patrick.net

Robert Cote'

O.K, that's fine. Perhaps 94-96 was crater for CA. The REST of the country was at or near the mean. Go peak to peak or trough to trough, but for it to mean anything it has to be a point in chronology that precedes 1997. After that everything becomes contorted b/c we went quite mad.

nomadtoons2,

I agree, it would be futile to "council" those that have already taken the plunge. But if you have someone that you care about (client/friend) and they have walked away a winner and now they're tempted to go BACK to the table? Yeah, I don't stand on a street corner with a "sandwich" sign saying the end is near and I haven't been able to "save" everyone but if you can help keep one person off "dope" isn't this a better world for it?

Newfreak,
The interesting thing about the H3 is that the size aspect is mostly percieved. It's actually the same size as a Honda Pilot, and you never hear people badmouthing those since it's a... Honda. To me, the H3 is sheer ingenious marketing.. make something that looks exactly like it's monsterous cousin the H2 and the even bigger H1, and bingo- people seem to think the thing is HUGE when in reality it is average with a V6 that gets 21-23 MPG. So the truck-drivin' deer-huntin' dudes that want the look of a H2 can have a baby version, and still get the same effect.

nomad,

Everyone I know who bought investment RE or bought a bigger house than they can afford truly believe that RE never goes down. They either dream of being RE moguls in 5 years or they believe that they'll be locked out if they wait.

newsfreak,

The idea would be, as I read it (and note that I am unconvinced of this theory at this time):

When people build home equity it is a form of savings that is inflation protected. When you put money into your savings account, you will only keep it there if interest rates are high enough to make it worth your while. Otherwise, if the Fed loosens money and drops rates, you'll pull your money out of savings and spend some and "invest" the rest into other things which do promise some greater return.

Remember that at one point money markets were earning barely over 1% and even long CDs weren't worth while. During that period holding cash was a losing proposition because it had negative real return.

But, when people have the ability to pile money into home equity they can save at a potential return rate not controlled directly or even indirectly by the Fed (home prices don't correlate well to bonds). Further, home equity is _usually_ inflation protected (again because of correlations, not anything magic).

The conspiracy part: Perhaps the Fed seeks to shift a significant portion of home equity savings into adjustable loans, thereby gaining control over how much Americans are prone to save (put into equity) or dis-save (pull out of equity). The primary reason I even give this theory time of day is because the primary savings vehicle of Americans is home equity, so this isn't a completely crazy notion, just a bit unlikely in my opinion.

SFWoman'

I'm O.K with "We ARE the pin" but I especially like George's "nail...... meet coffin".

Would it be rude to just have a pin in your lapel? I mean I've seen all kinds of "pins" and broaches over the years. Everything from AIDS to 9/11, cures and causes of all shape and form. But a pin? Just a pin?

As in: Hey DinOR! What's the pin for?

Bwahahahahahha!

nomad,

There's something about a Hummer that just screams nuisance value. As you say, H3 = Honda Pilot (and H2 = F150) people who buy H2s and H3s are buying it to flaunt and piss other drivers off. In reality, they're no better or worse than people who buy Pilots and F150s but don't need them.

I always figured if people buy based on opinions on oneside, without checking out the other side of the story, they're pretty much doomed already. My mom, on the other hand, thinks there's no such thing as a bad deal if everybody else is doing it.

SFWoman,

I'm picturing Excalibur itself, reduced to 1/4 the size of a letter opener. Small, but mighty! The bigger your bubble, the quicker the slaying.

newsfreak,

The Fed's mission is to control manage the monetary policy of the US. In such, they consider macroeconomic variables and attempt to maintain equilibrium. Therefore they need levers (as listed above, there are three) in order to affect those variables. Home equity as a form of savings is a variable which the Fed cannot easily affect with any of their three levers; in fact, home equity becomes more attractive as the Fed seeks to cause dis-savings by lowering rates.

Otherwise, I don't ascribe any particular diabolical intent to the Fed's actions. The Fed doesn't control Fiscal Policy, your elected officials do that. The Fed just has to react to Fiscal Policy and try to keep things coordinated and running smoothly.

"Or perhaps, a 666 pin, see what the 6th of June does for home sales."

Hehe, we could research what happened in the year 6 or 1006...

newsfreak,

Welcome to the United States of Real Estate! This is why there are so many among us that are quite sure that the the FED would NEVER do anything detrimental to the bubble! This goes a long way toward explaining the mania of 2004 and 2005. Truly and totally unnecessary but without ANY fear that the Fed would raise rates in any meaningful way the party went on.

newsfreak,

A pin made of precious metal. How appropriate! I'm not an "Anglophile" in particular so being as how you're in PA a replica of those used at Gettysburg would be acceptable. We'll have Bubble Busting Campaign Ribbons with annual re-enactments of bears cutting down crooked appraisers and realtors.

SFwoman,
The CL forum is a little asanine. Those people are absolutly nuts and when I used to go there, it was fairly frusturating due to the large amount of anons. You had no clue who said what, or where the conversation was going. I have a theory that the CL forum is inhabited by Realtors who post anonymous posts of people who claim they want to buy regardless of the costs.

