans off over their term. So, if inflation is going to eat away the value of the dollar, wouldn't it be wise to buy now with a mortgage, and pay back the mortgage over the next 30 years with dollars that are continually decreasing in value?
Thanks for your input . . . .
How does this situation balance out with the "good to be a borrower" inflation scenario where my crappy bonars pay for huge pieces of my mortgage? I thought sometimes inflation was good for the borrower? :rolleyes:
LargoWinch
07-11-08, 09:28 AM
Hmm Raja. If I may give you my 2 cents on this:
Real Estate is declining and will do so for the short and medium term (2-7 years). As such, the rent income will not be enough to offset the decline in value of your property. So RE is out.
The way I see it, is that you can do a combination of the following:
1- PMs (mostly gold/silver)
2- High-Dividends paying stocks outside the US in Canada, Australia, Brasil or Russia (currently Canada and Russia are the only two net oil exporter of the G8). Make sure you have no exposure to $USD
3- Buying some currencies (RMB, SF, YEN)
4- Buying energy ETF (Natural Gas, Oil)
5- Buying Agricultural Commodities both Hard and Softs via ETF
6- Have 6 Months of expenses in cash
... and that is my 2cents.
hasbeenblocktrader
07-11-08, 09:39 AM
I am only a washed up old trader but it seems to me that in light of the developments in FNM/FRE it seems like an ideal time to discuss the massive derivatives exposure....perhaps a re-visit to the Forbes 2003 article re: Warren Buffett and the "The Great Derivatives Smackdown"...It is too big for our current bought and sold government to really turn this....
RebbePete
07-11-08, 09:53 AM
EJ or anyone, some advice/opinions please . . . .
My wife and I are retired, and we've got most of our savings in short-term T-bills and gold. We've got enough to support ourselves for the rest of our lives . . . as long as the value of our savings does not decrease dramatically.
Unfortunately, we expect that our dollars in T-bills will be eaten away by inflation, and we're using gold to partially hedge against that. But we want to diversify and invest in something "real" to reduce losses to our retirement nest egg. We fear putting it all in gold -- too risky to put all our eggs in one basket.
We've considered buying rental real estate, figuring that people will always need a place to live, and that rental rates will remain "real", that is, will probably go up as inflation rises. But we are confused by what seem to be opposing factors . . . housing prices are going down, yet the value of our dollars used to purchase that property is also being eaten away by inflation. So, my question is, will real estate prices will drop faster than the value of the dollar? If this were the case, it would seem to be better to wait a few years, and buy later . . . even though our dollars would have less purchasing power.
Another conundrum is that we can get low interest rate loans now . . . and we can keep enough cash socked away in T-bills to insure that we can pay these loans off over their term. So, if inflation is going to eat away the value of the dollar, wouldn't it be wise to buy now with a mortgage, and pay back the mortgage over the next 30 years with dollars that are continually decreasing in value?
Thanks for your input . . . .
First a disclaimer: I am not an investment advisor, so if you take my advice and lose all your money, it's your own darn fault.
I would not buy investment properties until the traditional measures of return on investment (ROI) make sense again, i.e., that you are taking in 10% or better from rent than you are paying for the upkeep, mortgage, etc. on it.
When the time comes, I might be buying commercial real estate, but only when the ROI works. Commercial is much easier since you're not getting called at 3 in the morning because a tenant got drunk, wrenched the toilet out of the floor and flung it through the glass window injuring a passer-by (who is now suing you). My grandfather had several apartment buildings, and, believe me, that's not much of an exaggeration.
Let's say you buy real estate for $200k, and have $200k in treasuries to cover it. You suffer a loss of $10k/year because the rents don't cover the mortgage, but it's partially offset by the $8k you're getting from the treasury interest. You're still losing $2K a year. Then the economy suffers a deeper downturn, no one can afford the rents, so you have to lower them. Now you're losing more money on it.
Right now, I'm keeping my money in ultra-short term treasuries (13 week), money market funds (be careful, some money market funds are better called "mortgage market funds"), gold (both a mutual fund and physical), silver (ETF and physical), Canadian junior mining stocks (for a boost both from currency differential and gold price) and miscellaneous other stocks. My house is paid off and I have no other debts. It's called "batten down the hatches, there's a storm coming."
- Pete
I've said this before but I'll say it again. I read the 2005 housing peak piece sometime in late 2006, after lurking around various bubble blogs and starting to believe those guys might be right. The iTulip analysis was thorough and convincing. It took a while longer for me to decide that Portland was very much part of the bubble as well. Fortunately, we were late to crest.
At any rate, once I decided that 1) Portland housing was in a bubble and prices would decline 2) I estimated prices would decline more than I had equity in the home 3) I didn't like my neighborhood enough to just ride it out; I prepared to sell.
The thing is, it took me months to finish (and in some cases start and finish) various projects to get the house in shape to sell. I got it on the market just as subprime suddenly hit the brakes, and just as Portland was peaking. It took seven months on the market before I found a buyer and sold.
In retrospect, I should have taken a month or two leave of absence from work to get the house ready and on the market. The difference in what I could have sold it for would have easily covered the salary loss.
My point is to say that if, after reading this, you think the best course of action might be selling your house, please do not hesitate. The real estate industry always says It's A Great Time To Buy! (http://www.realtor.org/prodser.nsf/products/135-40?OpenDocument). Today is not a great time to buy. Unfortunately, it's not a great time to sell either. However, now is a better time to sell than later. Be prepared to sit on the market for a long time, and/or sell for less than you think the house is worth. In a falling market, you have to make your house more appealing than comperable houses, and the most important way to do this IMO is to drop your price low enough below the comps that your house appears to be a bargain. While I was still trying to sell, and I looked at listings in my price range and area and most of the other houses were something I would not want to live in... I knew I was getting close. YMMV.
You have to maintain some detachment during this process too. Chances are, you really like your house and are sad to be letting it go. Don't let fondness and nostalgia get in the way of cutting your losses and bailing out. You also have to detach yourself from your buyer and the likelihood that further down the road they are going to be in trouble. In some ways, I still feel bad about selling my home to the people who eventually bought it. I think they will regret the purchase, if they don't already. But I am so happy to be done with it.
netdance expressed skepticism about the future employment prospects in California, relative to alternative energy. I looked at the chart and summary for Oregon and have some doubts as well. Secretly, EJ is a raging optimist!:D:eek: I have no idea if I might lose my job or not. I don't really feel adequately prepared for such an event, but I'm better prepared than most people out there. Certainly I am relieved to not have the mortgage hanging over my head, or any other debts.
A couple days ago I read an article about this year's upcoming Street of Dreams homes here in Portland. I assume most cities have a similar annual gig where builders construct a collection of enormous, gaudy houses with all the bells and whistles, let the public come tour them for "design inspiration", and then offer them for sale. They are going ahead with this year's houses, even though [I]none of the 2007 Street of Dreams homes have sold!
raja,
Put everything in TIPS, of maturities you figure out. If you are not familiar with TIPS, it’s because they don’t make much money for middlemen! TIPS are very high merit. To start, you can link from here:
http://homepage.mac.com/ttsmyf/recDJIAtoRD.html
and current real yields are here:
http://www.bloomberg.com/markets/rates/index.html
For homes’ pricing guessing-the-future, look at the past shown soundly:
http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html
and
http://homepage.mac.com/ttsmyf/Freds_Straight_Lines.html
Ed
World Traveler
07-11-08, 01:00 PM
For most people, it only pays to assume debt in inflationary times if their wages and income can keep up with inflation. That hasn't happened so far.
That's the difference between today and the '70's. I was a young working adult in the '70's and the common wisdom in mid to late '70's was to buy more house than you need, because you'll pay mortage back in cheaper dollars. At that time, U.S. was still a domestic-focused economy, unions were still fairly strong and widespread, and wages were going up with inflation. I went to work at a large corporation in late 1978, and in fall, 1979, we all got an across the board 5% salary increase because, we were told, our standard raises had not kept up with inflation.
That hasn't been happening this go-round, if anything, corporate America is using layoffs to solve their problems. As Michael Hudson and Eric have said, if wage inflation happens this time around, it will be due primarily to political factors and government policy.
My opinion is that it's to early to call. Maybe after the fall elections and in 2009, we'll have a clearer picture if wages will be allowed to rise.
Chris Coles
07-11-08, 01:18 PM
This has just come in on Channel 4 News this evening.
MORE US BANK WOES
Also tonight more financial woes unravelling Stateside that could eventually come our way. The big, state-backed Freddie Mac and Fannie Mae are in deep trouble - they own or guarantee about a half of the mortgages across America. Share prices plummeting and the US treasury holding off from stepping in just yet. We're on the case as to where the ripples coming across the Atlantic could end.
http://www.channel4.com/news/articles/politics/international_politics/sudan+president+to+be+indicted/2332297
They even got outbid on a house just recently! I tried to tell him once he's way early but you can only say so much before they have to live with their consequences.
This Just happened to a buddy of mine trying to buy a forclosure in citrus hills (north of Sac, CA) He bid $5KL over list and was out bid several times with the final offer $30K over his initial offer (Cash OFFER BTW). That happend to him several times, so now he's just going to rent.
Form his perspective, there were ALOT of people (ivestors with deep pockets) running around buying up foreclosures with cash.
Wonder what that means?
dbarberic
07-11-08, 02:11 PM
Revelation #2:
http://www.itulip.com/images/clevelandJuly2008.gif
The spike in unemployment in this P/C town is unlike anything on record, at least since the birth of the FIRE Econonomy 35 years ago :eek:
I current live in Northern Ohio and comparing this chart to overall Ohio one, as well as my own person experience, seems to indicate that Ohio could be split more into two regions; North & Centeral/South.
Nothern Ohio is manufacturing heavy with large amounts of businsses supplying the American auto industry. The only sector that is probably still holding is heathcare (the world-class Cleveland Clinic), but with a shrinking population, I'm not sure how much longer that will hold too. I would expect that if you did a chart for Detriot and the surrounding areas, it would be very similar to the one above.
The Central/Southern part of the state is more diversified accross multiple sectors: technology, military/government (Dayton), consumer staples (P&G), banking, retail, as well as the entire state having a strong agriculture industry. The greater weighting of these parts of the state are probably what gave the suprising rating of "fair" for the overall State of Ohio.
It would be interesting to compare the chart above to Detriot, as well as the Columbus, Dayton, and Cincinnatti areas of Ohio. I'm curious if what I suspect holds true.
Buying rental property may not be a bad investment, but I would very closely monitor the cap rate: i.e. rent divided by purchase price plus ongoing expenses.
I've talked previously about the little old lady in Fresno who was buying foreclosed unwanted houses for $10K and $20K in the mid to late '80s; these houses were fixed up for between $5K and $15K then rented out for $500/month. The worse case cap rate was then: $6K/($35K * 1.05) = 16%.
The 5% because the purchase prices were much lower than replacement value - for full replacement value 1% would be ok. But note that since she had so many, she didn't both paying fire insurance. After you own 50 or so houses, the fire insurance payment equals replacement cost of 1 house every year!
So, can you get a 10% cap rate with your rental property? This does not include any mortgage interest deductions - a straight cash proposition.
Every 1% below that magic number - your risk increases.
That's why even with the drops we've had, most major markets are still WAY too expensive to buy rentals in.
Just as Internet stock in 2002 were cheaper, did not mean they did not get even more cheap afterwards.
The point we're at - it is very conceivable that we end up with lower real wages. This in turn almost always means lower prices for everything. That would suck bad if you bought a bunch of rental properties.
I current live in Northern Ohio and comparing this chart to overall Ohio one, as well as my own person experience, seems to indicate that Ohio could be split more into two regions; North & Centeral/South.
Nothern Ohio is manufacturing heavy with large amounts of businsses supplying the American auto industry. The only sector that is probably still holding is heathcare (the world-class Cleveland Clinic), but with a shrinking population, I'm not sure how much longer that will hold too. I would expect that if you did a chart for Detriot and the surrounding areas, it would be very similar to the one above.
The Central/Southern part of the state is more diversified accross multiple sectors: technology, military/government (Dayton), consumer staples (P&G), banking, retail, as well as the entire state having a strong agriculture industry. The greater weighting of these parts of the state are probably what gave the suprising rating of "fair" for the overall State of Ohio.
It would be interesting to compare the chart above to Detroit, as well as the Columbus, Dayton, and Cincinnatti areas of Ohio. I'm curious if what I suspect holds true.
We do not have Columbus and Dayton data so we created a chart to compare Cleveland and Ohio without Cleveland, plus Detroit. As you suspected, the auto recession is hurting Detroit as much as Cleveland. But even outside of Cleveland, Ohio is experiencing a big spike in unemployment.
http://www.itulip.com/images/OHMIJuly2008.gif
World Traveler
07-12-08, 05:12 PM
Zoog, I think you made a smart move, based on my experience in a housing bust. Better to sell too soon than too late, in a major bust like this is shaping up to be. At least that's been my Lesson Learned. Too late, and you either lose a substantial sum at closing, or you end up stuck with a house for maybe a lot longer than you want.
In Houston housing bust, we stayed put in our first house far too long, mainly because spouse worked near our suburban sub-division, at least until laid off in 1986. After lay-off, we wanted to move, but house prices in neighborhood were nose-diving. In 1993, I was finally able to sell the house we bought in 1982, for a little less than we had paid. I had to sweeten the deal, by allowing them, with VA approval, to assume our existing mortgage.
It was an arduous process and I wouldn't want to do it again. I played realtor on this deal, put the ads in newspapers, did all the showings myself, etc., etc. I also looked up price of every house for sale in sub-division and slightly priced my house below them. By 1993, the nominal price people in sub-division were asking was back to 1982 prices, but I noticed that houses priced at that level were not really moving much. To get rid of our first house, I was willing to take a small loss, in nominal dollars 11 years later, and I felt it was worth every penny of that small loss. It had finally sold!!
rchdenton
07-12-08, 07:29 PM
Hmm, fascinating stuff. To what extent could New Zealand, where I live, be considered an outer state? And are we like Wisconsin???
For my part I have sold all residential real estate in the last few months and now live much more comfortably in a brand new rented house.
Having made the change it now seems like the right move.
What is entirely unclear to me is whereto next.
Master Shake
07-13-08, 07:34 AM
So, when do energy prices start reflecting the decreased demand brought about by the crappy economy? A good chunk of my 403(b) is in Fidelity's various energy and natural resources funds.
So, when do energy prices start reflecting the decreased demand brought about by the crappy economy? A good chunk of my 403(b) is in Fidelity's various energy and natural resources funds.
When the FIRE economy was roaring along, generating GDP through printing all manner of toxic waste paper and flogging it around the world, how much real energy did that require?
