Can The Economy Grow As The Housing Bubble Pops?
One reader is looking at the macroeconomics surrounding the housing bubble. “The nation’s factories are close to capacity. Productivity, with the exception of last quarter has been excellent. Consumer confidence is high. All these things point to a bright economic future. And yet..”
“The current account deficit hit a record, the budget deficit is near record highs for an expanding economy. The housing bubble shows signs of deflating. Question: If the average, NATIONWIDE price of homes in America drops 10%, is the general economy growing sufficiently to prevent broad economic meltdown.”
Another replied, “About the factory capacity. You’re forgetting that we used to produce more than we consumed, which is not true anymore. Yes, as of now, we might be at near-full-capacity in factories, but capacity of what? Of the equipment we have today, or compared to 30-40 years ago, when there were a LOT more factories open then?”
“Another thing is, check it out: ‘Net inflows into US markets dropped below the level needed to cover the trade deficit for the first time in seven months in December, prompting concern about the dangers of the current account deficit.’”
“‘The Treasury reported net inflows of $56.6 billion in December, down sharply from $91.6 billion in November and failing to match the $65.7 billion December trade deficit. As a crude measure, net inflows that fail to balance trade outflows imply less demand for dollars and therefore suggest the potential for a slide in the US currency.’”
The reply continues, “I don’t think the economy is growing enough to prevent the meltdown. There are other things involved, like inflation, losing faith in the US dollar, geopolitical tensions, lowering real wages and job characteristics, costs of building materials rising, rising interest rates, regulators starting to work on lenders in being more responsible in lending practices, resetting of creative financing, ad nauseum.”
“This year, we have about $80 billion in loans that reset to a higher level, such as the ones with less-than-full-interest payments, interest-only payments, whatnot. Next year, $300 billion of loans are estimated to reset, then in 2008, $1.2 TRILLION (10%!) in these loans will reset. My former rentor (not a landlord, since she couldn’t afford to keep proper maintenance on the house) was forced to sell the house I rented from her. She got one of these loans. She had two houses, and she was a school administrator. I think she ended up having to get both houses off her hands.”
“I see a concern about people being here because they’re looking to buy a house after the real estate collapse. I’ll let you know that for as long as I can’t buy a house with cash, I won’t buy one. It could mean that I will die houseless after all, but who cares? I can’t take it with me anyway, and I have seen too much happen in just a few years time, LOOONGGG before you’re even half-way through paying for the house.”
A third reader added, “Don’t forget the yield curve inversions.”
Technical note: a print function has been added to the bottom of the pages.
Motley Fool POST OF THE DAY
RodgerRafter’s Investing Journal
Vacancies and Overextended Borrowers
By RodgerRafter
February 7, 2006
Rental Vacancies peaked at 8.1% in Q3 1987.
Homeowner Vacancies peaked at 1.9% in Q3 1989.
There was a huge stock market crash in 1987 but the economy didn’t slow dramatically until the 1990 to 1992 period when the housing market slowed nationally. There is a wealth effect that goes with stock market bubbles but housing bubbles involve far more real jobs and much more credit expansion. When housing bubbles burst, they have a bigger impact on the greater economy and a slowing economy further suppresses housing prices.
Fast forward to the present situation.
Rental Vacancies peaked at 10.4% in Q1 2004.
Homeowner Vacancies set a record high of 2.0% in Q4 2005.
There are many reasons to fear an even greater economic slowdown starting in 2006 based on a more dramatic rise in home prices and extreme private and national debt levels.
From Q4 2004 to Q5 2004 the number of vacant homes increased by 427,000, with vacant for sale up 191,000 and seasonal vacancies up 245,000. With speculation by property flippers, vacation home buyers, and retirement home buyers driving demand for new homes, it is not surprising that the nation produced far more homes than were needed for habitation in 2005. All this is leading to a supply glut that finally is impacting prices. Median prices for new home sales were down 8.39% from September to December (if the most recent government data is accurate). Prices were up 13.61% y-o-y as of September, but were down 3.40% y-o-y as of December.
Builders loaded up on far too much land (and debt) in recent years and are rushing new developments onto the market in a futile race to unload it before prices fall too far. New homes for sale that are under construction or finished:
July - 378,000
Aug - 390,000
Sep - 399,000
Oct - 405,000
Nov - 415,000
Preliminary December data showed 415,000 new homes under construction or finished, but this will probably see an upward revision with the next report, just as September, October and November all did with the last report. The first estimate for new sales is always based largely on housing starts and historical patterns (assuming that most builders try to sell homes before they build them). Times have changed, however, and builders are going ahead with production schedules even though the buyers aren’t showing up like they used to. Also, ARIMA seasonal adjustments assume continuations of trends. The implication that the trend has changed shows up in the big downward revisions for October’s data that we’ve seen so far:
Preliminary - 1st revision - 2nd revision
October New Sales: 111K - 110K - 106K
Sold before starting: 46K - 44K - 40K
Started/Finished 4Sale: 400K - 399K - 405K
The greatest rate of construction has been taking place in much of the South and overcapacity there is already extreme. Searching newhomesource.com the areas I found with the most homes “Available now” were:
Houston…….1829
Dallas………692
Austin………431
Atlanta……..311
Tampa……….221
Charlotte……216
San Antonio….209
Denver………185
Phoenix……..162
Chicago……..157
Las Vegas……148
San Diego……132
Riverside……121
Orlando……..119
Raleigh……..117
Indianapolis…114
Those numbers aren’t precise and not all builders use the site, but the numbers seem believable in their proportions.
