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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
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I think there can be only one weekend topic this week, the nuclear bomb the PTB tried to set off:
Will Mell Watt be able to keep the bubble going? I don’t think it will be enough. Last time we had an (apparently) robust economy, a much better jobs picture, and fraud out the yin yang in order to drive prices up. Now we have stocks at an obviously steroid driven high and echo bubble prices that are already starting to fall in leading edge areas like PHX.
No Mel ain’t gonna be able to do it. There isn’t the demand at these prices.
Agreed. Fannie/Freddie for the weekend.
The problem is very clear:
1. House prices have to stay high to protect people who already bought.
2. House prices have to be low in order for more people to buy.
3. Prices are not going to go low enough for people to buy, because their PITI simply can’t compete with investor’s cash.
To solve this, you could prohibit investors from buying, which would drop prices low enough for people to buy. But that would destroy the people who already own, and it’s too much government interference.
Or you could somehow give money to people but not to investors, so that people could compete. Yellen at al are trying to do this by dropping interest rates so that house prices are high but with a lower PITI. But we’re pretty much at minimum interest rates now. And if people can borrow at low rates, so can cash buyers.
Or you could start creating well-paying jobs so people have money. Riiight.
OR you could sit around for a few years and debate it, and meanwhile inflation will slowly swallow the problem. This is what is happening by default.
OR you could sit around for a few years and debate it, and meanwhile inflation will slowly swallow the problem. This is what is happening by default.
That only works if people’s incomes rise as well. That isn’t going to happen. If ground beef costs $20/lb, no one will have money to buy a house.
Is milk going up in Colorado (other places). It is getting absurd around here. I know that a lot of the food issues are because of supply disruptions due to drought, etc., but the money is out of my pocket even if it doesn’t show up in the official inflation numbers.
even if it doesn’t show up in the official inflation numbers
Belief in the “official” inflation numbers is for the little people.
That’s not inflation.
To solve this, you could prohibit investors from buying, which would drop prices low enough for people to buy. But that would destroy the people who already own, and it’s too much government interference.
Like it’s not already held up by government interference. How about we just get the government out of it and just see where it wants to go?
The government is the housing market. They print the money, set the interest rates, guarantee the loans, refinance the losers, auction the land to the developers, buy the mortgage backed securities, decide who gets prosecuted, who get’s bailed out. Have I missed anything?
Yes.
Where are the buyers?
How about we just get the government out of it and just see where it wants to go?
Because if house prices drop when the government gets out, then millions of homeowners will vote those guys out of office.
And we already know where it will go… right back to 50% cash buyers.
Get some street smarts Mz. Craterton. Gov doesn’t care about you loan owners.
And we already know where it will go… right back to 50% cash buyers.
Fine. And when it keeps going down they will lose some of their money too. Eventually we will reach an affordable equilibrium. Until then, talk of not wanting to do something because it’s too much govt interference is just silly.
Get some street smarts Mz. Craterton. Gov doesn’t care about you loan owners.
Mz. Craterton hasn’t got a clue.
Who holds the gold? That’s the person with the power.
Hint: it’s not the debtor. They got no purse.
Strange that living in DC — you’d think that something so obvious would be clear.
Carl Morris:How about we just get the government out of it and just see where it wants to go?
oxide: Because if house prices drop when the government gets out, then millions of homeowners will vote those guys out of office.
But… do most voters realize that politicians have anything to do with house prices?
It’s like the head of the FCC killing net neutrality. It’s got no political consequence, despite service which will get worse and more expensive. Regardless of the howls of those few who do understand the money, politics and technical issues.
There is the angle that voters vote for incumbents or challengers based on their overall sense of well-being or malaise.
It’s not clear to me that releasing the housing market would be pinned on politicians.
The big issues is how it plays with the central bank, which creates a bank-safe/bank-friendly financial ecosystem. Central bankers wouldn’t like it. Also, the FIRE sector is one of the largest of all political contributors overall, for decades. And they wouldn’t like it. Those are the major factors in front of politicians it seems to me.
Or, you could just get out of the f’ing way and stop tinkering with the damn market for political reasons.
Builders who want to sell homes to people who have less income will start building smaller, more inexpensive homes.