I don't attribute the Fed with bad intent, but I do attribute the Fed with appeasing the wishes of short sighted politicians and CEOs.

The FED is paranoid of DEFLATION, and seeks to maintain a lot of control over liquidity. When people refuse to spend or invest and instead save, the Central Bank cannot so easily force an economy out of deflation cycles. Japan is the most recent case study. The folks running the Fed are students of the Great Depression and Japanese Deflation.

Actually, what we're doing right now on Patrick.net is an example of price-deflation force at work. Assuming we aren't all wrong about the RE/credit bubbles:

We are refusing to make purchase decisions, or making sales decisions, because we PERCEIVE that a dollar today will be worth MORE tomorrow, at least as far as buying a home goes. So we'd rather put our dollar somewhere else than a home because we fear a dollar in a home will DEPRECIATE.

When this kind of thing hits general prices for everyday goods and durable goods, things can get bad real fast. Image people acting this way about (elastic) things like cars, refrigerators, home-improvements, clothes, designer bags, and trips to Disney. The Fed will use all its power to prevent this ever happening, at least in the current era of Fed leadership.

newsfreak,

and deflation becomes real if the price of everything is so high (from higher oil prices), that consumers cut spending?

Note quite. Prices are always relative, so high or low doesn't really affect the equation. It is what consumers perceive about the future direction of prices.

astrid,

Thanks for putting that to rest. If the FED truly had any desire to put an end to this misery (and I call it that because this will end with a lot of misery) we would have seen 50, 75 and 100 bps rate hikes. They would have been well within their rights to have done so. Had that been the case all that would remain to be done is to contend with the tax code and dealing with those that put themselves under water through equity extraction. It could have, should have been dealt with no later than the end of 2003! But I think there was a certain curiousity to see where this would all lead. How far would the American people take it? Just how far would we let this thing get out of control? Did anyone else notice a certain Dr. Mengele fascination this event?

astrid Says:

"There’s something about a Hummer that just screams nuisance value. As you say, H3 = Honda Pilot (and H2 = F150) people who buy H2s and H3s are buying it to flaunt and piss other drivers off."

As we talked about before most Hummer drivers are not trying to "piss people off", but trying to "feel bigger even they may be short (or have something else that is short)"...

Not in any way to trivialize those that suffered at the hands of Josef Mengele!

Astrid said,

"They either dream of being RE moguls in 5 years or they believe that they’ll be locked out if they wait."

Fear and greed haven't gone away. I am personally quite addicted to both emotions. They are the engines behind much of our decision making.

The question for each of us is which way we decide to steer in the hopes of assuaging our fear and slaking our hunger for the finer things -- a life of security, ease and comfort. And the greater question is which way the great mass of people will steer, which direction will the psychology of fear and greed turn them?

I read a lot about "sheeple" here. It rings false to me. Arrogant psuedo-intellectual superiority. Like it or not, we are part of the herd. If you don't accept it you're likely to get trampled or left behind. None of us is nearly as strong as all of us.

nomadtoons2 Says:

"SFwoman, The CL forum is a little asanine. Those people are absolutly nuts"

As bad as things get around here they are 100 times better than the best CL forum...

newsfreak,

I have friends in advertising too and can honestly say it is the most brutal environment out there. I'm o.k with that.

What I take exception to is the way that the consumer allows him/herself to be manipulated from the "womb to the tomb". Whay do we make it so easy for them to exploit us?

Have you noticed that every article about the housing market these days ends with something along the lines of:

Nonetheless, optimism remains. "I believe we're still going to have a good real estate market this year," said MLS president Christopher Armstrong, broker for Century 21 Princeton Properties in Holbrook.

Basically every article can be summarized as:

The numbers are bleak, inventory is piling up, nobody is buying, builders are slashing prices, ARMs are coming due, and ma and pa sellers aren't lowering prices, but we think this is normal and will get about a 6% appreciation.

Sorry about the long post.

RE: the Fed's role in the RE bubble, this is from the section "Goals of Monetary Policy" from the Fed's own website: www.federalreserve.gov:

The goals of monetary policy are spelled out in the Federal Reserve Act, which specifies that the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." ...stable prices foster saving and capital formation, because when the risk of erosion of asset values resulting from inflation--and the need to guard against such losses--are minimized, households are encouraged to save more and businesses are encouraged to invest more.

Now lets give the Fed the benefit of the doubt and disregard the possibility of conspiracy/ulterior motives for Fed actions. From a non-economist point of view, it seems to me that IF the Fed were acting in good faith according to their mission, their primary goals would be "stable prices, maximum employment, and moderate long-term rates." Then, how could the Fed in good conscience continue to prop the housing bubble? Savings would continue to erode, lowering rates during a RE crash would possibly re-ignite inflation and devalue the dollar, both of which are in direct contradiction to the Fed's mission. Am I being naive, or am I missing something?