2005 Metro Area Vacancies won’t be out until around February 17th, but 2004 rental and homeowner vacancy rates were:
Top Metro Areas…..10.2%..1.7%
Houston………….15.6…3.1
Dallas…………..12.8…2.1
Austin…………..12.8…1.9
Atlanta…………..8.5…3.1
Tampa……………10.3…1.7
Charlotte………..12.2…2.6
San Antonio………14.4…1.1
Denver…………..14.4…2.9
Phoenix………….12.6…1.6
Chicago………….15.4…1.4
Las Vegas………..10.4…3.2
San Diego…………6.5…1.5
Riverside…………5.9…0.6
Orlando………….10.4…1.6
Raleigh………….18.6…2.1
Indianapolis……..14.3…4.5
It isn’t surprising that if you build a house where there is already overcapacity you might have a hard time selling it. I expect most of those percentages to jump upwards in the soon-to-be-released 2005 data.
More than 15,000 new homes are listed for sale at NewHomeSource.com in the Houston area, with the most expensive “Available now” one being a 6,186 square foot home for $668,288 and the least expensive finished one being 1,164 sq. ft. for $89,721 (in contrast, $653,000 will get you a 1,225 ft. condo, spitting distance from the freeway near downtown Oakland from Pulte). It is hard to imagine that the builders are making a profit at those prices, even with cheap land and financing. More likely, the builders got carried away with their land purchases 2, 3 and 4 years ago in an area where cheap land was plentiful (Homeowner vacancies in Houston were only 1.1% in 2002). Rather than letting land sit idle, builders pushed forward with development plans, capitalizing labor, material and interest expenses along the way and keeping profits high. The losses won’t hit the balance sheet until the homes are actually sold at a loss.
Over the past several years, the executives of homebuilding companies were handsomely rewarded for taking large risks and building at the fastest possible rate. It is a structural flaw of our financial system where executives get most of the benefits of risk taking and aggressive accounting while investors are exposed to most of the downside risks when companies overproduce. Being pessimistic on housing doesn’t help your stock price or boost the size of your bonus checks if you are the CEO of a publicly traded homebuilder.
Listening to the Standard Pacific conference call yesterday, I heard an analyst ask about the troubled Tampa market where many builders are resorting to large discounts and incentives to unload homes. The executive who answered simply said that they didn’t see a need to discount homes in that region and quoted some unspecific numbers about backlog. Looking at NewHomeSource.com, however reveals that 114 of the 221 “Available now” homes are theirs, with more listed as under construction. Perhaps they are reluctant to discount those homes and take a loss right now. Inventories for Standard Pacific are up sharply over the last year and their debt level is up sharply as well. If they don’t take the losses and hang on to too many homes, interest expense will eat away at their equity over time.
Meanwhile, many new homeowners are facing more acute pressures from interest expenses. Mortgage payments were up to a record 10.76% of income for all homeowners in Q3, and buried within that number are legions of bubble homebuyers and investors who’ve bought far more home than they can afford. With perhaps $1 trillion worth of adjustable rate mortgages resetting in 2006, pressure on many at the margin will push them into solvency. Defaults and foreclosures are already rising. As many single-family homeowners are converted into apartment renters through the bankruptcy and foreclosure processes, housing oversupply problems for single-family homes should escalate.
NAR estimated inventory of 2,796,000 existing homes for sale, or a 5.1-month supply in December, which is up by 582,000 (26.3%) year over year. Distressed borrowers will have a very hard time unloading their homes in a hurry if they decide they can no longer afford high mortgage payments.
Easy credit and temporarily low interest rates made it possible for people to buy more home than they could afford. It also allowed many others to extract imaginary equity out of their appreciating homes as prices soared. The result was rising debt levels, a trade gap and a housing boom. Far too many homes were built and the homes built were larger than the economy could support. Now that the homes have been built, median prices will probably spend a few years falling to a level that people can actually afford in most markets regardless of the size of the median home. A vacant home is a large cash drain on whoever is stuck holding it. Exactly what that level will be is hard to guess, but I’m expecting that we’ll see greater than 50% declines (adjusted for inflation) in some of the most overbuilt and overextended markets.
