patrick.net

pop writes: Realtor’s are the conscience-challenged wolves, licking their chops at all the cattle lowing in the fields nearby.

I think you're being unfair to ScottC.

We might be biased by the Realtor®s and markets in the Bay Area, many/most of whom definitely are predatory. Texans aren't the type to put up with a whole lot o' chicanery, and I'm persuaded by ScottC's descriptions and demeanor that things truly are different there.

Californians (the new generation of) can be a fairly exploitative crowd. In Texas, you can get shot for that kind of behaviour.

I see debt people. They’re everywhere. They don’t know they’re in debt.

waiting_for_the_fall,

I don't know if you're aware of it, but I used this exact pun last July for a thread: "I See Debt People"
http://patrick.net/wp/?p=35#header

Peter P was the first one to post with this:
"… They don’t see each other. They only see what they want to see. They don’t know they’re in debt."

Sorry, but it looks we beat 'ya to the punch!

Hm. Shiller’s graph shows a “permanently high plateau” starting around 1946, and the rising edge of the curve at that time does not look unlike the one of the last 5 years, both in form and relative increase.

I’m confused now. Somebody please explain.

That is because the graph is scaled down to the bubble we are in right now....as you can see, it makes previous crashes look like no crashes at all. This is why the drop is going to be the biggest in history.

Locally, in the Northcoast, the Times-Standard newspaper claims affordability is 13% for the area. A sad day in American housing. That means between 1 in 7 and 1 in 8 people/families can buy a house here.
Perhaps I am not a freak, or not a lonely one anyway.

That's old news.......it's actually quite cheap now....people just haven't realized it yet.....they will soon.

It would seem as though the most logical approach would be to inflate the debt away by increasing the money supply (m3) to the point where a million dollar mortgage today will be the equivilant of a 100k mortgage ten years from now.

Not going to happen............you think everyone is going to get a 100% raise? Because that is what would have to happen......if you've been following the media, you can see that wages are actually shrinking. Noone can afford a $70 loaf of bread with todays salary.

It's ironic too because they are outsourcing our technical jobs so they can save money (greedy pieces of shit), leaving those who were once high trained in their profession to do cheaper mindless jobs.......now there going to pay us more to do these jobs? :lol: :lol: :lol: On top of this, there is not going to be a demand for anyone to learn about technology so the colleges are going to have to lay off teachers...........and now that noone can afford the high cost of living, they are going to cut back tremendously on spending.........great plan they have :lol: :lol: :lol:

But allah, that is my point. Wages are not going up, but I think prices in general are, hense stagflation… I think the fed will try every trick in the book to avoid a recession / depression, including inflating away the debt. Why hide the m3 figure if there was not something going on?

Companies are ever so huge now....they produce more than any other time in history. They cannot just raise prices because people will just cut back and they will sell less..........remember, supply and demand.....if they sell less, they will have to lay off more which will make the situation worse. The FED is not going to allow the dollar to go to hell.....they may flirt with death a bit, but they will not let it fall.

Zephyr, thanks for the link. Lots of material there, but it all seems to be Keynesian, which is only one view of economic theory – one that is increasingly morphing to try to correct for its numerous failures in practice (remember Reagonomics?). I suggest you familiarize yourself with other economists (Friedman,Hayek,Lucas,etc) to round out your knowledge.

Ah yes, the unequivocal pessimist blog with too much information and not surprisingly you all have found one another just as usual.

Another frightened troll in denial.....they come here when they start to see the going get rough so they can get some therapy. Obviously you have been looking for this blog for fear of what is happening in the market....it's basic psycology.....well I hope it makes you feel better.... I'm sorry, but your property is losing value as we speak.....my landlord is worried that I am going to leave...... I could even get him to lower the rent if I wanted to but it is so low right now that I would feel like I'm taking advantage of him....BTW, he lets me use his washer/dryer..........even lets me use the yard/pool/playground for the kid.

You do that. Buy right now! LOTS!

