A Housing Bubble Built On Falling Wages?
One reader suggested a thread about incomes and home prices. “Let’s discuss the latest report showing median incomes declined: ‘Income growth was held back in from 2001 to 2004, largely because of a 6.2 percent fall in median wages, the largest source of family income, the report said.’”
“While there is a difference between the median and the average, I think this shreds any arguments that housing prices have gone up due to the fundamentals of rising incomes. Lax credit standards and the willingness to levarage based on creative finanancing, are the clear reasons why housing prices have seen their steep rise. There seem to be few other contributing factors.”
From the link, “Americans may feel much richer because of soaring home prices, but they’re not. U.S. families’ wealth stagnated during the economy’s recession and recovery from 2001 through 2004, as lackluster wage growth, sagging stock prices and rising debt levels offset the gains from higher home values, the Federal Reserve reported yesterday.”
Another saw a related topic, “Others have speculated on this blog about where the next bubble will happen as money flows out of RE. In yesterday’s WSJ, an article pointed out that trades by individual investors at discount brokerages rose 30% to 40% in January over December, and money flowing into stock mutual funds last month was at a near record level. Charles Schwab reported $4.5 Billion in inflows, the highest amount since February 2000.”
“So the question is, are we headed for another stock bubble? Heaven forbid, are in-duh-viduals using HELOC money to buy stocks?”
Some individuals, maybe, but more likely, the “smart” money that cashed out of RE early last year or even the year before.
If it’s smart money that cashed out over the last 24 months or so, why is it suddenly flowing into the stock market just now? It seems to me that the smart money re-entered the stock market in 2003 or so.
The smart money isn’t in the stock market either. A recent Economist magazine had a good article regarding the inverted yield curve and what it could mean for the near future. The current stock market increase is likely not based on fundamentals. Witness falling wages, GM & Ford against the ropes, rising energy costs meaning inflation, etc., so I’d say the Wall street sharks are going to swallow more of the guppy’s equity.
A lot of smart money came out of stocks to flip RE. Now that money is being put back where it come from.
OT, but if anyone has the text to the Business Week interview with the Countrywide CEO, please email it to:
thehousingbubble@gmail.com
Lets see…02 buy a property, 03-cash-out refi and buy another property, 04-cash-out refi and buy two more properties, 05-cash-out refi and buy three more properites, 06-cash-out refi and er..ok..real estate is going down…uh..lets see..ok..I’m up s*it creek cuz my I\O loans are adjusting..what do I do? Oh no, I need to make money quick, I’ve got it..DAYTRADING! Yea, the stock market, that Cramer guy is great, MAD MONEY baby, thats the ticket..yeeehaa. What’s wrong with that?
Jim Cramer doesn’t advocate day trading. He doesn’t advocate buying and holding for 10 years either. Mad Money is a great show
I know, didn’t mean to imply Cramer advocated “daytrading” he really advocates “swing trading.” I am a big Cramer fan, but be careful when he turns on a stock..whammo..the guy can create or destroy billions in market cap in like two seconds.
If you go back ~10 years, there was the classic Dan Dorfman ‘effect’, when he was a commentator for CNBC. Dorfman had such influence that it was common to see prices on his stock pics react dramatically.
If you go back ~20 years, there was Elaine Garzarelli, who correctly called the ‘87 crash when she was a stock analyst.
These, and other stock gurus such as Joseph Granville, usually get some degree of notoriety with a correct call on a major market turn (probably by coincidence), but then never can follow it up.
Cramer is CNBC’s stock guru de jour, but I find many of his picks in biotech (my speciality) to be extremely problematic. Biotech, as a whole, has never lived up to it speculative promise. My particular problem with Cramer is that he knows almost nothing about biotechnology, which can be deadly in a field filled with so many hucksters.
Cramer’s only criteria for stock-picking is price direction. If a stock is going up, he likes it. If it’s going down, he doesn’t like it. He may not advocate daytrading, but you need to be a daytrader to take advantage of his attention-deficit-disordered stock touts. He does zero homework other than a quick look at a chart (short-term chart, of course.) That’s why so many of his picks blow up because he has no idea what he’s touting. Be very careful playing his picks. There are a lot of sharpies out there who are preying on the Cramerites. If you play one of his picks and it goes up, make sure to sell with a profit. Don’t wait around for the other shoe to drop.