Landowners who expect prices to keep going up and up and up will either not sell their land, or drop their prices.
People who don’t have a 20% down payment saved up won’t get bailed out by the government with “down payment assistance”, and will have to (gasp!) either continue to rent, or (bigger gasp!) learn financial discipline, and save their money.
Lenders and investors in debt, without a federal government backstop will need to (heaven forbid) actually do their own due diligence, and restrict lending to bad credit risks.
“Builders who want to sell homes to people who have less income will start building smaller, more inexpensive homes.”
Why would I when it costs me next to nothing for an additional 500sq ft?
If your customer is trying to buy the most inexpensive house possible, then you’ll watch every penny…because if you don’t, another builder will build on a smaller lot (saving some money), cut out that 500 square feet, save the $15k-20k, and undercut your price.
We’re not discussing lots and 500sq ft isn’t $15-20k.
If the extra cost is so inconsequential, why stop at 500 square feet? Why don’t you build an extra 1,000 square feet? Perhaps 1,500 square feet? Then you’ll really make a killing since you can build them for effectively the same price on the same piece of land.
The point is that if consumers can borrow the money easily, then cost matters less, since the consumer paying it off very slowly.
If you can’t borrow money easily, cost matters a lot more, since consumers need to come with with at least 20% of the cost up front.
If cost matters more, people who want to sell to such consumers will build things the consumer NEEDS that they can sell for less (ie. needs matter more than wants in a world with cost conscious consumers).
If your 500 extra square feet isn’t needed by the cost conscious consumer, they won’t pay you for it. And you can’t tell me the cost is $0.
Contort all you want J._Fraud. Another 500sq ft is $15k-20k.
oxide: OR you could sit around for a few years and debate it, and meanwhile inflation will slowly swallow the problem. This is what is happening by default.
But wages are the problem. I’ve been checking a price range for houses in a bellwether zipcode for many years now. Recently, I thought that I needed to increase the dollar amount because of inflation. See:
1) MIT Billion Prices Project, which also shows CPI on that graph: http://bpp.mit.edu/usa/
However… take a look at wages:
1) Real wages are down since around 2000 (p5. numbered, p. 13 acutal): http://www.census.gov/prod/2013pubs/p60-245.pdf
2) Nominal (non-inflation adjusted) are up: http://www.ssa.gov/oact/cola/central.html
So what does this mean? With real purchasing power declining, but nominal wages going up… there is truth in what you say, and why the central bank is so enamored of inflation, as it encourages debt today. On the other hand, dropping real purchasing power is the other side of that coin and probably going to put some kind of a brake on house prices.
See also historic debt-to-income: http://www.frbsf.org/economic-research/publications/economic-letter/2011/january/consumers-economy-household-debt-weak-us-recovery/
“The problem is very clear:
1. House prices have to stay high to protect people who already bought.
2. House prices have to be low in order for more people to buy.
3. Prices are not going to go low enough for people to buy, because their PITI simply can’t compete with investor’s cash.”
The only reason for 3. is that savvy investors recognized that 1. would take precedence over 2. If prices were based on fundamentals, there would be no govt-sponsored bubble gains for investors to speculate on capturing.
“just get the government out of it…”
Debtors are easily herded. If you want more freedom, live an honest life without empty promises to pay later.
I think Mel Watt’s job is looting for the politicians but also for the minorities. His title should be Looting facilitator in chief. Don’t ya know it’s their turn to rob the kitty.
Will the bears coming out of the woodwork to pooh-pooh the stock market get it right this time?
Acampora’s ‘sick feeling’ about stocks: Nasdaq could fall 25%
May 16, 2014, 5:02 AM ET
The worst drop in five weeks for the S&P 500 (SPX -0.10%) and the Dow industrials (DJIA -0.02%) and a drive for the Russell 2000 (RUT -0.15%) into correction territory has brought out the bears and not just the SALT-y guys in Vegas.
Ralph Acampora, a known stock bull and technical analysis guru, told CNBC on Thursday before markets closed, that he thinks it could get really bad for stocks and that he has a “sick feeling” about what lies ahead.