The biggest bag holders for all of this are the ones who made it possible, the investors in mortgage backed securities, including:
-foreign investors and central banks, looking for a place to park Trillions in trade gap proceeds
-pension funds and hedge funds, seeking to generate short term yield regardless of long term risk
Investors in homebuilders, with too much debt and land on their books, and investors in lenders, with too many high risk loans on their books, will also be left with substantial losses.
How deeply the shakeout will strike and which investors will be left holding the bag for falling home prices remains to be seen. Another round of easy credit could fuel a rise in prices and bail out distressed borrowers with another round of cash-out refinancing. I don’t see one coming, however, because the Fed seems determined to definitively kill off the bubble by taking the profit out of mortgage lending. It appears that the Fed has finally burst the bubble it created with ultra-low rates a mere two years ago, but you won’t get an admission of this before it becomes so obvious that most investors have figured it out for themselves. I expect tightening to continue at the March meeting unless the inflation numbers and economic numbers both come down significantly.
Eventually I expect the Fed will try to stop the bleeding before its main constituents, the member banks, are too badly damaged. But just as bursting the bubble took a very long time to accomplish in the face of high levels of public greed, ensuring a gradual or shallow decline will be very difficult once high levels of fear come into play. On top of this, the US economy faces additional challenges in the form of unsustainably high government deficits and a $700 billion trade gap. Simply easing credit would likely lead to a rapidly falling dollar and rising inflation. That may happen anyway, if foreign investors decide that roughly $10 trillion in US debt is more than they want to hold. In the end, inflation may be what ends the cycle of falling home prices.
That is sobering. Since the builders don’t have the huge margins that they have in bubblezones, I hope this means that they’ll shut down the overbuilding pronto. On the plus side is this:
“An expected rise in interest rates is likely to squeeze homeowners with certain types of adjustable-rate mortgages often used by those stretching to buy houses. But Houston isn’t expected to take a big hit.
That’s because fewer of our home loans made in recent years were the type of ARMs deemed to have a higher risk. In 2005, 1.2 percent of new home loans here were so-called “option ARMs,” according to Loan Performance, a unit of First American Corp.”
http://www.chron.com/disp/story.mpl/business/sarnoff/3668754.html
I knew it! Something hasn’t looked right around here, and it’s like “Where are you finding the people to buy these places?!?”
a 10% fallback in prices would have a profound effect on the real estate industry as a whole. homebuilders, their suppliers and workers, the banking and mortgage industry, realtors and interior designers, etc. etc ad finitum. the current yield curve is the best display of what the markets think of the long term future of this heavily leverage economy.
We are already at a 10% fallback in many markets, esp. Kalifornia. The data just have yet to reflect it. MLS listings do.
You misspelled Kaleefornia.
The “strength” of our recent economic growth has been fundamentally provided by the consumer. With savings rates in the negative column, higher interest rates, presumably higher mortgage payments with the interest rate resets this year and next, it looks like the consumer is tapped out, unable to take on increasing amount of debts to drive further growth.
Excellent analysis on the negative savings rate for U.S. consumers:
Having some problem with url
http://contraryinvestor.com/mo.htm
A stock market bubble is forming in Japan:
NYT: In Japan, Day-Trading Like It’s 1999
Japan might be 15 years ahead of the US in terms of RE market trend, but it is 5 to 10 years behind the US in internet daytrading and it’s finally catching up on them:
reliable computer access hasn’t been around for awhile and Japan was in a bear market so of course daytrading should be behind.
I saw that story. Bullshit. I have been daytrading every day since 1997 and 2K to a million cannot be done daytrading. You’d have to have profit 100% of the time - NEVER be wrong - I don’t think I can say bullshit strongly enough. I’m good enough at it to make my living doing it and I’m lucky to be profitable 70% of the time.
The “resurgent” Nikkei is about 1,000 pts. off of recent highs, and doesn’t look to have much upside right now. IMO, it and the Dow have seen their best days just recently. It seems as though the bulls are trying to build a layer of fat for the leaner times just ahead.
Nikkei down 330 or so today.
Most news reports point to a ‘red-hot’ economy. What’s not reported is the underlying problems lurking out there like the out of control debt and increasing deficit (who can’t live nicely by borrowing more money every year?), the looming crisis in entitlements, the lack of any safety net for the majority of the population (no savings, overpriced housing, living paycheck to paycheck). Don’t forget about the dangerous world we live in, and energy. I suspect we’re just one world event or natural event away from $5 gas (pick one-Iran, Africa, South America). The US has never seen the convergence of so many problems of our own making at the same time. As long as we can keep consuming products and services at the current rate we’ll be fine, but I doubt we can. We’re at the mercy of our creditors, China and Japan, and much of our future lies in their hands.
I think that the red hot economy is probably accurate and bodes well for RE bears.
The economy remains strong and interest rates increase, popping the RE bubble over a period of 3-10 years.