All aboard! House of pleasure! Buy Buy buy!
Have you ever watched the ticker on the stock he recommends? Somebody must be making some huge money on his picks. I wonder if he tells all his buddies at cnbc his picks before the show starts so they can make some mad money baby!!!!
He gives a 5 day notice to what and how much of a stock he will buy. I believe he is totally legit- he gives insights into how pros think. Buy into weaknesses and sell into strengths.
So for housing you should have sold ‘into strength’-2003-2005-while it was strong. And when everyone thinks housing is waste of money it’s a big money pit, but there is a potential catalyst for it to go up, e.g. renting is more expensive than owning, you should buy.
I like cramer and watch the show. I read his book and do beleive he is smart guy who knows alot about the market. I just wonder about insider information though. I guess i’m a skeptic in some ways. I would not be buying a stock he mentions right after he says it.
I had some JDSU one day recently I paid 2.75 for. I was able to sell it for 3.10 in the aftermarket after he pumped it on that ridiculous carnival of a show and got it back at 2.75 less than a week later.
I don’t think you get it. The important part of the show is the thinking that he explains on why an investment is a good one. For example, if you read in a government journal the U.S. govt is intersted in buying widget A’s and there is one main buyer that has the capacity to manufacture widget A’s, then that’s a good opportunity. He says repeatedly buy and homework.
We all agree we’re in a housing bubble cause many people just followed the herd and bought without doing their homework. Jim Cramer shows you how to do homework with stocks.
I get it just fine, thank you very much. Anyone who pays any attention to Jumbo for anything but a quick flip is a bigger clown than he is and that’s saying something. We’ve been fading that bozo long and short for years and have done very well.
Txchick57,
Your language of carnival, bozo, “bigger clown than he is” shows a serious lack of maturity.
Right on! Cramer is just another carnival barker. Using his picks, you’d have lost everything months ago.
it seems all the Re geniuses on tv want you to order your course and daisy-chain one property after another. remember lereah saying if your house was paid off you did something wrong?
Most of the new jobs created are directly related to housing industry. The housing sector is leading the economy! If housing falters the economy takes a nose dive. There is way too much reliance on housing right now. I’m not sure what people in housing are going to do when the bubble pops.
As inventory grows in places like Boise Idaha, Boston, Miami etc, it becomes obvious that the old mantra “real estate is local” is no longer true. The cost of housing is affected by many things, and it is no longer local. When this house of cards falls, it’s going to hit everyone.
Lots of RE investors are now so used to double digit appreciation of the homes they own that there is no compelling reason to work for fixed wages any more.
Yes, with the bubble it’s become passe to work for living when buying a house can provide 10K/mo in appreciation. Happy HELOC Days!
The stock mkt hasn’t done much the last 5 or 6 years. Money poured into anything real estate. But now the bond bull mkt (20+ years) and the RE bulls are just about done. Money will quite naturally go where its treated best.
Since stocks haven’t done much these last 5 years, I think money will start to flow back into equities. Many solid funds with 70 year lives have a lifetime return of around 12 or 13% (dividends reinvested). The stock mkt as a whole is around 10%.
Despited the massive run up in the 80’s and 90’s, much of that has been absorbed and its likely time to “revert or return to the mean.”
My own fund has quietly done about 6% already this year and its not even March. I hope it slows down and does about 1% a month and I’ll be quite happy. (CWGIX)
Yes they have. Gold has shot up. Emerging Markets shot up. Last year I did well cause I did the research and concluded that gold and emerging markets would do well. In a nutshell, gold because of inflation, and emerging markets cause the costs are so damn cheap there.
It hasn’t? Geez, I know of many many stocks that have been 10-20 baggers off the 2002 lows. The nasdaq has doubled. The Dow and Russell are near all time highs. What do you want? BTW many of these gains far outstrip RE gains made from buys at that time. Dirty little secret of the “investment” world.
