It may seem that the escalating prices of homes has made many of us rethink exactly what we’re working for.
For those of you who are already independently wealthy, you can tune out now.
For the rest of us, this is critical to our understanding of the housing/credit bubble, if we are to understand it at all.
Imagine for a moment that your purchases are not measured in dollars, but in after-tax time. For example, if my after-tax time were measured in $25 per hour, purchasing a sweater might cost me 1 hour of time. Similarly, a house priced in $25K dollars would be 1000 hours of my working time, or roughly 25 weeks working 40 hours per week, or roughly 6 months. Similarly a house priced at $250K would be roughly 10 times that or 60 months (5 years). Double that again, and you’re talking about 10 years.
The median household income in Orange County is roughly 75K. This typically translates into about $25 per hour after-tax.
Anyone see where I’m going here? Basically, the typical home costs more than 10 years of the median household in much of Southern California (give or take a bit). After that, you need to add in an additional 15 years to pay for interest (typical for a 7% loan) Or, in other words, their house is taking 25 years for them to buy using their entire current income.
Let’s assume for a minute that this is normal. Let’s not look at history, but rather see what our personal tolerance for risk is. A couple of assumptions one would need to make is that you don’t eat, wear clothing, need medical attention, own or drive a car, experience a divorce, childbirth, nor do you plan to go on vacation, take a day off, get sick, or heaven forbid get laid off or quit.
What do you think the likelihood is of working without fail doing these things for 30 years? What about 25 years?
Let’s assume that you have the typical savings here in America… which is frankly zero or nearly zero. You begin to see where the problem is.
While the last few years, we have seen lenders throw caution to the wind in the name of financial innovation, the cold reality seems that these were moneychangers dealing with OPM (Other People’s Money).
The article I ripped the above graphic of the Dollar from iterates well what this blog has been preaching for 2 years now:
1. Trade Deficits and repatriated funds from China/Japan/Et al. matters to our borrowing rates:
Here’s the deal. In 2006 the US bought $800 billion dollars more stuff from overseas than it sold. US dollars left its shores and had those dollars had not been returned and used to buy US Treasury paper (government debt) two things would have happened – the dollar would have weakened (even more) and interest rates would have gone up (possibly by a lot). If you think the housing market is struggling now, just be glad it is not also facing 10% interest rates.
2. Affordability does matter to 90% of us, and that’s who buys the median homes:
My opinion is that the housing crash that is now before us will last far longer and be far worse than is commonly recognized. If we are lucky, the housing market will bottom in 2010-2011. When all is said and done I expect as much as a 90% price crash in some markets and an average of 40%-50% across all markets. I see nothing in the trajectory of this housing bubble to suggest a reason to suspect it will play out any differently financially or psychologically than any other bubble in history. In short, it’s NOT different this time. It’s very probably the same. If, however, we’re unlucky, housing, retiring boomers and peak oil will press their serious demands upon a concurrent stretch of the future and housing will never reclaim the peak seen in 2005.
If I had to boil the main problem down to one issue, what would it be? Affordability.
3. Globalization LOWERS reduces costs (income) through competition
Given that American families have had to endure essentially flat real wage growth for the past 3 decades which do you think is more likely? Will wages suddenly rocket up 100% or will house prices come down 50%? If you are interested in how real wages for average families have been depressed all these many decades you are in luck. Last week Circuit City laid off 3,500 workers in order to hire them all back at a fraction of their prior wage providing you with a textbook example of how it’s done.
4. The Spillover to other industries will be severe
What to watch for? Over the next few months it will become obvious that all the ‘experts’ currently predicting that housing woes will not impact other areas of the economy are dead wrong. When a housing bust happens, it’s not just the carpenters and mortgage brokers that get laid off. It is the people who sold them cars and served them food, and took their vacation reservations. The ripples extend far wider than is being currently acknowledged by an unfortunately large and vocal proportion of our financial marketing infrastructure.
5. We might be seeing the reperformance of a Depression. Trade restrictions akin to the Smoot-Hawley Tarrif Act are the politicians way of “fighting back”, but end up depressing our economy through trade wars and loss of global competitiveness in the short and long term:
The US is utterly dependent on China for a huge proportion of its daily financing and yet we’re slapping sanctions on China. This is not unlike insulting your banker the day before applying for an unsecured loan. It doesn’t seem very wise.
Within seconds of this announcement the dollar took a dive, stock markets swooned, gold launched and interest rates gyrated wildly before some measure of market stability returned.