On the flip side landlords increasing rents was a big story in the OC Register this morning. That is great news for RE bears. As it virtually assures more interest rate hikes.
As other posters have mentioned during the course of owning a home (30 years) there are thousands of opportunities to refinance interest rates but never once will a lender offer to renegotiate principal amounts.
Red hot economy=
Kraft 8,000 layoffs
Radio Shack 400-700 store closures
Office Depot 150 store closures
GM & Ford 25-30,000 layoffs each
Toys R Us 100 store closures
Pfizer layoffs
Mortgage banking layoffs et al.
I know I’m forgetting some others…
Red hot?
Layoffs are a bullish indicator on wallstreet.
Again the health of the population is more important than the health of individuals. Although it can suck to be one of the selected against individuals.
Selected layoffs for the purpose of strengthening an individual business is sometimes a good thing. When layoffs are throughout the economy, because of declining sales, is a bad thing.
Layoffs are a bullsih indicator, hiring is a bullsih indicator. What’s negative?
Stockspeak is not unlike REspeak. It’s ALL good until it’s bad.
They can increase rents all they want but if nobody will pay them, tough stuff.
If a landlord raises the rent in the forest and there are no tenants around, can anyone hear him scream?
yes the economy can grow but not for long.
I disagree. There are at least two instance in my lifetime when prices decline and the economy expanded. I mentioned the early-mid 1980s and the early-mid 1990s. Perhaps this is because people quit tossing their money on useless “investments” such as inflated housing and put it into more productive ventures.
I don’t know what will happen this time. Nor do those who say that we will soon be dealing with a massive depression.
From 1800 to 1900, back when the currency was truly backed by gold, the general price level fell by about 50%. Prices fell due to rising productivity even though the amount of gold available rose significantly thanks to discoveries in California and elsewhere. We see the same today in those industries where technology can significantly raise productivity — electronics is perhaps the most dramatic example.
So it’s quite possible for the economy as a whole to advance very nicely with falling price levels. But there will always be losers — the pain felt by indebted farmers as rising productivity lowered agricultural product prices in the late 19th Century was intense. Remember from history class that William Jennings Bryan quote, “Though shalt not crucify mankind upon a cross of gold.”? (http://historymatters.gmu.edu/d/5354/)
House prices are sticky on the way down. The spring selling season could turn out to be better than expected for the RE market. The Asian central banks continue their purchases of US Treasurys keeping yields down. China itself has grown its reserves to over $800 billion in 2005. Foreigners including the petro-sheikhs are continuing to buy MBS and Agency securities keeping mortgage rates low. RE loans grew 14.5% in the past 52 weeks. M3 has grown 8% in the past year. HEL growth is 22% higher than the year ago levels. There is ample liquidity in the system.
If RE prices decline enough to seriously threaten consumer spending then the Fed can step in to lower rates and increase liquidity as they have done consistently since 1987. Risk premiums are still very low as market participants are confident about the future. Sub-prime lenders are moving from ARMs to 40 year mortgages keeping loans intact.
Since this board has enough folks presenting the bear case I thought I’d present part of the bull case to even out the discussion.
Yeah, I have a feeling spring/summer will uptick a little because there are idiots that I talk to who are determined to buy their first house. They claim they don’t care about the “investment.” Yeah right. At least I make them aware that it is a buyers’ market and they should low ball.
On the flip side, I convinced more people to sell and/or not buy.
I don’t know if I qualify as one of the idiots to whom you refer but I would like to own my own place and I agree there may be an uptick this Spring. The fact that rents are so cheap compared to prices are what’s keeping me on the fence but I admit the psychological pressure to buy is quite intense (which is what lead me to believe there is a bubble). I looked at open housed today and it seems like there are a lot less properties being shown than a month ago. This bubble is going to take a long time to unwind.
The wife and I are hoping to buy a house in the next year or two, when we think we will have enough money saved for a good downpayment. We don’t care about the “investment” in the sense of trying to make a profit on the house; we are following the market closely because we want a house we can reasonably afford and eventually pay for and own free and clear. And we definitely don’t want to pay overvalued bubble prices for ugly crackerboxes. Is that so wrong?
Remember that housing prices USED to be “sticky on the way down.” With 25% of real estate being purchased by investors last year, the stickiness will decrease. (”Homeowners,” who typically have few reasons to sell create sticky conditions; investors always increase market fluctuation.) In addition, the rise of Internet marketing will also speed the downfall just as it did the rise.
The only pardigm shift that happens is on the way up RE bull arguments are focused on the new paradigm.
Once indicators point the other way the old paradigm (sticky on the way down) gets trotted out.
It will be stickier on the way down than NASDAQ but it will be unprecendented in the lack of RE stickiness due to 25% speculation and 12% stealth speculation (2nd homes).
“part of the bull case”
I suppose you know that “bull” is a double entendre in this case?
