Cycles and Supercycles: The Auto and SoCal
Chuck Ponzi January 17th, 2007
Every once in a while, I stumble across some good analysis of the current housing bubble that seems to go unnoticed. I uncovered just such a tidbit the other day that would make for a good read.
Some of the points I agree with, some I find hard to digest… the logic seems a little light, or perhaps there are other answers to the question posed. Just such an article appeared on Prudent Bear the other day.
The Author, Dan Forshee, takes us on a great historical ride regarding the last 90 years or so of housing prices in the US. It even includes the very impressive chart:
I am confident that it took quite some time to compile the data, normalize it, and show it in a meaningful way. As they say, a picture is worth a thousand words.
It made me reconsider the concept of cycles and supercycles that housing is falling into or may be falling into. Regardless of whether there is a supercycle at play here (I’m not sure myself), it’s a great way to consider the past as a possible predictor of future events.
Dan also includes a great discussion of land-use restrictions by measuring the number of years it takes for the tallest building early in the century to be superceded by an even taller structure. His estimation (and anecdotally if you look at the data he presents), is that it took quite some time after the roaring Teens, 20’s and early 30’s for land to once again be valuable enough to build taller skyscrapers on.
However, like any critical reader, I must view any assertions in some suspect light, even if I agree with the potential outcome.
For example, there was a very large drop after the 1930’s in land prices and corresponding building of supertall structures. Does this mean that suddenly land could become even less valuable than before? Possibly, but he offers very few clues as to the triggers.
Personally, I believe that there was a substantial shift that occured within cities as we knew them in the early part of the century with the widespread availability of automobiles and interstate highways. This made it possible for families to reside outside of urban centers and economically commute to places of work. This reduced the pressure on builders to build vertically. The technological changes of the automobile are fundamental when viewing the Southern California region’s building habits.
Much has been said about the condo-izing of Los Angeles, Orange County, and San Diego. However, the impetus for this kind of building up is also related to the relative prices/scarcity of cheap fuel for autos. The unseen hand both squishes up and smooshes down.
Peak Oil advocates (in my mind) would find it hard to be pro-housing bubble due to the obvious effects pricier energy would have on outer exurbs and commuting costs. However, it’s interesting to note that there are a number of die-hard bubble believers who are also peak oil believers as well. How they resolve that cognitive dissonance is as as difficult for me to understand as how Gary Watts is still able to sell his predictions after his embarassing smack-down on his 2006 forecast. Guess the impossible does happen.
On the other hand, if there were to be another fundamental technological shift, some disruptive technology that makes energy substantially cheaper than oil, or just as likely to negate the need for oil, we might see land prices once again fall. I have mentioned 2 such shifts… cheap nanotube based Solarpower and advanced telecommuting (for non service-based jobs). I know that many of the people I work with would gladly trade the great weather but terrible schools and oppressive taxes of California for other locales that have much cheaper housing and better schools (the bad weather notwithstanding). Anecdotal as it may be, employers have much to gain by reducing the costs of living for their employers since they then will be able to negotiate lower salaries. In the past, bandwidth was the primary hindrance to this dream. I believe we have already overcome it, and many new communities are recieving fiber to the home (fiber-optic internet) which can have much higher bandwidth than many can currently imagine. At this point, the hardware switches become the bottleneck, not the wire.
In addition, cheap nanotube solar power makes it possible for households to be self-supporting. Roofs as solar collectors are quite efficient and that’s a lower input per person in a high-rise. Stick-built houses are relatively inexpensive, and can collect greater amounts of solar power. This kind of disruptive technology will be available to homes much quicker than some know. As we speak, Nanosolar Inc. is developing a large production plant in Northern California to produce flexible solar panels on orders of magnitude cheaper than current silicon-based methods.
While my intention was not to discredit any particular concept outlined in Mr. Forshee’s analysis, it is rather to invite those reading to consider that even when a person comes to the same conclusion, thier reasoning might not be bullet proof. Bubble bloggers, after all, were the ones who railed against groupthink. We cannot allow ourselves to become victim to it.
Sphere: Related Content
http://www.eia.doe.gov/fuelelectric.html
Just a note about your assertion on energy prices and shifts. Gasoline prices are completely disconnected from electrical power generation. If you go to the link you can see that the majority of our power comes from coal, nukes and natural gas. Oil is a very small part. So a shift in technolgy will take a decade to impact since so many gas only vehicles are on the road.
The graph that you show is perhaps correct but I think if you look at the housing trend its pretty clear we saw exponential price growth causing a shift. A lot of that was due to low interest rates much of which comes from the China effect on our currency.
Perhaps a graph showing first and second derivatives on price would be more usefull.
It is possible is a scarcity of land developing from an economic standpoint. The factors causing this are peak oil (a driving factor that causes you to drive less) along with a shortage in refinery space. We could also be seeing a shift from large scale manufacturing in suburban/rural locations tword in city structures.
Additional problems come from the inabilty toi further spread out. Freeways look to be at maximum capacity and it is too expensive to expand them. I guess we could look at a cost benifit analysis but how much further could people practically drive.
Its hard for high tech companies to gather a work force in rural areas vs manufacturing who can hire any yahoo.
There was also a substantial shift considering changes in tax laws.
So a lot of stuff is going on.
Thanks for the great work on this blog.
LAEF2
Peak Oil advocates (in my mind) would find it hard to be pro-housing bubble due to the obvious effects pricier energy would have on outer exurbs and commuting costs.
I agree that $3/gal (and up) gasoline is quite bearish for suburban RE. The “problem” is that fuel hasn’t been expensive enough for long enough to have any real effect on suburban housing demand. These things take time.