At this time of great uncertainty, it is perhaps good to consider to whom the dollars are pledged… hint, it’s not the US Government, nor is it the People of the US, but rather the Federal Reserve:
After viewing this, if you don’t remember that the $1.00 is now worth just $.04 from when the Federal Reserve began, consider the following:
There are risks to everything in life. Risks that prices go up (that’s a certainty for some things), risks that prices go down (that’s also a certainty for some things). Risks that you keep your job or lose it, and make more or less than everything now that costs more. Basically, financial matters, it seems, are a crapshoot. Do you then take your money and stuff it in a mattress, or take it and stuff it into a depreciating home? Make the wrong decision, and you can easily face bankruptcy while the right decision can make you rich. Either way, whether you like it or not, risk is a part of life, even doing nothing carries its own risks. Most important to remember however: Past performance is no predictor of future returns. To see where we’re headed, it’s best to look back to where we were the last time these circumstances occured and act accordingly.
I guess this fits with what I had posted earlier. The housing prices are somewhat aligned with the growth in M3 except where excess debt has proped them up.
The reality is I have become much poorer over the past few years. We are very much seeing the third worldization of the United States. There were signs all around us. I thought at first it was just cancer to the cities due to population decline. No, it was spreading everywhere.
So, we are seeing “elevated” asset prices in almost all classes and a lot of cash in the market.
Bascially we are just starting to feel the inflation effects now.
I guess we are much closer to hyperinflation then we thought. Far too late to do anything about it. I guess it fits with the large number of people we have seen bouncing in to the boards with the 200K+ income. Perhaps we are much closer to currency collapse than we believed as well.
I have thought the same.
I used to think that how much money I currently make was a surprisingly high income. It seems I was wrong about that, and that 250K is the new 80K.
I remember a time when people considered a “six-figure job” to be very highly paid, reserved for only the best employees, and not very common. The truth is that some guys selling cell phones at Costco can make that much. That’s depressing.
Sometimes I wonder why I got that Master’s Degree to begin with. An MBA is a paltry designation compared to many of the Doctors and PHDs coming out of India and China.
Timing is everything. If my parents had had an MBA, they could have cleaned up nicely.
The problem with our monetary/trade policy is that is promotes malinvestment and discourages educational investment. Welcome to the new indentured servitude. Your home is your new cage. Better hope it has pergraniteel.
I have thought for a long time that NAFTA and the other trade agreements would have blowback.
Specifically that it would supress wages even more and lead to further wealth disparity.
Seems like it is happening but the data was surpressed by the credit bubble.
I don’t know what to say in that line of thinking. Its a terrible choice to restrict trade. However the system in China/India and the rest of the second world does not spread wealth.
I am big believer in the Ford principle and DO NOT see that happening over there. China is a particularly jacked up situation with a lot of wealthy people buying influence and keeping the workers so dirt poor.
What a mess this all going to be.
I had hopes that China would go on a spending spree that would make life better for everyone. Doesn’t sound like its going to happen. Same mercantilist crap we saw with Japan in a slightly different flavor.
“Slightly different flavor” eh comrade…
I’d say it’s a definitely different flavor. A repressed society based on ancient culture and traditions vs a state-supressed society with wild ambitions and a penchant for international buggery and violent at-home suppression that just happens to have 4000 years of documented oppression, greed, and torture.
Hey, the only thing going for us is that we only have about 200 years of that stuff, we’re the new kids on the block.
Sometimes it seems that Marxism was the answer… but it failed because of the same problems that capitalism failed… the golden rule is that he who has the gold, makes the rules. Keeps going until you have an overthrown government, bloody coup, or some such garbage. The only way to keep the masses placated is by keeping them fat, stupid, and happy. Plasma TVs and Hummers ought to do the trick. As soon as those become unaffordable, look for the lashback.
Chuck Ponzi
Chuck,
I was in the same boat when I lived in Orange County. I can comment about your fears regarding all the “Doctors and PhDs comming out of India and China”.
I have a PhD in Electrical Engineering, of a fairly new vintage. When I was in school, there was a time when I was the only American in the lab! However, having worked in the semiconductor industry for over 6 years now I’ve noticed something interesting. The best engineers are from American schools. Period. The “flood” of engineering graduates from China and India is interesting. In my personal experience, the majority homegrown Chinese engineers (in particular) have no idea what they’re doing. The higher-education system over there is a disaster, with a few very good schools, and many, many, medicore ones. The best Indian and Chinese engineers I have met and worked with all went to graduate school in the USA. They are our best hope of winning the global technology war. There simply aren’t enough good American citizens learning this stuff. That is why I think limiting the number of H1B visas is INSANE, but what do I know, I just work at a relatively high level in the industry… I’m not a politician.