OK, I'll grant that all those contractors in California, Arizona and Florida, flinging up pressed-oatmeal-panel tract houses used some fuel in their pick-ups. :)
But Wall Street was the bulk of the action, and as the much-touted "less energy intensive per unit of GDP" US FIRE economy implodes, we may be surprised at how little influence it has on total global energy demand [barring a BRIC meltdown] compared to the last really deep recessions in the 1970's and early 1980's. ;)
So, when do energy prices start reflecting the decreased demand brought about by the crappy economy? A good chunk of my 403(b) is in Fidelity's various energy and natural resources funds.
Perhaps not for a long time. Our working definition of Peak Cheap Oil:
Peak Cheap Oil™, n. (iTulip): Global oil depletion will result in oil output declines worldwide just as oil output peaked and declined in the US in the mid 1970s and many other countries before and since. We will only known in hindsight when the peak was reached. Years before physical oil production peaks, sophisticated market participants, such as governments and institutional investors, will begin to price in the economic and market impact. The primary impact is inflationary: rising energy costs exert a growing tax on economic surplus, eventually slowing and eventually reversing growth in countries that are unable to reduce oil energy demand quickly through efficiency gains.
The governments of both net oil consuming and net oil producing counties begin to hoard oil
Producers hoard oil in ground, consumers in storage (e.g., US strategic oil reserve)
More desirable higher quality sweet light crude is hoarded first before heavy, sour crude
Institutional investors are the first to anticipate an incipient rise in inflation
Investors purchase hard assets and claims on hard assets, including oil itself, to hedge inflation
Demand falls as prices rise, except among producers that subsidize oil either to fund government and early growth stage economies (e.g., China and India) that cannot produce economic output at high energy costs as can mature economies
As energy inflation intensifies, investment in hard assets widens to include all investor classes
Hoarding and investment in inflation hedges increases claims on physical assets, driving prices up even as demand falls
Governments respond to slowing economic growth with traditional reflation policies that result in global currency depreciation, accelerating energy price inflation in all currencies, which gradually feeds into pricing throughout the economy starting with energy-sensitive goods such as food and chemicals
The energy induced inflation spiral only ends when a new energy-based monetary policy orthodoxy is developed and deployed, including an energy based global currency regime, a process that may take as much as a decade
Master Shake
07-13-08, 09:56 AM
Thanks, EJ.
I'm sure you've covered this before but just what does this mean?
The energy induced inflation spiral only ends when a new energy-based monetary policy orthodoxy is developed and deployed, including an energy based global currency regime, a process that may take as much as a decade
Does that mean an end to central banking and fiat money as we know it and a return to asset-backed money?
My poor home town of Cleveland is in rough shape. Despite excellent medical and legal communities, it hasn't been able to attract/keep young people for years. The urban sprawl is almost down to Columbus and I fear it won't be long before we have a Detroit like situation. It's Florida minus the boom that never came. Feel for you Dbarberic. A survey to prepare for the week ahead.
Bloomberg Survey
================================================== ==============
=
Release Period Prior Median
Indicator Date Value Forecast
================================================== ==============
=
PPI MOM% 7/15 June 1.4% 1.3%
Core PPI MOM% 7/15 June 0.2% 0.3%
PPI YOY% 7/15 June 7.2% 8.6%
Core PPI YOY% 7/15 June 3.0% 3.2%
Empire Manu. Index 7/15 July -8.7 -7.8
Retail Sales MOM% 7/15 June 1.0% 0.4%
Retail ex-autos MOM% 7/15 June 1.2% 1.0%
Business Inv. MOM% 7/15 May 0.5% 0.5%
IBD/TIPP Conf. Index 7/15 Dec. 37.4 36.8
ABC Conf Index 7/15 14-Jul -41 -42
Mortgage Apps. WOW% 7/16 12-Jul 7.5% n/a
CPI MOM% 7/16 June 0.6% 0.7%
Core CPI MOM% 7/16 June 0.2% 0.2%
CPI YOY% 7/16 June 4.2% 4.5%
Core CPI YOY% 7/16 June 2.3% 2.3%
Core CPI SA Index 7/16 June 214.832 n/a
CPI NSA Index 7/16 June 216.632 217.907
Net Long Term TICS $ Bl 7/16 May 115.1 67.5
Total TICS $ Blns 7/16 May 60.6 57.5
Ind. Prod. MOM% 7/16 June -0.2% 0.0%
Cap. Util. % 7/16 June 79.4% 79.4%
NAHB Housing Index 7/16 July 18 18
Housing Starts ,000's 7/17 June 975 960
Building Permits ,000's 7/17 June 978 965
Initial Claims ,000's 7/17 13-Jul 346 380
Cont. Claims ,000's 7/17 6-Jul 3202 3180
Philly Fed Index 7/17 July -17.1 -15.0
================================================== ==============
=
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOAhjktHvbXU&refer=home
Uncle Jack
07-13-08, 03:41 PM
I don't think you mentioned it anywhere in the article, but I just thought I'd point out that I recognize the picture at the top of the article. It's Smiler Brogan's car going over the side of the highway in the movie, "It's a Mad, Mad, Mad, Mad World."
Nice.
Lukester
07-13-08, 03:59 PM
EJ - As I have long concluded, once you got interested in the many, many ramifications of Peak Cheap Oil, you would bring to bear a level of financial scrutiny, and resulting insights regarding it's myriad economic implications, that are even more probing than many others that have been all over this topic for the better part of a decade. This is where iTulip's existing strong suits (finance / econ) brought to bear, can peel back entire new layers of forward looking, invaluable intelligence for your readers. Way to go! I will follow this new / old iTulip line of inquiry, opening up that entire can of worms with lively interest.
Perhaps not for a long time. Our working definition of Peak Cheap Oil:
Peak Cheap Oil™, n. (iTulip): Global oil depletion will result in oil output declines worldwide just as oil output peaked and declined in the US in the mid 1970s and many other countries before and since. We will only known in hindsight when the peak was reached. Years before physical oil production peaks, sophisticated market participants, such as governments and institutional investors, will begin to price in the economic and market impact. The primary impact is inflationary: rising energy costs exert a growing tax on economic surplus, eventually slowing and eventually reversing growth in countries that are unable to reduce oil energy demand quickly through efficiency gains.
The governments of both net oil consuming and net oil producing counties begin to hoard oil
Producers hoard oil in ground, consumers in storage (e.g., US strategic oil reserve)
More desirable higher quality sweet light crude is hoarded first before heavy, sour crude
Institutional investors are the first to anticipate an incipient rise in inflation
Investors purchase hard assets and claims on hard assets, including oil itself, to hedge inflation
Demand falls as prices rise, except among producers that subsidize oil either to fund government and early growth stage economies (e.g., China and India) that cannot produce economic output at high energy costs as can mature economies
As energy inflation intensifies, investment in hard assets widens to include all investor classes
Hoarding and investment in inflation hedges increases claims on physical assets, driving prices up even as demand falls
Governments respond to slowing economic growth with traditional reflation policies that result in global currency depreciation, accelerating energy price inflation in all currencies, which gradually feeds into pricing throughout the economy starting with energy-sensitive goods such as food and chemicals
The energy induced inflation spiral only ends when a new energy-based monetary policy orthodoxy is developed and deployed, including an energy based global currency regime, a process that may take as much as a decade
when a new energy-based monetary policy orthodoxy is developed and deployed, including an energy based global currency regime, a process that may take as much as a decade
http://www.itulip.com/forums/showthread.php?p=33297#poststop
A controllable resource with few competitors, limited resource extraction, energy security, completely controlled processing, strict distribution management, enhanced environmental friendly product, and waste control management.
Who will be part of the new reserve basket?
ocelotl
07-14-08, 06:08 AM
Regarding the fundamental premise of this thread, the loss of jobs due to the declining value of both housing and the USD, it has been posted in this site that there is also a lack of wage inflation within US, but there is a sector that is going to face hard downgrades on revenues due to their same composition and that there are at the first row on this job loss stage: Non US based transnationals whose costs are not in USD but their sell prices are in USD.
Dissecting this sector, we see there is a clear wage and cost inflation (appreciating salaries, manufacturing and shipping costs costs due to the declining value of USD against several currencies, as well as the increasing oil costs) even when there is not a nominal increase of salaries.
As selling prices cannot increase according to costs due to competition with american counterparts, there is a loss of revenue in this sector, so we are in the way to a contagion of US recession conditions into the largest non USD transnationals due to this same effect.
LargoWinch
07-14-08, 08:46 AM
Hmmm I am a little confused regarding crude oil.
On one side, crude is under pressure from a slowing economy (at least in the US) and on the other side, inflation is picking up.
Both Marc Faber and Stephen Leebs think that crude oil and industrial commodities are headed lower during 3Q and 4Q of this year, but will then pick-up their long-term bullish trend.
Can someone shed some light on this for me?
Hmmm I am a little confused regarding crude oil.
On one side, crude is under pressure from a slowing economy (at least in the US) and on the other side, inflation is picking up.
Both Marc Faber and Stephen Leebs think that crude oil and industrial commodities are headed lower during 3Q and 4Q of this year, but will then pick-up their long-term bullish trend.
Can someone shed some light on this for me?
I would assume they believe that slowing global growth will dampen demand for raw materials and energy, but the usual Central Bank (particularly Fed) response to same will cause dollar denominated commodities to return to an inflationary price trend after that.
babbittd
07-14-08, 02:40 PM
My mother, in a desirable, suburban Massachusetts town, is just a few months away from paying off her mortgage. I've been trying to convince her to sell while some of the idiots in Massachusetts are still buying. Hopefully it is not to late and for her sake, she'll listen to E.J., if not me.
I wuz wrong (nothing new).
EJ:
Since this article was published several readers emailed to ask me if I own a home. My wife and I purchased our home in a suburb of Massachusetts in 1999. Current market price is approximately twice what we paid for it. We do not have a mortgage. Housing in our area did not participate significantly in the housing bubble price inflation. Prices increased only moderately during the 2002 to 2005 inflation period so there has been minimal asset bubble deflation here. The town is at low risk to significant further home price declines due to a well diversified state and regional economy, unique proximity to several world class universities, and one of the best K-12 school systems in the US. Areas of the US that produce and retain highly trained and thus globally competitive workers will continue to attract population from other areas. For that reason, and due to the strong euro attracting European buyers, home prices actually increased 5% between 2006 and 2007 here and the appreciation is accelerating this year, as a result of migration from areas of the country and European buyers.
Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs crash (Part I)
The housing market has fallen hard but it's not time to buy, no matter what you hear. Depending on where you live it's time to decide if you can afford not to sell before prices go lower, or grin and bear it. The choice depends on your likely future employment prospects and where you live.
In our first major update in our series of housing bubble forecasts since 2006 that began with our August 2002 Yes, it's a housing bubble (http://www.itulip.com/qc082002.htm)analysis, we delve into the next phase of the housing bubble correction: regional housing price crashes caused by rising unemployment and falling incomes, especially in any state that has a poorly diversified economy not tied to energy or food production. The rate of growth in unemployment in some states may shock you, but our analysis turns up some positive surprises as well...
This sounded decidedly UN-bank-Chairman-like:
House prices could fall for two years: Citigroup
Sat Jul 19, 2008 4:10am EDT
LONDON (Reuters) - Citigroup chairman Win Bischoff has warned that house prices in Britain and the United States are likely to keep falling for another two years.
The chairman of one of the world's most powerful banks told the BBC in an interview that he expects it will take two years for the markets to stabilise.
He also said he expected the credit crunch could continue through until 2009.
Bischoff told the BBC that there would be redundancies at the bank, which employs 12,000 people in Britain, and warned that some of them would be compulsory.
No further details were released of the interview which is due to be broadcast later on Saturday on the BBC News
This sounded decidedly UN-bank-Chairman-like:
House prices could fall for two years: Citigroup
Sat Jul 19, 2008 4:10am EDT
LONDON (Reuters) - Citigroup chairman Win Bischoff has warned that house prices in Britain and the United States are likely to keep falling for another two years.
The chairman of one of the world's most powerful banks told the BBC in an interview that he expects it will take two years for the markets to stabilise.
He also said he expected the credit crunch could continue through until 2009.
Bischoff told the BBC that there would be redundancies at the bank, which employs 12,000 people in Britain, and warned that some of them would be compulsory.
No further details were released of the interview which is due to be broadcast later on Saturday on the BBC News
my guess is that he knows there are a lot more write-offs ahead, so he's immunizing himself from investor lawsuits.
phirang
07-21-08, 08:06 AM
Why is the CIC buying into HSBC? Is there something I'm missing?
dave_cohen
07-25-08, 09:58 AM
Our readers ask, With these huge declines in major housing markets, isn't the worst over? No. All the decline we have seen so far has been the dissipation of asset price inflation created by too much housing credit chasing too few homes between 2002 and 2005. In the manner of all asset price inflations prices will continue to revert to the mean – then overshoot.
The overshoot in this bubble case will occur as housing prices once again correlate to regional incomes and employment as they have for a century before the housing bubble, except for the post WWII period when pent up demand sent prices reverting to the mean but in an upward direction.
Home prices fall whenever and wherever unemployment is rising and incomes are falling, and now that the recession is starting to produce unemployment, home prices will follow falling incomes down.It's impossible to disagree, but I would add that times have changed -- oil prices will also drive house values. From
Rising energy prices inflate costs of suburbia and beyond (http://www.iht.com/articles/2008/06/25/business/exurbs.php)
In Atlanta, Philadelphia, San Francisco and Minneapolis, homes beyond the urban core have been falling in value faster than those within, according to an analysis by Moody's Economy.com.
In Denver, housing prices in the urban core rose steadily from 2003 until late last year compared with previous years, before dipping nearly 5 percent in the last three months of last year, according to Economy.com. But house prices in the suburbs began falling earlier, in the middle of 2006, and then accelerated, dropping by 7 percent during the last three months of the year from a year earlier.
I'm not sure if we have a good set of historical data on this to guide us. As oil prices inevitably rise, we should expect additional falling values in more auto-dependent areas with concomitant value increases in urban areas.
When oil hits a sustained level of $140-$160/barrel, I think the effect will become quite pronounced. Let's face it, some areas will never recover because oil will never be cheap again. Talk about multiple failures.
It's impossible to disagree, but I would add that times have changed -- oil prices will also drive house values. From
Rising energy prices inflate costs of suburbia and beyond (http://www.iht.com/articles/2008/06/25/business/exurbs.php)
I'm not sure if we have a good set of historical data on this to guide us. As oil prices inevitably rise, we should expect additional falling values in more auto-dependent areas with concomitant value increases in urban areas.
When oil hits a sustained level of $140-$160/barrel, I think the effect will become quite pronounced. Let's face it, some areas will never recover because oil will never be cheap again. Talk about multiple failures.
Thanks and welcome. The IHT article seems to confirm our forecast as mentioned in this article: " The last update Housing Bubble Update: Geographic Regions Cascade, March 2006 (http://www.itulip.com/housingpriceregionscascade.htm) explained how asset inflation correction combined with rising fuel prices was due to hit rural areas harder and first before urban areas. This was confirmed by stories like this one (http://www.vermontguides.com/2008/07-jul/REmarket.html) about Vermont home buyers avoiding locations that require long commutes. One of our members reported an early instance of the phenomena in High Commuting Costs Push Rural Property Owners Past the Tipping Point, June 2006 (http://www.itulip.com/forums/showthread.php?t=106)."