Every quarter the Census Bureau surveys tens of thousands of households asking whether they are home owners. From 1994 through 2004, the percentage saying they were rose consistently about 0.5 percentage points a year, raising the ownership rate from the 64% neighborhood where it had stayed for decades up to its current level around 69%. But the peak of 69.2% was in Q4 2004 — in the year since it has actually fallen. Since the annual increase in number of households is fairly constant, the fact that the current record pace of construction not only did not raise the ownership rate by 0.5 points, but rather saw it fall, is strong evidence that much of the buying has been by speculators. That the ownership rate did not rise even with lending standards so lax as to boggle the mind, and is now fully 5 percentage points above a level that held steady for decades, is strong evidence that most everyone who wants a home and by any stretch of the imagination can afford one at current prices has already bought.
It’s hard to imagine that there can be much genuine pentup demand out there awaiting a fall in prices (the increase in the percentage of under-30s who already own a home has been especially large).
Since so much of the recent demand has clearly been due to speculative fever, it seems likely that as the cocktail party talk changes to horror stories of people ruined by real estate deals there will be a very rapid cooling of demand. If the rate of sales drops by half, the current 5.1 months of new home inventory will double to over 10 months due to that alone. As foreclosures on overextended borrowers hit the market, the scale of the glut may become truly amazing.
“My former rentor (not a landlord, since she couldn’t afford to keep proper maintenance on the house) was forced to sell the house I rented from her. She got one of these loans. She had two houses, and she was a school administrator. I think she ended up having to get both houses off her hands.”
After the dotcom crash cleaned out many people’s retirement accounts the super rich turned their attention to the vast wealth tied up in people’s home equity. This housing bubble has been the perfect scam to entice people to extract their wealth for “get-rich” schemes and the good life. When it’s all over they will be left homeless…and have a note to pay off.
You’re right. You should have see the intense pressure on the Texas legislature to “liberate” home equity in the late 1990s. Finally was allowed to happen in 1998. Then check out the bankruptcy and foreclosure rates since then, in a very good market and economy, and you will conclude that people should be protected from themselves.
The bull case has morphed from “no bubble” to “yes bubble but it might last a really really long time.”
Bad Shift:
I didn’t notice that until you said it.
It would be interesting to see the incendiary postings from a year ago versus what is being argued about today.
One California RE agent I know admits there’s a bubble, but he told me that prices don’t fall at the beach. He sells in Laguna Beach, CA. Pretty funny, huh?
I was at dinner party at a freind-of-a-freinds house, up on the hill in Laguna beach. After many folks left I had a long conversation with the owner (a realtor in Laguna) purchased the house a year ago for 3 million. He has put 500k fixing it up. Just surfaces…they didn’t change any walls or structure. And now he plans on selling it in a couple months and thinks he will clear a million.
He is young and this was his first large project. His holding costs alone were 10k per month. He sounded like he was aware that he was in a very risky position but he really did not see that slowdown that was happening.
Talk about all your eggs in one basket. Everything he has/makes is riding on the Laguna Beach market.
HeliBen & Hillary will regulate…RIOTS…ARSON…SUICIDE…MURDER
I predict a deflationary depression with 30 % unemployment and political swing to the left as that did happen in the 1930’s when 30% registered as socialists. Socialists will promote riots.
Real estate agents, bankers, and anyone with two cars and a decent income will draw the ire of lawsuits, harassment and greater taxation. Regulation will come and be enforced on the Real Estate industry. Four years ago Helicopter Ben gave a speech calling for tighter regulation of mortgages while reinforcing Alan Greenspan’s view that the Fed should not be responsible for popping asset bubbles.
One of the many lawsuits to open the MLS’s will be successful in front of the conservative Supreme Court.
President Hillary will pass forbearance laws preventing foreclosure for 2 years. Houses with federal backed mortgages that are foreclosed will be used to house the poor and unemployed.
Desperate, angry owners will commit arson for the insurance proceeds or suicide for the mortgage insurance or life insurance to the survivor. Sheriffs will be murdered to prevent foreclosures.
The Dark Side will rule.
Hillary will NEVER be President, but many of your other assertions, however dark, are certainly possible if not plausible.
I think we are staring down the barrel of some nasty economic times ahead.
Jerr,
WOW!!!
Now thats a bear attitude. Shit, I used to think myself a bear until I read your post.
I’m an eternal optimist compared to you =)
As distasteful as it seems–I have to agree that Hillary will be the big winner here. Bubba is already working the Bush family to negotiate a smooth transition of dynasties. Congress and the Supreme Court will accede to a multitude of economic props, not because they back them in principle, but out of necessity. Hugo Chavez will be flown in as an economic adviser. Time magazine will do a cover story “Cuba? The New Florida?” The Gap will start carrying the Che Guevara shirts. (Wait, I think they already have…)
I don’t think she will even be nominated, and she should not be if the Dems want to take advantage of this historic opportunity.