By the way, the majority of out-of-work engineers, be they American or not, aren’t really that good. The good ones get snatched up double quick.
I’d also note that I am considering resigning from my job and living off the state. The gains for working hard are so minimal at this point. At least I’d get to spend time with my children.
Yes, the path of living off the state seems to be on the path of becoming more and more attractive. Not only do you get deals on your housing, you get deals on food, electricity, transportation, college education, tons of sympathy from liberal politicians etc… etc…
In the city I live in, you have the working class living in slummy ruins of a house with street parking (if they’re lucky enough to be able to afford a car) and next door to them are new looking subsidized housing units with a one car garage, small yard, etc… And the average person in those subsidized units works less than 12 hours a week!
Works for me. I really think once you have a decent roof over your head, the less you have the better. Unless you have kids of course. Although 12-20 million illegals seem to be doing pretty good.
Too much doom and gloom in this article. Income is certainly up, some of the commentators in this thread contradict themselves it’s funny! They say anyone, such as the Costco salesman selling phones, these days can make 6 figure incomes..if that is the case then why is the $500k pricepoint not justified?
Housing may be overvalued, perhaps 10-15%, but to say there is going to be a 90% crash is silly.
There are still very strong wage earners in SoCal. Auto mechanics, AC technicians, Plumbers etc. all can make $75-80k easily and add a working spouse and you have a $120-130k household well within affordability of even current median prices.
Housing will come down a bit but for the most part high prices are here to stay. Accept it.
Good point Jamiel about incomes being up. Normally, the Federal Reserve notes something like that and responds accordingly by removing accomodating policy, but it hasn’t, and it hasn’t.
That could only mean 1 of 2 things:
1. Official Statistics are wrong about income. Local Household Income is not in fact near 75K, but much, much higher. In that case, inflation is truly running much, much higher. I’d really like to hear a rock-solid case for this so I can go back to my employer and negotiate a much higher raise than the measly 4% I got this year. (better than my coworkers who average 2.5%, but still not enough to keep up with the cost of healthcare, gas, food, or housing)
2. The Government is telling us big fat, stupid lies, about income. Like in #1, inflation is much, much higher. If you and I can build a case for this, I can perhaps negotiate some “hush money” from B Bernanke and his merry band of theives or threaten to take the story public. I figure if that’s the case, I can probably negotiate enough to get us both houses in La Jolla, Whaddya say?
On the other hand, it could be a bubble. “Gee, ya think?” and the Fed knows it. Therefore, they see no reason to pop it… it’ll just pop on its own. In the short term, it screws with incentives, but in the long run, it’ll all crash back down to where it should be when global competition finds a way to outsource $100K cell phone reps to India and China.
BTW, I was being faceitious about Cell phone reps making that much money. You have obviously missed the joke about all the OC loan officers and brokers going back to their old jobs selling cell phones in the mall. By any chance, is your name under “gullible” in the dictionary?
Chuck,
I would estimate I have read wishful thinking from more than a dozen homedebtors similar to Jamiel’s post over the last few months.
“Housing will come down a bit but for the most part high prices are here to stay. Accept it.”
The classic symptom is the attempt to justify home prices by saying everyone is making far more money than what is reported. There was one on OC Fliptrack where the claim was made that everyone coming out of college makes 60K+ and truck drivers all make 100K+. Basically every household is making far in excess of 200K.
It is probably true if you count the spending from homedebtors HELOCs.
My guess is most posters like that are leveraged into their places with 100% financing with an ARM (probably and option ARM). They absolutely need house prices to remain stable or go up. Besides, I am sure they all want their share of the HELOC gravy train. Prices need to increase for that to happen.
Jamiel, I hope you are not in those circumstances. BTW, I agree with you that a 90% drop is a ridiculous, but a 50% drop to bring prices back to their rental equivalent value is entirely possible.
So we are spending like we are making over 200K.
The more I look at the data the more ill I feel.
Tough to get a feel for where the median should be in the south bay. We have so many retires and houses paid off. Supply is somewhat restricted.
There are a lot of people with highly variable incomes so the median numbers can be a mess.
Basically its very noisy data here. I tend to look at OC/SD/Ventura/Riverside and try to scale things.
90% Drop in places like Florida, Las Vegas, Arizona would not be surprising. Who the hell wants to live there anyway? All burning hot sweatboxes.