Our ongoing research suggests the best places to live will have, as always:
Well educated population with high paying jobs, creating a strong tax base to fund high quality K-12 education
Well diversified economy
In addition, new factors for home values will be:
New Energy Era, education, and other new growth industries
Or close to the above
Our theory is that the commuting cost factor will be mitigated in many areas by the communitization of disparate communities, a process by which currently isolated areas dependent in imports of goods – economic islands – develop independent sources of much of what they are able to import now due to cheap energy and develop unique community capabilities in trade for those that they cannot. Communities that do not do this will become ghost towns and the property virtually worthless.
This is a 20 - 30 year process, however.
Chris Coles
07-25-08, 02:45 PM
Thanks and welcome.
Our theory is that the commuting cost factor will be mitigated in many areas by the communitization of disparate communities, a process by which currently isolated areas dependent in imports of goods – economic islands – develop independent sources of much of what they are able to import now due to cheap energy and develop unique community capabilities in trade for those that they cannot. Communities that do not do this will become ghost towns and the property virtually worthless.
This is a 20 - 30 year process, however.
Which might also apply to a country just as it will apply to localities within countries.
Well educated population with high paying jobs, creating a strong tax base to fund high quality K-12 education
I am watching the evolution of this in action with great interest.
For those states with Proposition 13 - there has been a severe dislocation of the property tax base. The property tax is what is used to pay for K-12 education.
Some economic classes have compensated by going to private schools, but for the rest even the semi-functional present system will be further dislocated as home sales volume falters and sold home are generally lower in price, not higher.
The result is "10 little indians, 9 little indians, etc" until the budgets are seen to be completely unrealistic due to the equally discriminatory property tax laws.
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.
.
The second update, Housing Bubble Correction Update, Fifteen Years to Revert to the Mean, December 2005 (http://www.itulip.com/housingbubblecorrection.htm), laid out a seven step process, A to G, of the eventual correction.
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.
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We are three years into the housing bubble correction process we defined, at Step D.
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Next housing bubble correction stage: The jobs crash
On a national scale, housing will continue to decline in line our 2005 forecast for at least another five years, and in some regions prices may not recover for decades. But not all locations will decline as much as others will nor in the same manner.
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.
Found this on SacramentoLanding (http://sacramentolanding.blogspot.com/2008/07/history-of-sacramento-home-prices.html). Click the link for their post and link to larger size chart that's easier to read. Acknowledging that this is just one city in one state and one previous local housing valuation wave, it is interesting to note how early in the decline the regional job growth rate went negative and affordability hit ~50%.
http://img210.imageshack.us/img210/9624/historysacramentopricesom3.jpg (http://imageshack.us)
metalman
08-05-08, 09:20 AM
gov't has always been able to get debt growth going again. what if they can't this time?
gov't has always been able to get debt growth going again. what if they can't this time?
the gov't can always grow its own debt and give the money away in new stimulus programs.
Jim Nickerson
08-05-08, 01:54 PM
the gov't can always grow its own debt and give the money away in new stimulus programs.
I think I heard or read last night, Obama's energy program is give everyone 1K bonars.
I think I heard or read last night, Obama's energy program is give everyone 1K bonars.
This is the crux of my long standing and, I hope, good natured feud with deflationists since 1999: the government can and will print money. It's not a complicated idea, but for some reason it has still not sunk in in some quarters. The only problem the government has is maintaining the purchasing power of the money it prints, because as it does so to meet its political obligations at home, foreign creditors may be less enthusiastic about the impact on their portfolios of treasury and agency debt, not to mention corp. bonds. So far they are on board, as depreciated dollars are still better than worthless ones. And they don't want to take it too far, in any case; WWII, readers may recall from college history, resulted primarily from the insistence of foreign creditors that Germany pay its debts. In the event it did, with a vastly depreciated currency.
The danger, as I have long warned, is that if US inflation exports result in economic pain that exceeds the ability of our creditors to absorb them politically, serious and unpredictable consequences will result. (See Economic M.A.D. (http://www.itulip.com/economicMAD.htm))
Chris Coles
08-06-08, 04:36 AM
To my way of thinking, China has made all the right decisions. It takes US Treasuries and uses their credibility to fund an enormous raft of internal investment, infrastructure being one example. Everything points towards a decline of the industrial base in the US matched by an increase in the base industrial strength of China. It is investing long term as against the West continuing to invest only to inflate short term paper assets.
Turning to Iran, we must ask the question; what if, they are in fact simply investing in peaceful uses of nuclear energy? Can they then be seen as being particularly prescient in seeing that their oil reserves are worthless if the global warming continues and everyone is forced to move to nuclear energy. They then become a significant player in that energy market.
Perhaps we should see the threats made against Iran as in fact the oldest game after sex, gun boat diplomacy to retain control of long term markets?
I return to my previous statements regarding the potential for sea level rises beyond the normal. If, (yes a big IF), but if sea levels suddenly start to rise, say by the minimum 20 feet suggested in the February edition of Scientific American, consequentially inundating every large city beside any form of sea - then just as suddenly, oil becomes worthless. Why?
The ports are unusable, the people will have to abandon the cities and the whole planet will be in chaos. I repeat, oil will become worthless. Nuclear might well become the only game in town, Iran will be standing on great strength and future potential..
Now look at the UK as an example of how to get it wrong. We were one of the pioneers of nuclear energy, yet we have now lagged behind many other countries with almost no investment and now no capacity to create new nuclear power plants. On the other hand, France has many nuclear power plants and holds all the cards. Any nation with nuclear capacity and an educated technical and industrial population will hold the rest of the planet's future in their hands.
Bombs in that circumstance are needed like a hole in the head; civil nuclear technical know how on the other hand will be worth its weight in gold.
Think about that?
Just in case you all think I am being alarmist take a look at some recent postings on the subject of ice and sea levels. The first is a very long article from February's Scientific American which I suggest you go to print out and sit down and read
http://www.sciam.com/article.cfm?id=the-unquiet-ice
http://www.sciam.com/article.cfm?id=the-unquiet-ice&print=true
The rest are even more recent articles. The primary concern is that, if sea levels suddenly rise, the cat will be well and truly out of the bag. I have recently seen a map of England as seven islands. The moment the sea rises above the normal, all hell will let loose. THAT is what concerns me.
This is last May, mid winter in Antarctica an ice shelf believed to be holding back one of the largest land based ice sheets lost 600 hundred square miles.
http://www.sciam.com/article.cfm?id=even-the-antarctic-winter
This is a report of a water lake on Greenland suddenly disappearing. April 2008
http://www.sciam.com/article.cfm?id=greenland-ice-sheet-speeding-to-sea
http://www.sciam.com/article.cfm?id=greenland-ice-sheet-speeding-to-sea
More on the break up of the Antarctic ice shelf.
http://www.sciam.com/article.cfm?id=polar-ice-shelf-break
This from the Independent
http://www.independent.co.uk/environment/climate-change/exclusive-no-ice-at-the-north-pole-855406.html
touchring
08-06-08, 04:47 AM
The US wants China to finance its wars and deficit, not the other way round.
To my way of thinking, China has made all the right decisions. It takes US Treasuries and uses their credibility to fund an enormous raft of internal investment, infrastructure being one example. Everything points towards a decline of the industrial base in the US matched by an increase in the base industrial strength of China. It is investing long term as against the West continuing to invest only to inflate short term paper assets.
Chris Coles
08-06-08, 05:19 AM
The US wants China to finance its wars and deficit, not the other way round.
And classically, you are missing the point; the only winner is China. All wars are money down the drain. At the end of WW2, the UK was bankrupt. In that case the US funded the war. Right now the wars started by the US are in the process of leaving the US in much the same position as the UK was post WW2.
The US is making money on armaments yes, but have you not noticed that by the same token the price paid has been the loss of much of the non military industrial capacity, this time in this case to China.
Yes, if at the end of the wars oil remains valuable then you might say they have succeeded. But your argument completely vanishes if in the end, oil becomes worthless. In that case, the whole exercise will be seen as the greatest waste of any nations greatest resource, its own capacity to create industrial products for its own markets.
If oil becomes worthless, where do you get the funding for the re-establishment of your industrial base...... China?
Anyone can guess the answer the US will receive..... please, don't make me laugh! Exactly the answer the US gave the UK post WW2.
And that answer led the US to create a huge rise in its international power base. Exactly the same is about to happen to China. The US started a war and the result leads, inevitably, to the consequential rise in the industrial might of China.
Your leaders have sold you all down the same road to fiscal hell. Impoverished currency, no industry, cap in hand to every other nation.
I have lived all my life in such a nation. You would not wish that experience on your worst enemy. And we still have not learnt the lessons.
marvenger
08-06-08, 06:05 AM
the US has the strongest military and the dollar is still the reserve currency so the US can still do whatever they want. But their lazy strategy of getting a free ride from the rest of the world can't go on forever as the rest of world builds it's capacity to supply cheap goods to the US eventually they'll develop their own demand and break free of US influence in their institutions and take more control of their own economies and the US will be in trouble. But I think it's still a way off.
Chris Coles
08-06-08, 07:29 AM
the US has the strongest military and the dollar is still the reserve currency so the US can still do whatever they want. But their lazy strategy of getting a free ride from the rest of the world can't go on forever as the rest of world builds it's capacity to supply cheap goods to the US eventually they'll develop their own demand and break free of US influence in their institutions and take more control of their own economies and the US will be in trouble. But I think it's still a way off.
We can agree to differ. I believe the US is already well past the point of no return. If it follows the UK road, then you can be certain of the following five decades with your elite telling the world how great you still are, regardless of the truth. The hardest part is facing the reality of anything we say or do. You cannot change direction without facing the truth.
touchring
08-06-08, 08:03 AM
Yes, if at the end of the wars oil remains valuable then you might say they have succeeded. But your argument completely vanishes if in the end, oil becomes worthless. In that case, the whole exercise will be seen as the greatest waste of any nations greatest resource, its own capacity to create industrial products for its own markets.
If oil becomes worthless, where do you get the funding for the re-establishment of your industrial base...... China?
How would oil become worthless? :D
The US is founded on cheap oil, without oil, how are people going to go to work?
Chris Coles
08-06-08, 08:39 AM
How would oil become worthless? :D
The US is founded on cheap oil, without oil, how are people going to go to work?
The premier scientific magazine in the US has told you that the sea might rise a minimum of 20 feet. Suddenly!
Now go down and take a look at the dock where the oil arrives and imagine the sea "at Least" 20 feet higher......
It is not cheap oil when you cannot take delivery, as you cannot take it at all. In that case, when you cannot deliver, it becomes worthless because you cannot sell it because you cannot deliver.
Please, sit down and wrap a wet towel around your head and imagine every city beside the sea with the sea 20 feet above present high tide levels, suddenly.
Now you get it?
And then imagine that instead their worst case arrives, not 20 feet, but 170 feet. No, not my idea, but the best scientists you have. Listen to them.
You will not have oil, or cars or trucks. You will be back to the middle ages using the horse. Oil will be worthless and probably the wells will be as under water as the rest of us.
The US has the strongest military and the dollar is still the reserve currency so the US can still do whatever they want. But their lazy strategy of getting a free ride from the rest of the world can't go on forever as the rest of world builds it's capacity to supply cheap goods to the US eventually they'll develop their own demand and break free of US influence in their institutions and take more control of their own economies and the US will be in trouble. But I think it's still a way off.
EJ writes in:
A second major shift in global wealth in 100 years is occurring. The first, a shift from Europe to the US, started around 1900 and peaked in the 1970s and the second, from the US and Europe to Asia, began. These processes are gradual. If you traveled from the US to Japan, China, and South Korea and also to Germany, France, and the UK every five years from 1980 to today, the high rate of economic development in Asia versus the US and Europe was obvious.
Here we represent the change in wealth by animating maps created by WorldMapper.org: "Territory size shows the proportion of worldwide Gross Domestic Product equalised in US$ in purchasing power parity that was produced there" in 1900, 1960, and projected to 2015.
http://www.itulip.com/movies/wealth1900-2015.mp4
Wealth from 1900 to 1960 (Europe to USA)
and 1960 to 2015 (USA and Europe to Asia)
Data and maps from WorldMapper.com (http://www.worldmapper.org/)
The point of the animated map is to demonstrate how gradual these processes are, occurring over decades. Citizens in the "from" wealthiest countries experience these shifts through the series of crises that typically attend global wealth shifts.
"Asia’s rise is the economic event of our age. Should it proceed as it has over the last few decades, it will bring the two centuries of global domination by Europe and, subsequently, its giant North American offshoot to an end." - Martin Wolf, 2003
Why might the growth not proceed as it has over the last few decades? Political risks, peak cheap oil, other show stoppers? Topic for another thread in the future.
We can agree to differ. I believe the US is already well past the point of no return. If it follows the UK road, then you can be certain of the following five decades with your elite telling the world how great you still are, regardless of the truth. The hardest part is facing the reality of anything we say or do. You cannot change direction without facing the truth.
Chris,
There is a difference between the US and the UK, however: size.
For all my doom and gloom, I still recognize that the US is still one of the largest countries by population and area, and definitely the largest in wealth (at least right now).
The UK was able to project force via its colonies, and against nations which were of roughly similar size (France, Britain, etc)
No matter what, the US as a large nation will still have its place in the world's leadership - I just don't believe it will be as THE leader.
http://online.wsj.com/article/SB121796016250214003.html
Sovereign Good
August 6, 2008
(From the Wall Street Journal Asia)
We write in response to the letter "Do Pick on Sovereign Wealth (http://online.wsj.com/article/SB121674614256974043.html?mod=Letters)" (July 23). As co-chairs of the Congressional Task Force on Sovereign Wealth, we agree on the need for greater transparency and intend to focus on that issue in key meetings in Europe and the Middle East this month. The leverage foreign governments could amass with Sovereign Wealth Funds (SWFs) is of serious concern, given that today, foreign governments finance 40 percent of the U.S. debt.
But we also believe the U.S. should proceed cautiously with any "one-size-fits-all" approach to governing SWF investment in the United States.
Since much of the tectonic shift of wealth to these funds is coming from our country to purchase oil and cheaper manufactured goods, we have, in effect, a critical stake in how "our" funds are reinvested.
We believe the International Monetary Fund is the most appropriate forum for addressing transparency and accountability in the near term. Strong arm tactics by our government can be counterproductive given the fact that SWFs can and will take their money elsewhere if the political risk premium for U.S. investment grows too high.
Sovereign wealth has played an enormous role in injecting capital into our financial institutions and economy in the wake of the subprime mortgage crisis. Citigroup, Merrill Lynch and other marquee names might have gone the way of IndyMac without the multi-billion-dollar infusions of cash over the past several months.
