patrick.net

More on Topic: Ron Insana predicted the housing bubble as well as the rise in gold and oil in his book "Trendwatching" in 2002. He claims that all bubbles have this in common:

1.A new invention that creates new investment opptys: "Exotic Mortgages".

2.An exogenous shock that causes monetary policy to be too easy: Tech bubble burst, 911 causing record low interest rates to prevent economic collapse.

3. Event that causes easing in fiscal policy: 911 leading to war, homeland security spending, tax cuts.

4.Investors believe that future gains will continue: Did you see the survey of expectations for 22% Yoy gains in LA lasting a least a decade?

5. Overtrading and mass participation by the public: flipping. 'nough said.

6. "Going parabolic". As the mainia feeds on itself, there is a dramatic spike in both transaction volume and prices (2003--July 2005).

7. Sudden collapse: dramatic fall when all buyers have bought.
8. Typical declines of 50-90%.
9. Often the whole process was kicked off by the unintended consequence of responding to a previous financial crisis: Tech bubble.

10. Those who got in early (smart money) make all the profits. everyone else all head for the exits at the same time, causing their profits to disappear and the smart money to accumualte all the winnings.

Kind of creepy.

Deo Vindice

Hmmm... new bull going by name of "Ricky", posting with email address of "hoss@cartwright.com" and using a vaguely familiar IP address.

Must resist urge to feed old trolls... must resist...

But for the 10% - 20% of the population that wants to compete on the world stage, there are only a few places you can really live and be taken seriously. And the housing prices in the those areas will always be much higher than the rest of the country.

You have no clue. If you want to compete on the world stage, you need to setup shops in developing countries (China is already too expensive) and oppress the population there. (You need your private army to protect your ass though.)

Peter P, unless I'm mistaken, I believe "Ricky" owes us some butterfish sushi (and an apology). :mrgreen:

Peter P, unless I’m mistaken, I believe “Ricky” owes us some butterfish sushi (and an apology).

I know. I won't count on it though.

Prat, do you want sushi? We can surely meet for sushi in Menlo Park sometime.

Sure. You've got access to my email? I only check yahoo every few days, but I do check it.

Cheers,
prat

http://www.newscoast.com/apps/pbcs.dll/article?AID=/20051223/BUSINESS/512230430

I look at the TUT spread, which is 2yr / 10yr. I am under the impression that many trading systems use this to obtain yield curve information.

Lulu,

Determining exactly when the yield curve "inverts" can be tricky to pinpoint because there's more than one way to measure it. In general, though, the MSM media (including Prat's CNN money article) seem to use the 2/10-year bond spread as the main benchmark.

For the little wager Peter P, myself and MarinaPrime had going back in August, I believe we settled on the 1/10 year spread, (mainly as a token/concession to MP). If you use the U.S. Treasury Dept's own yield curve data, it inverted on BOTH the 1/10 and 2/10-year spreads today: treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

Sure. You’ve got access to my email? I only check yahoo every few days, but I do check it.

Cool. Have you tried Kaygetsu (www.kaygetsu.com) yet? The owner used to run the famous Toshi Sushi in Menlo Park.

It is in the Sharon Height shopping mall, just be Santa Cruz and Sand Hill. Prime location for Palo Alto workers. :)

That’s what i’d do if i had one of those ‘exotic loans.’ Seems rational.

Too bad, sheeple are not as rational as you. Besides, if people could not afford 5% 30yr FRM last year, what makes you think that they can afford a 6.5% 10/1 ARM now?

Too bad they have been silly. Now many sheeple are stuck. Wolves are closing in on them.

Also, just wondering on this slight inversion… what does this mean for the economy? Is the bond market forecasting a recession? Or, is the bond market just saying that the inflationary outlook is benign and that the Fed is wrong?

Whatever you want to see it as.

peter p. this one is for you:

It requires registration. :(

@Lulu,

Yield curve inversion can signal a number of things. In general, the "standard' interpretation is that the bond market is expecting a weakening economy, which usually means falling future yields (interest rates) are on the way. An inverted yield curve has historically been a very reliable predictor of recessions, which usually follow with 6-12 months of the initial inversion.

peter p. this one is for you:
It requires registration.

Try BugMenot.com

There is no exterior distinction between affordable and market-rate housing.

How about interior distinctions? Perhaps one has pergraniteel and one does not. ;)

BTW, thanks primetroll.

I guess that makes sense. Is it possible that we can be in a recession, but still have rising home prices as investors shun stocks?

Or investors may shun housing and go to metals. It is all about prevailing expectations. Economic fundamentals are reactions to such expectations.