Any inland SoCal market can go way down as well. Basically its a stinking burning hot desert too.
Central USA… see what happens when a storm hits there. Credit bubble and manufacturing flight. UGLY. They have lost 70% of their values due to the forclosure waves already. Its a Friggin mess.
I guess what I observed and Chuck wrote so elegantly about was that M3 has shot up like hell. Wages would track but all the money is flowing off to China/Japan and to the hands of the wealthy.
From an M3 perspective their is no stock/housing/gold/oil bubble.
The middle class is just falling apart here.
Times are going to get very tough.
Income Statistics don’t give an accurate picture. OC has a lot of entrepreneurs who recieve unreported income. Someone reporting $50,000 in income may actually be making $100,000.
Interest rates are at historic lows and that also supports higher home prices.
2007 may be soft but we’re somewhere at the bottom and i’m predicting buyers on the sidelines will come back and give us a strong 2008 spring season.
Put your money where your mouth is.
How much are you willing to bet?
Chuck Ponzi
Nope, sorry. Look for a 40 to 50, yes, 50% trim by summer ’08. Can’t be stopped, baked-in-the-cake. Here at the beach, many many boomers are getting restless watching their equity/nestegg/retirement savings/everything they own threatened by the subprime collapse. Now watch as the Alt-A takes the stage. For Sale signs are popping up like weeds already, and the rush for the exits will begin. Don’t think that folks aren’t watching the dollar shrink against the yen, yuan, pound, etc.
Cash out, while you still can! will headline the south bay Daily Breeze before this is over.
90% decline? You’re out of your mind! Even in the most overpriced tract homes the materials cost alone would keep the price above that. My guess is that we’ll see around a 20% decline in real terms in the desirable areas (coastal and better neighborhoods) and up to 40% in the Inland Empire and older (crappy) homes.
You’re assuming that replacement cost is the baseline for valuations.
Ha Ha.
There are a number of places in the US RIGHT NOW that I can buy a house (with land) for less than the cost of the lumber in the house.
Its ALL about supply and demand. If you think the demand is there, then say it, and justify why it’s there, but don’t give us some bullspit answer about “it costs too much to build”.
Jimineez, are people not getting enough college education these days? I thought Econ 101 was required.
Chuck Ponzi
I grew up in a small town in Wisconsin where there hasn’t been any new construction in about 50 years. Prices are below replacement costs, so there is no new construction. In a growing market demand would drive prices up to where a builder could make a buck, but not in small-town rust-belt America.
Yep … I live in the proverbial rustbelt. I never paid more than $72,000 for a house. Oh ya … I loved that house … a circa late 80′s, 2,100 sf tri-level, 3 bd/2 bath w/ finished basement, 3 car garage. Sweet! I put a coat of paint on the inside and out, redid a bathroom, put all new flooring down, and did some basic landscaping. Turned around 8 months later and sold it for whopping $89,000. “I love the smell of $ in the morning” – - LMAO!
Oh … did I mention the median “houshold” income here is around $38,000. Super Sweet!
Heck, I can buy two low end homes here for the cost of materials in ONE. Really LMAO!
Born and raised on the southside of Chicago, been living in northwest Indiana for the last 17yr. never paid more than 60k.(3bd 1.5bth brick bunglow) currently worth 145k (maybe). BTW the rust in the “rustbelt” is caused by one of the planets largest supplies of fresh water. The construction industry, zoning officals, mayors, and most other movers and shakers of our current times have no concept of planning or sustainable future growth at some point in time all the McMansions won’t be worth shit, if you think that $3.00 a gallon gas is a pain in the economic ass, wait till the morning you awake to no water coming out of the faucet.
For all us landlords, whats your take on rent fluctuation in this downward market? My take, as we see more and more forclosers these obvious fools will need a place to stay and rebuild. i don’t see rent increase in certain areas, if at all. As baby boomer’s began to retire and move out of socal to other less inflated areas, i see stability in the long run for those areas. ie: idaho/washington.
Rent is entirely based on the rental supply to demand.
There has been strong rental growth the past 7 years in much of Socal due to the population growth. Further growth depends on the local employment situation. I think we’ve built a pretty strong case that that engine is about to stall. My guess (only a guess at this point, without good statistics) is that lower-end rentals will not experience softness (1000 to 1700). Mid-priced (1700 to 2500) will experience mild softness. High-end (2700+) will experience severe softness (which it already has)
Chuck Ponzi
Hey Chuck,
I just came across your blog. Looks like you are a person who sees the reality of the situation. I bookmarked your site and plan to make it part of my regular reading.