There is one little problem regarding the performance of the stock markets. You’re forgetting that the numbers in the markets are based on the US dollar. Just because the numbers are higher (11,000 for DJIA) doesn’t mean that it’s necessarily better. In fact, this is serious indication of inflation. Dollars that are created from thin air by the Federal Reserve System. You can always use historical data to calculate the gold/DJIA ratio. You will find that the number of ounces of gold it takes to buy the Dow Jones (like so-many ounces to buy 10,950, for example) has been DECREASING in the last 5 years, which is how long the precious metals bull market has been running for. It looks like precious metals have another 10-15 years before it runs its course and something else comes up from behind to take its place.
Stephanie
“Money poured into anything real estate.”
No, it didn’t. This is the problem. I said it before and I think it is worth repeating. If money had poured into real estate there wouldn’t be a problem, the problem is that credit/dept has poured into RE causing inflation in that area. If everyone had to pay cash (ie “money”) for real estate, the prices would be very low compared to what they are now.
The stock market has only gone through the first stage of the bear market; the main part of the correction that began in 2000 is still coming. ALL manias end up at prices lower than the starting place and with nearly everyone believing that whatever the mania asset was is the worst inverstment you could buy. The stock market didn’t even come close to that point. Your fund has been enjoying the tail end of a large bear market rally. If you have very much money in equities you should think about doing more research in this area. I really recommend Robert Prechter’s book “Conquer the Crash”. You might be able to get it from the library. His timing tends to be early, but his evaluations have been right on, predicting the huge bull market of the 80’s and 90’s and the coming crash, too, including the RE crash.
Thanks, Kim, for making me feel less alone in my pessimism!
You’re welcome, but I don’t feel that I am a pessimist and you probably aren’t really one either. I just believe that the economy is off balance and unhealthy and needs a chance to correct itself so that we can get back to a productive environment.
Kim, I agree with you about the stock market to a degree. In Bulleye Investing by John Mauldin, there is ample research that shows that from 2000 to 2010, you’ll make higher returns in a money market fund than you will in the stock market.
The stock market mania that ended in 2000 is going to take 10 years to burn off.
oh god, I think you folk who are calling this new influx the effect of Cramer are right on…that and some ’smart money’ folks who cashed out earlier. It’s not exactly daytrading, the time windows can be more like condo-flipping periods, *perfect* for those who were cashing out and refinancing and buying more. And it’s sexier than hitting those granite countertop installation shops some more, surely!
It would just be really scary if it were HELOC people doing it, but who knows. If some of them were planning on using that credit to put in new kitchens and now realize they won’t see that money back in homesale price, maybe they’re hoping to “diversify” with their funnymoney til the little blip in buyer sentiment ends and they can make RE money again!
The Ann Arbor news has been running a graph in one of the realtor’s sunday open house listings, showing how there just isn’t any need to worry…”don’t let a challenging moment in the market stop you from getting in…this too shall pass” literal copy. They show how the average price (mean) of a house in town has recovered well after periods of downturn, and how despite little flat spots, mean price has increased 98% from 84 to 94 and 110% from 98 to 05, blah blah, so *please* come look at some houses with us!
cheers!
Those who are looking for some insight into how likely things are going to playout from this point onward, please visit the following site and listen to the audio interview:
2nd Hour Guest Expert
Marc Faber, Ph.D. “Dr. Doom”
Topic: The Road to Ruin
2nd Hour Guest Expert
Marc Faber, Ph.D. “Dr. Doom”
Topic: The Road to Ruin
http://www.netcastdaily.com/fsnewshour.htm
Faber is great. I tend to disagree with his hyper-inflation first hypothesis though. I think deflation will hit and then the FRB will monetize debt as a last ditch effort to save the banking system.
The money does not move from one asset class to another. Think about it. Before the money goes anywhere, you have to sell it. RE is an illiquid asset class. Some who sold at the top will be able to move their profits into other asset classes. However, the vast majority will not be able to sell at a profit (especially the late-comers). Some will panic and sell at a loss, others will end up defaulting. A virtuous cycle of expansion will become a vicious cycle of deflation, a classic liquidity squeeze. This will be bad for ALL asset classes.