I guess investors can also shun everything, in which case liquidity rises tremendously as cash gets hoarded in money markets and savings, which results in a rightward shift in the LM Money Supply curve, which further pushes down real interest rates, which ultimately proves to be a catalyst for corporates and consumers to borrow and invest again?

Unlikely. You are describing a textbook economic utopia. The fact is that markets are 100% driven by psychology and that liquidity bubbles forms and disappears.

Read Soros.

Lulu,

The fact that so much money (and credit) has already been thrown at RE since 2000, and that housing prices have outpaced incomes, rents and overall inflation for so long tells me that much more appreciation is unlikely at this point. 2000 was really the point at which the current RE bubble took off, thanks to AG's negative real interest rates combined with relatively new speculator-friendly tax incentives and fleeing Dot.com "investors".

The odds of this trend-line continuing indefinitely, given the current sky-high price/rent ratios must be very low. Trees just don't grow to the sky. Of course, median prices (on falling inventory) can still go up a bit further, as the remaining few buyers can now "scale up" and cherry-pick among much greater inventories, but it's very likely that we're already at or near peak prices in most regions.

Whether or not the Fed can start another asset/credit bubble in another market is anyone's guess, but housing's day is done --you can stick a fork in it. :-)

thanks to AG’s negative real interest rates combined with relatively new speculator-friendly tax incentives and fleeing Dot.com “investors”.

Forgot to mention the massive role that GSE/MBS risk underwriting has played in this cycle. Fannie, Freddie & Ginnie have purchased (and guaranteed) around 50% of outstanding residential mortgages out there, allowing banks and sub-prime lenders to hand out I/O mortgages to minimum-wage earners, illegals and dead people.

Whether or not the Fed can start another asset/credit bubble in another market is anyone’s guess, but housing’s day is done –you can stick a fork in it.

I am wondering how much gold will go up in value if just a portion of the excess liquidity is going after it.

All gold ever surfaced in history can fit inside just a few McMansions.

I am not a gold bug.

Things are definitely cyclical, but i think in general, due to population growth, and inflation.. things tend to continue moving up in the long run.

Very true. However, one must be able to meet short-term obligations. How many "investors" can withstand a 10-year drawdown in real-estate on negative cashflow?

I don’t know about gold. It seems that everybody is chasing gold. Take a look at the chart.

Gold is down from the top and is having some trouble heading back up. We will see.

Things are definitely cyclical, but i think in general, due to population growth, and inflation.. things tend to continue moving up in the long run.

Yes, the overall trend for housing (and most any asset class) is up. The question is, does housing historically go up much faster than inflation and incomes? Now that housing is completely unaffordable in bubble regions for anyone not rich (or using NAAVLPs), who is left to be the "greater fool"?

But, regarding non investors, those like me.. who just want to buy a house and live, i think most really don’t think about capital appreciation or depreciation. They/I just don’t want to pay someone else’s mortgage, they just want to pay the bank, who owns the majority of the house!

Yes. It is totally fine if you can afford the mortgage.

Many homeowners rely on NAAVLPs to afford. They will face reality.

I do not really care to whom I pay, but I need numbers that make sense. Paying $5000 a month for a condo that costs $2000 to rent does not make financial sense.

Joe smooo, I agree. :)

I go there every day.

"I don’t know about gold. It seems that everybody is chasing gold. Take a look at the chart."

The future is not predtermined. Investors use gold as a hedge against uncertain events. Big risks for 2006: Bernanke prints money, dollar drops, geopolitical events spiral out of control, derivatives collapse, banks become insolvent when housing tanks, Stock market reverts to mean P/E, Oil takes off due to supply disruptions, dollar loses reserve currency status, Iranian Euro oil exchange, inverted yield curve/recession. Much uncertainty. Few ways to protect your assets. All that liquidity goes somewhere. Some of it seeks the protection of gold. I haven't bought since $468. Not adding, but it will go higher. Fear will drive the market (herd) to perceived safety in 2006.

PeterP, I agree, investors over the past year who are cash flow negative (aren’t they all), are going to lose money if they try to sell within a one year, if not a two year time frame.

There are also investors who achieve "positive" cashflow using Option ARM minimum payments.

I really do not know how it is possible for them to stay in the game.

They/I just don’t want to pay someone else’s mortgage, they just want to pay the bank, who owns the majority of the house!

True enough if you are using a traditional 30 year fixed. If you are going I/O and paying significantly more than equivalent rent? That is the situation in most of the bay area right now.

Good? Bad?

_shrug_

I don't mind paying 1/4th of someone else's mortgage and making 12% long term on a highly diversified portfolio with the rest. But I'm a nut like that.

