April 29, 2017

It Turns Out We Might Have Too Much Housing

A report from Costar.com. “Having borne the brunt of declines in U.S. apartment rents since the third quarter of last year, urban luxury apartment communities are in some cases now cutting base rents and offering multiple months of free rent and other incentives to attract a depleted pool of high-income renters, according to CoStar Portfolio Strategy. Consistent with trends it has observed for a couple of years, AvalonBay saw rent growth in its suburban submarkets outperform urban areas in its Northern California, New York/New Jersey and Boston portfolios by an average of more than 300 basis points in the first quarter of 2017, CEO Timothy J. Naughton said.”

“Most of Equity Residential’s New York City portfolio is exposed to the high-end luxury segment of the market in Manhattan and Brooklyn, Chief Operating Officer David Santee said. ‘The question that that will be answered soon is, will Long Island City become a new value destination, and will that draw folks from Manhattan or Brooklyn in search of a lower rent,’ Santee said, adding that more than 30% of EQR’s revenue is from West side properties where construction and competition is booming.”

The Jamaica Plain News in Massachusetts. “Many people believe rents are higher than ever — and they certainly are higher than five years ago. But according to a city report, rents for Jamaica Plain’s older housing stock — buildings built before 2011 — went down 5 percent in 2016 compared to 2015. With more rental units being built, are overall rental unit prices going to drop? Josh Brett, Nextdoor Realty Team at Unlimited Sotheby’s International Realty: ‘The rental market seems to have stabilized with the recent spike in new-construction luxury apartments in Jamaica Plain. Possibly as a result of the increased supply of luxury apartments and concessions being made to fill those apartments, it seems that the rental rates have moderated for units in existing buildings.”

The Post and Courier in South Carolina. “Charleston’s overwhelming popularity these days has led to nothing short of a real estate crisis. City Councilman Robert Mitchell says he’s in the same boat as a lot of locals: He could not afford to buy the house he lives in on the open market today. How many people have you heard say that in recent years? Probably quite a few. The sad truth is, more and more people have to rent to live here. And even with an apartment glut under way, that is not getting any cheaper.”

The Capital Journal in South Dakota. “Pierre’s housing problem has once again reared its ugly head. This time, though, we’re faced with an interesting wrinkle. It turns out Pierre might have too much housing, at least when it comes to high-end apartments. That, at least, was one of the arguments behind reevaluating the taxable value of two apartment complexes. Both Highlands Ridge and Country View are asking more, perhaps hundreds of dollars more per month than most folks can pay. Both complexes have found themselves short of renters, which makes paying their property taxes more difficult.”

“Now that it appears that the Pierre and Fort Pierre area has, for now, reached the cap of ‘luxury’ apartments it’s market can support, the question becomes where and how will our community expand the available housing options.”

The Denver Business Journal in Colorado. “The priciest area in Denver to rent an apartment is getting cheaper. By just a little, though. According to apartment rental site Zumper, the Golden Triangle area near downtown remains the city’s most expensive area for renters, with a median monthly rent for a one-bedroom apartment of $2,090. In August, a one-bedroom apartment in the Golden Triangle had a median rent of $2,200.”

“More apartments are planned for Denver’s Golden Triangle: In February, ground was broken on a 322-unit apartment complex, and in December, plans were announced for a 16-story, 302-unit apartment building.”

The News Tribune in Washington. “Rent bargains in Lakewood? Sure, if you can find them. According to Zumper, Lakewood posted the highest rent increase in the Puget Sound region this month. Comparatively, Seattle rents for a two-bedroom apartment dropped 6.6 percent compared with last year, to $2,400 per month — also the highest rent in the region for a two-bedroom.”

The Portland Tribune in Oregon. “Portland’s skyrocketing rent increases have slowed dramatically in recent months as more apartment buildings have been completed. A report the Zumper rental tracking firm says Portland has the 19th most expensive rents in the country. But unlike recent years, citywide median rents are no longer increasing by double digits. In fact, according to Zumper’s Spring 2017 report, the median price of a one bedroom unit decreased 1.5 percent to $1,340.”