Henry
I do see a substantial decline in values and incomes.
If you pull up the wikpedia page and look at M3 under money supply it tracks asset values pretty well. The problem right now is that incomes have not tracked inflation. This seems to be a direct consequence of jobs leaving the united states. That causes wage suppresion. The people on the top of the scale, merchants, wealthy exc are benifiting in a huge run up of realtive wealth. The middle class has been falling away and going over our heads in debt.
The correction to the stock markets looks to be small as it is just following the M3. Housing will take a while to catch up.
Seems like all of this went nuts in the Reagan administration during the cold war. Continued in to the early part of the 90s. So debt levels and the Fed both effected this.
Basically this will start to balance out if the trade imbalnces start to equal out and cash flows back to the US and makes its way to income earners.
Seems like the transient effects on values will go something like this: a mass of new housing will show up on the markey as affordability and debt are unsustainable. Rent will also decline as incomes will decline. People will double up to make occupancy.
US trade will be restricted to further slow economic activity. This is a “sort of” bad thing. Basically the second world nations need to enforce a living wage & true open market to rebalance things. Also the US will need to raise tax rates and pull in more funds to redistribute them to the masses. So, a lot of disorder in the markets for a while as buisness models are impacted.
Esentially seems like the above guys will both be right in time.
We could have substantial drops in real value and more when adjusted for inflation. There is a lot of cash floating around though… when or if that returns to housing…. when it finally gets to the wage earners.
How long could that take? I’d guess about 7 years for companies to establish themselves. Go through birth/death cycles.
All that could change if China moves to invest/purchase large amounts of goods/serivces from the US. Can’t see it happening though.
I’d think reversion to the mean based on classical affordability is in order. Some overshoot due to forclosures and resulting depression.
Many other countries experience what we economists call “Bimodal Distribution”. Essentially, rather than having a naturally shaped bell-curve of incomes, you have something that looks like 2 humps, rather than one. A pronounced bimodal distribition often leads to social unrest, so economists often monitor these situations closely. I don’t think that’s the case… yet. However, much of the illegal immigration that posesses a lot of SoCal is forming a “base mode” that could indeed cause this to happen. The real question is whether these people have upward mobility (from a strict economics stanpoint). If they do not, then you end up with a bimodal distribution.
BTW, Bimodal distribution can skew your affordability statistics, because it makes it look like FEWER people can afford homes.
Without giving a full discource on the subject… if this bimodal distribution is not resolved (something it seems that some housing bulls would like), you can expect a severe erosion of the middle-class and class warfare between the haves and the havenots. This causes political unrest and is not a very nice place to live. Again, I don’t think that’s the case, and time will resolve our current imbalance.
Chuck Ponzi
I think you have a pretty severe case of bimodal distribution in LA County. I think that is why their price/income ratios hover between 6-8 even at the bottom of the cycle. It probably also explains things like the Watts riots.
Just one comment on the China/$ situation.
China ties their currency to the dollar so that they can maximize their exports. Just like Japan did previously, although China’s link is explicit and they’re revaluing the yuan upward gradually. This is classic mercantilism. Nevertheless, their balance of trade surplus with the US is a couple hundred billion $’s a year or thereabouts and isn’t going to stop climbing anytime soon. They currently have about a $trillion in reserve and growing.
My main point is this – there’s really only one thing they can do with all those dollars. Invest them in the US debt markets. They can’t really convert them into Euros because they would depress the value of the dollar even more and thus depress the value of their current holdings. They can’t really invest those dollars anywhere else, because there really isn’t any other market that’s big enough to absorb that kind of size. In fact, the US credit markets (US gov’t debt, mortgage debt and corporate and agency debt) really aren’t even big enough, as evidenced by the inverted curve (until very recently) and the low yields out the curve relative to the Fed Funds rate. Bernanke calls this “the global savings glut.”
They can’t buy common stocks either in the US or abroad because those markets are just not broad or deep enough, and the gov’ts of those countries in which they would wish to invest wouldn’t allow it anyway. They can’t buy real estate due to the same issues.
Therefore, they must keep their money in dollars in US debt markets. And this leads to lower US interest rates than would ordinarily be the case. And it will be this way for a while.
Not necessarily.
You’re assuming ceteris paribus in all other areas.
1. China can let their currency float, and have begun to do so. A rebalance would mean serious issues, so you’re right to be concerned, but that doesn’t mean that they can’t or won’t. Especially considering the first shot in a trade war that we just opened up.
