patrick.net

Usually real estate is not a good inflation hedge. In times of inflation, commodities go up...things we HAVE to use on a day to day basis. Oil, food, etc. Real estate doesn't HAVE to be bought (it can be rented), therefore it ends up being less of a priority for day to day living, which lowers it's demand in proportion to other things.

Bayview, that article includes only properties that are MORE than 90 days delinquent.

Bizarre cutoff since 2 missed payments is a solid indicator.

one thing no one has mentioned - the government saves the banks time and time again.
they will find a way to hyperinflate so that rents go sky hi and then the equivalent to own will go down in relative terms.
if you are paying 10K a month in rent, your fixed mortgage at 5% or whatever will look pretty good as your costs may only be 5K to live there.

never underestimate the government to serve the interest of the banks. what is their interest? prices up.

how will they do this? not sure, we'll see, won't we?

pht4 says

one thing no one has mentioned - the government saves the banks time and time again.

they will find a way to hyperinflate so that rents go sky hi and then the equivalent to own will go down in relative terms.

if you are paying 10K a month in rent, your fixed mortgage at 5% or whatever will look pretty good as your costs may only be 5K to live there.
never underestimate the government to serve the interest of the banks. what is their interest? prices up.
how will they do this? not sure, we’ll see, won’t we?

Government can't stop earth quakes,tsunami etc., same way they can't stop the home price slide..which very inflated with the supporting foundation of pure avarice and NOT real money generated through economic activity. If you print too much money then we won't be the USA anymore...the country with best life style in the world...think about it....go ask APOCALYPSE...K what is the truth. :)

bayview6 says

A very large percentage of boomers have their mortgage paid off. They don’t have to sell to fund their retirement. All they need is a reverse mortgage.

Last article I read said 65% of 55-64 year olds still have a mortgage, 18% of those are underwater. Obviously some are near payoff, but from people I've talked to a lot aren't even close. This doesn't include home equity loans on top of mortgages or on paid off homes. That doesn't qualify as a very large percentage paid off ready for a reverse mortgage to me.

thunderlips11 says

This is more like the Great Depression, a period after an asset bubble fueled by easy credit. Bubble bursting was not the cause of the “70s stagflation” - most households did not own a single credit card, and the national debt was low and manageable (it would only start to explode in the 80s), and most people paid CASH for just about everything.

This is an interesting perspective thunderlips. My concern is that the price inflation that started last fall for oil and and other commodities has not yet found its peak, or current equilibrium for that matter.

It seems like you are arguing that there will be little or no wage inflation, in contrast to what occurred in the 70's. I am inclined to agree - this is highlighted by the socio-economic differences between then and now that you commented on. And this argues against strong inflation across all asset classes... and more to the point of this thread, against strong (nominal or inflation-adjusted) house price inflation.

nathanielbwest1 says

Usually real estate is not a good inflation hedge. In times of inflation, commodities go up…things we HAVE to use on a day to day basis. Oil, food, etc. Real estate doesn’t HAVE to be bought (it can be rented), therefore it ends up being less of a priority for day to day living, which lowers it’s demand in proportion to other things.

However, people need to eat, and most Americans need to drive to the food store and either their job or the unemployment office to get money to buy the food. And food/gas prices are still going up. Sure, as gas prices go up, people will drive less (demand goes down) - but this, in part, is how oil price spikes tend to reduce GDP and promote recessions, leading to/maintaining high levels of unemployment. So then prices for oil and other things should level-off or drop during a economic leveling off or downturn... but will they with so much fed money/credit sloshing around for speculative investment? With actual oil supply disruptions in the middle east? With 'helicopter ben' driving the money supply? And could he ACTUALLY raise interest rates in the near future, BEFORE oil/commodities price inflation gets worse?

So I see a case for continued rising prices for many household essentials, AND a case for persistent high levels of unemployment. Hence, stagflation at least for the near term, unless oil and other commodities prices are contained.

BTW, I'm no economist - any clarification on these issues would be appreciated.

bob2356 says

bayview6 says

A very large percentage of boomers have their mortgage paid off. They don’t have to sell to fund their retirement. All they need is a reverse mortgage.

Last article I read said 65% of 55-64 year olds still have a mortgage, 18% of those are underwater. Obviously some are near payoff, but from people I’ve talked to a lot aren’t even close. This doesn’t include home equity loans on top of mortgages or on paid off homes. That doesn’t qualify as a very large percentage paid off ready for a reverse mortgage to me.