“The increasing supply of new apartments is tempering what owners can charge for them because of increasing competition. Although down $100 from last quarter, the report says the highest median rent for a one-bedroom apartment was in the Pearl District at $2,090.”

The Berkeley Daily Planet in California. “Downtown land use activist Kelly Hammargren has written to Berkeley Mayor Arreguin, City of Berkeley planning staff and the city council to report her discovery that a very large new apartment complex on South Shattuck Avenue in downtown Berkeley is being rented as a hotel instead of as the dwelling units for which it was permitted.”

“In a letter sent to them on Saturday night, she says: ‘For all the cries for affordable housing and the posturing that Berkeley isn’t approving and building enough housing, recently opened projects in the Berkeley downtown area can’t seem to find renters. Possibly luxury priced projects in the downtown are overbuilt or possibly there is more interest by the developer in being a hotel than providing housing.’”

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Comment by Ben Jones
2017-04-29 08:52:33

‘The priciest area in Denver to rent an apartment is getting cheaper’

‘down $100 from last quarter, the report says the highest median rent for a one-bedroom apartment was in the Pearl District’

‘Seattle rents for a two-bedroom apartment dropped 6.6 percent compared with last year, to $2,400 per month — also the highest rent in the region for a two-bedroom’

As we’ve been seeing, the highest rent cities have fallen the most, and within those cities, the highest rent sub-markets have fallen the most.

Comment by Senior Housing Analyst
2017-04-29 09:02:44
Comment by Casa$Loco
2017-04-29 09:05:01

And so it begins, another “this time it’s different” moment SHATTERED. Once housing prices had only one way to go, UP! Now they still only have one way to go DOWN!! SoS as last time, called the top Aug ‘07. Calling the top now, you housing filliping ilk, can catch that falling knife. I’ll pick it up off the floor like I did in ‘09.

Comment by Race Bannon
2017-04-29 09:12:52

09 was just a minor correction. Prices were still double to triple long term trend.

Comment by new attitude
2017-04-29 12:49:41

You got some sweet deals in 09, are you still holding 7 homes? Can you still do those 25 chin ups? SAT 1000?

Comment by Casa$Loco
2017-04-30 07:09:45

No, Yes, Yes. I only own the home I live in, for investment purposes I only hold physical precious metals and performance automobiles, Porsche’s are my favorite! You get to drive them when the market is cold and sell them when the market is hot.

Comment by Raymond K Hessel
Comment by megamike
2017-04-29 09:15:01

The St. Louis Missouri report:
Under Construction:
The Alverne/Gallery 1014 - 81 units
1900 Washington - 36 units
Mercantile Library - 100+ units (guesstimate)
117 units + Mercantile under construction

Likely to start soon
The Monogram - 168 units

Slated to start Second Half 2017
Jefferson Arms - 239 units
Ballpark Village - 300 units (guesstimate)
913-921 Locust - 88 units

Not firm
The Chemical - 125 units
Railway Exchange - 550 units
Crowne Plaza Partial Conversion - 300 units

Comment by Ben Jones
2017-04-29 09:24:50

‘Rents in both Manhattan and Brooklyn continued to decline as new construction saturated the market, according to the Q1 2017 StreetEasy® Market Reports.’

“A surge in new construction, particularly at the high end of the market, has had a ripple effect throughout the market and pushed down rents across the city, particularly in Brooklyn,” said StreetEasy Senior Economist Grant Long. “Renters planning on signing a new lease this year are likely to have more negotiating power as competition starts picking up among new buildings vying for the attention of prospective tenants.”

‘Rents in hot Downtown Manhattan neighborhoods fell the most. Of the 19 neighborhoods where median asking rents fell year-over-year, 11 were in the Downtown submarket, including Little Italy, Battery Park City, West Village and Greenwich Village.’

‘Brooklyn rents fell to their lowest level since Q3 2014. Brooklyn’s median rent price fell 4.2 percent relative to Q1 2016 and dropped steadily since fall 2016. New construction around Downtown Brooklyn weighed on the Brooklyn rental market. Renters had 27.6 percent more options to choose from in Q1 2017 relative to the same period in 2016. Inventory in South Brooklyn jumped the most – up 45 percent year-over-year.’