Oh, and for the record, I don’t know if we’re at peak oil but I do think it’s time that the we as a nation start thinking really hard about what to do when the stuff gets scarce.
Maybe David meant the effect of disruptive tech (ie. Nanosolar ) might be hard to measure, but definately will shake things up.
1st anonymous’ comment about gas prices being disconnected from electrical power generation is certainly true, but when you can produce ‘free’ electricity, the shift to electric-only cars could give relevance to oil prices vs. power generation vs. commuting.
sorry, John, not David (reading multiple blogs, sorry)
oc_fliptrack
I’m all for clean fuel. Whether we’re at peak oil for me is irrelevant. We will always need fossil fuels for lots of different applications, but I personally don’t feel like we should be sponsoring the middle east with its myriad of social problems that are reinforced by high oil prices.
I’ve never revealed my political standings, and I believe that given the chance, it’s not about politics, every American (if not especially the current and future presidents) would love for the middle east to fix its own problems. While my understanding of the problem is limited, it has been reported that some have the mistaken impression that we are “stealing” their “wealth” by buying oil. I say let them cook in their own wealth. Anything that gets me off of gasoline is great.
I have mentioned before on Nanosolar’s technology. If it happens as it is supposed to, you will be able to outfit your roof to produce nearly free electricity. While there are currently a number of difficulties with electric cars (namely driving distance and time to refuel), those same don’t apply to hydrogen fuel cell. Producing hydrogen at home requires water and electricity and can be stored and refueled nearly as quickly as gasoline. Wouldn’t the world be a better place with that kind of a solution?
“Peak Oil advocates (in my mind) would find it hard to be pro-housing bubble due to the obvious effects pricier energy would have on outer exurbs and commuting costs. However, it’s interesting to note that there are a number of die-hard bubble believers who are also peak oil believers as well. How they resolve that cognitive dissonance is as as difficult for me to understand as how Gary Watts is still able to sell his predictions after his embarassing smack-down on his 2006 forecast. Guess the impossible does happen.”
Keep in mind that the American public is happy to see the entire floor fall out beneath the futures market for oil. Why? It is the seduction of instant gratification. What you mention about technology improving lives in your article is a double-edged sword at best; when we think technology can streamline our life does it? Now with a Blackberry many folks are reachable 24/7 – not sure if that is my idea of efficiency having a virtual leash around you all the time. But back to peak oil, the shorts in the market are having a field day because unnaturally warm fall/winter temperatures in the North East have affected the supply. In addition, we had a relatively weak hurricane season so that had another impact on the market. Couple this with the OPEC announcement and you have your $50 oil. But the real question is supply and oil as usual is not a renewable source of energy. The four biggest oil fields are now in decline:
1. The Cantareel field of Mexico
2. The Burgan field of Kuwait
3. Daqing field of China
4. Chawar in Saudi Arabia
In regards to Cantarell Pemex there is a projected 40 percent annual decline. Pemex is nearly a monopoly in the field and corruption runs rampant in the Mexican oil industry. Again not stability and oil markets love this don’t they? Second, Burgan is also in a decline as Kuwaitis have announced in 2006 and Daqing is primarily concerned at fueling the interest of its domestic market in China. In regards to Ghawar there is a cloak of mystery here and independent audits are nearly impossible to have. But considering the field is nearly half a millennia old I would venture to say that it is also in decline. In addition, how much can we count on this field considering the geo-politics of the region and our highly popular Iraq war? Point being, peak-oil is still on the march but only for a temporary blip on the map.
How does someone reconcile high oil with high housing? Again this instant gratification. The housing market is on its third leg and we are starting to see cracks. How can California be up year-on-year while inventory jumps and foreclosures rise? Well, we need only look at the explosion of sub-prime loans in 2005 and 2006. Loan originations in the sub-prime market accounted for 25% of the mortgage market. A large number indeed. In addition, we are seeing halo cities benefiting from branded areas such as the LA effect and the OC effect. Many of these other cities will be hit the hardest because the lending industry is pushing essentially what is tantamount to suicide loans on the folks who can least afford it. As a sample study conducted by the L.A. Times last year showed 60 percent of all no-doc loans had false information; not only that but folks over-stated their income by 50%. So how does peak oil and high housing go together? By fudging the numbers and trying to keep the pied piper at bay for as long as possible.
Dr. Housing Bubble
http://drhousingbubble.blogspot.com
We’re in agreement again. I’ve always maintained that breakthroughs in photovoltaic and/or battery technologies would alter the energy landscape in ways which we cannot imagine.
The hydrogen-at-home thing, with today’s technology, is unworkable. If Nanosolar really does deliver as promised, we’ll have something to be very excited about.
John, with the singular extreme exception of NYCs suspect reporting total energy efficiency/consumption is the same in the US regardless of urban/exurban character. At that SoCal residents don’t drive anymore than the average Metro denizen. Near every technological advance on the horizon preferentially favors the exurban model as well.
We aren’t running out of developable land, energy or resources. The exurban diaspora is nearing 100 years with nothing more than sporadic blips in the rate of exurbanization. All but two of the 50 largest cities OPAC/rustbelt cities have lower populations than 1950. If you want to talk supercycles then you appear to be missing the largest supercycle of them all.
Robert,
I don’t think we’re saying the same thing.
It seems to me that the logical conclusion is that Exurbia cannot continue to expand unless there is some form of disruptive technology… for the very reasons that we are moving to an era in the US of increasing information workers and away from human-worker-based manufacturing in our race to the bottom.
My apologies if I misunderstood your post.
John