This will be bad for ALL asset classes.
I think you’re right. Soros says a recession will come in about a year. It’s tough though to put money in bonds and money markets where the earnings are so small.
Don’t feel so bad. Even with negative real rates, the money market has out-performed the DOW, S&P and NASDAQ for over 6 years now.
“All asset classes” includes bonds. And be careful of money market funds, you can lose money in them. Some will be OK and others not. In my opinion, short term t-bills are the way to go right now, and the rates are better than the government bonds anyway, and they are short term enough to be pretty liquid.
“In my opinion, short term t-bills are the way to go…”
Good advice here!
I opened an account at treasurydirect.gov and set it up to keep reinvesting in 4-week Treasury Bills. I’ve been getting annualized rates of 4.3%, and the money can be yanked out with no penalty within a month if some sort of crisis develops (loss of job, medical bill, dollar crisis, etc.).
Their website is actually quite nice. I have the feeling we paid a fortune for it.
Well said. Those who predict any buying binges later on when prices go down also forget the huge number of speculators, and upside-down mortgage holders who will be removed from the buying pool, possibly forever. It is sad and scary to think that many of these folks will be those first time home buyers naive enough to believe their mortgage brokers’ b.s. Enter the sharecropper society….
Another downer for stocks are people who sell stocks to pay off debt. Some people will need to liquidate whatever assets they have to stay solvent. Not most people, but I think there will be enough desperate Donald Trump wannabes having to do this to have an impact.
You are correct about money flowing in and out of asset classes. On the margins, you might see some asset allocation back into stocks. But the institutional money (pension funds, life insurance, etc) in RE pales in size to that in stocks or bonds. So a RE downturn wouldn’t have a significantly positive inflow impact on stocks. Most of the asset allocation is b/w stocks and bonds.
As far as individuals go, they make up a tiny pct of the $$ in the stock market. Joe6Pack doesn’t have any money to put into stocks anyway, outside 401k contributions. The folks watching Cramer are basically daytrading, whether they realize it or not. This is not “new” money entering the market, but money that is already dedicated to stocks. It’s just shifting from one stock to another, or from a brokerage cash account to stocks and back again.
The only way you might see money flow into stocks from Joe6Pack would be if everyone sold their home for a big gain and decided to rent or move to a cheaper area, and put the remainder in stocks. I’d give that scenario about a 1-in-1000 chance.
Here’s my crazy conspiracy theory:
Deflation is accelerating due to a technology. Low end computers used to cost $1400, long distance phone calls weren’t cheap, servers were tens of thousands of dollars, etc. That efficiency trickles down to all areas of the economy.
Everybody assumes Chinese employment is kicking butt but they’re learning to automate things there too. Think ATMs, theater ticket robots, Roombas, etc. but applied to manufacturing jobs (see Chinese unemployment soars)
The Fed can print money but they can’t control where that money goes. In this case it’s housing and not wages. The fact is our global economy has advanced to the point where having a high school diploma in America is becomming more and more useless. Capitalism leads to haves and have nots but the have nots in our case have TVs(more than half of those below the poverty line in America have TVs) and cars.
The point is that the median house price should have been declining since about 2000. The fact that it hasn’t means that the correction is going to be worse than a simple return to where it would have been assuming appreciation of 5%. It could return to 2000 levels and then some.
The Fed is fighting a losing battle because their tools are too blunt. Deflation is a natural thing, prices get lower as technology improves. That’s not good for the banking industry so the Fed(a banking cartel) and their partners in Congress(beneficiaries of the Fed printing press) have an inflation target of 2%. The global fiat currency fiasco is almost over, the return to sanity isn’t going to be pretty.
I’m looking forward to a gold backed currency, lower prices every year(deflation), etc. Yes there will be massive unemployment but the unemployed won’t starve, they just won’t have BMWs.
yes computers and etc are deflating, but energy is going up and up and up, and food is getting more expensive. think about it, the cost of a household-average computer has been halve this past ten year (more or less), how often do you buy one? compare that to food going up 10% per year, and gas going up (…plug in your number) that you need to buy every week or so?