Bob, it would seem to me that 35% is a large percentage. However, since about 35% of ALL houses don't have a mortgage I suspect that the age 62+ crowd without a mortgage is a lot higher than 35%. In addition, Bob, you should also consider the fact that a senior with significant home equity can also get a reverse mortgage. If you combine those two groups together I think you will come up with a very large percentage.

The point being that seniors that are underwater or without significant equity in their home probably will not be able to retire early, and those without a mortgage or have significant equity can fund their retirement without selling their house.

Drop off the key lee and set yourself free. Material costs are dropping? If your using cash. You will work for 6 months just to pay a stove off. Apparently in other peoples estimation. Their time is not worth a damn. Mine is. I don't know about others.

Actually it does not boil to time. What it really is about is labor. Buddy labor is damn hard. If you like being conned hey. Your biz. Its almost funny people want to keep this servitudinal system going. I guess if you can't think for yourself.. Like letting the people of interest, banks etc. telling you what to do, think and for working for them when to do it. Fine. Your in the system not as the boss but as a wag. A wag is the animals tail. So wag away. Me. Im not their fool.

Heck I ain't even married. See I'll date the babe. But even I have my limits. So the whale swims along. I wait. Hit like a shark and take a piece of it ass off and I am happy.

ArtimusMaxtor says

Hit like a shark and take a piece of it ass off and I am happy.

Wow, my grandma says the EXACT same thing when we take her to Applebees!

dodgerfanjohn says

I’d add that “replacement” cost is a faulty number. If housing is “artificially” repressed at the moment, then you also must consider that housing costs have been “artificially” inflated for the past several years. This includes construction material, labor, land, and government fees. While some of this is starting to come down, particularly material, the price/sq ft to build is still quite high. And of course high school drop outs are still wishing for $30-40/hr(though 1 out of 10 will now accept $15/hr or so).

So replacement cost remains a ridiculous grasping at straws argument.

I'm not going to argue just for the sake of arguing so I'll just say.. yes.

Though it doesn't really change the point that houses can be bought today at well below fair value
based on several metrics. replacement cost, rents.

Though I guess you could say that rents are falling too.
Put a negative number in the expected rent increase field and you'll probably find that it's never a good time to buy.

Is everyone posting in this thread today smoking the green leafy stuff or am I the troll target of the day? I swear I don't understand these responses.

I understood you correctly you're saying the price of everything is inflated so there is no fair value?

terriDeaner says

So I see a case for continued rising prices for many household essentials, AND a case for persistent high levels of unemployment. Hence, stagflation at least for the near term, unless oil and other commodities prices are contained.

Stagflation implies rising prices in all categories including wages, the prices of finished goods and services, not just food and gas.

I'm not sure what so call rising global commodity prices, low overall inflation, and high unemployment. I'm sure somebody will come up with a name that will stick, but it's not stagflation.

Thanks MarkInSF. Is the following strictly true though?

MarkInSF says

Stagflation implies rising prices in all categories including wages, the prices of finished goods and services, not just food and gas.

The reason I ask is because I've come across many different definitions online for stagflation, like

"A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation. " - from Investopedia

and

"In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate is low." - from Wikipedia

among others. And wouldn't you expect a lag in price increases for finished goods to follow increases in raw material and oil prices?

MarkInSF says

I’m not sure what so call rising global commodity prices, low overall inflation, and high unemployment.

I'm assuming by this you mean core CPI, yes?

Here's what I hold truth:
1. When stock market go up, real estate will follow
2. I am bullish on housing AS LONG AS you buy it when it's undervalued (i.e, Buy low so you can sell high)

bubblesitter says

shrekgrinch says

Expat64 says

House prices always go up. You can’t make more land. It’s a great time to buy. Interest rates are low. Foreclosures and distressed sales don’t count. Real estate is all about location and each house is unique in its specific location so it will go up in price. The Bernank has our back. Lereah will return! And, it’s a great time to buy or you will miss out.

Please tell me you’re being sarcastic.

Seriously, I am thinking he is sarcastic.

Seriously, I agree. He has to be sarcastic. Either that, or he is a Realtor selling his miracle snake oil with the same old weather beaten garbage that just makes no logical sense.

Prices on all but the cream of the crop, well located luxury properties, will not rise for at least a decade. No real appreciation and no nominal either.

During the bubble homes sold routinely for double today's prices. How exactly are people supposed to recover from such massive losses to go on and buy more real estate?