We also are apprehensive that a heavy-handed approach could result in reciprocal negative reactions, such as a shift away from the dollar to another currency, further weakening the greenback and driving up the price of oil.
Given the positive role SWFs have and can continue to play in our economy, we believe it is imperative to think carefully before creating barriers to the reinvestment of these funds.
Reps. James Moran (D., Va.)
and Thomas Davis (R., Va.)
Co-chairs
Congressional Working Group on Sovereign Wealth Funds
Washington
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Chris Coles
08-06-08, 04:22 PM
EJ writes in:
A second major shift in global wealth in 100 years is occurring. The first, a shift from Europe to the US, started around 1900 and peaked in the 1970s and the second, from the US and Europe to Asia, began. These processes are gradual. If you traveled from the US to Japan, China, and South Korea and also to Germany, France, and the UK every five years from 1980 to today, the high rate of economic development in Asia versus the US and Europe was obvious.
The point of the animated map is to demonstrate how gradual these processes are, occurring over decades.
What I have been trying to get across is very well illustrated by EJ above. Unless you have lived through it, you would indeed have real difficulty in seeing the decline from outside. It occurs so slowly, almost imperceptibly. But you do see it if you have your eyes open.
I well remember once standing on a railway station in the South of England when the topic came up as a conversation between travellers. Someone came out with "You do not realise just how Third World the UK has become until you come back from a Third World country".
We lost more of our industrial base during the Thatcher era than during WW2. We have got so far away from any understanding of how industry is created that not only our political leaders, but also almost the entire financial leadership came on board with the drastic inflation of house prices as the only way they could see to invigorate the economy. And now, even after we can all see the problems of continuing with that strategy, they cannot stop themselves. They are simply following along the same old road to disaster.
In the 1970's and 1980's the lack of long term investment in utilities became a standing joke. And I do mean a standing joke. So they all got privatised. But then we have had the same experience as Russia, only this time the French came in and bought the lot. Our utilities are owned by France. Now I have French family and I admire them. But please, you try living through all that and see the result of decades of a complete lack of understanding of the nature of investment needed to keep a nation on track and sufficient for its citizens.
Believe me, it is a devastating experience to watch a fine nation, YOUR nation, disintegrate in front of your eyes, slowly, like watching a log disintegrate with a fungus....
I am well reminded of a paper written by a Professor writing about the decline in the number of citations in science here in the UK, who showed me how he had ended the paper with the words, "And who cares?" And that was in the early 1980's.
They still do not care.
For those of you in the US who feel things are not so bad, I can only suggest you take a drive, outside of the financial centre, of almost any city in the nation. Try around the likes of Detroit. or, for that matter, take a train ride between your two main cities on the East coast, Washington and New York, but instead of reading your newspaper, just look out of the window. Oh! And remember, you will not be travelling at near 185 MPH as you would in Europe. Take a careful note of the age and repair state of the railway infrastructure.
Scrape the surface, open your eyes and see.
jimmygu3
08-09-08, 09:30 PM
The premier scientific magazine in the US has told you that the sea might rise a minimum of 20 feet. Suddenly!
Now go down and take a look at the dock where the oil arrives and imagine the sea "at Least" 20 feet higher......
It is not cheap oil when you cannot take delivery, as you cannot take it at all. In that case, when you cannot deliver, it becomes worthless because you cannot sell it because you cannot deliver.
Please, sit down and wrap a wet towel around your head and imagine every city beside the sea with the sea 20 feet above present high tide levels, suddenly.
Now you get it?
And then imagine that instead their worst case arrives, not 20 feet, but 170 feet. No, not my idea, but the best scientists you have. Listen to them.
You will not have oil, or cars or trucks. You will be back to the middle ages using the horse. Oil will be worthless and probably the wells will be as under water as the rest of us.
Chris,
I appreciate the link to the article, and I always enjoy your posts.
I think you are 180° off with regards to oil being worthless in a rising-sea world. Imagine the Greenland ice shelf sliding off next summer, unleashing worldwide tsunamis and causing the sea levels to permanently rise 20 feet. It would create unthinkable damage and loss of life, but the other 99% of us will have to move forward, go to work and feed our families. This requires transportation, which generally requires oil.
We would quickly find makeshift ports (deep rivers near the coast maybe?) to deliver oil. If tankers can't dock, a whole new industry of "oil tenders" will spring up to transfer cargo from anchored ships to smaller vessels that can make it to port. The result would be a massive increase in the price of oil. Peak Cheap Oil on steroids. Other essential imports would behave similarly.
I know you feel like the 200 ft rise would be the end of the world, as it would be devastating to Britain, but life would go on in that case, as well. People fleeing flooded cities would flock to cities on higher ground, bidding up the price of real estate like never before. :eek:
You're right that many would have to opt for a horse and buggy, but not because oil is worthless, but rather priceless. OK, maybe not exactly priceless, but it sounded good.
Jimmygu3
Atlanta, GA (elevation 1000 ft, and loving it!);)
Chris Coles
08-10-08, 01:12 AM
Jimmy,
You are quite correct and I am put squarely in my place, I should have used the word "Priceless" instead of worthless. Many thanks for pointing that out to me.
But you still miss the main point, the "oil" you talk about has to be refined and it will be the refineries that have not been replaced since they were first built in the 1950's and 1960's that, when underwater, are worthless. And, moreover, it takes some years to plan and build a new one, which is one of the principle reasons why there have not been any new ones built for some years now in the US, (for example).
No refining capacity and the raw crude oil becomes ?
What is the correct word for a priceless unusable commodity?
Chris.
tombat1913
08-10-08, 06:28 AM
For all my doom and gloom, I still recognize that the US is still one of the largest countries by population and area, and definitely the largest in wealth (at least right now).
Perhaps I'm wrong but it seems more like an illusion of wealth. Economic trickery to push from one bubble to the next as any true wealth leaches out of our hands. The governments own ex-accountant Comptroller General Walker quit his post to inform the public of this on a full time basis. We're broke.
If I took out loans and credit cards and bought some bling and rims I'd look damn wealthy too! Still an illusion all the same.
touchring
08-10-08, 06:48 AM
For all my doom and gloom, I still recognize that the US is still one of the largest countries by population and area, and definitely the largest in wealth (at least right now).
The US government can impose a one-time 10%-40% living wealth tax on all millionaire americans to pay off the federal debt (including fannie and freddie). So billionaires like Bill gates and warren buffet will need to fork out $25 billion each.
Perhaps I'm wrong but it seems more like an illusion of wealth. Economic trickery to push from one bubble to the next as any true wealth leaches out of our hands. The governments own ex-accountant Comptroller General Walker quit his post to inform the public of this on a full time basis. We're broke.
Tom,
Certainly some of the present wealth is illusory, but not all of it.
Despite its present shape - the infrastructure in the US is still far superior to most nations of the world.
Between roads, sewage plants, hospitals, dams, bridges, etc there is still a lot of economic benefits to being an American.
Then there are the accumulated savings. There is still a lot of cash - even outside the top 5%. While it is being eroded by inflation, we're not Zimbabwe (at least, so far). That money can still do something.
For all my 'down on the USA' talk, I still view a possible future as the US being temporarily pushed down to Poland status in the grand scheme. But still the 4th largest nation in the world - France, Germany, and Russia all had their bad days as well but size eventually does matter.
Paulemtg
08-27-08, 01:11 PM
The housing bubble is now popped, but an interesting and predictable trend has begun again, treasuries are a desired investment. With the world economies in decline, there really isn't a single viable alternative at par with a US Treasury debt instrument. Thats why the dollar is becoming stronger...thats going to lead to more cash, and dare I say it, the rapid decline in home purchasing will moderate, but prices will continue to fall. Now with out question there is a lot of activity by investors picking up properties, and many actually think that its a good investment. They are most likely wrong, as prices will continue to fall. With Freddie Mac, and Fannie on the verge of BK, FDIC is getting ready to take over. You can be assured that they will move bad debt, and modifiy loans quickly, and without much feeling for the investor. That will drop prices like a rock in most urban markets, but there is a silver linning, we will begind to see a bottom, and a recovery will begin, although it may be moderate. 5 years for a complete cycle? Hmm maybe, but I've noticed over the last 40 years that markets react to reality, and move towards equilibrium. 2 to 3 years of adjustment is the more likely scenario.;)
The housing bubble is now popped, but an interesting and predictable trend has begun again, treasuries are a desired investment. With the world economies in decline, there really isn't a single viable alternative at par with a US Treasury debt instrument. Thats why the dollar is becoming stronger...thats going to lead to more cash, and dare I say it, the rapid decline in home purchasing will moderate, but prices will continue to fall. Now with out question there is a lot of activity by investors picking up properties, and many actually think that its a good investment. They are most likely wrong, as prices will continue to fall. With Freddie Mac, and Fannie on the verge of BK, FDIC is getting ready to take over. You can be assured that they will move bad debt, and modifiy loans quickly, and without much feeling for the investor. That will drop prices like a rock in most urban markets, but there is a silver linning, we will begind to see a bottom, and a recovery will begin, although it may be moderate. 5 years for a complete cycle? Hmm maybe, but I've noticed over the last 40 years that markets react to reality, and move towards equilibrium. 2 to 3 years of adjustment is the more likely scenario.;)
Good points and welcome. For long term iTulip forecasts goggle "housing bubble correction" (http://www.google.com/search?hl=en&q=housing+bubble+correction&btnG=Google+Search&aq=f&oq=)
Paul,
The nationalization of Fannie and Freddie will mark a turning point in the writeoff of previously accumulated crap mortgages, but it does not fix the other major problem: The entire securitization process is broken.
Unless another method is developed to provide cheap and easy credit, the housing markets are still going to be crippled by the lack of credit - its lifeblood.
While it may be hyperbole to say so, I do think it is quite possible that nominal housing prices may return to pre-securitization level - i.e. 1999 before the 'bottom' is reached.
The only reason I'm not more certain is that we have the inflation variable. One very possible result is a price which bottoms out at 2003, but a purchasing power equivalent which goes back much further.
The ironic situation now is that the so called dollar strengthening will only hurt the entire nationalization process: the US as a debtor nation doesn't need a stronger currency.
metalman
08-27-08, 08:53 PM
Paul,
The nationalization of Fannie and Freddie will mark a turning point in the writeoff of previously accumulated crap mortgages, but it does not fix the other major problem: The entire securitization process is broken.
Unless another method is developed to provide cheap and easy credit, the housing markets are still going to be crippled by the lack of credit - its lifeblood.
While it may be hyperbole to say so, I do think it is quite possible that nominal housing prices may return to pre-securitization level - i.e. 1999 before the 'bottom' is reached.
The only reason I'm not more certain is that we have the inflation variable. One very possible result is a price which bottoms out at 2003, but a purchasing power equivalent which goes back much further.
The ironic situation now is that the so called dollar strengthening will only hurt the entire nationalization process: the US as a debtor nation doesn't need a stronger currency.
the dream that this eu/japan/china intervention will last has legs like the last desperate attempt to maintain a dying international currency regime... (http://www.itulip.com/greenspangold.htm)
Chris Coles
08-28-08, 03:17 AM
the dream that this eu/japan/china intervention will last has legs like the last desperate attempt to maintain a dying international currency regime... (http://www.itulip.com/greenspangold.htm)
There is nothing to say we have to use the existing money system; indeed, any money system. Why not construct one of our own and bring everyone into it. This is after all a society that depends upon competition. Why not compete? Why not construct our own system and completely bypass the banking system that is so dysfunctional?
The only thing that limits our capabilities is negative thinking. Thinking positively, we can do anything we set as a task. So why not?
http://en.wikipedia.org/wiki/Credit_union
http://pandp.eusa.ed.ac.uk/campaigns/coops/coop.html
There is nothing to say we have to use the existing money system; indeed, any money system. Why not construct one of our own and bring everyone into it.
There is not a capability barrier to changing a money system.
There are, however, a LOT of people and a LOT of existing money which does not desire any change.
That's why you get Cultural Revolutions.
phirang
08-28-08, 10:08 AM
There is not a capability barrier to changing a money system.
There are, however, a LOT of people and a LOT of existing money which does not desire any change.
That's why you get Cultural Revolutions.
People use $'s because then they get weapons, more $'s themselves, and miiltary support.
Governments are mafias a la prusse.
Chris Coles
08-28-08, 10:14 AM
I am not saying do not use the $ or £, what I am saying is the underlying system of banking is defunct and we do not have to use it. We can walk out the door to our own competitor.
Phirang, -- Right on the button. Give some people a government job in a fine government building and they turn into monsters.
Power crazy!:eek::mad:
I feel that when "High-Tech" companies lay off workers, the "US" just celebrates capitalism. When Detroit, Indiana, Texas old manufacturing lose jobs, that's when the "US" starts talking bailout.
So let's give money, in the form of low-interest loans, to GM etc to create an electric car. IF all those people getting the benefit of this government behaviour don't vote Democrat then they don't understand the values that are (trying to) keep them employed.
Long live the New Economy!
But you wouldn't know it reading Ben Stein.
Why do you even quote Ben Stein? Did you take a look at his miserable articles in the Yahoo Financial Experts column?
Sorry but anyone who reads Ben Stein deserves to lose his money, it is first rate garbage.
Why do you even quote Ben Stein? Did you take a look at his miserable articles in the Yahoo Financial Experts column?
Sorry but anyone who reads Ben Stein deserves to lose his money, it is first rate garbage.
FYI, iTulip has a long history of ridiculing Ben Stein.
Why do you even quote Ben Stein? Did you take a look at his miserable articles in the Yahoo Financial Experts column?
Sorry but anyone who reads Ben Stein deserves to lose his money, it is first rate garbage.
Ben Stein sucks but Been Stooge is the best!
Another View of the Economy from Abroad (http://69.89.31.133/%7Eitulipco//forums/showthread.php?p=12150#post12150)
Grease my Palm with Big Oil (http://69.89.31.133/%7Eitulipco//forums/showthread.php?p=17036#post17036)
Buy Financials! Catch a falling knife! (http://www.itulip.com/forums/showthread.php?p=39207#post39207)
http://www.itulip.com/images/offcliff.jpg Keep your seat belts fastened
July this year we warned readers to "Fasten your seat belts, here comes the jobs crash." After today's announcement of a "surprising" jump in unemployment to a 14 year high, we compare our forecast to see what we got right and what we got wrong so we can learn from it and refine our analysis. The big story: a stunning rate of increase in unemployment.
In Part II our analysis ($ubsriber) (http://itulip.com/forums/showthread.php?t=4424) we we broke our per-state jobs forecasts down into four categories, most predictable loser, most surprising loser, most surprising winner, and fastest crashing economy. Here are the forecasts compared to the actuals.