‘North Brooklyn was the only Brooklyn submarket with falling prices. The median resale price fell 4.75 percent from Q1 2016 to a median resale price of $865,804. Buyers had more homes to choose from in Q1. There were 5.3 percent more homes for sale in Brooklyn relative to the same period last yearvi. North Brooklyn reported the greatest inventory gains among all Brooklyn submarkets, up 27.8 percent from Q1 2016.’

Comment by Race Bannon
2017-04-29 09:30:20

‘The rental market seems to have stabilized ‘

Realtor doubletalk for “prices are falling”.

Comment by Ben Jones
2017-04-29 09:30:54

‘Now that it appears that the Pierre and Fort Pierre area has, for now, reached the cap of ‘luxury’ apartments it’s market can support, the question becomes where and how will our community expand the available housing options’

The unasked question is, how can we end up with too much luxury and not enough affordable housing? The market has been distorted by money creation and artificially low interest rates. Land prices doubled, tripled and more since QE began. NYC commercial land prices doubled in two years! When we were building houses without metal nails we never had a shortage. The other day I watched a time lapse video of Chinese developers building a several stories tall building in days. Such is the mania. Shortage has been so ingrained in the public it’s taken as a never ending truth, when it’s just hogwash.

Comment by aqius
2017-04-29 09:48:55

my house here in N. CA was built in 1972 with aluminum wiring.
not sure if it was a cost saving feature, supply shortage or just an experiment for the time . . . !?

Comment by scdave
2017-04-29 10:01:54

Cost saving….

Comment by new attitude
2017-04-29 10:44:22

alum wired houses tend to burn to the ground. It is a red flag when I shop for homes.

Comment by scdave
2017-04-29 11:18:46

alum wired houses tend to burn to the ground ??

Wives tale…Not true…Sizing and properly tightened grounding locknuts are the key…

Dispelling the Myths;


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Comment by new attitude
2017-04-29 12:52:33

Sizing and properly tightened grounding locknuts are the key…

you said it.

ACCORDING to the Consumer Product Safety Commission, an estimated two million homes in the United States were built or renovated using electrical circuits with aluminum wiring. And, according to the commission and specialists in the field, unless certain safety procedures are undertaken, every outlet, light switch and junction box connected to such circuits is a fire waiting to happen.

Comment by new attitude
2017-04-29 12:53:45


Tom Kraeutler, host of “The Money Pit,” a nationally syndicated home-improvement radio show, said that from the mid-1960’s to the early 1970’s, many new homes — as well as some existing homes that were remodeled or enlarged — had aluminum wiring installed to feed branch circuits that run from the main electrical panel to the outlets and lighting fixtures.

But because of electrical failures involving the wiring, it became apparent that while a continuous run of aluminum wire does not present a problem, when that wire is connected to outlets and light switches — and even to other wires in junction boxes — the connection can deteriorate and become a fire hazard.

Comment by Yaan
2017-04-30 08:14:10

Someone I know has a condo built in the 70’s. One of her light switches ran warm (and it wasn’t a dimmer). I said, “you’d better get that looked at”.

Comment by ibbots
2017-04-29 12:54:52

Ditto with my house built in mid 60’s. Most of the home runs have been replaced with copper though. The stuff in the walls is still aluminum. Haven’t had any issued but they were all pigtailed professionally.

A bigger issue around here was the Federal Pacific breaker boxes. Those things burned down some houses.

Comment by Mike
2017-04-29 10:02:18

20 years from now, when the money printing induced madness of crowds has passed, Greenspan/Bernanke/Yellen will be seen for the useful idiots that they are.
The shift from a production economy to a financial engineering economy has exacted a grievous cost on families, the old and new entrants to the workforce, all to enrich an already fortunate few.
Just to have a roof over their heads, average working people have take on take on huge debts and pay an exorbitant percent of income.
This could be a comic study in economic illiteracy were there not so much human suffering involved.

Comment by Ben Jones
2017-04-29 10:31:21

‘The retail slowdown has become a key theme in the narrative of the market over the last year-and-a-half. Brokers bemoan stubborn landlords holding out for higher rents, but many landlords remain optimistic they’ll find tenants willing to pay top dollar for a presence on the city’s most popular shopping corridors.’