Unless the bullish see some sort of significant and broadly based wage inflation, unlikely in a globalized economy, they are just delusional.

terriDeaner says

And wouldn’t you expect a lag in price increases for finished goods to follow increases in raw material and oil prices?

Yes, but commodity prices are a tiny portion of the economy like the US. Most of the economy is labor - the supply chain to consumers for finished goods, or good and services that don't even involve commodities. If all commodities get 5X as expensive (which happened to oil in the last 10 years), it in no way implies everything else will get anywhere near 5X as expensive.

More important is that a rise in commodity prices does NOT imply self-perpetuating, embedded inflation, where prices go up 5% or 10% per year in a self-sustaining way, where people just expect prices to go up and expect to get a raise, which was the situation in the 70's stagflation. Any prices increases in finished goods from more expensive commodities are likely to be a one-time phenomena, and do nothing to increase the "rate" of inflation in the future.

terriDeaner says

I’m assuming by this you mean core CPI, yes?

No, core is just useful as a measure inflation inertia. I mean inflation for "all items", which includes food and energy in the portion in which they are purchased.

Clearly lower income people that spend more of their incomes on energy and food staples experience more price shock than higher income people. Someone with a subsistence income sees a 10% bump in the price of bread, while someone with a middle class income sees a 2% bump in the price of a sandwich they buy at a restaurant.

Governments always inflate to destruction or severe austerity measures (you ain't seen anything yet). Politicians love to inflate. Look at the decline of the dollar since 1900 - declined 95+%. What we have been experiencing the last several years is a temporary correction of a long term inflationary trend. On the demand side we have population growth. I think the general upward trend in housing prices will resume in 3-5 yrs. I also predict mass inflation (30%), but not hyperinflation. After mass inflation who knows what?

Yep Terri, Grandma's are like that. I saw Grandma rip the fin's off of a whale once. That big boy didn't see her sneaking up on him in her inflatable raft. Grandma's not so smart about a lot of things like arguing with bell boy's. Shes got a touch of Alzeimers. Oh and she will get you involved in some really dumb schemes if your not careful. She sells Amway or Mary Kay or some damn thing. Shes got a parrot too. It keeps singing "take me for a ride". I really don't pay attention to the thing. It's kind of boring.

People get all screwed up over the inflation thing. 19% interest rates in 78' over a 70C rise in gas. We are over 4 times that now and have no inflation. Cars have risen as much as 400% in prices. Still no inflation. All goods in the supermarket. Carters 55mph and the sudden very sudden knowledge we were running out of gas. Which even termites in California know its scientifically solved easily. Just spells oil provocator's. The greasy rich. It's not contrived. It calculated. For those that really want to ride threw a nasty house of horrors.

ArtimusMaxtor says

Yep Terri, Grandma’s are like that. I saw Grandma rip the fin’s off of a whale once.[...] Shes got a parrot too. I really don’t pay attention to the thing. It’s kind of boring.

Well I for one would listen to it if it sang something catchy, like "I wanna take a ride on your disco stick!" But then again, I'd probably prefer that it just kept its mouth shut most of the time.

MarkInSF says

More important is that a rise in commodity prices does NOT imply self-perpetuating, embedded inflation, where prices go up 5% or 10% per year in a self-sustaining way, where people just expect prices to go up and expect to get a raise, which was the situation in the 70’s stagflation. Any prices increases in finished goods from more expensive commodities are likely to be a one-time phenomena, and do nothing to increase the “rate” of inflation in the future.

But why just one-time? This line of reasoning seems to hedge on the notion that the current upswing in commodities prices is not self-sustaining because it is not wage-price spiral driven. Consider the scenario where raw materials, food, and oil keep going up in price because actual supply is low and/or speculative investment is strong... does it really matter if anyone gets a raise or not?

MarkInSF says

Yes, but commodity prices are a tiny portion of the economy like the US. Most of the economy is labor - the supply chain to consumers for finished goods, or good and services that don’t even involve commodities. If all commodities get 5X as expensive (which happened to oil in the last 10 years), it in no way implies everything else will get anywhere near 5X as expensive.

I agree that raw material/commodity prices will not translate 1:1 (or anywhere near that ratio) to finished product prices. Still the weak links in the economic chain seems to be the price of oil, which affects most everything in the economy via price of production and/or price of delivery, and the price of food-related commodities, which is related to what everyone needs to eat. There seems to be a lot up room for upward movement for both of these before the system crashes again...

as you say:

MarkInSF says

Clearly lower income people that spend more of their incomes on energy and food staples experience more price shock than higher income people. Someone with a subsistence income sees a 10% bump in the price of bread, while someone with a middle class income sees a 2% bump in the price of a sandwich they buy at a restaurant.

terriDeaner says

But why just one-time? This line of reasoning seems to hedge on the notion that the current upswing in commodities prices is not self-sustaining because it is not wage-price spiral driven. Consider the scenario where raw materials, food, and oil keep going up in price because actual supply is low and/or speculative investment is strong… does it really matter if anyone gets a raise or not?

