October 1, 2009

The Biznestate Cycle

-by the Mysterious Flying Miser

I recently had a discussion with a friend about the difference between real estate cycles and real estate bubbles. I thought it would be a good idea to look a few of them up and perform an analysis that might provide some differentiating characteristics. Interestingly enough, what I came across were a few articles layering the concepts of bubbles and cycles in a completely unexpected way.

Firstly, I found the following at http://www.foldvary.net/works/cycle.html, by Fred Foldvary, an economist at Santa Clara University:

Table 1. The Real-Estate Cycle in the US

Peaks in Land Value (Years) Interval Peaks in Construction (Years) Interval Depressions Interval
1818 1819
1836 18 1836 __ 1837 18
1854 18 1856 20 1857 20
1872 18 1871 15 1873 16
1890 18 1892 21 1893 20
1907 17 1909 17 1918 25
1925 18 1925 16 1929 11
1973 48 1972 47 1973 44
1979 6 1978 6 1980 7
1989 10 1986 8 1990 10
2006 17 2006 20 2008! 18

“Real-estate values and construction have peaked one to two years before a depression, and have stayed at peak levels until the onset of the downturn. The historical evidence is consistent with the theory that speculative booms in real-estate prices and construction act as an impetus for the downturn itself. For an explanation, see my article: “The Business Cycle: A Georgist-Austrian Synthesis.” American Journal of Economics and Sociology 56 (4) (October 1997): 521-41. An updated explanation (2007) is in my booklet, The Depression of 2008, by the Gutenberg Press.

I was surprised to find this table (referenced by multiple other authors), since I have been so imbued with the mantra that “there is no national real-estate market”. According to this dude, not only is there a national real-estate market, but it has been tightly predictable and consistently linked to the US business cycle for about 200 years.

The thing about this table that immediately stood out to me is that our two great real-estate bubbles (today’s bubble and the one preceding the Great Depression) both occurred on time for a normal period of the real-estate cycle, indicating these bubbles were no more than exaggerated versions of a completely periodic event.

The second thing that stood out was that the normal 18-year interval between house-price peaks was only disrupted immediately following the Great Depression. Presumably, the long rise in prices was potentiated by the steep drop preceding it. So what does that say about prospects for future house-price moves in this country? Should people who invest in US real estate immediately following the current crash expect to enjoy steady, long-term appreciation?

Upon further investigation into the above blatant and simple dataset, I came across a 2007 paper, entitled “Housing is the Business Cycle“, by Edward Leamer of the Kansas City Federal Reserve Bank, the partial introduction and conclusion of which I have manually typed (you’re welcome) below:

Introduction

“Indeed, if you look up ‘real estate’ in the index to Mankiew’s (2007) best-selling Principles of Macroeconomics, you will find real exchange rates, gross domestic profit (GDP), real interest rates, real variables, and even reality, but no real estate. Under “housing”, you will find a reference to the consumer price index (CPI) and to rent control, but no reference to the business cycle. I have not been able to find any macroeconomic textbook that places real estate front and center, where it belongs

“But it’s not just a problem with our theory. The National Bureau of Economic Research (NBER) macroeconomics data miners have largely missed housing too. The index to Vector Zarnowitz’ (1992) Business Cycle, Theory, History, Indicators, and Forecasting has no reference to real estate or housing. (Actually, there are no ‘h’s in the index at all). Likewise, the index to James H. Stock and Mark W. Watson’s edited volume, Business Cycles, Indicators and Forecasting, has no references to residential investment or to housing. Housing is treated with the same level of interest that building permits has in the index of leading indicators: one of many things that might predict a recession, about as interesting as x7 in the list x1, x2, x3, …,x10.

“There is substantial, mostly older literature on the modeling of residential investment (e.g., Alberts 1962, Fair 1972, Ketchum 1954, de Leeuw and Gramlich 1969). This literature takes the overall business cycle as a given and explores the effects of income and interest rates on residential investment. By including interest rates as explanatory variables, this literature does explicitly explore the link (between) monetary policy (and) housing, but when Maisel (1967), for example, reports that residential investment is an important channel through which monetary policy affects the economy, that finding is treated like the discovery that alcohol (exerts its effects) by depressing the central nervous system, which is a mildly interesting fact that doesn’t at all affect how much we drink. Another round of grog, please.

“Something’s wrong here. Housing is the most important sector in our economic recessions, and any attempt to control the business cycle needs to focus especially on residential investment. But housing presents a special control problem because monetary policy affects mostly the timing of the building, but not the total building. After a surge of building, there has to be a time out, like we are experiencing today, before building can get back to normal and before this channel through which monetary policy affects the real economy is operative again. The Fed can stimulate now or later, but not both.

“The difference in the dynamics of inflation and housing create a problem for the conduct of monetary policy that is aimed at both inflation and housing-related employment. Inflation is very persistent, and needs to be fought every day. For housing, it’s the cycle that is persistent. Once the cycle starts, it keeps on going, like a pebble thrown into a smooth pond of water. The best time to fight the housing cycle with tight monetary policy is when the wave is starting to rise, not when it is cresting. The worst time to stimulate the economy with loose monetary policy is when the wave is starting to rise. That is going to make the crest all the higher, and the crash all the more catastrophic. You know of which I speak, I suppose.

“To put the point as clearly as possible, what I am advocating is a modified Taylor rule that depends on a long-term measure of inflation having little to do with the phase in the cycle and, in place of Taylor’s output gap, housing starts and the change in housing starts, which together form the best forward-looking indicator of the cycle of which I am aware. This would create pre-emptive anti-inflation policy in the middle of the expansions when housing is not so sensitive to interest rates, making it less likely that anti-inflation policies would be needed near the ends of expansions when housing is very interest-rate sensitive, thus making our recessions less frequent/severe.”

Conclusion

“The Pertinent Facts: It’s a Consumer Cycle, not a Business Cycle

“Housing makes an incidental contribution to normal economic growth. The average growth of GDP since 1947 has been 3.47% per year. Only 4.6% of that growth has originated in residential investment.