But I think technology can help in the areas of food and energy, too. Energy costs are so high because there’s a decreasing supply of oil mainly controlled by regions that have political and economic ‘competition’ with the US. (Venezuela, Middle East, Russia, etc.) And sadly, humanity has not really put full blown resources into discovering affordable, renewable energy. I tend to think that one day technologies will be discovered that allow for a safe, renewable, relatively fixed-cost energy source.
Ditto on the food front. I heard that today we produce more than five times the amount of food per acre than 25 years ago. (Heard that stat on the news, don’t know how true it is.) Why are prices going up? Beats me. I’d guess increasing energy costs, governmental policy, increased labor and marketing costs, and so on.
Energy costs are a major input into food production, and have doubled for the farm I work for, since last year. Labor is getting to be a problem because the Mexicans that do most of the work are getting better money in construction. A lot of farmers in around here have been selling off land for development, because they aren’t making it. Big chains like Wal Mart have them by the short and curlies on price, so they are clearing less and less.
Meanwhile, we breed like rabbits, pave over good farm land, and import our food from other countries You think food is expensive now…just wait until supply actually becomes a problem, and we are invading countries to protect our food supply.
Macrostupidity.
The U.S. has been running an agricultural trade deficit now for more than 18 months, and the deficit looks like it’s increasing too. The administration is also ready to begin cutting back on farm subsidies, slowly at first but increasing over time.
Increased energy costs,wages etc. Sounds like inflation!
Nice post Kirk. The value of unskilled or marginally skilled labor is declining by the minute, not just because of direct replacement by technology, but also because technology allows sourcing of labor to the lowest cost centers. Friedman’s recent book makes a similar point that it’s now much better to be a top student in China than to be a marginal C student in the US. But at the same time that technology is making life better with cheaper products, we’re running up against the limitations of natural resources (e.g. peak oil) and likely commodity prices will skyrocket even as electronics become fantastically inexpensive. Since new housing construction has high natural resource inputs, I suspect that housing costs may not drop as much as we’d hope in the long term, though in the short term, I’m a believe in the bubble and expect a major 20%+ correction.
For the past 6000 years of recorded human history, transportation costs created limited monopolies for almost every local business. Those costs have evaporated with the internet and associated boosts in logistics. There is no reason that a Top Student in China, India or Russia should face a differing set of returns from one in the US. As western nations begin to fully process this difference, I suspect most will follow the French model (with market restrictions placed on hiring non-immigrant labor) and extending the limited monopoly. Ultimatly the main variable in local rents will be land value, and it is bound to drop in western cities and rise in emerging markets. I find it interesting that GS (the savvyist of WS savvy) is leasing their new NYC building but bought their building in Bejing.
While writing my earlier post, I was thinking that as Americans see their first-world standard of living under threat, we’re likely to see a rebirth of socialism, or elements of it, whether the French model (as you suggest), protectionism, increased government limits on hiring/firing practices, or all of the above. Even if a pure laissez-faire approach maximizes profitability and productivity, Joe average voter may opt for more predictability and certainty. Whether that’s a good idea or not is a whole other topic, but I bet it will happen.
Interesting observation on renting in NYC vs. buying in Beijing. I’m sure that it’s based on sound bottom-line costing on the part of GS. I wonder if they’ve included risk calculations for political uncertainty in China. Probably so.
The average American is too myopic and greedy to support socialism.
In America its Socialism for the Corporations; Capitalism for the working class.
“…I’m a believe in the bubble and expect a major 20%+ correction.”
Maybe for the midwest, but since we have seen 20% YOY increases in the coastal markets, I’d think a larger drop is in order; the music will stop when the ARM paper starts adjusting.
Yeah, no doubt that there will be a “reversion to mean”, which will be a lot more than 20% in some markets. Living in Texas, I sometimes forget just how crazy it’s gotten elsewhere (though we certainly have our pockets of pricing insanity here too).