DinOR,

A neoclassical economist would say that we "make it so easy for them" because it is in our interest to do so. This is because they equate standard of living with per capita GDP. I don't think per capita GDP really captures standard of living beyond a certain threshold (but it definitely does below that threshold; for example developing/third world countries aren't concerned about the finer points of living, just living).

newsfreak,

Since so much of this bubble has been in truly uncharted waters I think there was a certain level of curiousity on the part of the Fed and Fed watchers to see if this couldn't be a new "lever" to add to their tool bag. You've got to admit, initially it worked well. The recession was kept shallow and brief with very little pain and the HB kick started the recovery in grand fashion! I think there was a level of temptation to see if it could be used for more than just a way to stave off recessions?

skibum,

I agree that on your opinion of the Fed. I think they are good people who take their mission seriously. I was just trying to help people think through the "conspiracy" logic so they can understand the proposition and decide for themselves. Like I said, I really don't believe in conspiracy theories. People don't generally cooperate well enough to make them work (it's basic game theory).

@SFWoman

BHs = Bubble Heads = all of us here

Get the vomit bowl ready

www.msnbc.msn.com/id/12288548/

Key quote "Boomers are no strangers to drugs,” said Sallie Foley, author of Sex & Love for Grownups. “They see drugs as their friends.”

FAB,

"As we talked about before most Hummer drivers are not trying to “piss people off”, but trying to “feel bigger even they may be short (or have something else that is short)”…"

I phrased my point a bit poorly. What I meant to say the things offered by an H2 or H3, the sense of being unique and above the fray, manifests themselves as nuisance to other drivers, ie indifference to traffic situations, blocking other driver's views, and general bad driving. So, not that Hummer drivers buy H2 to be jerks, but that they become jerks when they buy the Hummer.

Or maybe it's just a self selected sample, as per your observation on Hummer drivers' height.

DinOR,

Correct me if I'm wrong, I'm just learning from you economic geeks. In fiat money systems increased liquidity is the same as increased money supply, no? So facilitating the HELOC boom with low rates, easy credit, favorable cap gains laws, and inflated appraisals of paper "equity" is a neat way to expand the money supply?

Randy H says:
Especially given that this will create very real social implications: where different classes of people can live, what schools they can attend, what colleges they can afford, etc. Land Barons, courtesy of the “free market”, and defended by fair-weather free-market fundamentalists

Several of your posts show an anti free market bias. Free markets did not cause this bubble, easy money thanks to Uncle Sam did. Do you think that banks would be so easy with credit is they did not have gov backing on loans? Would loans be so cheap if banks had only depositors money ("retail money") to lend, and not from the Federal Reserve? Think back to the Carter era for another example. Carter (in what would seem a Republican thing to do) raised the federal deposit insurance from $10,000 per depositor to $100,000. The result was that S&Ls made riskier loans and we ended up with a large bailout. You may think that bank regulation would negate the negative effects of gov insurance, but as you may recall, a few bought off politicians kept the regulators off the backs of Lincoln S&L and others.

The bubble was caused by easy credit and will pop unless the gov finds ways to pump more borrowed cash into the hands of a free spending public.

Newsfreak,

Right. I guess I meant to ask DinOR whether increasing the availability of credit is the same as increasing the money supply. I think it has something to do with the concept of creating paper money in the first place. That is, the government is somehow really just making a loan by printing money or a bank "note".

It's all new to me so you'll have to explain if you don't want your disciples wandering around half-blind.

Garth,

We are awash in capital. We're literally gagging on it. No question. The question is (in my mind anyway) after the Fed had adeptly avoided a deeper recession or even a depression why were they so reluctant to close the valve? It was so obvious that the penny ante rate hikes were having NO EFFECT of the bubble and yet they maintained this snails pace in addressing it with measured language. The now famous "froth" comment didn't come until when?

Headset,

Several of your posts show an anti free market bias.

Perhaps you haven't read enough of my posts. I am a strong proponent of free markets; probably about as close as one can get without being a free market fundamentalist ideologue. However, in the real world no markets are truly free; all of them exist within legal frameworks, fiscal policy, and monetary reality.

I don't generally make value statements about whether these policies are good or bad. I'm not smart enough and don't have the data the policy makers do. I just think through their strategy (or apparent strategy) and point out the logical benefits and shortcomings.

I do maintain a perspective which is sometimes disagreed with here: free market mechanics tend to find optimizations with unmatched efficiency. However these same mechanics favor getting "stuck" on early efficiencies and eschew taking "pain" in order to discover greater efficiencies. This is local maxima theory. Only government intervention can unstick a non-optimizing market (more precisely, one that is maximizing at a lower maxima point than is possible given the entire market function).

My favorite SpamBot from today's filter:

I am jealous of this blog. Very few comments are wrong, if any at all. I set your site as one of my favorites.Be back blogging shortly.

And I am blogous of this jell.

The average American is in over $8500 in credit card debt. That aught to mean something to a few economists.

Randy H,

You're kidding right? Thanks for sharing that. Something indeed is "in the air!"