“Though unimportant in normal periods, weakness in housing is a critical part of US economic recessions. Excepting the DOD downturn in 1953 and the internet comeuppance in 2001, problems in residential investment have contributed 26% of the weakness in the economy in the year before the 8 recessions since World War II, and 11% of the weakness in the 2-year periods commencing with recessions.

“Most of the other leading weakness is also on the consumer side. In the years before recessions, 20% of the weakness is from consumer durables, 10% from consumer services, and 9% from consumer nondurables. Thus, consumers contribute a total of 65% of the leading weakness. In contrast, business spending contributes only 10% of the weakness before recessions, 8% is from equipment and software and 2% from business structures. Most of the weakness on the business side coincides with the recession rather than leading it.

“The first item to soften and the first to turn back up is residential investment. The temporal ordering of the spending weakness is: residential investment, consumer durables, consumer nondurables, and consumer services before the recession. And then, once the recession officially commences, business spending on the short-lived assets equipment and software, and last, business spending on the long-lived assets offices and factories. The ordering in the recovery is exactly the same.

Policy Targets

1. “Smooth the business cycle.

Happiness and well-being are much affected by the collective unwanted idleness we call recessions. It would be helpful if our monetary authorities could do something to make recessions less frequent, less severe, and more short-lived. Housing surely deserves attention in that enterprise.

2. “Keep us working productively.

Happiness and well-being can also be affected if our financial markets absorb too much of our productive time and energy, and if savings are diverted into unwise real investments. It would be helpful if our monetary authorities did what they could to limit the speculative bubbles that absorb our labor and time and that divert savings into low-yielding investments. Housing surely deserves attention in that enterprise.

3. “Limit the redistribution of wealth caused by financial market disruptions

The part of your wealth that comes deservedly from hard work and special foresight is not a problem for me, but I am made miserable when my wealth is transferred to you by unstable and uncaring financial markets. It would be helpful if our monetary policy makers could minimize the extent to which turbulence in financial markets causes redistributions of wealth from one group to another as, for example, when unexpected inflation transfers wealth from lenders to borrowers. Since housing price appreciation effects a substantial redistribution of wealth from renters (future owners) to current homeowners, housing surely deserves attention in that enterprise.

4. “Keep our balance sheets accurately reflecting reality.

Happiness and well-being can also be affected if we do not save enough to provide for the material needs of our elderly. The real assets on which our future depends are the factories and equipment and knowledge and homes that are needed to produce the GDP of the future. The numerical valuations of these assets that we record on our hard drives are only a shadow of those real assets, a shadow that is sometimes larger and sometimes smaller than the real thing. For us to do our planning correctly, we need these numbers to reflect reality. We want our measured asset values to increase when our investments and discoveries make us confident that future GDP will be greater than we had originally thought. We do not want a monetary system that allows us to put phantom assets onto our balance sheets and that signals to us that hard work and savings are not needed to prepare for our retirements. Housing surely deserves attention in that enterprise. Of particular concern is the fact that, absent a change in the technology for transforming residential land into housing services, the contribution of our residential land to GDP is about the same now as it was 5 years ago, but on our hard drives we are recording real values for this land that are double what they were.”

So, what do you guys think? Is housing the business cycle? If so, should the Federal Reserve try to balance out the business cycle by paying special attention to residential investments?




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106 Comments »

Comment by Professor Bear
2009-10-01 09:51:44

Take-home lessons:

1) Before 1925, there was a near-perfect 18-year US real estate cycle (from 1818-1925). After 1925, the cycle was interputed by policy interventions, such as New Deal housing programs, which laid the foundation for a 48 year hiatus from real estate busts.

2) Unless this time is different, we are likely to see the next peak in land values by 2024 or so (2006 + 18 = 2024).

3) Since this peak was so much bigger than all previous ones, the time the national US real estate market takes to correct and recycle may prove much longer than the typical 18 year period.

Comment by Professor Bear
2009-10-01 10:01:27

Why was the “natural” (pre-1925) cycle 18 years in duration? Perhaps this is connected to the human reproduction cycle — it takes 18 years to breed another generation of greater fools who believe “real estate always goes up.”

Comment by Big V
2009-10-01 10:21:10

That is a likely possibility.

 
Comment by Pondering the Mess
2009-10-02 09:07:07

Considering declining living standards and later age of housing purchases, it may be considerably longer until we see another peak in real estate.

Of course, if the Merry Fools at the Fed have their way, we’ll be permanently flat-lined at “overpriced” forever.

 
 
Comment by az_lender
2009-10-01 11:44:49

I like PB’s (3) — this housing boom was so big that the recovery will take much longer than “normal” cyclical recovery. And/or, the PTB are so anxious to keep FB’s making their payments (thus propping up the banks) that they will do anything to slow the bust, with the result that the bust will be very protracted.

I looked up Fred Foldvary and see that he’s only a few months younger than I am, so I am surprised to see him attributing the 1973-75 bust to housing. That wasn’t my impression at all. House prices had been rising in the 60’s and early 70’s, but not out of line with rents/incomes. My husband and I bought a house in 1972 for about 6 or 8 times the likely annual rental rate. The oil shortage of ‘73 seems a more memorable precipitating event. In any event, I am highly suspicious of the premise that “housing IS the business cycle.” It’s only been in recent years that housing replaced all other productive endeavors in the US.

 
Comment by alpha-sloth
2009-10-01 13:39:30

My take home impressions:

1) Wow! Sure were a lot of depressions back in those free market, gold standard 1800’s! (Oh, that’s right- they flew by back in those days.)

2) Must have been CRA’s back in the old days, too. How else could we possibly have had so many RE bubbles?

3) Perhaps it was the (shudder) *regulations* placed on the banking world by evil FDR during the last GD that interrupted the ‘normal’ 18 year RE boom/bust cycle? (At least as likely a cause as ‘New Deal housing programs’, no?)