Most predictable loser (July 2008)
http://www.itulip.com/images/FLuJuly2008.gif
Housing Bubble Ground Zero state
National Unemployment Growth Rank: 2
Macro-economic Vulnerability: High
Unemployment Growth Rate: High
Estimated Post Recession Peak Unemployment Rate: 10%
Future Home Values Rating: Poor
Most predictable loser (Sept. 2008)
http://www.itulip.com/images/FLNovUnemp.gif
In three months since July, unemployment is up 1% from 5.6% to 6.6% in Florida. Given that unemployment is typically a lagging indicator and the current recession officially started April 2008, current course and speed unemployment in Florida will reach our 10% forecast by June 2009.
Most surprising loser (July 2008)
http://www.itulip.com/images/MTuJuly2008.gif
National Unemployment 16
Macro-economic Vulnerability: High
Unemployment Growth Rate: High
Estimated Post Recession Peak Unemployment Rate: 8%
Future Home Values Rating: Poor
Most surprising loser (Sept. 2008)
http://www.itulip.com/images/MTNovUnemp.gif
In three months since our last report, unemployment is up modestly from 4% to 4.6% in Montana. The rate of change of all of these charts is the real news. Note that even in the 1980s recessions unemployment never increased by more than 20% year over year. In Sept. unemployment increased in Montana by 43%. Current course and speed unemployment in Montana will reach our 8% forecast by June 2009.
Most surprising winner (July 2008)
http://www.itulip.com/images/SDuJuly2008.gif
Energy and Food Price Inflation state
National Unemployment Growth Rank: 46
Macro-economic Vulnerability: Low
Unemployment Growth Rate: Low
Estimated Post Recession Peak Unemployment Rate: 4%
Future Home Values Rating: Good
Most surprising winner (Sept. 2008)
http://www.itulip.com/images/SDNovUnemp.gif
In three months since July, unemployment is up modestly from 3% to 3.2% in South Dakota. Not exactly earth shattering unemployment growth at 15% y-o-y but it does call into question our assumption that South Dakota is relatively immune from the developing US depression. We expect to see the rate of unemployment growth increase as the retail, manufacturing, construction, and finance industries shed jobs. Based on the increase in the rate of increase in unemployment, we are raising our estimate from 4% to 6% and expect to see that level reached by June 2009.
Fastest crashing state economy (July 2008)
http://www.itulip.com/images/TNuJuly2008.gif
Macro-economic Vulnerability: High
Unemployment Growth Rate: High
Estimated Post Recession Peak Unemployment Rate: 11%
Future Home Values Rating: Poor
Fastest crashing state economy (Sept. 2008)
http://www.itulip.com/images/TNNovUnemp.gif
In three months since our last report, unemployment is up 1% from 6.2% to 7.2% in Tennessee. At this rate unemployment in the state will reach our target of 11% by Q3 or Q4 2009.
The rate of change in unemployment is the story here as it exceeds the rates we saw in the worst of the recessions of the early 1980s. Combined with sales data, such as this chart of recent light truck sales, prospects are grim.
http://www.itulip.com/images/lighttrucks1975-2008.gif
Unemployment will kick off a series of feedback loops. One, as we pointed out in July, is the feedback loop of rising unemployment, falling incomes, increases in mortgage defaults and foreclosure, and further declines in home prices. For 100 years before the housing bubble home prices were correlated to incomes. Now that the bubble is over and unemployment is rising, home prices will correlate to incomes again, and incomes will soon be falling as unemployment rises.
The rate of increase in unemployment will take cities, towns, and states by surprise. This is not what was forecast by the mainstream business press. Property and income tax revenues will plummet. Strains on the Federal budget will be epic.
Cash will continue to be king until heroic monetary and fiscal stimulus finally increase inflation expectations in the economy. We expect commodity prices will continue to soften except for those that are the most sensitive to future inflation as implied by the growth of money aggregates over the past year.
http://www.itulip.com/images/MZM2007-2008.gif
iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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mercerbear
11-07-08, 01:25 PM
Thoughts welcome on this.....
Let's say I want to buy a house in TN where we expect unemployment to continue increasing and housing prices to continue falling and I have cash on the sidelines to make this purchase. Ideally, I would want to wait until the final months of Ka, right before Poom hits, right?
Let's change that and say I want to build a new house instead of purchasing an existing home. Ka would definitely be a good time for this as input prices are down and builders are desperate for work, right? Expecting poom, would it be a better idea to take out a mortgage and let dollar devaluation effectively lower the cost of my mortgage payments or pay up front in cash?
Please, anyone feel free to give me your take on this one. I'm a professional basketball player in Europe for the moment but I plan on living in TN sometime in the next 5 years and I'm trying to figure out the best way to take advantage of the current situation regarding housing.
Any ideas on timing would be great also...
Thanks!
Chris Coles
11-07-08, 01:41 PM
Thoughts welcome on this.....
Let's say I want to buy a house in TN where we expect unemployment to continue increasing and housing prices to continue falling and I have cash on the sidelines to make this purchase. Ideally, I would want to wait until the final months of Ka, right before Poom hits, right?
Let's change that and say I want to build a new house instead of purchasing an existing home. Ka would definitely be a good time for this as input prices are down and builders are desperate for work, right? Expecting poom, would it be a better idea to take out a mortgage and let dollar devaluation effectively lower the cost of my mortgage payments or pay up front in cash?
Please, anyone feel free to give me your take on this one. I'm a professional basketball player in Europe for the moment but I plan on living in TN sometime in the next 5 years and I'm trying to figure out the best way to take advantage of the current situation regarding housing.
Any ideas on timing would be great also...
Thanks!
In a very real sense you show exactly why everyone is in a mess, you just cannot let go of the idea that somehow, very soon, everything is going to return to normal and you will be able to continue to make money from property.
It is all over. By the time property reaches bottom, the prices will be so low, and the earnings so improbable, you will be hard put to make any money for a decade. Try and scratch an income for a few months is one thing, but try and struggle for several years and the rents you will be able to achieve will not give you anything other than a subsistance return.
We have to wait for the bottom and then the money to be made will be in creating new employment, industrial employment. All those exported jobs will now have to be re-created. You can have 3% of your population living on a park bench, but when you reach 10% or more, you have to change direction.
Keep your powder dry and remember the words of Adam Smith "All jobs are created in direct proportion to the amount of capital employed". Use your capital wisely.
mercerbear
11-07-08, 01:55 PM
In a very real sense you show exactly why everyone is in a mess, you just cannot let go of the idea that somehow, very soon, everything is going to return to normal and you will be able to continue to make money from property.
It is all over. By the time property reaches bottom, the prices will be so low, and the earnings so improbable, you will be hard put to make any money for a decade. Try and scratch an income for a few months is one thing, but try and struggle for several years and the rents you will be able to achieve will not give you anything other than a subsistance return.
We have to wait for the bottom and then the money to be made will be in creating new employment, industrial employment. All those exported jobs will now have to be re-created. You can have 3% of your population living on a park bench, but when you reach 10% or more, you have to change direction.
Keep your powder dry and remember the words of Adam Smith "All jobs are created in direct proportion to the amount of capital employed". Use your capital wisely.
Thanks for the reply Chris. Let me clarify one thing...I am not looking to "profit" on this house by renting it out or flipping it. I am actually going to live in this house long term. I am just trying to decide whether to buy an existing home or build a new one, and also, how to finance it since I could either pay outright or take a mortgage. The last part was just a question about when I should do this. Thanks again.
Thoughts welcome on this.....
Let's say I want to buy a house in TN where we expect unemployment to continue increasing and housing prices to continue falling and I have cash on the sidelines to make this purchase. Ideally, I would want to wait until the final months of Ka, right before Poom hits, right?
Let's change that and say I want to build a new house instead of purchasing an existing home. Ka would definitely be a good time for this as input prices are down and builders are desperate for work, right? Expecting poom, would it be a better idea to take out a mortgage and let dollar devaluation effectively lower the cost of my mortgage payments or pay up front in cash?
Please, anyone feel free to give me your take on this one. I'm a professional basketball player in Europe for the moment but I plan on living in TN sometime in the next 5 years and I'm trying to figure out the best way to take advantage of the current situation regarding housing.
Any ideas on timing would be great also...
Thanks!
I'd like to point out a potential misunderstanding of Ka-Poom Theory.
Either way, whether prices are inflated a little or a lot, or if we are completely wrong and we get modest deflation, it's all the same thing: we are all poorer. We will have less purchasing power either way because in any case the purchasing power of income is falling.
The advantage of inflation under conditions of indebtedness is that it allows past debt to be paid down more quickly out of income and also means that more money can go to other uses than paying down debt. For this reason there is less unemployment if a debt deflation is managed down with modest inflation as part of the program.
In modest inflation home prices will continue to decline–asset price deflation vs commodity price inflation–but interest rates will rise. In terms of your purchasing power it's all the same.
If we are right about inflation then you should be able to exchange inflation hedges for inflated goods prices, but there is no net gain, only an avoidance of losses that might otherwise be experienced if deflating assets are held instead.
Growing up in an era of continuous real estate price inflation, the hardest thing for us to get our heads around is that there will be no money to be made in property for ten or twenty years. In the wake of the housing bubble residential real estate is dead as an asset class.
The Outback Oracle
11-07-08, 02:12 PM
I'm still fascinated by the idea that you can run an economy without savings. Deflation has a feed-back loop? Well so does inflation (I know i am not saying anything you don't know in saying that). Inflation, and the coincident negative interest rates lead to zero saving, increased indebtedness, high CAD's. In my thinking you might inflate your way out of one lot of debt but only by creating a whole new higher more fragile debt structure and economy.
Frankly the solutions proffered in this "we gotta inflate" scenario are exactly what brought us to this point in the first place.
I'd like to point out a potential misunderstanding of Ka-Poom Theory.
Either way, whether prices are inflated a little or a lot, or if we are completely wrong and we get modest deflation, it's all the same thing: we are all poorer. We will have less purchasing power either way because in any case the purchasing power of income is falling.
The advantage of inflation under conditions of indebtedness is that it allows past debt to be paid down more quickly out of income and also means that more money can go to other uses than paying down debt. For this reason there is less unemployment if a debt deflation is managed down with modest inflation as part of the program.
In modest inflation home prices will continue to decline–asset price deflation vs commodity price inflation–but interest rates will rise. In terms of your purchasing power it's all the same.
If we are right about inflation then you should be able to exchange inflation hedges for inflated goods prices, but there is no net gain, only an avoidance of losses that might otherwise be experienced if deflating assets are held instead.
Growing up in an era of continuous real estate price inflation, the hardest thing for us to get our heads around is that there will be no money to be made in property for ten or twenty years. In the wake of the housing bubble residential real estate is dead as an asset class.
FRED,
I think there are alot of folks in MB's shoes (myself included). The problem is we don't own a house where we want to live. Question is if I control my wants and find the best time to buy, "when is going to be the time to buy the house I want to live in and raise my kids in and stay in till I'm 65?"
I'm thinking it is somewhere between the q3 of 09 to mid 2010 based on CS projections.
Just want to know what your thoughts are for this SPECIFIC purpose. (owning my own house where I want to live for shelter)
Thanks
JT
touchring
11-07-08, 02:39 PM
maybe you should examine the mongol empire that lasted about one hundred years.
it runs on a deficit and prints paper money backed by nothing. it is the biggest empire in the world covering most of Asia, the middle east, and one third of Europe.
I'm still fascinated by the idea that you can run an economy without savings. Deflation has a feed-back loop? Well so does inflation (I know i am not saying anything you don't know in saying that). Inflation, and the coincident negative interest rates lead to zero saving, increased indebtedness, high CAD's. In my thinking you might inflate your way out of one lot of debt but only by creating a whole new higher more fragile debt structure and economy.
Frankly the solutions proffered in this "we gotta inflate" scenario are exactly what brought us to this point in the first place.
I'm still fascinated by the idea that you can run an economy without savings. Deflation has a feed-back loop? Well so does inflation (I know i am not saying anything you don't know in saying that). Inflation, and the coincident negative interest rates lead to zero saving, increased indebtedness, high CAD's. In my thinking you might inflate your way out of one lot of debt but only by creating a whole new higher more fragile debt structure and economy.
Frankly the solutions proffered in this "we gotta inflate" scenario are exactly what brought us to this point in the first place.
Hope no one gets the impression that we approve of our government's policies. We seek to understand what our government is thinking and forecast what it is likely to do, given its institutional antecedents, past behavior, and so on.
In a perfect world the FIRE Economy would have never existed in the first place and we'd now not be in this predicament.
mercerbear
11-07-08, 02:51 PM
Thank you for the replies. I do not think I made myself clear initially. I am not a housing speculator. I know that game is dead and I was too young to play it myself.
My situation is this:
I have enough cash saved to buy an average house in which I will personally reside in TN. I know two things.
(1) Housing prices and the prices of materials required to build houses are currently falling. I assume this has something to do with Ka. This bodes well for my ability to afford a home with my dollars that are accruing 3.3% in an etrade savings account.
(2) At some point Poom will occur and it will change the ballgame. At this point, housing prices and the cost of materials required to build a house will begin climbing as the dollars in my etrade account devalue in an inflationary situation, be it modest or hyper. At this point, I am able to afford less house for my saved money.
Given the above conditions, it seems to me that there is an ideal time during Ka and before Poom for a person who has saved dollars for the purpose of buying a house to go ahead and buy the house.
What I was hoping to get some perspective on is when and how I should buy my house given these conditions. New or existing? Pay in cash or take a mortgage?? etc. Any ideas in general on how I can maximize the money I have saved to get a nice place to live in.
Haha, unfortunately that is as articulately as I am able to explain my position and question. I realize there is a distinct possibility that I am missing the big picture and embarassing myself but I'll risk cyber shame for the opportunity to post this rather important personal question on this forum where I put great stock in the knowledge and intelligence of other community members.
Thanks again to all.
FRED,
I think there are alot of folks in MB's shoes (myself included). The problem is we don't own a house where we want to live. Question is if I control my wants and find the best time to buy, "when is going to be the time to buy the house I want to live in and raise my kids in and stay in till I'm 65?"
I'm thinking it is somewhere between the q3 of 09 to mid 2010 based on CS projections.
Just want to know what your thoughts are for this SPECIFIC purpose. (owning my own house where I want to live for shelter)
Thanks
JT
I am in the same boat. The wife and I are sick of renting and want to buy at some point in the near future. I am looking in MA, within the 495 loop but not necessarily within the 128 loop. Prices have come down, but my feeling is that they will begin to fall hard in 2009. For those of us who simply want to own a reasonably priced home, what is the best time in the cycle to take the risk? Perhaps we should ask, what indicators should we look for to let us know that now is a better time to buy than others?
I know I make my own decisions here, just hoping for a bit of input, as most information on purchasing real estate does not provide any clarity other than "Now is a great time to buy."
Thanks,
Basil
The Outback Oracle
11-07-08, 02:55 PM
Ok sorry ...sometimes i get confused...it's easily done:eek:
mercerbear
11-07-08, 03:03 PM
I am in the same boat. The wife and I are sick of renting and want to buy at some point in the near future. I am looking in MA, within the 495 loop but not necessarily within the 128 loop. Prices have come down, but my feeling is that they will begin to fall hard in 2009. For those of us who simply want to own a reasonably priced home, what is the best time in the cycle to take the risk? Perhaps we should ask, what indicators should we look for to let us know that now is a better time to buy than others?
