patrick.net

"History has not dealt kindly with the aftermath of protracted periods of low-risk premiums" - Alan Greenspan

Sounds like he's talking about MBS's to me.

Regarding Shiller's housing price timeline: (marginalrevolution.com/photos/uncategorized/21realgraphic.gif)

I would say the data does not show a "permanently high plateau" after 1946, rather it initially shows housing oscillating around the rate of overall inflation (represented by the "100" line, meaning 100% or 1:1 ratio) from 1890 (starting point). After 1916, it plunges far BELOW the rate of inflation until 1946. If you had been invested in RE during that time, you would have taken a bath.

After 1946, yes, RE prices rose and have stayed a few points above the rate of inflation, spiking here and there during cyclical housing booms. I believe Shiller himself theorized that prices were basically "catching up" from the precipitous drops they experienced during the 1916-1946 RE bear market, not to mention responding to the enormous real demand from the post-war boom.

In any case, nothing satisfactorily explains their meteoric rise since 1998 as being permanent or sustainable.

“History has not dealt kindly with the aftermath of protracted periods of low-risk premiums” - Alan Greenspan

Sounds like he’s talking about MBS’s to me.

Allah,

It's hard to say precisely what AG means any time he open his mouth (hence the term "Greenspeak" ;-) ), but as I recall, most media pundits at the time took this to mean that he wanted long-term rates to start rising. It's also true he has also issued statements to the effect that Fannie/Freddie should not assume they will get a federal bailout.

Even so, I would still argue that the two companies holding some 44% of the outstanding residential mortgage debt in this country are not going to go quietly into the night. Not helping them would have enormous economic and political repercussions that will make this practically impossible.

OTH, I agree that individual homedebtors/speculators are screwed.

flak - np, buddy. Great minds think alike. :mrgreen:

but as I recall, most media pundits at the time took this to mean that he wanted long-term rates to start rising.

Aren't MBS's low risk premiums? ...anyway, while I was doing a search, I came across an interesting article.

http://tinyurl.com/85hng

Fed my pause rate tightening for now, this will give housing another boost.

Pausing will not stop the crash.

"We’re headed towards a bad, bad deflation&depression."

Yes, deflation is bad. I don’t know what I would do with all the extra cash I have remaining in my pockets after a visit to the grocery store ;-))

I agree that a depression is possible and is bad. I would only hope that it is accompanied by deflation should it occur.

Fed my pause rate tightening for now

Unlikely. The Japanese will need to be reimbursed for their currency risk.

Joe says, "...it is the FED’s fiat currency regime that in the first place creates the bubbles it then pretends to fight."

How right you are!

And if it is of any consolation, many believe that as the economy becomes increasingly global the Fed will wither away into a powerless bunch of economic report pushers.

allah Says:

"...so people will get burned….who? The stupid, that’s who! That’s a good thing…having history bitch slap the fools who created the problem in the first place……Darwinism at its best! If we don’t have to spend so much on housing, there will be a lot more left to pay for other important things..."

Whew!

No slack!

Joe writes: People might learn that to go back to a gold standard money sytem without any FED burocracy would be the wise thing to do.

...really?

It seems to me that going back to a gold standard would be incomprehensibly complicated. Particularly since, as a debtor nation, we'd have to confiscate it from overseas.

Are you sure they will get ‘bitch slapped’?

From what you just wrote, Jack and Jill seem to be getting pistol whipped by santa if they can't afford to buy presents this year.....and things are going to be getting worse for them I'm sure. It really doesn't matter who votes, because politics has nothing to do with people deciding they don't want to pay the prices that people are pushing for houses. If people have to sell their house after getting some ridiculous mortgage and they cannot get their money back, they will have no choice but to foreclose. This is what I mean by being bitch-slapped!

My Mothers neighbor has been trying to sell their house, they originally listed it for $749K......someone offered a few thousand below that and they wouldn't accept, I couldn't believe it!...........since then noone has made any offers. They then they reduced it to $699K.......someone lowballed them with $600k, but they didn't take it. I would have took that and ran personally, but they are holding out........I bet in the end they will get less than $600k. I wonder how much longer until they realize that their property is losing value every single day.....They are boomers and their house is paid off, probably didn't pay more than $40K for it when they bought it....but I bet if they weren't in such a good financial position, they would have unloaded in a heartbeat!

R. Patrick.

Yes, we’ve all heard the story before – if prices are falling, consumers stop buying because they expect the prices to be lower if they wait, blah, blah, blah. This is nonsense. We all know that the latest electronic gadget will be cheaper next month, we all know that this season’s must have outfit will be 50% off in the Spring, we all know that Christmas gifts for the kids will be cheaper in January. Still, many of us are compelled to buy the costlier product precisely because we want it NOW!

All these under-consumption theorists should be required to spend several weekends with their five-year old nieces and nephews at Toys-r-Us to teach them a little about the effort involved in deferring instant gratification.