Everyone, recite this until you can do so from memory. I don’t know how blunt the “tools” are, but get this - the fiat currency Captain Kirk is referring to is simply adult play money, money real enough to get people killed, lives ruined, worlds ruined, ad nauseum.
I would like to see someone go back in historical data and find out how much gold it took to buy a house in the past versus now.
Stephanie
Low wages, no problemo, we can just keep extracting every-growing equity out of our homes, right? And in case you worry this trend is getting out of hand, you might want to check out what Christopher Cagan at First American has to say about this in a recent study (cited in the following Kenneth Harney article):
——————————————————————————-
NATION’S HOUSING KENNETH HARNEY
Many new borrowers are flirting with negative equity
February 26, 2006
WASHINGTON – Billowing appreciation rates have been the hot news in home real estate for much of the past three years. But now, with many of the most effervescent local markets in a cool-down phase, the focus is turning to something much more fundamental: homeowners’ equity stakes.
How big is your home equity cushion? How much more is your home worth compared with the debts you’ve loaded on it – primarily your first and second mortgages and credit lines? Do you have a 20 percent equity stake? Less than 10 percent?
The popular image is that America’s homeowners are turning into debt junkies, hocking their houses to the hilt, and are banking on double-digit appreciation rates to bail them out. But a comprehensive new analysis of home equity holdings nationwide suggests that the reality is much more nuanced. On the one hand, it is true that a surprisingly large percentage of recent home buyers are reporting minimal – even negative – equity levels. On the other hand, most homeowners have substantial net equity holdings – a record $11 trillion, almost double what they had just five years ago.
http://tinyurl.com/h8rok
——————————————————————————–
P.S. Don’t overlook the strawman characterization of the “popular image” — if this were as popular as the author asserts, then there would not be so many fools making the same mistake…
Come on, are some of you actually trying to say that Jim Cramer is an honest friend of the average investor?
Please.
Cramer is just like any Wall St. salesman. He is looking out for himself. His public track record is terrible.
He’s just like Dr. Phil, Suze Orman, et al. Focus on the correct calls, and ignore the incorrect ones. It’s not to difficult to do, when you control what gets said on the show.
There are plenty of people on the web who track Cramer’s stock picks. Look it up. He’s not even batting .500.
If you are going to make predictions, I suggest making a very diverse range of them, then only reporting after the fact on the ones which pan out.
You can make money on Jumbo. By fading him.
I totally agree. I’ve watched him a few times. He is very smart, but I would not rely on his info. Use it as a tool and nothing more.
Last night I saw SUZY and she said and posted that RE values were going DOWN in ‘06 and ‘07. Is is a coincidence that she is on the same tv channel as Maria and Cramer?
Was telling call in sheeple to refi to fixed rates and get out of neg ARMs and IOs. Pay off HELOCs. She is UnAmerican. 
I don’t think Cramer is crooked. But his friends are. Not to mention all of Wall Street. It’s institionalized theft. During bull runs, the avg Joe gets to shares in the looting. At other times, Joe gets the shaft. Remember there are always two sides to every trade. When Cramer reco’s some bogus company and the stock jumps $5 the next morning, be aware that someone is SELLING you that stock. They want you to have it. That’s why it’s exceedingly important to remember to SELL when you have gains on speculative daytrading-type plays like Cramer reco’s.
For anyone who is under the impression that Cramer is a great stock market guru, please read the many Internet links to his work over the past seven years and note just how abysmal he is at key turning points in the market. Anyone can be a genius when stocks are going up. But it takes a lot of experience and knowledge to be able to invest safely. Cramer is always mega-bullish at turning points—right before the market hits the skids. And guess what, Cramer is mega-bullish right now.
I am trying to track down the “Mike from Texas” who was on the Peter Schiff show last Wednesday. He referred to this site so I thought I would post this to see if I can make contact with him.
anyone have a wage number w HIC & MIC deducted- WOW
bet real wages are off10% or more
And rents are going to go up in this environment?
Note income by age of household head. Those under age 45 are getting poorer. Those 45 or over are getting richer.
This country has a horrific generational equity issue. You can’t screw future generations and expect to sell your house to them at a high price.