The Dems have a tendency to grab the snowboard before crossing the finish line, as it were.
While extreme cases are useful for scenario planning, the odds are stacked largely against you.
In short, I don’t think so.
Actually, in the Great Depression Congress tried to “suspend” foreclosures for five years through the Bankruptcy Act of 1933. That was ultimately ruled unconstitutional by the Supreme Court. There is no way that the lenders will permit the politicians to interfere with the collection of their debts, even if it means they take back relatively worthless properties and are forced to hold them for a decade until the situation improves. What will happen, however, is the massive, and largely unknown, secured derivatives market will absolutely implode, and Congress will have a choice of stepping in to prevent financial bloodshed on a level previously unseen in this country, or the shock ripples will spread into a devastating crash for the financial sector. Capital flight will ensue both because of the government interference, whether only attempted or successful, and because the risks will suddenly be painfully clear.
I have no problem buying as long as the “Lost money” cost of buying (interest, property tax, hoa, insurance, - tax deductions)
Even a rich man can starve to death.
I remember a famine in Africa that started like this. The price of cattle went sky high. Everyone was raising cattle. Then the price of cattle feed trippled. Cattle prices dropped so low that selling one cow would not buy enough cattle feed, to feed one cow one month. Most of the cattle starved to death, then it was the speculators that were starving to death.
“A third reader added, “Don’t forget the yield curve inversions.”
Helicopter Ben was asked about this after his speech last week. A senator pointed out that each time this has happened in the past, it was followed by a recession. “Are you worried now”, he asked.
I don’t remember exactly what Ben replied, but it was essentially, “I’m not worried, it’s different this time.”
The senator seemed surprised at this, and even tried to press Ben for a better answer, but he didn’t get one.
Don’t worry…be happy…
don’t worry, be happy, don’t worry, be happy…
Ben will drop only just enough money from helicopters to keep the inflation rate slightly positive — probably around 2%.
(Read his books, you can buy them at very reasonable prices from Amazon.)
Keep in mind that when the housing market was in the pits between 96 and 99, the economy was booming. So Yes we can have a real estate correction and still have a growing economy. I don’t see the big real estate crash affecting the economy until 2008.
It’s different this time.
It is different this time, the Feds have raised interest rates 2 1/2% and the 30 year mortgage rate has only moved up 1/2 a percent in the same time. The Feds are pushing on a rope!
If one of these institutions that buys second trust deeds drops dead, you’ll see a panic in the bond market.
Who’s buying all of that Dietech paper??
Keep in mind that 96 was at the end of a long-and-painful recession in CA. Nobody in their right mind at that point had any faith that housing was a good investment. (Contrast that to the current situation, where many folks are just now learning that lesson again the hard way.)
Well we all know about M3, another rate hike, possible war in Iran, yield curve inversion, foriegn holdings of US debt, and the derivitives markets…..and oh yes the US technical default as of Jan 24th. The convergance of these events will be met with the Iranian’s decision to open a new oil bourse in Euros.
Syria already transitioned to Euros a few weeks ago, and on March 20th Iran looks to trade oil in Euros. Demand for the dollar will go caput and the hyperinflation shall commence. That is if the US doesn’t attack Iran first. Iraq had the same proposal in 2000 and we invaded in 2003. April fools day this year i think wont be that funny.
Oh yeah and venezuela is right behind Iran in moving to Euros as well.
100 dollar a barrel oil????
http://www.aljazeera.com/me.asp?service_ID=10610
Perhaps you should consider your source before leaping to wild conclusions.
Okay, here’s a Republican Congressman with the balls to say the same thing:
http://www.house.gov/paul/congrec/congrec2006/cr021506.htm
‘In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein– though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.
It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.
There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.
In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.
After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.
It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.
Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.’
Governments are in the business of self-perpetuation.
Please name one government that tried hyperinflation and succeeded by staying in power.
Who ever said that the status quo has to be maintained. I never said that. With all this stuff about to set off i can’t see how it would. But we are lazy americans with plasma tv’s and playstation to opiate US right.
If Iran prices their oil in Euros, we can expect some seriously bad things to happen. Not so sure about hyperinflation, but certainly we’ll see $100 bbl oil.
“Not so sure about hyperinflation, but certainly we’ll see $100 bbl oil.”
That sounds like atleast some fast inflation to me from $60ish to $100
Just the fact that more and more countries will start shunning the dollar will leave so many excess dollars out there they will be so much less valuable and all assets will hyperinflate that are priced in USD. Then the ensuing deflation will hit afterwards .
IMO it will go from mania(now) to slight deflation, fast inflation, to big deflation.
Do you mean 90 Euro per barrel oil????
I don’t know how many times I’ll have to say this, but…
“Real Estate is the Economy”
If you eliminate all the government’s manipulation of CPI, employment, GDP, etc. you’ll find we’re already in a recession, and have been since last year. They’ve cooked the books, and to a lesser extent so has Wall Street. The only thing supporting this whole house of cards has been equity-flush consumers, and their days are severely numbered. Look out below!