Bad for manufacturers? Hardly.What people seem to miss is that as prices fall, costs are likely to fall too. Producers may therefore count on earning either the same profit per item or the same profit overall through higher unit sales.

Our savings and wages go further too. This makes us feel richer and spend more, not less. Historically, wages did fall in nominal terms during periods of deflation, but nominal prices fell faster. Therefore these were seen as periods of rising real wages. As a matter of fact, it was FDR’s policy of wage stability that prolonged the Great Depression because it had the effect of increasing unemployment. Finally, I don’t know about you, but under our current policy of inflation, my real salary has been shrinking over the past several years!

Furthermore, with decreasing prices, we need less money to consume, so we tend to save or invest more, providing for tomorrow’s purchases. It’s a self-reinforcing cycle to prosperity.

Deflation does increase the burden of debt, and discourages borrowing, but so what? If you are concerned about long-term production, then saving is better than borrowing. It’s too bad for the mortgage holders, but taking on debt is speculation in a sense. There is no guarantee that says the value of your investment must always rise or the value of your debt must always fall.

A world of gently decreasing prices would be paradise for the consumer. Falling prices are a result of technological innovations that make production more efficient. This is exactly what took place during the 19th century, so we know that it works.

Anyone got any idea what happened in 1920?

I recall a bit of housing froth in FL.

Another thought about the Shiller graph -
The dip begins in 1920, and lasts through to about 1942ish.
Anyone got any idea what happened in 1920?

The graph is adjusted for inflation so it doesn't read the way one would think.......remember, there was a great deal of deflation during that time and inflation at other times....it would be nice if he did another that wasn't adjusted for inflation.

A permanently high plateau is not possible if the current pricing reflects high expectation of future appreciation without a fresh round of monetary accommodation.

Even if the FED pause now, the stimulation would still be inadequate. The FED would have to cut interest rate again, which seems very unlikely at this point of the credit cycle.

Let's give the dying housing bubble a moment of silence.

What happened in 1920? A post–war recession in 1919 - 1920.

The accuracy of Shiller’s graph is greatly diminished by the inflation adjustments. We all know that inflation adjustments are prone to imperfection. Also, the methods for measuring inflation have changed significantly over the years - so we have the old “apples and oranges” problem as well. Further, the home prices for the older periods are not from quality data sources like those we have for the latest 40 years. Instead, they are largely based on anecdotal material that he and his student assistants have interpreted for his study. There is much room for compounding of error in such a process.

While the graph it is interesting information, it is full of errors and data problems, and should be viewed with an understanding of its shortcomings.

Frank, You said the economics material that I gave the link for all seems to be Keynesian…

The link contains about 60 textbooks covering a wide on a wide variety of topics in economics ranging from introductory economics to econometric techniques – something for everyone. Certainly the Keynesian view is included, but it is not the case that all of the materials are Keynesian.

Speaking of Keynesians, I had the opportunity to meet John Kenneth Galbraith (in Vermont) many years ago. That was a treat for me since his work was in vogue during my training. However, I was then and continue to be more inclined toward the monetarist school.

As for the names you mention, Milton Friedman was my hero when I was a young economics student. Of course, I have read from the works of many other great economists. I continue to read the views and work of many contemporary economists on a regular basis as part of my effort to stay sharp, and to make better investment decisions.

I believe not.

Further on Shiller… Using the GDP deflator for inflation the plateau disappears and we have a long secular rise in prices over the last 40 years, with peak periods coinciding with the actual market cycle peaks. No tricks or interpretations. Just straight government data.

I believe Shiller used the CPI. This index overstated inflation during most of the plateau years, and many claim that it has understated it in recent years. This would make the price adjustments in the older years greater causing a flattening of the data, while making the price increases in the recent years seem steeper. So, the Shiller plateau and the recent severe surge are likely the result of data problems in the inflation adjustment. This effect goes away when the GDP deflator is used for the inflation adjustment.

I suspect that the details of this graph has not been examined in the way I have done it (using an alternative). Apeer is likely to ask "Did Shiller use a reasonable standard?" and conclude that he did. Is it the best (most accurate choice? No. Would that be obvious to academics? Probably not.

Over the long run the errors are modest and do not seem to be a big deal in the big picture. However, a few points per year are a big deal when compared to a flat line.

The general principles of his research and book remain worthy even if this particular graph is flawed.

I suspect that the details of this graph has not been examined in the way I have done it (using an alternative). Apeer is likely to ask “Did Shiller use a reasonable standard?” and conclude that he did. Is it the best (most accurate choice? No. Would that be obvious to academics? Probably not.

Hmmm... not quite yet ready to casually dismiss the painstaking research of such a respected academic (with no personal axe to grind) as Shiller. Especially when it's so consistent with so much other data indicating a sharp spike in RE prices relative to other indexes (incomes, rents, consumer prices, etc.) over the past several years.

Yes, I agree that the much manipulated CPI has understated true inflation at least for the past 10 years or so (as use of hedonics and substitution became commonplace at the BLS). Eliminating such statistical gimmickry and substituting a bullshit-corrected CPI would shrink that sharp spike somewhat, but even so, it would still exist and still be quite large.