‘Not so, says Billy Macklowe. “I think retail is f#cked, plain and simple,” the head of the William Macklowe company said Friday, adding that the signs are obvious to anyone walking down Fifth and Madison avenues or around Soho. “If you do that, just on a visual basis, you will get to a radical vacancy rate the major brokerages aren’t putting out there,” he said.’

‘Don Peebles, a fellow panelist and head of the Peebles Corporation, said residential developers had in the past seen retail as another avenue for value creation in new buildings. “Now we’re in an unknown space,” he said. He described retail vacancies on Fifth Avenue as a “bloodbath” and said retail throughout the city has weathered “dramatic” price adjustments.’

Good thing Yellen was all over this mess.

Comment by Karen
2017-04-29 12:05:50

the signs are obvious to anyone walking down Fifth and Madison avenues or around Soho. “If you do that, just on a visual basis, you will get to a radical vacancy rate the major brokerages aren’t putting out there,” he said.’

In other words, the officially published vacancy rates, like everything else involved with real estate, are just lies.

Comment by SW
2017-04-29 20:33:43

Anyone know what the real vacancy rates are?

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Comment by Jingle Male
2017-04-30 09:36:20

I cannot find an overall vacancy rate, but here is a clue about Manhattan from CBRE:

Following an unprecedented rental increase between 2012 and 2014 in which average asking rents rose by
close to 90%, the Manhattan retail market is in a period of easing. Of the 16 corridors tracked by CBRE,
12 recorded decreases in average asking rents year-over-year, while the overall average dropped 2.7% in
the past 12 months. Downward pressure on rents is coming from increasing availability, with the total
number of available spaces growing by 24.4% quarter-over-quarter. However, retail fundamentals within
New York City are performing well, as unemployment is down and gross metropolitan product is up.
Discount retailers signed three of the top five transactions this quarter, while food retailers, including
quick-service restaurants, cafés, bakeries and sit-down restaurants, remained active.

Comment by Karen
2017-04-30 11:13:29

Discount retailers signed three of the top five transactions this quarter

Comment by Ben Jones
2017-04-29 10:04:44

‘Even as confusion still reigns over whether short-term rentals are legal in San Diego, the city plans to step up its efforts to collect back lodging taxes from home-sharing hosts, whether they’re renting out a spare bedroom or multiple properties at the beach.’

‘While the City Treasurer’s Office continues to audit, as it has the last several years, Airbnb and other short-term rentals to ensure payment of the city’s 10.5 percent transient occupancy tax, it says it needs more resources to help keep pace with the explosive growth of vacation rentals.’

‘While City Attorney Mara Elliott recently issued a memo concluding that such rentals are not permitted in any zone in the city, elected leaders have been unable to reach a consensus on how widely short-term rentals should be allowed.’

‘By her accounting, Larson figures she owes about $8,000, plus as much as a 25 percent penalty for not having paid before Airbnb started collecting taxes on her behalf. “Back in 2014 the city found me by replying to an ad on the website,” said Larson, who retired last year as a training analyst for a software company. “They acted like they were a guest and when I replied, they said we represent the city and wanted to collect TOT.’

“Retrospectively, I wished I had started paying from 2014 on, but now there’s no way we can pay it. It’s too much of a hardship, but how can we possibly fight it?”

Comment by Ben Jones
2017-04-29 10:13:07

‘there’s no way we can pay it. It’s too much of a hardship’

You’ve been disrupted.

Comment by Ben Jones
2017-04-29 10:07:22

‘About two dozen supporters of increased regulations for short-term housing rental companies like Airbnb gathered outside City Hall to call for limitations on the number of days units can be rented. The group included representatives of the Venice Community Housing Corporation, the Coalition for Economic Survival and the California Hotel & Lodging Association.’

‘Connie Llanos, Southern California deputy policy manager for Airbnb, said that 3,400 hosts in the city avoided foreclosure or eviction in 2016 and kept their home due to the supplemental income they make from hosting on Airbnb.’

“We know that Airbnb is a lifeline for thousands of Angelenos,” Llanos said.’