It's not self sustaining unless wages go up too. If wages don't go up, then there is a limit to the price people can pay for a given supply. If oil went up to $300 a barrel, and wheat to $1000 a ton, but wages stayed flat, that would be very bad for the US economy, but it still wouldn't be stagflation.

terriDeaner says

Still the weak links in the economic chain seems to be the price of oil

Yes, it effects the price of lots of things, including the price other commodities since oil is heavily used to produce them, but still 20 million barrels a day at $100 a barrel is still only 5% of GDP.

MarkInSF says

terriDeaner says

But why just one-time? This line of reasoning seems to hedge on the notion that the current upswing in commodities prices is not self-sustaining because it is not wage-price spiral driven. Consider the scenario where raw materials, food, and oil keep going up in price because actual supply is low and/or speculative investment is strong… does it really matter if anyone gets a raise or not?

It’s not self sustaining unless wages go up too. If wages don’t go up, then there is a limit to the price people can pay for a given supply. If oil went up to $300 a barrel, and wheat to $1000 a ton, but wages stayed flat, that would be very bad for the US economy, but it still wouldn’t be stagflation.

Just to add, if oil goes up that much price of other affected items would not because alternatives would become cheaper reducing demand for oil. we learned that back in econ. And like you mentioned without salaries rising there can be no inflation.

MarkInSF says

It’s not self sustaining unless wages go up too. If wages don’t go up, then there is a limit to the price people can pay for a given supply. If oil went up to $300 a barrel, and wheat to $1000 a ton, but wages stayed flat, that would be very bad for the US economy, but it still wouldn’t be stagflation.

Agreed. We'd likely be zooming down towards recession/depression at that point. I think I see what you're saying here.

But what about the next 6-12 months? Oil prices show no signs of slowing down:

WTI Passes $109
http://www.zerohedge.com/article/wti-passes-109

And even Bill McBride is getting itchy about calling for a slowdown later this year:

A QE Timeline
http://www.calculatedriskblog.com/2011/04/qe-timeline.html

Although I thought we'd avoid a double dip recession last year, I was forecasting a slowdown (here is a post from May 4, 2010: The 2nd Half Slowdown).

Right now I think Q1 2011 was sluggish (based on data so far), and Q2 will probably be a little better. But I'm not confident about the 2nd half of this year (although I'm not forecasting another slowdown yet).

What do you call this state of affairs for the short term? Also, If these inter-related trends continue it is hard to see how house prices will inflate by the end of the year. Maybe a weak seasonal bump up this summer, but then most likely a continued, steeper decline this fall.

it will be a long time before housing prices go up...too many still struggling in this economy.

terriDeaner says

But what about the next 6-12 months? Oil prices show no signs of slowing down:

Don't know. Maybe another summer spike and fall like in 2008? (Not as deep a fall of course since there won't likely be another financial panic soon.) Long term outlook is almost certainly for more expensive oil. New discoveries are just are not keeping up with depletion rates, and world demand is rising.

The '73 oil embargo started in October. In 2010 dollars, oil jumped from $20 to $40. The prices of EVERYTHING in the US economy had shot up by 20% within 2 years.

The price of oil went from $20 to $60 from 1999 to 2005. Inflation barely budged. It's been averaging $70-80, since then, and DISINFLATION been happening since the housing bubble burst.

Seriously, I don't know how anybody can look at these facts and think this is anything like the 70's.

If that’s true, then how did this happen? I thought there was supposed to be a huge sucking sound somewhere on this graph?... Also notice that the huge spike in printing is also reflected in the M2 during the recession.
Shouldn't massive debt repudiation have the net effect which is seen on the graph during the recession. Banks and those who hold the mortgages that have been sold off (MBSes) are the losers, but the freed debtor now has cash that can be used on rent, banked or spent (showing up in M2). Also, the silent stimulus (squatting in a home that has not yet been foreclosed) creates a similar scenario. Everyone benefits, except for, ya know, that gaping hole in the banks balance sheet. And the poor folks who bought securitized junk. The banks are insolvent, so their balance sheets get propped up by printing (Fed buying MBSes, and now Treasuries, in an unsterilized manner) as MarkInSF described.

bayview6 says

In addition, Bob, you should also consider the fact that a senior with significant home equity can also get a reverse mortgage.