I know I make my own decisions here, just hoping for a bit of input, as most information on purchasing real estate does not provide any clarity other than "Now is a great time to buy."
Thanks,
Basil
FRED,
I think there are alot of folks in MB's shoes (myself included). The problem is we don't own a house where we want to live. Question is if I control my wants and find the best time to buy, "when is going to be the time to buy the house I want to live in and raise my kids in and stay in till I'm 65?"
I'm thinking it is somewhere between the q3 of 09 to mid 2010 based on CS projections.
Just want to know what your thoughts are for this SPECIFIC purpose. (owning my own house where I want to live for shelter)
Thanks
JT Thanks JT and Basil, it's nice to have some company here! It seems the 3 of us are fundamentally curious about the same issue. I thought I had inadvertently drawn the ire of the itulip powers that be for a moment before explaining that I'm not a speculator! ;)
Thanks JT and Basil, it's nice to have some company here! It seems the 3 of us are fundamentally curious about the same issue. I thought I had inadvertently drawn the ire of the itulip powers that be for a moment before explaining that I'm not a speculator! ;)
No ire. Just want to be sure that Ka-Poom isn't taken as some sort of "get rich off inflation" scheme. There's a lot of that mentality on Internet financial sites.
No question that if you are looking for a place to live that asset price deflation is your friend. It will be obvious when the market has bottomed: the same family and friends who told you years ago there was no housing bubble and prices only go up will tell you that you are a dummy for buying a home and that housing is a terrible investment. :D
But you won't be buying a house as an investment but as a cheap place to live. Very likely the reversion to the mean of home prices will in many places mean homes will be well under-priced in terms of equivalent rent because cash and credit will be too limited to bid up home prices.
While you're at it, you may want to wait before buying a car.
mercerbear
11-07-08, 03:46 PM
Thanks Fred, sorry for not making my position clear initially.
But you won't be buying a house as an investment but as a cheap place to live. Very likely the reversion to the mean of home prices will in many places mean homes will be well under-priced in terms of equivalent rent because cash and credit will be too limited to bid up home prices.How do you do this kind of analysis to see if the price of buying is cheap in terms of rental prices?
While you're at it, you may want to wait before buying a car.Haha, I'm 27 and I still don't own a car. During the season in Europe the team I play for provides one and when I'm in the states I drive my parents' 3rd car....a 1995 Honda Civic with plenty of dents. I have saved everything and now I'm just trying to protect myself and make good decisions.
How do you do this kind of analysis to see if the price of buying is cheap in terms of rental prices?
Rent - (Taxes/month + Insurance/month + Warranty/month + Other expenses/month) = cashflow
Haha, I'm 27 and I still don't own a car. During the season in Europe the team I play for provides one and when I'm in the states I drive my parents' 3rd car....a 1995 Honda Civic with plenty of dents. I have saved everything and now I'm just trying to protect myself and make good decisions.
Glad to have you here. I bet 90% of the older folks here can relate to driving around in a beater at your age. Good man.
Rent - (Taxes/month + Insurance/month + Warranty/month + Other expenses/month) = cashflow
Glad to have you here. I bet 90% of the older folks here can relate to driving around in a beater at your age. Good man.
I have three kids, we were a 1 car family until I turned 31, and then I paid cash for a junker $1000 get me to work car.
Bought a new family car when I was 33 paid it off when I was 34.
I have three kids, we were a 1 car family until I turned 31, and then I paid cash for a junker $1000 get me to work car.
Bought a new family car when I was 33 paid it off when I was 34.
Sold my car in August because I was already biking everywhere anyways, rain, shine, sleet or snow. My wife has one for the kids, but hardly drives it. I have always felt that cars are a very bad use of money if one can avoid them.
As for the housing, Roubini seems to think that we are looking at another 20% down in 2009. Based upon the vibe I am getting from realtwhores, I think we have a ways to go before the realization that the boom is not coming back sets in (at least in the Boston area). But it is nice to see prices falling quite a bit faster. Perhaps if I wait until 2010 I can buy with cash. The last time I bought a place, I paid cash. My realtwhore thought I was crazy, but it felt great.
If you are truly looking for a home to live in for a long time, it is more a lifestyle issue than a financial one (within reason).
Over a long period of time (eg 30 years) it will all even out and paying a little more or less now won't make a big difference.
Find the area you want to live in that you can afford. If you can find your dream house that has already been built, buy it. Only build a new house if you have to create your 'own space' from scratch.
I look at it this way:
Take the amount you would pay in rent per year and multiply it by the number of years you would live in the house.
Eg: If renting is $15k pa and assume 30 years in the house, spend $450k on a house. It doesn't matter what the house is worth in the end - you only spent what you were going to spend on rent anyway - and you own the house!
If you pay cash up front you lose the income that cash could have earned. If you take a mortgage you pay interest but can invest your cash. Probably doesn't make a big difference which way you do it in the long term (ie 30 years).
mercerbear
I believe that the next 1 - 3 years would be the best time to buy your house, because many of the variable interest, teaser rate, pick a payment loans will reach negative equity and / or re-adjust from home purchase made at the peak of the market.
I wouldn't suggest hiring builders to build a home, because most likely you can buy one from a distressed seller (home owner or builder in trouble)
cheaper than you can build it.
Keep 3 - 6 months cash in an emergency fund and use the rest to buy your house. It's silly to have a mortgage, especially when you don't have to and in times of uncertainty. Look at it this way, paying cash for your house is like earning 6.5% or so on your money - guaranteed. You aquire wealth by combinations of increasing money earned and decreasing money spent. If you hear the idea that a mortgage is a tax deduction, this is a stupid idea - the math doesn't work out to your benifit.
I know this site is dedicated to somewhat predicting the future - but if all of the news letter, website, talking heads, etc. could actually predict the future, then they wouldn't need to sell their services. Just find a house you like, do your research (don't take a sales person's word as gosple), get a discount, and be happy.
RebbePete
11-07-08, 09:19 PM
What I was hoping to get some perspective on is when and how I should buy my house given these conditions. New or existing? Pay in cash or take a mortgage?? etc. Any ideas in general on how I can maximize the money I have saved to get a nice place to live in.
Historical averages for house prices are about three times median income. They still have a long way to go to get there; they'll probably undershoot, but if you're buying to live in a house, the 3x median income is a good indicator that house prices are "about right."
Even in inflationary times, I would say paying cash is preferable. Even if your mortgage is getting cheaper since you're paying it back with depreciating dollars, you still run the risk of losing your income and defaulting on a mortgage.
As far as new vs. resale, resales will probably be a better deal IMHO due to all the foreclosures. In my case, thank God, I actually bought a new home in the last downturn during the mid-90's that was a foreclosure. How was that possible? The builder finished the house except for carpeting, painting, etc., the buyer backed out, and the builder went bankrupt before anyone ever lived in it. It sat vacant for a year, so the bank gave us all kinds of goodies. Keep your eye open for deals like that.
- Pete
I'd like to point out a potential misunderstanding of Ka-Poom Theory.
Either way, whether prices are inflated a little or a lot, or if we are completely wrong and we get modest deflation, it's all the same thing: we are all poorer. We will have less purchasing power either way because in any case the purchasing power of income is falling.
The advantage of inflation under conditions of indebtedness is that it allows past debt to be paid down more quickly out of income and also means that more money can go to other uses than paying down debt. For this reason there is less unemployment if a debt deflation is managed down with modest inflation as part of the program.
In modest inflation home prices will continue to decline–asset price deflation vs commodity price inflation–but interest rates will rise. In terms of your purchasing power it's all the same.
If we are right about inflation then you should be able to exchange inflation hedges for inflated goods prices, but there is no net gain, only an avoidance of losses that might otherwise be experienced if deflating assets are held instead.
Growing up in an era of continuous real estate price inflation, the hardest thing for us to get our heads around is that there will be no money to be made in property for ten or twenty years. In the wake of the housing bubble residential real estate is dead as an asset class.
Fred, you're leaving out hyperinflation in your analysis . . . .
I know EJ isn't predicting hyperinflation, but he admits it's a possibility, and the feeling I get is that he thinks the likelihood is increasing.
As a side note, my wife's relatives in a middle sized-town in Ukraine are reporting that without warning to the general public, the banks there are not giving depositors their money, i.e., people's savings are frozen! We can't even send money to help, since the Debit card we sent for transferring money won't work . . . ATMs are no longer allowing transactions :eek:
Thoughts welcome on this.....
Let's say I want to buy a house in TN where we expect unemployment to continue increasing and housing prices to continue falling and I have cash on the sidelines to make this purchase. Ideally, I would want to wait until the final months of Ka, right before Poom hits, right?
Let's change that and say I want to build a new house instead of purchasing an existing home. Ka would definitely be a good time for this as input prices are down and builders are desperate for work, right? Expecting poom, would it be a better idea to take out a mortgage and let dollar devaluation effectively lower the cost of my mortgage payments or pay up front in cash?
Please, anyone feel free to give me your take on this one. I'm a professional basketball player in Europe for the moment but I plan on living in TN sometime in the next 5 years and I'm trying to figure out the best way to take advantage of the current situation regarding housing.
Any ideas on timing would be great also...
Thanks!
Be very, very patient. And wait.
Several of us here witnessed first hand the spectacular housing bust in the 1980's in the oil patch jurisdictions of Alberta and Texas, and there have been a number of posts in the past on iTulip about that. Worth searching and re-reading imo, because that is probably the closest analogue to what's happening today.
1. Building new will likely cost more than buying in a distressed market. In distressed markets homes sell for below replacement cost. If you build you will end up with a home that cost more than the market price. Not necessarily the wrong thing to do, but understand the consequences.
2. Wages and raw material input costs are "sticky". They do not come down as fast as you might think. This lag means that input costs are usually the cheapest just as the market is entering the early stages of recovery of existing housing stock after a long decline [point of maximum pessimism]. We probably aren't there yet in most jurisdictions, but you'll need to research and judge that for where you want to settle.
3. No need to rush because even if the market has bottomed where you wish to reside, it is highly unlikely there will be any price increases until employment security and incomes start to rise, and confidence to take on long term debt [mortgages] returns.
we_are_toast
11-08-08, 06:20 AM
Build your own home! I don't mean hire a contractor to build a house for you, I mean literally build your own home. Start your research now while materials are still dropping. Design it to be energy efficient and powered by the sun.
Get all the books you can on building houses (there are a ton of them) and plan on spending 5 years of weekends until you move in. After all your hard work you'll be amazed at how good you feel to be living in something you built with your own hands. You'll have exactly what you want, you'll know how to fix what needs to be repaired, the material quality will be high, and you'll save 40-50% of the price of cookie-cutter house.
labasta
11-08-08, 07:34 AM
Thank you for the replies. I do not think I made myself clear initially. I am not a housing speculator. I know that game is dead and I was too young to play it myself.
My situation is this:
I have enough cash saved to buy an average house in which I will personally reside in TN. I know two things.
(1) Housing prices and the prices of materials required to build houses are currently falling. I assume this has something to do with Ka. This bodes well for my ability to afford a home with my dollars that are accruing 3.3% in an etrade savings account.
(2) At some point Poom will occur and it will change the ballgame. At this point, housing prices and the cost of materials required to build a house will begin climbing as the dollars in my etrade account devalue in an inflationary situation, be it modest or hyper. At this point, I am able to afford less house for my saved money.
Given the above conditions, it seems to me that there is an ideal time during Ka and before Poom for a person who has saved dollars for the purpose of buying a house to go ahead and buy the house.
What I was hoping to get some perspective on is when and how I should buy my house given these conditions. New or existing? Pay in cash or take a mortgage?? etc. Any ideas in general on how I can maximize the money I have saved to get a nice place to live in.
Haha, unfortunately that is as articulately as I am able to explain my position and question. I realize there is a distinct possibility that I am missing the big picture and embarassing myself but I'll risk cyber shame for the opportunity to post this rather important personal question on this forum where I put great stock in the knowledge and intelligence of other community members.
Thanks again to all.
Amazingly, I am also on the same boat, but not quite as fortunate. At today's prices we could afford half a house outright. I was thinking of picking one up in a couple of years time (to live in till I kick the bucket).
It would have to be perfect enough for us if it was going to be second hand. Land prices are generally way too over inflated here in Ireland. The cost to build a house is 100 to 150k. Land in a good location subject to planning permission and enough to have a large vegetable patch fruit trees and kiddies play area backgarden tends to be around 150k. I'm sure there are extra costs involved like kitting out the new house just the way we like it and legal fees and stamp duty and making the house as green as possible (my dream is to have an energy self sufficient house, purely emotional reasons). This will add to it as well. We are probably looking at around 350k in total.
At the moment, I can get all that on an older house for about the same price. Land and second-hand home values are shooting down here, but when serious inflation starts, the new build price will rocket. I suppose it's swings and roundabouts, isn't it? (six and half a dozen etc.: English phrase)
Would second hand prices of houses rise even in a poom? Would incomes be raised in a poom? I suppose they would, but not by as much as everything else, as we would still be in a recession. On that note, I guess buying a second-hand home which fits our requirements would be perfect.
The question is: Is the poom caused by merely government adding zeros thereby nothing goes up relative to one another, or is poom caused by increased import prices due to sudden stop/capital controls?
I guess the only way to take advantage of an economic crap situation would be to still be employed. Everything goes out the window if income is reduced. That is gambling a bit. May be purchasing is based on chance of keeping future income.
In the end I probably wouldn't buy if the mortgage (up to 25 years) I was paying was more than what I pay now in rent (income adjusted if poom occurred). Yes, the bought house would be nicer, but still. Interest rates might be shockingly high in 2 years. I'm still confused though. I'll probably just buy in 2 or 3 years and be done with it.
Mmm, this is difficult. Let's say dream house costs 350k (end price) and I have 100k. Dream house goes down to 250k in 2 years.
I have a mortgage of 150k instead of 250k. But interest rates have shot up so I am paying the same amount per month.
Here's a rule of thumb for when it might be the time to buy a house:
When the house PITI (mortgage (principle+interest), taxes, and insurance) monthly payment is less than rent, even WITHOUT the mortgage deduction.
At that point people are actively avoiding ownership - and clearly we've reached over-reaction point.
Sold my car in August because I was already biking everywhere anyways, rain, shine, sleet or snow. My wife has one for the kids, but hardly drives it. I have always felt that cars are a very bad use of money if one can avoid them.
As for the housing, Roubini seems to think that we are looking at another 20% down in 2009. Based upon the vibe I am getting from realtwhores, I think we have a ways to go before the realization that the boom is not coming back sets in (at least in the Boston area). But it is nice to see prices falling quite a bit faster. Perhaps if I wait until 2010 I can buy with cash. The last time I bought a place, I paid cash. My realtwhore thought I was crazy, but it felt great.