Yes.....There is so much to choose from.....indulge yourself! ...and don't forget to take advantage of those IO loans, they are dynamite(literally).

Girgl Says:
Hm. Shiller’s graph shows a “permanently high plateau” starting around 1946, and the rising edge of the curve at that time does not look unlike the one of the last 5 years, both in form and relative increase.

I’m confused now. Somebody please explain.

allah Says:

That is because the graph is scaled down to the bubble we are in right now….as you can see, it makes previous crashes look like no crashes at all. This is why the drop is going to be the biggest in history.

If you put yourself into 1946 and look at the graph, you would see a exponential increase in real house prices just like the one we had in the last five years, and you (just like today) might argue that it's a huge bubble that'll end in tears.
In reality, prices stayed at that "permanently high plateau" for the next 50 years.
Who says it cannot happen now? Maybe society as a whole is now valuing housing much higher, and since the tax man does everything to decrease affordability via subsidy of rich people with multiple expensive houses, maybe the price and affordability levels are here to stay?

That's why I'm confused.
I'm sure there are things to be said on why it was different at that time (end of war and all), but I don't know what they are.

Ok, allah, so how is the fed going to deal with the massive debt this country has piled on, both publicly and privately? Allow massive defaults on debt?

Yes.....they have before and they can do it again....Why do you think they changed the bankruptcy laws? They want to make sure people are more responsible for their debts......people will not get the clean slate they used to get, they will have to pay their creditors for years to come, but they will still walk away from their houses.....will there be a lot of pain? Yes, but there is no easy way out of this....Hyper-Inflation would be even more painful and I highly doubt the FED will let that happen......The bottom line is that we are free to do whatever(almost) we want here in america....if we want to cut our own throats, we can. Wages are not going up period..... go to money.cnn.com and watch the web video titled "shrinking paychecks".

In reality, prices stayed at that “permanently high plateau” for the next 50 years.

Don't forget that the chart is adjusted for inflation.

Shiller’s graph shows a “permanently high plateau” starting around 1946, and the rising edge of the curve at that time does not look unlike the one of the last 5 years, both in form and relative increase.

I’m confused now. Somebody please explain.

Two major hits on demand there...the depression, followed by WWII. There was a runup on RE when GIs returned home.

Sure...they have to bail out explicit obligations...and they may even bail out implicit obligations as well.....but that isn't going to save those who bought these houses at outrageous prices....they aren't going to say...here you go joe homedeptor....everyone here is chipping in to pay off your mortgage.....you now own it free and clear! What is going to happen is the bailout will hurt others who are just getting by paying their overpriced mortgage, thus causing them to default as well. The fact of the matter is shit has to happen.....there is no easy way out.

During the stock bubble, AG didn't warn people directly by saying there is a stock bubble growing.....he can't, his words are so powerfull that if he was to say that it would have popped instantly! but instead he gave the warning with his irrational exuberance speech.

No one listened.....everyone continued to buy in.........now it is all gone...our 401k savings evaporated before our eyes....did we get bailed out? No......did we survive.....sort of....

A new bubble forms...the housing bubble..........he can't say that we are in a housing bubble because it would instantly pop....his words are very powerful....but he has been dropping hints all along to try to bring sanity to the market....but that failed. My favorite one:

"Newly abundant liquidity can readily disappear"

He gave the warning loud and clear.........but still noone listened......even after he mentioned that "some markets might even decline"....he kind of tried to be a little down to earth that time.....do you think that the debt will disappear? Hell no.

Talk about the boy who cried wolf! .....and this "permanently high plateu" theory will not work this time. What causes a "permanently high plateu"? .....When people can't get the price they want, they take the house off the market and wait for a better time......but this time people don't have the time or the money....they are overleveraged to the hilt.....when you have a "no money down" IO mortgage and you have zero equity to start, just a 5% decline will put you underwater.......people can't stay underwater to long cause they will drown! Fish don't buy houses, People do!

We need housing to crash.....it will allow people to be able to really afford a house.......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.

"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?