So, the Shiller plateau and the recent severe surge are likely the result of data problems in the inflation adjustment. This effect goes away when the GDP deflator is used for the inflation adjustment.

Zephyr, what makes you so sure that your GDP deflator is a better measure of RE prices relative to Shiller's CPI data?

What makes you so sure that you can eliminate the historical/data errors that you claim plagues Shiller's results with your method? If the raw economic RE data from the periods prior to the mid-1960's is nonexistent to spotty, then how would the GDP deflator provide more accurate results with the same (supposedly) unreliable data?

Garbage in, garbage out, right?

Have you plotted your RE graph using the GDP deflator in place of the CPI? If so, would you be willing to share the results with us?

Fair enough. I was trained in history, not economics, and using a flawed quantitative analysis like that would get you into trouble around a history department.

flak,

Don't be too quick to dismiss Shiller's analysis. While I respect Zephyr's considerable experience and breadth of knowledge, he is not all-knowing or infallible.

He may or may not be correct on the GDP deflator being a better historical yardstick for guaging RE prices. Ditto for Shiller's data and methodology. I'm not saying he isn't, I'm just taking the old Scottish approach and declaring it "not proven".

But when I read Shiller’s book, I thought he had avoided that problem, using something more sophisticated than that straight correction. I don’t own a copy of the book, but someone here must, and perhaps could enlighten us.

I'm going to have to call in "lazy" on this as well. My wife bought me the book as a birthday gift a while back, but I haven't read most of it yet. I think you're right about him using something better than straight CPI correction, though.

One thing that makes me think his historical data is more accurate than Zephyr suggests is that he relies heavily on RESALE data --as in tracking the same houses as they are resold throughout the years. His reasoning is that this gives you a more accurate picture of asset inflation by comparing apples to apples. In other words, it's not comparing an 1890 Victorian to a 2005 McMansion --it's tracking the actual sale price of the SAME house over the timeline.

ScottC,

I don't think the other bloggers were attacking you personally, or accusing all Realtors everywhere of being stupid and dishonest. They were mainly responding to your rather sweeping statement about "full disclosure":

"Real estate is a legal transaction that requires full disclosure. So honesty is the only policy. "

Perhaps you meant to say, "honesty SHOULD BE the only policy", or, "honesty is the only policy for me and my close associates". I think you can see the distinction here. Clearly there are plenty of Realtors (especially here in Cali) for whom dishonesty and distortion are a way of life.

As far as making a successful career in RE, I'm sure that it normally involves a great deal of hard work, diligence and intelligence. Which is why you'll probably still be in the business 10 years later, while most of the newly-minted CA agents will not be. A temporary across the board lowering of employee standards/qualifications in a mania-related field is a quite common phenomenon, and is not restricted to RE (as IT workers will attest).

Everyone's job looks easy to other people.

"No tricks or interpretations. Just straight government data."

This is a joke right? :-)

"I’m wondering how many of you have ever had to sit down and write a check for $10,000 and mail it to the IRS"

Yes, for us employees, about 1/3-1/2 gets taken out of every pay check. How lucky are we?! ;-)

Zephyr, for a different perspective on deflation, read my post Nov 22, 5:55pm in this thread.

Nov. 22 (Bloomberg) -- Inflation outside of food and energy will probably accelerate next year, prompting the Federal Reserve to raise rates another three-quarters of a percentage point, according to a survey by the National Association for Business Economics.

Not everything is as rosy as some would have you believe...

http://www.usatoday.com/money/economy/2005-11-22-wages-1a-cover-usat_x.htm

From a Cincinnati rag...

"Greater Cincinnati/Northern Kentucky and most housing markets across the country are safe from a feared investment bubble, according to the top forecaster for the National Association of Home Builders."

Oh gee a "top forecaster"! I guess we're all wrong then, huh?

Oh gee a “top forecaster”! I guess we’re all wrong then, huh?

A nameless top forecaster?

I'm waiting for troll brothers to start advertising....buy one McMansion, get one free. :)

.........but then again, it's probably still not worth it.

"A nameless top forecaster?"

Yes, but it is "...according to THE top forecaster", so there can only be one ;-).

Based on listings from realtor.com for NYC tri-state area, number of homes for sale on average have been increasing >100% annualized over the past several weeks. Some areas such as Paramus, NJ are close to 200%. Not what I would expect during fall/winter and with holidays right around the corner.

You californians might want to read the piglet book...especially those in sacromento http://tinyurl.com/bn8j8

Alot of good information on this site as far as taxpayer protection
http://www.cagw.org/site/PageServer

“Second, the re graph is purposely linear and not log-normal or you could see that current returns are far from unprecedented.”

This would certainly make the exponential increases look less dizzying, wouldn’t it?

Self-serving statistics, Lesson #47: If you don't like what the graph is showing you, arbitrarily change the scale and/or data until it does. If that doesn't work, try discrediting the graph-maker.

Problem solved!