I was hoping to buy with gold or silver:D
Originally Posted by mercerbear http://www.itulip.com/forums/images/buttons/viewpost.gif (http://www.itulip.com/forums/showthread.php?p=59552#post59552)
Please, anyone feel free to give me your take on this one. I'm a professional basketball player in Europe for the moment but I plan on living in TN sometime in the next 5 years and I'm trying to figure out the best way to take advantage of the current situation regarding housing.
Any ideas on timing would be great also...
Thanks!
Food for thought:
http://www.nowandfutures.com/images/case_shiller_home_month_supply.png
from my real estate page, chart updated monthly.
donalds
11-08-08, 06:59 PM
Fred,
You state:
"Cash will continue to be king until heroic monetary and fiscal stimulus finally increase inflation expectations in the economy."
I question whether the general public will see "heroic monetary and fiscal stimulus" as setting the stage for actual future inflation? What evidence leads to you this assumption?
I question whether the general public will draw such a conclusion. Seems to me they won't generally see inflation until it shows up in increasing prices. From this they will then develop the expectation of future inflation.
You see it the other way around, that the expectation for inflation will proceed the real inflation, and that this expectation will develop as a result of the "heroic monetary and fiscal stimulus". Am I correct in my understanding here? If so, on what basis do you ground your assertion?
derelict54
11-08-08, 09:30 PM
My Two cents:
This winter is going to be a "nuclear winter" for the real estate industry. It will be the lowest transactions in a long while. The real estate sector relies on three things.
#1 long term treasuryrates, and the spread (fannie freddie) agency bonds.
#2 access to credit (loan programs, requirement by banks etc.)
#3 feeling of the market participants (friends and neighbors)
Right now spreads are at all time highs, access to credit is very tight & still tightening, friends and neighbors still think getting a foreclosue is a good deal.
I would wait until:
#1 Bush or Obama either begs the foreign governments to buy our fannie bonds, or the fed starts doing it themselves (which is most likely) something like the tarp, give us your crap and you can only buy good agency bonds with it. Meaning our underwriting guidelines are back within realm of realism and these new ones shouldn't default.
#2 unemployment is near its high, meaning that the banks are going to see less defaults, we are a two person debt paying society right now, one person in a home loses their job, the debt defaults.
#3 What Fred said, this will get so bad that friends and neighbors will say don't buy any real estate it is the worst investment ever.
Markets tend to fluctuate, and as this market was way overzealous on the way up, it is likely to overshoot on the way down. The key thing though is that housing is still affordable, people can make their payments, and that has most to do with mortgage rates. They have been trading in the same range of 5.5 to 6.5 since late 2006. I would look for the government to do all they can to stabilize these rates loe, after all once you see on CNBC that housing permits have gone up, or preexisting homes have gone substanitally higher (not just foreclosure demand) We are most likely to see the bottom. I would think Q3 2009. People will start coming out looking for bargains next spring, through the summer it will start gaining a bottom. But two things to keep an eye on:
-Renegotiating of Bretton Woods II (which could signal Poom, if not negotiated correctly by next administration)
-How mortgage spreads and the treasury bond markets react during the first few months of the next administration.
Regardless if you build or buy a home next summer, (consider our ecomonomy and currency foundations nearly the same) you should be within 5-10% of the bottom if not the bottom. I would pay cash then, (being deflationary) and when you start seeing appetites for agency and treasury bonds starting to deminish, The poom is gaining traction, I would take a cash out loan to 50-65% (guaranteeing the best rates) and use that leverage to your advantage in the inflation to follow.
Whether you build the house or buy a foreclosure, either will depend on the deal, but you may be happier in a house you build and given the commodity prices and desperate labor you may be able to get yourself a pretty cheap custom home.
Food for thought:
http://www.nowandfutures.com/images/case_shiller_home_month_supply.png
from my real estate page, chart updated monthly.
Bart, I see it but what are you trying to say? (When do you think it's time for me to buy MY house?)
Bart, I see it but what are you trying to say?
Nothing complex, mercerbear asked about timing and that was my best answer for another timing guideline. In my opinion, we're far from a bottom... assuming "normal" patterns.
Nothing complex, mercerbear asked about timing and that was my best answer for another timing guideline. In my opinion, we're far from a bottom... assuming "normal" patterns.
Bart, thanks, great chart. You have few other too don't you? ;)
mercerbear
11-09-08, 08:49 AM
I would like to thank everyone who offered their opinions and advice to my questions. I really do appreciate it!
Charles Mackay
11-09-08, 10:20 AM
jtabeb, mercerbear, others
While the usual metrics have worked in the past (cap rates etc.) I don't think they'll work in this "greater depression". How can you measure something in a currency that will be massively devalued overnight?
Do you really think we are going to get a green light signal that the FED is re-inflating fast enough to put us back into inflation, allowing us all to move to the other side of the boat and protect ourselves? Did they warn the citizens in 1933 before the 70% devaluation? No!
Might that 70% dollar devaluation happen in 2009? That prior devaluation happened in FDR's first term. Will it happen in FDR II's first term (Obama)? FDR was inaugurated into office on March 4, 1933 during a banking panic. That is when he uttered the famous phrase "we have nothing to fear but fear itself". He then signed Executive Order 6102 confiscating American's gold on April 5, 1933 just one month after taking office! The penalty for non compliance was punishable by a fine up to $10,000 (which is $166,000 in 2008 dollars!) and up to 10 years in prison!
The hot money currently sloshing around the world trying to protect itself from the inflation/deflation whipsaw will have to be devalued overnight in order to wash out the collapsing debt laden financial system.
At the bottom of the depression in the 30's you could buy a typical US house for $3500 and after the dollar devaluation, 100 oz of gold bought that house. In 1980 during the wave IV assets/gold revaluation you could buy a typical US house for 100 oz of gold. Some time in the next few years you'll be able to buy a nice house for 100 oz of gold.
So, I suggest you accumulate 100 oz of gold and keep it overseas in a depository like GoldMoney and then buy that nice house for cash when the median existing house price in the US (published monthly) reaches 100 ounces. I have published my houses/gold chart many times here on iTulip but if it can't be found I'll post it again upon request.
steveaustin2006
11-09-08, 06:50 PM
I
If we are right about inflation then you should be able to exchange inflation hedges for inflated goods prices, but there is no net gain, only an avoidance of losses that might otherwise be experienced if deflating assets are held instead.
This is one of my issues with Ka-Poom. If it becomes obvious that inflation hedges are required, then those assets should eventually become inflated and not just reflect the exact offset that you would expect from a theoretical approach. Investor sentiment and movement of hot money might move those assets to highly inflated prices - at least that is what market history tells me during highly inflationary times. I am not talking about speculating, but acknowledging that the more likely outcome is that these inflation hedges will more than reflect the offset. Comments?
The other issue I have is this tossing in of the towel I keep hearing - i.e. you said we are all poorer in this country whether inflation comes or a continued deflation happens. If the US dollar decreases less than other currencies or even if it does not I would expect commodity based currencies to provide a far greater level of protection for similar reasons - they should not only offset inflation but there should be capital flight to those currencies.
Sure capital controls may prevent you from doing this later if one continues to reside in the US, however there will still be plenty of equities you can buy for companies which reside wholly outside of the US or at least derive their income predominantly from outside the US, but trade on US exchanges.
Moreover, why do some many US citizens think they are just stuck? For gawds sake we are all educated. You can get a job in Canada and just move there and protect yourself, that is assuming you buy into my argument.
Yes, I know it is more difficult to attain a job and will be increasingly difficult, but if you are here at iTulip, chances are you are a lot smarter than others, :-)
herbkarajan
11-09-08, 09:08 PM
[quote=Charles Mackay;59833]jtabeb, mercerbear, others
Might that 70% dollar devaluation happen in 2009? That prior devaluation happened in FDR's first term. Will it happen in FDR II's first term (Obama)?
Devaluation against what? in 1933 gold was money, it was recognized and fixed against the dollar. Gold is no longer money, no one imagines it to be a midium of exchange, it's an asset class which is less appealing than oil.
What do you plan to devalue the dollar against? A vital economic commodity such as oil, wheat etc.. an nonessential relic such as gold, what's the point. How about your trading partner's currencies, loonie, euro, rmb. Do you think they'll like it or allow it to happen?
The government can simply spend money on projects and try to employ people layed off in the private sector. The banks can not stop the crash they can only mitigate the speed of the descend
jtabeb, mercerbear, others
While the usual metrics have worked in the past (cap rates etc.) I don't think they'll work in this "greater depression". How can you measure something in a currency that will be massively devalued overnight?
Do you really think we are going to get a green light signal that the FED is re-inflating fast enough to put us back into inflation, allowing us all to move to the other side of the boat and protect ourselves? Did they warn the citizens in 1933 before the 70% devaluation? No!
Might that 70% dollar devaluation happen in 2009? That prior devaluation happened in FDR's first term. Will it happen in FDR II's first term (Obama)? FDR was inaugurated into office on March 4, 1933 during a banking panic. That is when he uttered the famous phrase "we have nothing to fear but fear itself". He then signed Executive Order 6102 confiscating American's gold on April 5, 1933 just one month after taking office! The penalty for non compliance was punishable by a fine up to $10,000 (which is $166,000 in 2008 dollars!) and up to 10 years in prison!
The hot money currently sloshing around the world trying to protect itself from the inflation/deflation whipsaw will have to be devalued overnight in order to wash out the collapsing debt laden financial system.
At the bottom of the depression in the 30's you could buy a typical US house for $3500 and after the dollar devaluation, 100 oz of gold bought that house. In 1980 during the wave IV assets/gold revaluation you could buy a typical US house for 100 oz of gold. Some time in the next few years you'll be able to buy a nice house for 100 oz of gold.
So, I suggest you accumulate 100 oz of gold and keep it overseas in a depository like GoldMoney and then buy that nice house for cash when the median existing house price in the US (published monthly) reaches 100 ounces. I have published my houses/gold chart many times here on iTulip but if it can't be found I'll post it again upon request.
Let's say that the national median home price falls back to pre-bubble 1995 price of $110,500. Are you saying you expect gold to rise to $1,150 to equal 100 oz.?
Or do you think median home prices will not fall much from the current $122,000 due to inflation that will take gold to $1,220 to work out to 100 oz?
Or do you think nominal median home prices may actually be inflated to, say, $500,000 to help deflate mortgage debt against the collateral, resulting in a gold price of $3037 ($500,000/$122,000 = 4.09 * $750)
Just a few scenarios to consider to get to 100 oz of gold for a home in the future :)
Thank you for the replies. I do not think I made myself clear initially. I am not a housing speculator. I know that game is dead and I was too young to play it myself.
My situation is this:
I have enough cash saved to buy an average house in which I will personally reside in TN. I know two things.
(1) Housing prices and the prices of materials required to build houses are currently falling. I assume this has something to do with Ka. This bodes well for my ability to afford a home with my dollars that are accruing 3.3% in an etrade savings account.
(2) At some point Poom will occur and it will change the ballgame. At this point, housing prices and the cost of materials required to build a house will begin climbing as the dollars in my etrade account devalue in an inflationary situation, be it modest or hyper. At this point, I am able to afford less house for my saved money.
Given the above conditions, it seems to me that there is an ideal time during Ka and before Poom for a person who has saved dollars for the purpose of buying a house to go ahead and buy the house.
What I was hoping to get some perspective on is when and how I should buy my house given these conditions. New or existing? Pay in cash or take a mortgage?? etc. Any ideas in general on how I can maximize the money I have saved to get a nice place to live in.
Haha, unfortunately that is as articulately as I am able to explain my position and question. I realize there is a distinct possibility that I am missing the big picture and embarassing myself but I'll risk cyber shame for the opportunity to post this rather important personal question on this forum where I put great stock in the knowledge and intelligence of other community members.
Thanks again to all.
For what it's worth, I'm in approximately the same boat -- but not able to pay cash outright. I'm on the patented GRG55 "wait" plan. I have enough savings earmarked for a home to pay approximately 1/3 of the average price in my area, with a portion of those savings in inflation hedges.
If we're headed into a deep recession or depression, then that's not going to be good for employment or house prices. If we get inflation, then maybe the inflation hedges overshoot on the up side; maybe they don't but they retain their purchasing power. If we get deflation, then a portion of my savings don't do so well, but probably there are even more people out of work, which should be even worse for home prices. As long as I'm not one of those who is out of a job (which, thankfully, is something I can predict with about a 2-year time horizon), then I imagine I'll do best by waiting.
I agree with the other posters who say that buying an existing distressed property is more efficient than building your own. That said, I have my heart set upon building my own.
Charles Mackay
11-10-08, 01:22 PM
Let's say that the national median home price falls back to pre-bubble 1995 price of $110,500. Are you saying you expect gold to rise to $1,150 to equal 100 oz.?
Or do you think median home prices will not fall much from the current $122,000 due to inflation that will take gold to $1,220 to work out to 100 oz?
Or do you think nominal median home prices may actually be inflated to, say, $500,000 to help deflate mortgage debt against the collateral, resulting in a gold price of $3037 ($500,000/$122,000 = 4.09 * $750)
Just a few scenarios to consider to get to 100 oz of gold for a home in the future :)
Yes, any of those scenarios could happen and I realize that someone contemplating buying a house would like to base their decision upon which scenario is more likely, but I'm not sure it's knowable. Obviously we'd all go out and buy 5 homes if it were going to be 500K and 5K gold. Although in a forced devaluation mortgages could also be re-calibrated by law which has been done in other hyper inflating countries so even that may be risky. I've personally decided that I'm not going to gamble on making money from a deflating mortgage and will just buy a house again at around 100 oz.
BTW, the "median existing" US house price in August was $201,900 and the preliminary figure for September is $190,600 subject to revision (which it always is) so I assume your $122,000 figure above was a hypothetical? Maybe you meant $222,000?
Here is the link to the National Association of Realtors figures that I use.
http://www.realtor.org/wps/wcm/connect/b7e901004bab74e790a5f356cdbb95a4/singlefamilyreport.pdf?MOD=AJPERES&CACHEID=b7e901004bab74e790a5f356cdbb95a4
Yes, any of those scenarios could happen and I realize that someone contemplating buying a house would like to base their decision upon which scenario is more likely, but I'm not sure it's knowable. Obviously we'd all go out and buy 5 homes if it were going to be 500K and 5K gold. Although in a forced devaluation mortgages could also be re-calibrated by law which has been done in other hyper inflating countries so even that may be risky. I've personally decided that I'm not going to gamble on making money from a deflating mortgage and will just buy a house again at around 100 oz.
BTW, the "median existing" US house price in August was $201,900 and the preliminary figure for September is $190,600 subject to revision (which it always is) so I assume your $122,000 figure above was a hypothetical? Maybe you meant $222,000?