Of course, in three years when The Boss says we are getting a house, I'm afraid all the spreadsheets in the world won't make a difference. Viva la bubble!

Cheers,
prat

Of course, in three years when The Boss says we are getting a house, I’m afraid all the spreadsheets in the world won’t make a difference. Viva la bubble!

Perhaps we can convince The Boss over a nice meal of sushi?

PeterP - $5,000 vs. $2,000… is it really that out of whack right now? Perhaps more like $4K to own, and $2K to rent? I thought I read somewhere (Chronicle) that it’s 50% cheaper to rent. But, let’s say you pay $4k, isn’t that really $2,400 after tax ‘benefits’? Not too much more… but obviously too much if the property is going down!

It is probably 4K without HOA and property tax.

A typical condo will cost about $400 a month in HOA and another $700 in tax and insurance. If you factor in possible tax deduction, it may be closer to 4K, but there are serious talk about taking that tax benefit away.

So the difference is more like 4000 vs 2000 after tax.

"I don’t mind paying 1/4th of someone else’s mortgage and making 12% long term on a highly diversified portfolio with the rest."

John Mauldin believes that the pension crisis is far worse than people realize because people assume 12% equity returns over the next 10 years. He believes that equities will actually yield negative real returns due to the current PE and reversion to the mean. We are in a dangerous time with unusually high geopolitical risk, simultaneous asset bubbles, and gobal imbalances. IMO, the one who loses least over the next 10 years wins. Most investors will lose money. Few will get 12% quoted in Mutual fund marketing literature.

QUESTION: What Liability Would a Illigal Alien have in just walking away??? Whats to keep them from just heading back over the border if things dont work out here in the USA??

Liability is irrelevant. One cannot be forced to sell kidneys to repay debt.

NEXT QUESTION: what kind of income level are many of People that cross the Border from Mexico??
I just dont see how someone crossing the border is a good risk??

Usually not very good. However, some may run cash businesses who have "special tax treatment".

ANOTHER QUESTION: How are Illegals Qualifying for Homes.. apparently they are?? … … are People coming from mexico even in the average income bracket?? if people with decent jobs not able to qualify by traditional metheds..

They are qualified for the payment structure, not the principal amount. Someone who come in illegally are unlikely to be risk-adverse. They love the thrill of NAAVLPs.

Sunnyvale_Renter:

I'm certain of a gold bubble, too. I will begin to take profits at $800, and all the way up. I agree that we face the potential for a weimar style inflation. Bernanke must print money. That wipes out middle class savings and disproportiantely harms the poor. Historically, hyper-inflation has lead to dictatorships for this reason. When you look at US politics applying European Balance of power models, you see that we live in interesting times. I mention European BoP models because your allusion to the weimar republic is on the money. I'm working on keeping my comments short, but I've been modelling end-game scenarios for the break-up of the United states. Few people in blue states understand that the South's evangelical christianity is really resurgent Southern Nationalism with the ability to cross Southern borders. This may sound radical, but a student of history would say that it is inevitable.

Check out the history of Arlington Nat'l Cemetery. You will be ashamed to be an American.

While we're on Weimar doom and gloom:
Google yourself one of the many papers about the German currency and bank crisis of 1931. The consensus seems to be that the triggers were
- excessive amounts of risk taking for competitive reasons by banks that were considered "too big to fail", in particular: risky loan policies and small equity covers.
- large amounts of short term foreign debt that was withdrawn as the crisis played out and confidence in the stability of the currency was shattered.

Here's one:
http://www.sfb504.uni-mannheim.de/publications/dp02-48.pdf

Of course, many aspects of the crisis were totally different from the situation today, but it's an interesting case study nonetheless.

In case you're interested how the NSDAP did during these years of depression and economic crisis, here's a distillation of election data from Wikipedia:
1928: 12 of 491 seats (2.4%)
1930: 107 of 577 seats (18.5%)
1932 (July): 230 of 608 seats (37.8%)
1932 (November): 196 of 584 seats (33.5%)
1933 (March): 288 of 647 seats (44.5%)

Sunnyvale_Renter :

I'm working on shortening my posts, so I'll move on from this topic, except to say: We have an ideological and geographically polarized political climate for historical reasons. It will play out according to the pattern that these things always follow, as WWI and WWII did. History does not repeat, but it does rhyme. Bullish for gold, bad for Real estate.

RE: Fencing. My wife was saying that she wanted to take up fencing. She comes from a long line of people who were good with a sword. Apparently, she doesn't have enough useless aristocratic abilities already.

Where do you take lessons?

If there is a sushi party and it is in the Bay area, please invite everyone on the blog.

Of course. Any suggestion?