Comment by Professor Bear
2009-10-01 14:30:04

“2) Must have been CRA’s back in the old days, too. How else could we possibly have had so many RE bubbles?”

Are you claiming that CRA’s are a necessary condition for RE bubbles? I certainly never suggested anything of the sort myself…

Comment by alpha-sloth
2009-10-01 15:29:11

then we agree!

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Comment by Professor Bear
2009-10-01 16:16:59

Not necessarily.

I suggested that the CRA may have been a key contributing factor to the current bubble, which is completely different from claiming that one cannot have a bubble without a CRA (the idea you keep bringing up).

 
Comment by alpha-sloth
2009-10-01 17:08:25

I was just trying to determine if you thought we’d have had a housing bubble if we hadn’t had CRA’s. (You never answered.) When you look at the long, cyclical record of RE bubbles in our history, it makes it seem unlikely there was a different and distinct ’cause’ for each one, but rather something more fundamental at work.

 
Comment by Professor Bear
2009-10-01 17:14:47

“(You never answered.)”

I think I did answer, but to reiterate, the fact that there have been numerous financial booms and busts going back all the way to the dawn of trade and that CRA was a recent invention suggests that CRA was not necessary for a bubble to occur. But this is not to say CRA did not have any impact. For instance, a requirement to lend in areas where private firms would otherwise choose not to lend tends to result in a relaxation of underwriting standards.

 
 
 
Comment by Professor Bear
2009-10-01 14:31:44

“…*regulations* placed on the banking world by evil FDR during the last GD that interrupted the ‘normal’ 18 year RE boom/bust cycle?”

Fair enough. It is easy to see the cycle’s disruption, but far more complicated to say whether things got better or worse thereafter…

Comment by alpha-sloth
2009-10-01 15:35:06

I don’t think it’s hard to perceive that things got a LOT better in the US from the GD to the present. In fact, if the entire run was based on ‘voodoo’ economics, or fiat currency, you’ve nonetheless got to admit, it was one of the best runs in history. And probably worth it.

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Comment by Professor Bear
2009-10-01 16:18:34

“I don’t think it’s hard to perceive that things got a LOT better in the US from the GD to the present.”

Oh really? Then how come our manufacturing, finance and construction sectors are FUBAR?

 
Comment by alpha-sloth
2009-10-01 16:28:38

I’m not saying we haven’t finally skrewed the pooch pretty good, but going from the destitution of the GD to being the richest, most powerful country in history, was quite a run. And I’m not so sure we’re done yet.

 
Comment by Professor Bear
2009-10-01 17:17:38

“…going from the destitution of the GD to being the richest, most powerful country in history, was quite a run…”

It is hard to attribute causality to a single data point (the history of the US economy from the 1930s to the present). For instance, was it the smoothing of business cycles or the destruction of rival nations’ capital bases or something else that explains US success?

 
Comment by alpha-sloth
2009-10-01 17:58:37

Well regulation sure didn’t hurt,eh? And it coincided coincidentally with a period when America’s financial markets were the ‘gold standard’ for the rest of the world. And it wasn’t until we relaxed those regulations that it all came tumbling down. So at some point you have to postulate that the regulations may have been a fundamental part of the long period of widely-shared prosperity enjoyed by America at the time. And that it was their relaxation that ended the extraordinarily long period of prosperity they coincided with.

I think your ACORN/CRA argument makes much the same point. You just want us to believe the relaxation of regulations was forced upon us and Wall Street by well connected community activists.

 
Comment by cobaltblue
2009-10-01 18:14:46

The political reality is that when the interests of the criminals behind ACORN actually coincided with the interests of the criminals behind the banksters, bad laws happened.

As a result, criminals looted the Treasury, country, and world; and will probably never do time because of it.

 
 
 
Comment by exeter
2009-10-01 14:34:58

ACORN caused the great depression I declare!

Comment by mikey
2009-10-01 15:38:49

There were bigger NUTS than ACORN that caused this Disaster.
:)

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Comment by rentor
2009-10-01 16:06:41

Because ACORN represented interests of pimps and hooker make better television. BTW what happened to the Wall Street pimps wearing pin-stripped suits? Don’t see them on Kudlow or CNBC

 
 
Comment by Professor Bear
2009-10-01 16:21:20

The CRA caused ACORN. ACORN may have helped encourage many low income households to put themselves on the hook for unrepayable debt, but their macroeconomic impact is clearly limited.

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Comment by Will
2009-10-02 00:14:14

And perhaps it was just the size of the 1928 bubble and the depth of the subsequent depression that caused the recovery to take so many years. Policy actions, good and bad, tend to get way too much credit. Animal spirits, folks, animal spirits.

Actually, I think poor book-keeping and a failure to comprehend compound interest fools so many into thinking that residential housing a good investment time after time.

Bear’s generational learning model makes sense here. How can anybody think that house or even land prices can forever rise faster than everything else? It must be an inbred belief.

Did any of the “me” generation even read about Tom Joad’s farm, much less try to understand why so many defaulted?

 
 
Comment by Housing Wizard
2009-10-01 20:14:50

PB…I would project that 2040 would most likely be the next peak . All that is going to happen until 2024 is a return to the 2005 peak prices .
So ,I think in reality the prices shot up 18 years into the future with this mania of 2000-2007. Prices of 2005 should of taken to 2024 to come about .

 
Comment by ahansen
2009-10-01 22:16:52

How nice it would be if we all lived in predictable economic cycles.

Alas, there are so many variables beyond the control of our abstracts and algorithms, that trying to predict the future on the basis of the past is an exercise in futility. More to the point, it’s just plain dumb to bet against the Fed…which is what our current HFT models rely upon—and why so many of us are in such financial straits.

Comment by ahansen
2009-10-01 22:18:28

PS. Great info in this post, though. Thanks for making me think, Miser. Excellent work!