I'm very curious about the reverse mortgage business these days. Wouldn't the lower value of houses mean a much lower payment to the owner? With all the distressed inventory already on the books, why would any company want to essentially buy the senior's home unless they were guaranteed to make a killing on it? You can't just walk into a bank and get a reverse mortgage based on what you paid or what you think the house is worth, they get to decide if they want to bother with you or not. If that 35% of seniors with paid-off mortgages decided to do reverse-mortgages, wouldn't the glut depress payouts further? I apologize for not knowing the technical terms for this stuff.

I've only heard really horrible things about reverse mortgages, so I'm not sure how it is good retirement planning.

@Cautious

I would guess that the bank assesses the value of the house low (not necessarily what the owner paid for it), since they are in a way buying it back from you.

@American: Exactly! So how can that be a retirement strategy when you'll get ripped off? Wouldn't it be better to rent out your house (if you can find a renter) or take in roommates (if you can stand them)? Hope I'm not getting off-topic, but this does relate to the subject in that the banks are going to try to clear this inventory of expired reverse mortgages in years to come. Seniors receiving a tiny equity check aren't going to do much for the economy, and after they die, their homes are going to be offered to a smaller, increasingly urban generation, which doesn't sound very bullish to me.

It could be beneficial if they are have equity in their home but have little in liquid assets that they need for living. Those who lose out are really the potential heirs...

@ LosAngeles Renter:

"Sure houses were a lot cheaper in the 90s also… BUT you paid as high as 10% interest rate on that house."

I'd like to present an example I concocted during my hard research over the years. That hard research was what led me to this site, DoctorHousingBubble and others.

Now for this hypothetical example we will be conservative so imagine a $250K house that eventually went on the market for $500K. I think we can all agree that the price of a house doubling in a few years is not far fetched. Now let's say the house which is now $500K gets an APR of 5%. The question I ask is how much of an APR would the house when it was $250K be in order to equal the mortgage payment (P&I only) of the house at 500K and 5% APR?

If you say 10% (like I did) you are wrong. It is actually over 12%. Put those figure in any mortgage calculator and see for yourself. You are STILL paying less.

Thank you Patrick for preventing me from making a HUGE mistake. I came to the conclusion a few years ago I would rather pay 10% on 100K than 5% on 500K. (I know THAT sounds far fetched but I remember the erector set houses that went up in the South Bronx back in the 90's and sold for $50K that are asking for $400K now. YEAH, RIGHT!!)

Cautious1 says

@American: Exactly! So how can that be a retirement strategy when you’ll get ripped off? Wouldn’t it be better to rent out your house (if you can find a renter) or take in roommates (if you can stand them)? Hope I’m not getting off-topic, but this does relate to the subject in that the banks are going to try to clear this inventory of expired reverse mortgages in years to come. Seniors receiving a tiny equity check aren’t going to do much for the economy, and after they die, their homes are going to be offered to a smaller, increasingly urban generation, which doesn’t sound very bullish to me.

The main element of a reverse mortgage that concerns us is that the senior gets to stay in the house until she or he dies. In effect, the can is kicked down the road with those houses. The folks making these reverse mortgages are betting that in 10 or 15 years, the housing market will have recovered to its historical appreciation rate.

American in Japan nothing will change. History will repeat itself.

All those bullish on housing I'll be seeing on television in 3 to 5 years from now, with their sob stories about how they can't feed their children. It's cyclical in CA. Every few years some people get into too much debt over their head and end up crying for a bail out. And for most part it is obvious that they paid too much for their dwelling, or bought in an area where it periodically floods/burns/mudslides... sometimes of course it's worse such as medical bills or other terrible life events.

And it is all because some level of amnesia kicks in after some time and people get too cocky believing downturns in life cannot happen to them, so they don't account for such, and bullishly believe that whatever they buy goes up in price permanently such as cars, old electronics, laundry detergent, or housing. And they over-leverage their liabilities right into permanent debt. Those type of people are the reason all the banks in LA are the tallest buildings and realtors are spending half a year on cruises in their pricey yachts drinking wine and enjoying life. Someone has to pay for all that extravagance, that someone is very easy to spot... usually a high mortgage and some sort of a HELOC down the line.

I want to quote Jurassic Park here…

Are real estate agents still enjoying those luxury cruises?