Comment by Ben Jones
2017-04-29 10:16:45

‘Legislation is starting to take shape in D.C. that would place rules on websites that offer homes and rooms for short-term stays. A recent study by the Working Families Party found that online rental listings rose 38 percent between 2015 and 2016. “In the last two years, our hosts have paid $14.5 million in taxes to the District of Columbia. And for our hosts, 88 percent of them who are renting out their primary residence, home-sharing has been a lifeline. For several hundred of our hosts, they’ve avoided foreclosure or eviction,” said Airbnb company representative Joseph Burns.’

‘Regulations like those could help quell what Valerie Ervin with the Working Families Party described as disturbing trends. “We see party houses taking over. We see investors buying one, two or three homes and converting them into full-time Airbnbs,” Ervin said. Ervin also said that an international company recently was found listing apartments in a rent-controlled D.C. building, which is a violation of the District’s housing act.’

Comment by Ben Jones
2017-04-29 10:21:51

These guys are using a WEBSITE people! Laws don’t cover WEBSITES! Don’t you know they have an office in San Francisco?!

Comment by Senior Housing Analyst
2017-04-29 10:19:08

San Ramon, CA Rental Rates Crater 8% YoY On Ballooning Excess Housing Inventory


Comment by Neuromance
2017-04-29 10:30:53

The somewhat famous “Debt Moralizers” by Krugman article was posted here a few weeks ago, and it got me to thinking, and I wanted to comment (warning: tldr posts below - but hopefully they provide some food for thought and discussion). Some initial setup points first, then the response, in the two posts below:

Comment by Neuromance
2017-04-29 10:34:28

Setup points:

1) Among other things, the economy is a competition for resources. People provide goods and services in an effort to convince people to give them resources, mostly in the form of money. Criminals try to steal resources and convert them to money. Panhandlers try to obtain resources by having people take pity on them and give them donations of food or cigarettes or money.

2) Government goes out and takes money via taxes. So it has a pool of money to spend (convincing politicians and agency heads to give you money can be quite lucrative).

3) Money represents the value of everything that can be purchased with that money. If the level of goods and services rises while the money supply remains stable, each dollar becomes worth more. If the money supply rises while the level of goods and services remains stable or drops, each dollar becomes worth less (most assuredly these are not the only factors determining prices, but would be true, all other things being held equal, which they often aren’t. Economic phenomena are typically due to multiple factors, f(a,b,c,d … n), not merely one factor, f(a)). In a very small society, 10 people, 20 cattle, 5 wheelbarrows, it’s easy to see the money supply represent the total stock of goods and services. Once society grows beyond one person’s view, they can only see the sliver of the economy visible from their own two eyes.

4) Printing money as stimulus merely dilutes the purchasing power of the existing money supply. It does however give the printer the ability to direct that extracted wealth to causes he or she sees fit.

5) Financial alchemy, the getting of something for nothing, the free lunch, is still a siren song for even the most august central bankers and economic thinkers.

6) The financial sector has become much more consolidated since the 90s. Banks, savings and loans, stock and bond trading companies and more all merged with the final elimination of Glass Steagall. This creates unknown counterparty risks and takes consumer deposits hostage. It’s as if in the 90s, the financial sector made a deal with the decision makers (politicians and the central bank): “Point this spring-loaded dagger at your heart. We’ll tie a string to the trigger. If we get in trouble we start pulling the string until you bail us out. It will result in prosperity beyond your wildest dreams.” It did - but only for the financial sector. This is the structure which allows the financial sector to continue to suck money out of the society, funneling it from the many to the few (”reverse Robin Hood”). The financial sector has consolidated into a house of cards. Damage one part and the whole edifice can come down.

7) Consolidation breeds fragility in the financial sector. A fragile consolidated financial sector provides cover for bailouts. In order to avoid continuing this phenomenon, the financial sector must be broken up, re-modularized into its various components, and those individual units must be allowed to fail individually, or in groups, without credibly risking the entire system. Now… if you have a house, if you have stocks and a 401K - this current state of affairs is just peachy, the government and central bank are working for you in the best way possible. However, many of the people creating the actual wealth are being stripmined. Young people see a resource flow from them to existing asset holders. One wonders how long this can continue without pushback (some would say the unexpected election results here and in Britain and Europe are the beginning of that pushback).