“Real Estate is the Economy”
Yes. Today that is true.
It is still difficult for many to understand that approx 73% of our countries “economic engine” (GNP) is from consumer-spending. We somehow think there is this secure and secret machine of stable GNP-generators made of up wise corporate leaders and their spending, govt and foreign interests that keep America humming in balance. It just is not so, it is the spending of the everyday Joe Six Pack - as we’ve coined him here - that supports our economy.
Housing (equity cash outs and building new) is funding most of that Joe Six pack spending right now on everything from school loans to clothes to food. Let’s say housing prices just stabilize and stop going up - as they are starting to do. Then the US economy will be bare and naked, operating off of real income from wages. At the same time, the demise of Ford and even slower painful death of GM, the switch to a service economy (which translates to lower wages) suggests a recession. It is the recession we should have had after stock market bubble and 911. But AG pulled out all the stops and made sure it did not happen (at least on his watch).
We can lower interest rates, expand home loans to 40 and 50 years for only so long, and the hope is something else will come along to support consumer spending before these tacts to prop up the economy no longer work. What those new sources of spending generators will be, I have no guess.
http://www.dailyreckoning.com/rpt/USConsumerSpending.html
Article that has some good basic points…
The Daily Reckoning article is exactly what I’m trying to inform people on, the lack of savings and things being done on credit. That is the mindset I come from, which is why I save in gold or silver rather than money in the bank, because the dollars continue to depreciate through inflation, whereas gold and silver act as inflation hedges in times like this.
Stephanie
Keep in mind the RE economy has fueled a lot of purchases from new McCars to vacations that has helped many make a living. The lower income groups who work hard and actually produce somthing be it hamburgers to grass clippings will continue to find lower levels of employment for basic subsistance. The easy money folks will loose their ATM’s via th HELO and house flippers will not take jobs flipping hamburgers. This is going to lead to a lot of unhappy ME NOWERS seeking easy money. What will the next asset they attack? Do we see a tempory rise in the stock market as new ideas leak from the minds of the have it now generation. Wait for the results as they unfold in the next few months as these asset mongers attempt a new form of greed.
I hope they try to get it back in the stock market. It’s been awhile since there’s been a flood of dumb money. Past few years, it’s taken actual skill to survive and be consistently profitable.
Highly unlikely. Earnings from here on out can only be disappointing, and it’s still too soon after the crash.
Look on the bright side. A crashing market can make you a fortune faster, provided your skills include shorting.
I have posted this before, but since it sheds much light on the topic at hand, I do so again:
“When Bubbles Burst”
IMF World Economic Outlook, April 2003
http://www.imf.org/External/Pubs/FT/weo/2003/01/pdf/chapter2.pdf
(Caution: The link is to a pdf file)
IMPORTANT IMPLICATION: The housing bubble was already on the IMF radar screen as of April 2003!
GetStucco,
Thanks for the link. I didn’t read the material yet, but was this research done by Jeremy Grantham’s group?
I know he did an extensive study of 28 bubbles, and discovered that all 28 bubbles eventually collapsed. I have been wanting to read the complete research study from Grantham. Any idea how I can assess it?
Excellent article. Can anyone find the current Corporate Vulnerability Index (CVI)? A quick Google turned up nothing more recent than 2002-03. It appears to be an excellent predictor and I’m very curious what it’s showing in 2006.
“‘The Treasury reported net inflows of $56.6 billion in December, down sharply from $91.6 billion in November and failing to match the $65.7 billion December trade deficit. As a crude measure, net inflows that fail to balance trade outflows imply less demand for dollars and therefore suggest the potential for a slide in the US currency.’”
This part leaves me confused. The large and growing debt burden at many different levels of the US economy creates a motive for Ben Bernanke to live up to his “Helicopter” label, which creates upwards pressure on l-t Treasury bond yields. But the prospect of a collapsing housing bubble and ensuing recession create downwards pressure. And the yield curve pretty much miraculously stays as flat as a pancake day-in-day-out. What gives, and in what direction?
Things don’t mean what they used to mean.
Factories are running near full production because so many factories have been shut down that, yes, the few remaining ones are busy.
Productivity is up because business continues to lay off labor while enjoying cheap component costs while also hammering the remaining workers for more work.
Unemployement is low because an ever increasing percentage of the workforce have simply given up or work part time or under the table. Fewer and fewer workers meet the classic definition of the “unemployed” as those between jobs who are currently collecting benefits.
So all these things that once meant the economy is strong now mean that the economy is hollow. The housing crash will, without a doubt, drive us into a full blown depression.