Comment by Housing Wizard
2009-10-02 06:12:48

ahansen…Well ,I have a theory down below about why at times we depart from the more normal business cycles ,but I agree that it is so complex to try to predict ,especially when you have the interference you talk about .

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Comment by Skip
2009-10-01 10:00:37

But is real estate the cause or the effect?

Comment by The Mysterious Flying Miser
2009-10-01 10:27:39

That’s actually a perfect question. If you click on the link to Leamer’s paper, you’ll see that he explains at length (almost apologizes) why he thinks it’s appropriate to draw a causal relationship from the temporal one described above. In a nutshell, it’s all economists have to work with, since they aren’t able to perform experiments.

In my opinion, we don’t need to prove causation to acknowledge the correlation between the two variables. If we can see that they tend (very strongly) to coincide, and we are aware of a mechanism that would explain that coincidence, then it’s reasonable to predict the occurance of one based on the occurance of the other.

 
Comment by Prime_Is_Contained
2009-10-01 11:44:54

“But is real estate the cause or the effect?”

As with any feedback-based system, the answer is “Yes.”

Comment by Professor Bear
2009-10-01 15:05:46

What happens when a feedback-based system is hyperstimulated for a protracted period of time?

Comment by Carl Morris
2009-10-01 16:21:28

A refractory period?

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Comment by Prime_Is_Contained
2009-10-01 18:40:36

LOL… Close—a _hyper_-refractory period.

So limp it will be quite hard to stimulate for a while.

:-)

 
 
 
Comment by Matt_in_TX
2009-10-03 07:34:09

Maybe we should get the lawyers out of the economic loop and let the controls engineers take over.

Time to analyze this Ecomony thing properly. Let’s see, we have an unknown plant that operates at very low frequency with a widely distributed architecture. It is subjected to random disturbances that are similar to step functions at intervals of 2, 4, 6, and 8 years, and a suspected 18 year sinusoidal input, and a large amount of other noise.

The owners goal is regulation, but large destructive oscillations are commonplace. Strangely, the owners tolerate the managements propensity to use these cycles to enrich themselves. It has heretofore been controlled (using the term in the loosest possible sense) at a 4 per anum rate using filtered signals and compensation-by-commitee using proprietary algorithms by a private contractor. Apparently it is usually treated as a single input multiple output system!

Sheesh. Those guys need better consultants. I haven’t had a chance to properly prepare a bid, but I suspect that we nerds could cause half the havoc at less than half the price you are paying now. Call my people. We’ll do lunch.

 
 
Comment by measton
2009-10-01 13:28:45

Its both
I suspect it is an early indicator of excess credit or easy money and later crushes confidence and spending.

 
 
Comment by Big V
2009-10-01 10:32:55

1. I wonder whether or not there were post-1918 interventions leading up to the imbalances that cuased the Great Depression. IIRC, there was some change in central banking or something after that recession. I should look it up. If so, then we may be seeing a repeat pattern of imbalances building up after interventions, thereby leading to violent and powerful backlashes of natural forces.

2. Notice we had just gotten back to the normal 18-year interval right about the moment that today’s Big Recession began to take place. Could the Big Recession be a sign of the return to normalcy?

Comment by Skip
2009-10-01 11:31:44

V - Although not shown on the chart, there was a depression(depending on how you determine depression vs. recession) in 1921.

From Wikipedia:
The recession of 1920–21 was characterized by extreme deflation — the largest one-year percentage decline in around 140 years of data.[2] The Department of Commerce estimates 18% deflation, Balke and Gordon estimate 13% deflation, and Romer estimates 14.8% deflation. The drop in wholesale prices was even more severe, falling by 36.8%, the most severe drop since the American Revolutionary War. This is worse than any year during the Great Depression

 
 
Comment by New_to_site
2009-10-01 10:41:50

test

Comment by SanFranciscoBayAreaGal
2009-10-01 10:47:27

You passed.

Now get to posting New_to_site. :)

Comment by cobaltblue
2009-10-01 10:59:27

And he can expect some kind of test to his posting authority in the first six months, according to Joe.

-badda-bing-

 
 
Comment by alpha-sloth
2009-10-01 14:04:20

I guess we failed his test

 
 
Comment by southwest guy
2009-10-01 11:10:58

This real state crisis was all about out and out fraud by builders,mortgage companies,appraiser, RE agents and the general public who thought flipping a house was like taking candy from a baby.
All in all most of these folks should be in jail or paying back a whole lot of money for wrecking a very important industry housing and housing values thru out this nation.

Comment by Sleepr Cell
2009-10-01 11:45:43

I agree with you and I also found the periodic 18 year cycle more than a little curious. The fraud aspect of this mess really backs that up. Fool me once, shame on you, etc etc. Kids now (at least those born without the benefit of a silver spoon) will remember how painfull this whole episode was and be reluctant to engage in the same foolish behaviour. It seems perfectly reasonable that it takes a generation to wash that well founded caution away.

Comment by buynhold
2009-10-01 15:38:35

Ooh, good point, there’s alway the next generation who thinks the rules have changed and don’t need to listen to history.
Can’t avoid the cycles, just hope to make them not catastrophic.

 
 
Comment by az_lender
2009-10-01 11:46:58

Agree. In 1973 we did NOT have “flip that house” programs on TV. Mr Foldvary is back-extrapolating present experiences.

 
Comment by alpha-sloth
2009-10-01 14:01:14

When you’re living through a depression, it’s easy to think ‘this one’s different from the others because of x’, but that’s the same mentality that thinks ‘this boom is different from the others because of x’. All boom/bust cycles are characterized by fraud, chicanery, and hubris. It’s the same thing as the previous ones, different in some of its manifestations and severity, but really the same thing.

 
 
Comment by Arizona Slim
2009-10-01 11:18:02

Hey, folks. Got a quasi-business question for y’all.

One of my clients (along with her husband) has been fixing up a house near where they live. They live in one of Tucson’s most prestigious nabes, and the fixup house is a few blocks away.