8) Government spending is merely redistribution of resources. It goes out and collects money (as taxes). And it borrows from those who buy Treasuries, or it borrows from a central bank which prints money. Printing money extracts value from existing money. Hillary famously said “the government can spend money better than the private sector”. This hubris is unavoidable with top level leaders, has always been unavoidable throughout history, despite the experiments with central planning.

9) Keynes great insight in the 30s was that “aggregate demand” was lacking in the economy. So government should step in and be the buyer of last resort, injecting money into the economy to increase aggregate demand (Also there was the bright idea of government becoming the lender of last resort as well). Then, yadda yadda, the economy starts growing again and social welfare increases. The devil though, is in the details, in the yadda yadda. This effect, if it exists at all, is poorly understood. What it does do is allow top level leaders to indulge their hubris that they can spend more deftly, in a more socially beneficial way than the market can (and with that power of course, they can direct a little something for family and supporters). Granted, if taxation was indeed taking from the rich and giving to the poor, and if government borrowed actual money only, without the central bank printing to buy government debt… who knows, it is within the realm of possibility that this could have some beneficial effect. But… politicians are the ones directing this effort. Many of whom are feckless and venal, which is unavoidable. This cannot be ignored.

10) A speculative bubble does increase the wealth of a society. Suddenly there are items shooting up in value, as evidenced by the higher and higher prices people are willing to pay. The money supply is increased to maintain stable prices and the money velocity increases. People’s expectations about future wealth increase leads to more spending now. But speculative bubbles are inherently fragile, and lead to dislocations once the “greatest fool” buys and seeks to profit and cash out. Speculative bubbles in discretionary items like stocks allow those who want to play, to play. A speculative bubble in necessities forces those who don’t want to play to play, leading to resource transfer from new buyers to existing holders of the bubble good. A speculative bubble in a necessity, which also requires debt, is deflationary (like a housing bubble), as it forces people to reduce their other spending and leading to wealth transfer to existing asset holders.

Comment by Neuromance
2017-04-29 10:37:31


So: coming around to responding to Krugman’s famous “Debt Moralizers” article, he advocates for government borrowing and spending (”stimulus”) and debt reduction in the form of principal writedowns and bailouts (”Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli”). What loss if global net debt is zero, as Krugman notes? The money was transferred willingly with the expectation it would be paid back, with interest. That second part (paid back with interest) won’t happen, and while corporate expectations of future income will drop, money is not going poof. Global net debt is zero. It was just transferred in an unexpected way. However value is going poof. This is where value un-cleaves from money. The total value of goods and services represented by the money supply is dropping.

So the money supply remains the same while the value of that which the money represents declines. Each dollar represents less. This ought to be inflationary. But it’s deflationary, highlighting the complex driving forces in the economy. It’s deflationary because humans are the basis of the economy and they perceive they are less wealthy due to loss of a future income stream, or bubble pop dislocation has led to job loss and they have again lost a current income stream. They have less to spend and less inclination to spend. Then the expectation is government comes in and deftly redistributes (”injects stimulus”), and yadda yadda, the economy starts growing again? Or uses printed money to exract value from all money holders, and directs that wealth to the “optimal” sectors for superior economic benefit?

I understand where Summers and Krugman are coming from in their defense of bubbles. The level of wealth in society increases with bubbles or with technological breakthroughs, which also create wealth which people want. Asset prices increase, more money is injected into the economy, leading to more money circulation and aggregate demand. The problem is that bubbles are fragile, driven by speculative demand, not the more stable consumption demand. So they create massive dislocation and drops in social welfare when they pop. But technological breakthroughs are hard, and chaotic. Sparking bubbles is relatively easy. The former is persistent though, and the latter is ephemeral.

After a bubble, should government be the buyer of last resort, trying to prop up the asset prices through redistributive policies, which is all it can do? How does that benefit society? I agree that debt overhangs should be removed. But the question is, what is the most socially beneficial way to remove that debt? Through the “natural” mechanism of realizing losses between defaulters and lenders, or by redistributing wealth from the rest of the society to the defaulters and lenders? I would argue the former, because historically, undistorted markets are more effective at allocating wealth versus central planners. Also rewarding socially destructive behavior encourages more of that behavior (moral hazard).