Here is the link to the National Association of Realtors figures that I use.
http://www.realtor.org/wps/wcm/connect/b7e901004bab74e790a5f356cdbb95a4/singlefamilyreport.pdf?MOD=AJPERES&CACHEID=b7e901004bab74e790a5f356cdbb95a4
Typo. Meant $222,000 not $122,000. That's means we need $2,220 gold to buy that median home today! :)
Charles Mackay
11-10-08, 01:52 PM
Typo. Meant $222,000 not $122,000. That's means we need $2,220 gold to buy that median home today! :)
Right! and that could happen in a very short period of time couldn't it? The 1980 gold crisis was actually even more severe than the 30's. The median existing house was $63,000 when gold was priced at $875 for a house/gold ratio of 72 oz. But, you'd have to be pretty quick on your feet to get a real estate purchase contract signed and your gold sold on that day! ;) ...so 100 oz is a more realistic figure for what was doable.
It makes perfect sense to me that houses were even cheaper priced in gold in 1980 than 1933 because 1971 was an even greater gold crisis than the FDR revaluation. A Bretton Woods failure leading to world fiat with no anchor.... now that's a real crisis. And it's just playing out it's final chapter right now.
jimmygu3
11-11-08, 08:03 PM
Right! and that could happen in a very short period of time couldn't it? The 1980 gold crisis was actually even more severe than the 30's. The median existing house was $63,000 when gold was priced at $875 for a house/gold ratio of 72 oz. But, you'd have to be pretty quick on your feet to get a real estate purchase contract signed and your gold sold on that day! ;) ...so 100 oz is a more realistic figure for what was doable.
It makes perfect sense to me that houses were even cheaper priced in gold in 1980 than 1933 because 1971 was an even greater gold crisis than the FDR revaluation. A Bretton Woods failure leading to world fiat with no anchor.... now that's a real crisis. And it's just playing out it's final chapter right now.
I think it's also worth noting that it was illegal to own gold in 1933, so the hypothetical '100 oz. house' wouldn't have been a practical trade. Laws, taxes and currency controls in our near future could also present obstacles, even if the gold/housing ratio again falls into the sweet spot.
Jimmy
Chris Coles
11-12-08, 03:36 AM
Personally, I will stick to the statement made decades ago now by Robert Beckman in his book, The Downwave; "Cash is King in the Downwave".
http://www.antiqbook.co.uk/boox/lbw/019585.shtml
I must add that it would seem to be improbable to conclude that the bottom for house prices will bounce. Once reached, the bottom will be there for several years as everyone wakes up to the end of the FIRE economy.
kingcopper
11-12-08, 05:41 AM
What I love about this 100oz. gold-home purchase is that I've actually used a similar philosophy to buy apartments in advance. $600.00 2br. units, not exactly luxury; but in hip, urban locations.
I bought a bunch of units that have very strong positive cash flow and am financing around 65%. I then bought a corresponding amount of silver bullion to pay off the mortgages in a few years.
The best part was that I was having serious "investor's block" about buying and my frickin banker, Mr. Cynical, told me to buy the bullion and go have a drink! Mr. Cynical is turning every other commercial banker in my town into a gold and silver bug! ha.ha.ha. These cats know how deep the rabbit hole is!
I think it's also worth noting that it was illegal to own gold in 1933, so the hypothetical '100 oz. house' wouldn't have been a practical trade. Laws, taxes and currency controls in our near future could also present obstacles, even if the gold/housing ratio again falls into the sweet spot.
Jimmy
The timing is different, but silver or platinum also work.
Charles Mackay
11-12-08, 09:11 AM
I think it's also worth noting that it was illegal to own gold in 1933, so the hypothetical '100 oz. house' wouldn't have been a practical trade. Laws, taxes and currency controls in our near future could also present obstacles, even if the gold/housing ratio again falls into the sweet spot.
Jimmy
Jimmy, if you have your gold at GoldMoney or in a swiss bank safebox, or a Canadian bank safebox no obstacle is presented.
jimmygu3
11-12-08, 12:46 PM
Jimmy, if you have your gold at GoldMoney or in a swiss bank safebox, or a Canadian bank safebox no obstacle is presented.
That takes care of the confiscation threat (which only happened in '33 because of the gold standard), but the tax issue still exists. Holding assets outside the US does not exempt citizens from reporting income. If you buy 100 oz of gold today at $725 and sell in the future when gold is $1450 and a house is $145k, you are taxed 28% for your gain on the gold sale: $20,300. If the prices align at $2170 and $217k, your taxes due are double that. What if they raise the collectibles tax rate to 50%? 100%?
Jimmy
LargoWinch
11-12-08, 01:07 PM
Jimmy, if you have your gold at GoldMoney or in a swiss bank safebox, or a Canadian bank safebox no obstacle is presented.
As a Canadian myself, I am not sure that Canada is be much better than the US.
I understand that the US wrote the book regarding gold confiscation within a free market economy, but the current "collaboration" of CBs during this crisis does not make me feel "good and fuzzy" to say the least!
I fear that all G7/G8 members could outlaw gold at the same time as part of their coordinated efforts...
metalman
02-23-09, 09:55 AM
Forecasters: Economy worse in '09, better in '10 (http://biz.yahoo.com/ap/090223/troubled_economy.html)
Monday February 23, 7:19 am ET
By Jeannine Aversa, AP Economics Writer <table border="0" cellpadding="0" cellspacing="0" height="4"><tbody><tr><td height="4">
</td></tr></tbody></table>Forecasters see deeper downturn, higher unemployment this year, but hopeful for 2010 recovery
WASHINGTON (AP) -- Brace yourself: The recession is projected to worsen this year. The country stands to lose a sizable chunk of economic activity in 2009 as consumers at home and abroad retrench in the face of persistent economic troubles. And the U.S. unemployment rate -- now at 7.6 percent, the highest in more than 16 years -- is expected hit a peak of 9 percent this year.
BadJuju
02-23-09, 09:59 AM
I do not know why anyone thought the housing bubble was a good thing. :mad: Having to pay 300-500k for a small home is just insane! You should be able to afford a decent house (at least a few hundred sq ft) in a decent neighborhood with even a small wage.
LargoWinch
02-24-09, 07:54 AM
I do not know why anyone thought the housing bubble was a good thing. :mad: Having to pay 300-500k for a small home is just insane! You should be able to afford a decent house (at least a few hundred sq ft) in a decent neighborhood with even a small wage.
People with Real Estate exposure sure liked it; the "most often than not" leveraged position made them appear rich.
The savers and renters were suckers.
Now that the tide is reversing the Real Estate owners are crying foul and won't honor their commitment. Did I say moral hazard?
Of course lower prices are better, but this does not help the banks and the governments, the speculators were just a by product.
BadJuju
02-24-09, 08:04 AM
People with Real Estate exposure sure liked it; the "most often than not" leveraged position made them appear rich.
The savers and renters were suckers.
Now that the tide is reversing the Real Estate owners are crying foul and won't honor their commitment. Did I say moral hazard?
Of course lower prices are better, but this does not help the banks and the governments, the speculators were just a by product.
Screw 'em! A house should simply be that, not some instrument of obtaining wealth.
No wonder Congress extended job benefits again today.
http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=19601&category_id=0&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=UEMPMEAN,&transformation=lin,&scale=Left,&range=Custom,&cosd=1948-01-01,&coed=2009-10-01,&line_color=%230000FF,&link_values=,&mark_type=NONE,&line_style=Solid,&vintage_date=2009-11-06,&revision_date=2009-11-06,&mma=0,&nd=,&ost=,&oet=,
Down Under
11-06-09, 03:16 PM
No wonder Congress extended job benefits again today.
http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=19601&category_id=0&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=UEMPMEAN,&transformation=lin,&scale=Left,&range=Custom,&cosd=1948-01-01,&coed=2009-10-01,&line_color=%230000FF,&link_values=,&mark_type=NONE,&line_style=Solid,&vintage_date=2009-11-06,&revision_date=2009-11-06,&mma=0,&nd=,&ost=,&oet=,
What a disaster.
goadam1
11-06-09, 07:15 PM
Screw 'em! A house should simply be that, not some instrument of obtaining wealth.
Working and saving and investing is a fools game. Borrowing millions beyond your means is an investment in the future and a get quick rich scheme.
goadam1
11-06-09, 07:18 PM
No wonder Congress extended job benefits again today.
http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=19601&category_id=0&recession_bars=On&width=800&height=480&bgcolor=%2399FF99&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&id=UEMPMEAN,&transformation=lin,&scale=Left,&range=Custom,&cosd=1948-01-01,&coed=2009-10-01,&line_color=%230000FF,&link_values=,&mark_type=NONE,&line_style=Solid,&vintage_date=2009-11-06,&revision_date=2009-11-06,&mma=0,&nd=,&ost=,&oet=,
I'm still holding you to your 20% prediction. I'll give you till 2014 and call it even. One more cycle.
Chris Coles
11-07-09, 02:33 AM
Working and saving and investing is a fools game. Borrowing millions beyond your means is an investment in the future and a get quick rich scheme.
That will depend upon from which direction you take your viewpoint. If you see yourself as a single individual with no responsibilities towards anyone in your local community, then you are perhaps correct
But if you see your own good fortune as a responsibility to do what you can to help the rest of your local community to prosper and follow you as their leader to better times, then you are absolutely wrong.
What you have not noticed is that it is not only the investments that change, it is also the underlying philosophy. Humanity has prospered in the distant past by combining their efforts to the good of everyone. What we have at the moment is a devil take the hindmost attitude; that signally, has not succeeded and as a consequence, has to also change. You will find yourself out of step with the next phase of successful investment if you remain locked into the past paradigm.
You see, the FIRE economic model can only succeed for a relatively short period, which comes to an end when the hidden prosperity of the majority runs out, as is happening right in front of all of us. It is the same reason why any feudal model essentially fails every time. You end up with the majority so poor, they have no market power and all you can do is sit in your ivory tower and look out on an economic wasteland.
Prosperity is much more than money in the bank; it is being able to hold your head up in our local community and look around you at a local community that also has been able to see the value of what you have provided by leadership and investment.
Pity the man that sits on a pile of gold and all he can see is the starving poor surrounding him.
LargoWinch
11-07-09, 07:31 AM
I'm still holding you to your 20% prediction. I'll give you till 2014 and call it even. One more cycle.
goadam1, FRED is kind enough to share is research with us and he is not "accountable to anyone". As they say: take it or leave it.
On the flip side no one is perfect - just that some people are better than other at different things, so if you feel you can provide better insight on a topic, then by all means! That is the point of the community.
goadam1
11-07-09, 07:35 AM
goadam1, FRED is kind enough to share is research with us and he is not "accountable to anyone". As they say: take it or leave it.
On the flip side no one is perfect - just that some people are better than other at different things, so if you feel you can provide better insight on a topic, then by all means! That is the point of the community.
tone is hard to get out in a posting. I was joshing. Who can predict. We extrapolate and speculate. We interpret. Great ideas here. But to say we all should admit where we didn't get the timing of the deflation and reflation cycle right. Otherwise, we are as blind as everyone else.
we_are_toast
11-07-09, 08:08 AM
What a disaster.
What an opportunity!
The Economic and Political timing is right for the administration to propose a massive government green jobs program. Something very much on the order of FDR's CCC. The cost of putting unemployed people to work on putting solar panels on government and other buildings, retrofitting buildings for higher energy efficiency, and Research in ALT-E technologies is not much higher than paying them to sit home.
The Politics is right in that the party in power knows it's in trouble if it doesn't lower the unemployment rate or at least have a plan to do so. The government jobs might be a stretch for the Obama Admin, but I think there's a good chance that Stimulus II will be very much directed toward green and infrastructure (unfortunately) jobs. It'll be hard for the Repubs to vote against a jobs program with unemployment this high and the Dems know they have to do something.
Let the games begin!:)
Actually If you look at the ShadowStat numbers, we are already there
http://www.shadowstats.com/imgs/sgs-emp.gif
LargoWinch
11-07-09, 10:01 AM
tone is hard to get out in a posting.
Agreed. You simply forgot to use one of those: ;) :) :D :p
Next time!
we_are_toast
11-13-09, 08:10 AM
What an opportunity!
The Economic and Political timing is right for the administration to propose a massive government green jobs program. Something very much on the order of FDR's CCC. The cost of putting unemployed people to work on putting solar panels on government and other buildings, retrofitting buildings for higher energy efficiency, and Research in ALT-E technologies is not much higher than paying them to sit home.
The Politics is right in that the party in power knows it's in trouble if it doesn't lower the unemployment rate or at least have a plan to do so. The government jobs might be a stretch for the Obama Admin, but I think there's a good chance that Stimulus II will be very much directed toward green and infrastructure (unfortunately) jobs. It'll be hard for the Repubs to vote against a jobs program with unemployment this high and the Dems know they have to do something.
Let the games begin!:)
The jobs Stimulus II ship is leaving the dock.
Senator Reid tees up 2010 jobs bill
By Walter Alarkon - 11/11/09 06:00 AM ET
Senate Democrats will take up a new job-creation bill in the wake of the 10.2 percent unemployment rate, Majority Leader Harry Reid told his colleagues Tuesday.
Sen. Ben Cardin (D-Md.) told The Hill that Reid (D-Nev.) made the announcement about a new jobs bill at the Senate Democrats’ weekly lunch.
Reid said he was looking at an initiative focused on job creation “and that our caucus will take it up,” Cardin said. http://thehill.com/homenews/senate/67299-reid-tees-up-2010-jobs-bill
Obama to focus on job creation<!-- P2P_LIVE_EDIT "content_item_headline_preview" END -->
<!-- P2P_LIVE_EDIT "content_item_subheadline_preview" START -->He will hold a White House summit next month and says he's open to 'any demonstrably good idea.'
Reporting from Washington - <!-- P2P_LIVE_EDIT "content_item_dateline_preview" END --> <!-- P2P_LIVE_EDIT "content_item_body_preview" START -->President Obama will convene a White House summit early next month to explore ways to reverse the soaring unemployment rate -- and there won't be any shortage of ideas.
Economists and lawmakers hope that such proposals as tax breaks for companies that add workers, tax cuts for small businesses and more government highway construction will get renewed attention after Obama's call Thursday for new ways to reverse job losses.
But the administration and its allies in Congress are facing another shortage -- time.
Economic and political concerns are rising after the unemployment rate hit 10.2% last month, reaching double digits for the first time in 26 years. With congressional midterm elections looming next year and thousands more jobs being lost each week, Washington must act quickly to get new programs in place.
http://www.latimes.com/business/la-fi-obama-jobs13-2009nov13,0,1759115.story
CalculatedRisk makes the good point that this will be another boost to GDP next year. iTulip anticipated a serious of bounces as the government introduced these programs, but we seem to be getting one extended bounce and I'm wondering if this will extend the bounce even further.
If the new Stimulus is a lot like the old Stimulus, with tax breaks and highway construction, rather than an effort to move from fossil fuels to Alt-E, it'll mean when this elongated bounce is over, it's really going to hurt.
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