Seems that the house is fixed up and ready to go on the market. They’ve decided to go the FSBO route, and, given the generally low quality of the local UHS, I agree with that decision.

They want me to design some “for sale by owner” flyers, which I can certainly do. But, since I’m not qualified as an architectural photographer, I’m staying out of the photo aspect, except to recommend that they hire a good one who can get shots that will work well on a flyer. Or on a website. Or a brochure. I know a fellow who does architectural photography and I gave the client his contact info.

If nothing else, I think that they should have the best photographic and design representation for their house. After all, there’s plenty of other houses on the local market. Even in this prestigious neighborhood.

I also think that they’ll need a sharp, ethical real estate attorney on their side of the transaction. What do y’all think of this idea? And how should they go about finding such an attorney. I know a guy who specializes in this area, but I’ve never dealt with him as an attorney.

Thanks in advance, everyone!

Comment by az_lender
2009-10-01 11:50:28

I don’t see why they need an attorney at all. Have done so many AZ transactions with no attorney (sometimes even no title company), that I don’t see the need unless they run into a special problem.

Don’t get me wrong, I LOVE my AZ lawyer. He is great, and his participation always produces cooperation from deadbeats who could actually be paying. I just don’t see what the seller needs a lawyer for.

Comment by awaiting wipeout
2009-10-01 13:51:08

imho, they should use a Title Co and an Attorney would make sure all laws are covered. It’s usually cheaper than making a mistake (green and consumer laws), and having it come back to haunt you. Prudence is honorable.

 
Comment by mikey
2009-10-01 15:49:59

There is a lot of fraud and mischief going on in the RE environment. Paying a trusted RE attorney 400-500$ just to review the contract and documents is just good insurance in my book.

mikey doesn’t buy or sell houses everyday and he sure doesn’t gamble.

:)

Comment by awaiting wipeout
2009-10-01 17:53:38

I’m licensed (Agent) in Ca. and I have my Broker’s education done, and we are using an Attorney when we buy a sfh REO, to review the docs and keep all the players in line. Mikey is right, it’s cheap insurance.

NOLO Press (Self Help Law Firm -website) has some really good FSBO books (even shows docs and instructions/w whys on filling them out). Borders and Barnes & Noble carries them too.

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Comment by mdindestin
2009-10-03 05:20:56

A couple I know bought a house from a bank with a house partially on what they didn’t know was an electric transmission line easement. The power company had not cleared the full width of the right of way and is telling them to remove the house.

Needless to say, these buyers also didn’t use an attorney nor did they use a surveyor or purchase an owner’s title policy.

MD

 
 
 
 
Comment by Kim
2009-10-01 12:02:27

My advice to them would be price it right from the beginning and implement a marketing plan (made formal by putting it in schedule format on paper, with checklists, etc.).

Comment by Arizona Slim
2009-10-02 08:03:24

I’m with you, Kim. And thanks to everyone who replied to my question.

 
 
 
Comment by Housing Wizard
2009-10-01 11:30:49

I think there is a normal business cycle ,but I think you can link the 2
big Depressions (1930′’s and the current one we are in ) to leverage and
over-supply of easy money ,not to mention breach of sound lending principals.

Look at the stock market crash of 1929. Wall Street was selling stocks on margin to anybody and everybody ,which created a Black Swan Mania in the Stock Market . Look at 2000-2008 … excess easy money supply (massive fraud )for leverage from around the World ,that got directed into real estate instead of stocks this time .

So ,to me ,its not just interest rates ,but it’s leverage and easy money and over supply of money that creates these bubbles ,and this one is the mother of all bubbles .

Had they even policed lending from 2002 onward this severe crash would not of happened ,not to say we would not of had a recession, but we could recoup quicker . So, to me the great evil is the times in which leverage is abused along with to much supply of money looking for a place to
park, combined with rah rah cheer-leading for public consumption .
Look at the roaring 20’s and they are similar to this current lead up
in terms of credit expansion and letting the good times roll .Just like a foreign invader you have to watch out for the business cycle wanting to create money that doesn’t exist, so they can sell sell sell .

So control over leverage and easy money is key here in keeping the business cycles more stable . We can start with the Feds not having a conflict of interest in their policies to begin with .

Comment by The Mysterious Flying Miser
2009-10-01 12:03:30

I have to agree about the conflict of interests. Upon reading Leamer’s paper, I couldn’t help but wonder whether Leamer even knows who he’s talking to. The top brass at the Federal Reserve is really only concerned with the happiness and well-being of the chosen few, so the premise of his article would be wholly uncompelling to them. On the other hand, if Leamer is attempting to communicate with Congress (or with people like us), then his message is right on target.

Congress and the rest of us need to understand what the Federal Reserve should be doing before we become capable of noticing there’s a problem.

Comment by Housing Wizard
2009-10-01 17:48:45

Greenspan couldn’t stop the unregulated excess money supply that became prevalent during the boom ,and it would of just kept coming because they were thinking of exotic ways to finance people with toxic loans that had time-bombs for higher interest rates .So,just raising interest rates ,when you can have teaser rate ,wasn’t stopping the mania .

So, while raising interest rates usually curbs inflation of assets,clever designed loan product can keep the fires burning far longer . So,the regulator body would have to have some impact on loan product
as well as the leverage potential of the unregulated banks ,as well as the regulated banks. Also , allowing Investment houses to also play Lender is a conflict of interest that they already enacted regulation against after 1929 ,so that regulation should be brought back .

 
 
 
Comment by Blue Skye
2009-10-01 12:20:05

Cycles! The 18 year cycle is interesting. It’s a multiple of my Ex’s six year manic depression cycle. She was busty that way. Manic sex was something to look forward to during the dark times.

Kondratief was interested in the 60 +/- year cycles. The USA was born at the peak of one of these, relative to the 1720 bust of the South Sea/Mississippi Bubbles. And there was a depression following that party too (the revolution). It gets really scary if you look into the longer wave civilization collapse cycles.