Back to “Debt Moralizers”: Basically Krugman’s argument is that those who took out too much debt and defaulted should be allowed to keep their assets and the debt should be paid back by the rest of society. And that this will benefit everyone. Well it doesn’t benefit everyone. It merely redistributes wealth to the most financially illiterate and/or reckless and those who enabled the debt (this has consequences - it encourages that kind of behavior). He says that this will work down the debt overhang. Ray Dalio talked about the “Beautiful deleveraging”, where the losses are socialized - i.e. wealth is redistributed to the financial sector and defaulters. You know what would also work down the overhang? Accepting the defaults, and forcing lenders to accept the losses. But - see paragraph 4 above about the financial sector becoming consolidated into a house of cards. They’ve taken consumer deposits hostage, and they have created opaque counterparty risks. They’ve been allowed - encouraged - to point a spring-loaded dagger at the heart of the economy, which will fire if any part of the system fails, due to opaque counterparty risks and risk to consumer deposits.

The problem is, people don’t like being stolen from, either by street criminals who do it overtly (aside: a defense of theft, which could be written by any number of modern economists, is this: “well, criminals will get money to spend, increasing aggregate demand, and you’ll need to replace your stolen items, perhaps by taking out more debt, so getting stolen from is actually good for you!”), or by politicians and central bankers who do it somewhat covertly through flawed redistributionary policies and money printing.

The economy is a competition for resources. The reason we have a justice system is because Americans don’t like being stolen from or otherwise victimized. A dictator can transfer national wealth as he sees fit, in his hubris thinking he is a better allocator than the markets. In more democratic societies, people are willing to pay for public goods and some level of social welfare spending. But they’re not going to be content being stolen from, and the resources (money and assets) sent to the financial sector and the financially illiterate or reckless.

And no, this redistributive policy is not going to be good for everyone, which is Krugman’s basic point that it would be. It’s good for those receiving the redistributed largesse. There are other, more just, more socially and economically beneficial ways to work down the debt overhang. And ways which don’t encourage socially destructive behavior. The financial sector should be broken up, modularized and pieces of it should be allowed to fail. I think redistributive stimulus has a dim track record. “But what about World War II? Look at the vast government spending and the resulting boom!” Let’s look at WWII - the end of it heralded the dawn of the jet age, the dawn of the computer age, and the rapid increase in technology in all areas of life. I suspect that had more to do with the end of the Depression than redistributive war spending stimulus had.

Historically speaking, undistorted markets are better at increasing social welfare and allocating resources than central planners. WWII stimulus and deficit spending is commonly credited with ending the Depression, but I suspect the end of the Depression had more to do with the explosion in technology associated with WWII and the loss of a chunk of working age males rather than redistribution via government spending. There’s a lesson there. If government does choose to engage in redistributive stimulus, it should probably be R&D oriented, not merely firehosing it at the FIRE sector.

Also, many point to Japan as the model. The BOJ is in full money printing mode, expanding its balance sheet massively, year after year, buying government debt. It’s all redistributive. They need to increase the value of goods and services in their society. They could spark a speculative financial asset bubble, which they are trying to do, as well as trying to boost the price of assets and encourage financial asset (stock) purchases by keeping interest rates at zero. Has any of this managed to spark inflation or growth in Japan? No. There’s a lesson there too. And despite all of the touting of the positive indicators of Japanese social welfare, they do have a high suicide rate. Which is not typically indicative of high social satisfaction.

Comment by Neuromance
2017-04-29 10:58:36

Another note: When people hear the word “stimulus” spoken by an economist, they should understand it’s short for “redistributive stimulus”.

Comment by Senior Housing Analyst
2017-04-29 11:48:30

Federal Way, WA Housing Prices Crater 12% YoY As Demand Tanks Statewide


Comment by sod
2017-04-29 12:32:12

“The sad truth is, more and more people have to rent to live here. And even with an apartment glut under way, that is not getting any cheaper.”