I really, really feel like the crash will be like a plane crash that hits so hard that the bodies are gristed together with plane parts from the forces. This housing bubble of this magnitude has never happened before. I’m very tempted to ask my employer if they could do a “consumer profile research project,” where they determine their financial profile. There’s no telling, with these customers going to Western Siberia, Mexico, Iraq, taking whole groups of kids to Filmont, etc., just how much of their spending with our business is funded by the ATM machine on the sides of houses and how much is funding by their making such a good living that they don’t have to charge deeper into debt. I’d hate to think, but I think it will be important to know.
Stephanie
Oh my god… I just found out that I have to update my figures and how fast we’re moving beyond where I thought we were. Just off CNN’s web site:
This moves things up A WHOLE YEAR!! Oh boy, things are starting to get interesting…
I can’t find where I read this, but it seems like in the 1800’s where there was an economic crash, things got so bad that houses sold for fractions of a penny on the dollar, like from $1-10 a house at auctions, but nobody had the money to buy these houses. If anyone can help me locate and verify this historical footnote, I sure would appreciate it.
Thanks!
Stephanie
Stephanie, google the 1893 recession - at that time there was land expansion west of the Mississippi and you get get a mortgage and you only had to put down 50%. When the monetary collapse started the banks folded, the farmers lost their land, business ceased - the result was the formation of the Federal Reserve system. The underlying lack of monetary trust that led to the collapse is present NOW!
Hell. No.
Conundrum, my ass.
http://www.xanga.com/russwinter
I read the great article/study from the IMF that was posted above. If anyone is still reading this thread I would HIGHLY recommend searching it out and reading it. I wish I had read it two years ago when it came out. Once again, goes to show that history DOES repeat itself.
I just want to say that I am a doom and gloom guy, but also a trained economist. I have been talking about and acting on the housing bubble for a couple years now. I have been correct so far except for the timing. The IMF article really clears up some of the timing issues with really good numbers.
Take this little nugget from page 11 for example:
“The behavior of short-term real interest rates
after a bust depends on the asset class. In the
case of equity price busts, rates typically fell after
the event, which is consistent with the ensuing
decline in output growth and monetary easing,
while their behavior before the event did not
indicate a clear pattern. In the case of housing
price busts, however, short-term rates clearly
increased prior to the event and remained about
constant thereafter, which is consistent with the
notion that the bust may reflect monetary policy
tightening.”
Damn were they right on that one! The bubble didn’t start to crash until the Fed started raising SHORT term interest rates. (And I would think that the Fed might stop raising rates after the next meeting of two.)
On a more positive note I am glad that Helicopter Ben is in charge at the Fed right now. The MAIN risk that the IMF report shows is that if the bust spreads and causes banking problems and runs on banks is where you have problems. I think that hiding the M3 numbers means the Fed sees this coming also and is getting into a position to put cash into the banking system as the lender of last resort. (Sorry all you gold guys {and gals}, but I think the gold run is just about over. Sell now.)
There are plenty more nuggets of good information in the IMF article that EVERYONE on this blog should be checking out. Ben, if you haven’t looked at it yet you really should.
Until later.
Eric in DC
Thanks GetStucco! I read the great article/study from the IMF that was posted above. If anyone is still reading this thread I would HIGHLY recommend searching it out and reading it. I wish I had read it two years ago when it came out. Once again, goes to show that history DOES repeat itself.
“When Bubbles Burst”
IMF World Economic Outlook, April 2003
http://www.imf.org/External/Pubs/FT/weo/2003/01/pdf/chapter2.pdf
(Caution: The link is to a pdf file)
I just want to say that I am a doom and gloom guy, but also a trained economist. I have been talking about and acting on the housing bubble for a couple years now. I have been correct so far except for the timing. The IMF article really clears up some of the timing issues with really good numbers.
Take this little nugget from page 11 for example:
“The behavior of short-term real interest rates
after a bust depends on the asset class. In the
case of equity price busts, rates typically fell after
the event, which is consistent with the ensuing
decline in output growth and monetary easing,
while their behavior before the event did not
indicate a clear pattern. In the case of housing
price busts, however, short-term rates clearly
increased prior to the event and remained about
constant thereafter, which is consistent with the
notion that the bust may reflect monetary policy
tightening.”
Damn were they right on that one! The bubble didn’t start to crash until the Fed started raising SHORT term interest rates. (And I would think that the Fed might stop raising rates after the next meeting of two.)
On a more positive note I am glad that Helicopter Ben is in charge at the Fed right now. The MAIN risk that the IMF report shows is that if the bust spreads and causes banking problems and runs on banks is where you have problems. I think that hiding the M3 numbers means the Fed sees this coming also and is getting into a position to put cash into the banking system as the lender of last resort. (Sorry all you gold guys {and gals}, but I think the gold run is just about over. Sell now.)
There are plenty more nuggets of good information in the IMF article that EVERYONE on this blog should be checking out. Ben, if you haven’t looked at it yet you really should.
Until later.
Eric in DC
Sorry About The Double Post.