On any frequency you tune to, I don’t see homedebtors getting manic sex for a generation. Maybe a little tease now and then is all.

Government policy cannot stop the tide of human mania.

Comment by The Mysterious Flying Miser
2009-10-01 12:29:04

As Leamer notes, the vast majority of economists and laypeople accept without question the notion of a business cycle, yet many have a hard time with the suggestion that other cycles may be related to, or predictive of, said business cycle.

 
Comment by Sleepr Cell
2009-10-01 13:02:38

“On any frequency you tune to, I don’t see homedebtors getting manic sex for a generation.”

Oh man, Now I’m REALLY bummed ;)

Comment by Olympiagal
2009-10-01 13:47:17

Hello, Hbbers.
So, you know how every now and then someone says ‘LOL, I just spit coffee into my keyboard?’ As a way of indicating what a comical statement someone just posted?

WELL! Giggle no more!

Night before last I started to laugh at something that either tresho or slothy said and I choked on my beer* and then I gargled and bugged my eyes out and flailed my hands around dramatically, still laughing, and then I spit about an eight a cupful of warm and slightly used beer right into my keyboard, and THEN about 10 minutes later the keyboard stopped working in mid-sentence.
I have hopes for it. It’s ergonomic, and cost more. I propped it outside to dry and meanwhile I’m using this keyboard, whcich I dug out of the garage, from my last computer. It’s all icky and with tiny spiders in it, though, which I don’t find to be super delightful.

Anyway, that whole keyboard thing is not an urban myth after all. Make a note of it, pals,and turn your heads when you start to laugh.

* I brewed it myself. I called it ‘End of Summer Boo-Hoo Laundry-room Ale’.

Comment by Olympiagal
2009-10-01 13:52:31

Oh, but my point was, seeing as there’s so many tech folks on Bens Blog, if I rinse my keyboard out in the kitchen sink to get out the stickiness, is that bad? Will I blow up when it dries out and I plug it back in and try to use it?
Tell me right away, por favor. Gracias.

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Comment by Bill in Los Angeles
2009-10-01 15:06:08

I spilled red wine on my ole lap top not once, but twice. Boy was she mad!

 
Comment by ATE-UP
2009-10-01 15:10:27

Oly, I wouldn’t know for sure, but if I remember correctly, and again, I don’t know, if some electronic is “solid state” it can handle liquids?

I would buy a new one, you’re throwing up beer on it all the time anyway. It probably is drunk itself.

Also, thanks for the kind message the other day. I left you a reply yesterday about me an’ Shorty camping out @ Chernobyl…

But, I guess you didn’t get it.

Ya Bud,

ATE

 
Comment by Olympiagal
2009-10-01 15:50:02

I left you a reply yesterday about me an’ Shorty camping out @ Chernobyl…

I should have guessed you guys caused that! I’m gonna go check out your post, and then I shall rebuke you both!

 
Comment by mikey
2009-10-01 15:59:27

Sheesh Oly, maybe you need to a breath alcohol analyzer lock connected to the computer before you before this happens again and you fry yourself.
;)

 
Comment by ATE-UP
2009-10-01 15:59:29

:)

 
Comment by Olympiagal
2009-10-01 16:40:24

Sheesh Oly, maybe you need to a breath alcohol analyzer lock connected to the computer before you before this happens again and you fry yourself.

You sound like you know about these things…;)
(and like you learned about these things this very afternoon…’before you before’?…)

Anyway, I hardly ever drive my computer around recklessly, so I can’t imagine why I would need to not fry myself by accident. Or something.
…Look! Whatever! This is all slothy’s fault! :)

 
Comment by mikey
2009-10-01 16:49:20

You sound like you know about these things…;)

Hey, I’m working on a a hot DiGiorno Pizza and my 2nd Kansas City Flying Monkey beer here and MY computer still flies Great !
:)

 
Comment by Olympiagal
2009-10-01 17:12:49

I’m working on a a hot DiGiorno Pizza and my 2nd Kansas City Flying Monkey beer here and MY computer still flies Great !

Yeah, I just bet….
What flavor of DiGiorno? I like DiGiornos.
Anyway, feed some of both to your computer and lets see how sassy and airborne you both are then.

Hey, guess what!
Today I heard a beautiful and wonderful thing… I heard that the shadow inventory here in Thurston County is, and I quote: ‘Huge.’
I heard this from a banker. He works at a bank, and had on a dark suit and very boring tie and everything else bankery-like.
So I believed him, of course. ‘Always believe someone wearing a boring tie’, is my rule.

 
Comment by mikey
2009-10-01 17:16:27

A 3 meat Supreme

;)

 
Comment by Olympiagal
2009-10-01 17:18:42

Oh, I haven’t had that one. But I bet my computer wouldn’t fly too good after I did, if I did.

 
Comment by mikey
2009-10-01 17:33:16

I just hung up my Halloween lights and decortations, it’s a drizzly Fall Wisconsin night at 55 degrees with lots of leaves. The Great Pumpkin is coming !

Pizza and beer was quick n’ dirty.

 
Comment by Olympiagal
2009-10-01 17:47:14

Sigh….
It’s raining here, too. The rain was only flirting before, being coy, but today—although light—the rain is moving in and getting comfortable.
It’s the End of Summer.
I know this, because today when I got home I took down my gauzy white Summer curtains off my big glass doors and in their place I washed and dried and hung up my Winter curtains, which are ember-red and heavy, to keep in the heat at night.
That means it is the end of the season. Before today I was pretending I didn’t know this.

In a few days I will love this, and rejoice in the rain, which I’ve been looking forward to greatly, but right now I’m on the cusp between seasons, saying goodbye to one, while not yet entered into the other. You know how it is. I imagine you thought about this as you tried not to fall off your roof as you put up Hallowe’en decorations.