Tell me about it.

Comment by SJ
2017-04-29 12:38:46

BUT we have a shortage of affordable housing in southern California.

Comment by new attitude
2017-04-29 12:51:08

If you are Asian (see photos), they are marketing to you for the Great Park (old Tustin air base)

Comment by Race Bannon
2017-04-29 13:52:51

So you’re saying that housing is overpriced. Now that’s progress.

Comment by GreenEggsAndSpam
2017-04-29 15:58:02

Berzerkly has housing problems? I guess the rioters get a good deal living in the dorms, maybe thats what the poor should do, enroll and join Soros’ color revolution.

Comment by ZH
2017-04-29 16:03:52


Furious Bank Run Leaves Canada’s Largest Alternative Mortgage Lender On Edge Of Collapse

Comment by Raymond K Hessel
2017-04-29 16:14:26

Despite the “all is well” cooing from the Canadian financial media over the near-collapse of mortgage lender Home Capital this week, reader comments suggest the canary in the coal mine just keeled over.


Comment by rms
2017-04-29 19:09:28

Does Canada have a trusted celebrity a la Warren Buffet to trot-out and calm the steerage rats so the top hats and ladies can board the lifeboats politely?

Comment by Raymond K Hessel
2017-04-30 08:13:56

I don’t know, but the reader comments section on the article was abruptly closed. I smell fear.

Comment by Senior Housing Analyst
2017-04-29 16:36:07

Carrollton, TX Housing Prices Crater 5% YoY


Comment by azdude
2017-04-29 17:46:36

8 years of bogus data. Houses are americas savings account now.

Comment by rms
2017-04-29 19:11:56

Haha… I want a debt card that’s linked to my home equity.

Comment by Ben Jones
2017-04-29 19:46:54

I worked a foreclosure where I found one of these home equity credit cards. It was the same house where the guys threw up when the fridge full of snails fell open.

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Comment by azdude
2017-04-30 04:56:59

“If millennials don’t buy a home, their chances of actually having any wealth in this country are little to none. The average homeowner to this day is 38 times wealthier than a renter.” —David Bach, author of “The Automatic Millionaire”

Comment by Ben Jones
2017-04-30 07:06:28

‘US consumer debt is approaching a record 20% of GDP, and millennials owe most of it. Millennials — 21 to 34-year-olds — hold an estimated $1.1 trillion of the country’s $3.6 trillion in consumer debt, according to UBS, as rising student and auto loans outweigh a drop in mortgages.’

A’nd all that rising debt is coming with rising default risks. A UBS evidence lab survey found that 52% of people worried about defaulting on any loan over the next 12 months were in the 21 to 34 age group.’

‘That’s not good news considering those same individuals are meant to be the largest source of spending on big-ticket purchase items like houses and cars over the next year.’

Comment by SW
2017-04-30 08:20:22

This might kill the millennials will buy all the houses meme.

Comment by Raymond K Hessel
2017-04-30 08:26:32

Millennials are too deep in debt and too shut out of living-wage jobs to prop up the housing bubble.


Comment by rms
2017-04-30 09:42:44

How are the Millennials going to pay for my mobility scooter?

Comment by Patrick
2017-04-29 17:09:27

One of the reasons for the massive withdrawals of cash might be the restructuring of investments from financial instruments to real estate !

Comment by palmetto
2017-04-29 20:10:58

Holy Jeebus. This woman is or was the CEO of a major corporation. Marissa Mayer’s laugh is just too creepy for words.


Comment by JSandusky
2017-04-30 06:58:12

Right place right time…nothing else.

Comment by azdude
2017-04-30 06:50:24

There seems to be a big notion that the FED is going to print whatever it takes to keep stocks and homes from crashing again.This notion is really encouraging reckless speculation again. Any thoughts on this?

People are bragging about stock gains again around the water cooler.

Comment by acutehemroid
2017-04-30 07:28:57

“The sad truth is, more and more people have to rent to live here. And even with an apartment glut under way, that is not getting any cheaper.”

The “apartment glut” will cause rental prices to drop if the glut actually exists. The cost of any item will drop if there is more of said item than is required by consumer demand.

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