The director of technical trading at Altaira Investment Solutions predicts the S&P 500, which is up 1.2% for the year so far, will see a 10% drop between now and October. His crystal ball darkens considerably for other indexes
“If you ask me about the Russell and the Nasdaq Composite (COMP -0.32%) and the S&P MidCap, I think you’re talking about 20, 25%…and I call it a stealth bear market going on,” said Acampora.
…
Sell in May and walk away.
Who gave the bull a hit of Viagra today? The stock market got quite a rise out of it!
500 steps forward, 450 steps back. It makes for better news — and better day trading — than +50 every couple days.
Did you buy the dip?
May 16, 2014, 5:04 p.m. EDT
U.S. stocks end higher as ‘buy the dip’ takes hold
S&P 500, Dow average post slight loss; Nasdaq Composite rebounds
By Anora Mahmudova, MarketWatch
NEW YORK (MarketWatch) — The U.S. stock market closed higher Friday after an abrupt late-day reversal. Analysts attributed such a move to ‘buying the dip’ strategy that has been the theme in the past few months.
…
Last evening I was tipped off to a fun retirement calculator.
firecalc.com
Basically, imagine that you will retire today. Put in a total portfolio amount, how much you spend, and how many years you expect the fund will last. Firecalc will look at the markets and calculate how long your portfolio will really last.
The beauty of Firecalc is that they don’t try to predict the market for the next 20-30 years. They look to the past.
In their words: If your retirement strategy would have withstood the worst ravages of inflation, the Great Depression, and every other financial calamity the US has seen since 1871, then it is likely to withstand whatever might happen between now and the day you [die].
If you accept that assumption, then just tell FIRECalc how much you have and how much you’ll be spending, and FIRECalc will tell you how often your strategy would have worked throughout history. Or what you need to change to make it all work.
Make sure to scroll down and change your variables.
Very cool. Thanks.
As usual, Mz. Craterton doesn’t understand basic mathematics.
Let’s say you pick a 20 year period.
The calculator treats every 20-year period as “independent” in the probability-theory sense of the word.
This is plainly false. Intuitively, it can’t matter whether you retired in 1943 or 1944 — those 20-year periods overlap. They have “roughly” the same performance.
Even worse for 30-year periods and you can give up about 50-year periods. There is no independence.
They are extrapolating from roughly a 100-year period and trying to convert it into “independent samples”. This is bogus.
Not to mention that you can only go off the gold standard once so for most of the 20th century the data simply doesn’t apply to the modern world.
This is pseudo-scientificity at its very best.
Of course, but it is infinitely better than assuming a fixed rate of return for the rest of your life (as many such calculators, and pension funds do).
So your upshot is that you compared a completely bogus method with an even more bogus method and hence declared this one as the winning proposition that you should bet on?
Sounds real scientific to me.
So, a racist billionaire finally is exposed as a racist, and is fined $2.5 million (only because, to my understanding, that was the maximum fine allowed).
GM hides a defect for a LONG time, that was linked to at least 31 crashes and 13 deaths, and is fined $35 million.
Does anyone else here see the GM fine as a ridiculously small slap on the wrist?
Mmoney does not prevent mental illness, nor can fines cure it.
Is deflation really an economic threat, or merely one of those hobgoblins used to justify wealth redistribution schemes from everyone else to the FIRE sector?
Hedge fund billionaires sleepless over deflation: SkyBridge’s Scaramucci
May 16, 2014, 11:14 AM ET
Wall Street’s hedge fund billionaires are sounding increasingly worried about deflation.
…
Scaramooch, scaramooch,
Can you do the fandango?
Since CA seems to be one of the epicenters of the U.S. bubble, I ask: What is so enticing about living there? With all the things that could go wrong environmentally (i.e. wildfires, earthquakes, radiation from Japan, and a dire water shortage which could decimate the entire state) not to mention the plethora of social and economic issues constantly plaguing them, I hardly believe people think that it’s the “weather” that is worth all that trouble. Please explain.
Please explain.
Simply put, it is heaven on earth. There is no finer place anywhere.
Woody Guthrie was poetic about it:
“California Dreaming” - mommas and poppas
“Going to California” - Led Zeppelin
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Thank you