 
Comment by mikey
2009-10-01 18:07:35

:)

 
Comment by awaiting wipeout
2009-10-01 18:12:34

Mikey,
Fall in Wisconsin sounds delicious. Here in So Ca it’s still warm and sunny. I love fall. I bet your falls are truly wonderful.

I’ve noticed a trend in the last 2-3 years here in So Ca (L A & Ventura Counties). Halloween is going back to the ones we had as kids, and not these over priced Haunted Houses, Maze, Festival events. Amateur Yard Haunts, Amateur Haunted Houses, and other assorted freebies for all to enjoy, middle class or poor. It feels like 1964 again.

Wish it would be a drizzly fall night here.

 
Comment by mikey
2009-10-01 18:26:16

I have been around the world more than a little and places back and forth in between. I have never loved a place more than Wisconsin. Through in a beautiful Fall night, some hardwood smoke and a little rain and I’m in 7th Heaven.

I did live on the Majove River in the high desert as a kid for a while and I liked it there too.

 
Comment by awaiting wipeout
2009-10-01 20:35:40

Gosh Mikey,
You sure know how to set the visuals in motion. Wisconsin sounds like a great place to live. I bet the colors of Fall are beautiful. Same goes for you Olygal. You two know how to live.

 
Comment by Olympiagal
2009-10-01 21:10:09

Same goes for you Olygal. You two know how to live.

Until we fall off the roof, I guess. Sigh. You know how it is. Annoying.

 
Comment by Olympiagal
2009-10-01 21:13:42

‘Awaiting, awaiting, we’re all waiting for awaiting…come out to play, come out to playyyy, awaitinnnnng…’

:lol:

 
 
Comment by wolfgirl
2009-10-01 14:58:24

Computer science major daugher spilled orange crush in laptop keyboard. She was able to salvage the hard drive,but the computer itself was history.

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Comment by Olympiagal
2009-10-01 15:31:46

What?! But it was only a little bit of beer! Beer is good for things, surely? Luckily, this is not a laptop, so stuff was not connected all inside one little box. I only violated the keyboard. The real computer part/hard-drive was too far away.
Anyway, what sort of college student drinks Orange Crush, instead of beer.
That’s just crazy.

But thanks for your words. I think.

*grumble *

 
Comment by alpha-sloth
2009-10-01 15:54:07

You guys drink apricot ale up there, right? That stuff is extra sticky. I recommend ‘Super Solv’, but I don’t guarantee it.

 
Comment by Olympiagal
2009-10-01 16:30:59

You guys drink apricot ale up there, right?

You!
You know how I feel about this! You taunt me.
Interestingly, I was right in the middle of discussing the very subject, trying to persuade you to never, ever touch the horrid substance again, when my keyboard quit.
Now that I think about it, it probably wasn’t the moist and refreshing shower of beer (real beer) into the keyboard, probably the keyboard quit because it refused to type words about apricot flavored beer.

*shudder *

So, if in a short while this new, teensy-spider decorated keyboard explodes in a shower of sparks, then I will know this is your fault.

 
Comment by Olympiagal
2009-10-01 16:32:25

PS. S*atan drinks apricot flavored beer. Everyone knows that. Ask anyone.

 
Comment by alpha-sloth
2009-10-01 17:42:46

It’s apricot *ale* you people drink- that makes it cool.
I just drank an oatmeal stout with my cheeseburger. We don’t like the ‘fruity’ beers down here like you rainsters do. (I thought Satan drank buttermilk.)

 
Comment by Olympiagal
2009-10-01 17:55:52

(I thought Satan drank buttermilk.)

Really? I had no idea.
But I’m going to abandon all my elegant thoughts and my compelling rebukings of you, all in favor of hearing more about this. This is one of the most significant theories I ever heard! It would explain a lot, too.

 
Comment by alpha-sloth
2009-10-01 18:26:09

buttermilk, chitlins, and OPM…

 
Comment by Olympiagal
2009-10-01 18:59:03

‘Orientations of Proteins in Membranes’?
‘Office of Personnel Management’?
‘Onyx Plated Mummies’?
‘Owls Playing with Marbles?’

I like the last one the best. I bet owls would be great at marbles! They can spin their heads all around, you know. Talk about line-of-sight.
Plus they bite.

 
Comment by Olympiagal
2009-10-01 19:01:40

They can spin their heads all around, you know. Talk about line-of-sight.
Plus they bite.

Why, just like me! No wonder I like owls AND marbles so much.

 
Comment by Mariusz69
2009-10-01 21:27:58

Page down, page down, page down, page down

 
 
 
 
 
Comment by buynhold
2009-10-01 13:43:44

Coincidentally, I just read Foldvary’s entire paper yesterday. I thought that the long stretch after the depression of increasing prices was due to the size of the bubble before the depression, but he states that it was due to WWII and the lack of construction and demand at that time that prevented a bubble in the normal 18 year cycle. So it had less to do with the depression and more to do with the fact that there was limited construction and so many people overseas that there was greatly reduced demand.

I also find it interesting that he thought that the next bubble would collapse in 2008, which was pretty much true. I believe the paper was written in 1997, although it might have been updated.

Comment by The Mysterious Flying Miser
2009-10-01 14:08:25

Good, I was hoping someone would read the paper. I am too Mysterious to be found hunched over the computer in some university library, downloading free articles from scholarly journals.

That is an interesting point about WWII possibly depressing house-buying, although I don’t think we can be totally sure of it. It was probably at least a factor. It will be interesting to see how long the buying stays depressed during this current cycle.

Comment by Olympiagal
2009-10-01 15:24:02

I am too Mysterious to be found hunched over the computer in some university library, downloading free articles from scholarly journals.

Well, of course. Anyone can see that. You need to spend your time wisely, flying over cities with your winged cape and shouting ‘Aha!’, and blasting evil and other things like that.
And I know that I, for one, sleep much better for it. :)

 
Comment by buynhold
2009-10-01 15:28:26

Well, actually the paper is on his website and it’s not very long, otherwise I’d be with you, waiting for someone else to read it and summarize.

I was worried initially that because of the size of the bubble that the cycle might be longer than usual, judging from the Great Depression. Being a buy and hold guy, hence my name, that concerned me that it might take a long time for prices to go up. But his article made it sound like WWII was more responsible for the longer cycle than the Depression. So I’ll be ready to take some profits and pay for the kids college in 2026. :)

 
 
Comment by alpha-sloth
2009-10-01 16:12:55

“but he states that it was due to WWII and the lack of construction and demand at that time that prevented a bubble in the normal 18 year cycle. So it had less to do with the depression and more to do with the fact that there was limited construction and so many people overseas that there was greatly reduced demand”

That makes no sense to me whatsoever. People were overseas for four years during WW2, and that precludes a RE bubble for 47(!) years. Have we not had wars throughout US history? Why would they not have prevented RE bubbles, too?

Still seems like FDR’s regulations were the key difference to me. But no one likes the easy answers but me. (And Occam.)

 
 
Comment by Professor Bear
Comment by CA renter
2009-10-02 02:24:38

I was wondering if it was the same Ed Leamer…

 
 
Comment by Professor Bear
2009-10-01 16:24:52

“Smooth the business cycle.”

What if the business cycle gets so smooth that everyone throws caution to the wind, flattening out risk premiums in the process?

“…history has not dealt kindly with the aftermath of protracted periods of low risk premiums…”

 
Comment by Housing Wizard
2009-10-01 19:38:55

What about the fact that in 1926 there was a real estate bust in Florida that the rest of the United States didn’t experience at the time . That run up was purely based on speculation with easy money at the time . It’s a perfect example of how the business cycle seems to go to a trend toward
speculation ,and again I think it goes back to cycles of risk where by the
leverage for speculation becomes available .

So, a society works hard ,builds up the money supply by savings ,they put the money in the bank or investment house ,the bank has to find somewhere to lend it ,and
than the bank will leverage to make more money and take more risks
because of the need to make money on the excess money supply originally .

So,my point is that the speculation cycle comes about because of excess money supply for the true needs of the area. So , supply and demand principals are upset by to much savings that result in mis-allocation of funds by banks/lenders ,who have to do something with the deposits .

Comment by CA renter
2009-10-02 02:21:15

I very much agree with your premise, Wiz.

Comment by Housing Wizard
2009-10-02 05:56:43

Hi Ca. renter .Either you come home late ,or you get up early I think,
so I usually catch your posts later . Boy ,we have both been around for a long time on this blog, haven’t we .

 
 
 
Comment by Leo
2009-10-01 21:02:54

I think there are several interesting ideas in this post.

One of them is the observation that there appears to be fairly long historical record on things like national housing markets when current conventional wisdom maintains that there can be no such thing. This echoes the complaints of many old-school economists that the past 30 years, in which free market ideology dominated academic and popular discourse, has been almost like the dark ages for the discipline of economics. Many ideas, which at one point were considered established, were forgotten and are now thought of as “new.”

In the utopian scenario of free market economics, business cycles and bubbles aren’t supposed occur because they should be arbitraged away immediately. In this way, this ideology is very fundamentalist in nature because it tends to ignore things it cannot explain. So it is not a big surprise that bubbles and business cycles have been forgotten. Hopefully, the recent crisis will steer the discipline of economics back towards empiricism and away from theory.

One of the other interesting points this post brings up is that the 18-year cycle is not really a cycle. It looks like it is exactly 18 years between depressions in the table, but in reality, the criteria for what constitutes a depression is pretty arbitrary. Using a slightly different definition, it won’t look like a regular 18-year cycle anymore. I would even suspect that the definition of a depression was specifically chosen in order to make the business cycles look more regular. I’m generally not a big fan of free-market ideology; however, one contribution it did make to economics is to use rigorous mathematical analysis to demonstrate that the apparent 18-year periodicity is not statistically significant.

 
Comment by CA renter
2009-10-02 02:11:39

Though this graph only goes back to 1980, I think it’s instructive to note debt service levels and how they relate to housing prices. I’m guessing we would see a pattern between debt as a percentage of income rising to a peak at the same time housing prices peaked for any given cycle. Just a guess…

http://research.stlouisfed.org/fred2/series/TDSP?rid=89&soid=1

Comment by Housing Wizard
2009-10-02 06:40:35

Interesting chart Ca renter . I think the money supply (or funds available for investment ) built up so high ,leading to the easy money cycle that
it got directed to high risk debt . To bad more thought wasn’t put into
where investment money went and people were just allowed debt beyond
their ability to afford it in terms of monthly debt service . Also,when you have money coming in to the United States from all over the World ,(based on our past reputation ),it became a giant supply of funds .
Eventually dumb money went everywhere and here was Wall Street and the Bankers making a short term fortune off of this excess money trying to chase yields on OPM .

Comment by Housing Wizard
2009-10-02 07:33:21

Also,I failed to mention the 30 to 40x’s leveraging that the Money Changers were doing to create more profits from already a huge excess money supply . Is it any wonder that with that kind of leverage
that money ended up going to every Tom Dick and Harry on the planet .

So, reform would have to involve requiring prudent capital requirements and limits on leverage ratios . It’s funny how Goldman’s CEO doesn’t project reform is going to come about until 2012 or 2013,and he also blames the borrowers for the meltdown in so many words ,as if it wasn’t the crazy leveraging that investment banks
were doing using the stupid CDO’s as the weapons of mass destruction to pull it off .

I find it funny how the melt down started in about 2006 ,but
the current Politicians can’t seems to bring about reform this many years later . Notice how quickly Congress/Senate performs on giving bail-outs to the Kingpins but they will talk for years about what reform is needed to bust this corruption ,and you notice how
the Money Changers still get their status quo and even more relaxed standards on mark to market requirements .

 
 
 
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