2. They can simply reinvest those earnings at home. This could cause them substantial inflation (for exported goods), but it seems the USD is going south with a quickness… there may be nothing they can do about it (and in fact, they may be the cause). It’s the eternal question of whether to sell a stock if you’re the marketmaker. You’re going to influence the market value of the holdings by selling, so you’re damned if you do, damned if you don’t.
3. China could diversify holdings, but their central bank may not want to or policy may prevent them from diversifying. They could also decide to buy Gold, that barbarous relic, and then we could easily see $3000/oz.
4. Their savings glut directly benefits us… except it’s like giving crack to a cocaine addict. We’ll just do more of it. Ideally, we would just default on our loans to them and stick it to the man… joking aside, we can’t do that, but it would be easier in the short-term.
Any way you look at it, the outcome is not good for homeowners who are counting on their houses to support a lifestyle. It is dead for that purpose for a while. The best it can do is retain its value in a fantasically inflationary environment.
Chuck Ponzi
Whenever I think of the Chinese, I think about the movie “Rogue Trader” about Nick Leeson who bankrupted Barings Bank in London. He kept supporting the market through continual buying until finally it became too big and the market collapsed taking everything with it.
IMO, the Chinese are going to get hosed because they are holding so much of our debt which is going to lose value when the dollar drops. They can only buy dollars so long. Eventually they will stop and allow their currency to float. When they do, we will have a recession, but they will have utter economic collapse. We have had the benefit of low-cost debt service and under-cost imports from China while they modernize their country. When it is all over, they will have a bigger hangover than we will.
This is a gloomy discussion. Reminds me of Kunstler’s comments section, where most of the posters are predicting the American economic apocalypse.
It’s going to take a while, but I think we’ll see asset prices and the devaluation of the dollar meet somewhere in the middle. I think home prices will come down, but not by 90%. Maybe more like 30-40%, which is more than enough to ruin millions of homeowners/housedebtors. I’m really looking forward to this development, even if I never buy a home. It’s not that I want to see people’s lives destroyed, although I do admit I wouldn’t mind seeing some of the self-proclaimed RE geniuses I have met get burned. I just want things to go back to normal.
In terms of income, $250k isn’t the new $80k, but it’s not far off the mark. Two tenured teachers in a household probably earned around $80k total when I was a kid (in the 80′s) and that number is probably around $120-$140k now. So I would say that $140k is the new $80k. If you can’t get by on $140k today, you’re wasting money somewhere, or your sense of entitlement might be a bit overdeveloped.
I agree. No one saw the NASDAQ drop 82% from the high in March 2000 to the low in 2002. Once the baby boomers can’t rely on their home equity refinancing to fund their retirement, the market will really come down.
I’d guess another odd way of viewing this is that China does nto have a currency. They have so much in US dollars that is almost a defacto currency for them. What we are seeing then is all of this money has gone off and not returned. Our buddies over there are still trying to figure out what to do with it and how to spend it.
They have also become kind of concerned about our spending habits the last few months. Kind of like they are doing all the work and we are doing all the spending.
Anyhow, if the money rolls back across the ocean we would really feel the inflation. So, the M3 is correct in that we printed a heck of a lot of the green stuff. Its also correct that CPI has not shot through the roof.
Anyhow, this sounds oddly like family finances where the wife is spending all the husbands earnings.
I don’t understand what the people of China need or can be talked in to buying from us? Hmmmm. I’d really like to sell them a bunch of cars, help them build roads, power plants and grids.
We have top notch medical technology.
I am at a bit of a loss here.
Do they like motorcycles?
Real Estate is the source of long term wealth, most people don’t realize that. You get degrees, slog your a$$ off for 5 years, how much did you save? Now how much have prices appreciated in the last 5 years? People have made so much money just buying and selling Real Estate and with leverage available from loans to just about anyone. People have made millions flipping houses without much work. We may have a lull in the market now but in the future things will brighten up, it always does.
The difference between the rich and poor is not that one earns $30k and the other earns $100k, it’s that one is a renter and the other owns Real Estate.
Getting into Real Estate is especially important for people that make over $80k due to huge tax advantages.
To Quote from Buffet (Warren, not Jimmy)
“What wise men do in the beginning, fools do in the end.”
You’re a fool if you think wealth is divided between renter and owner. What’s the other saying about fools? …
One and his money are soon parted?
Chuck Ponzi
BTW, are you a troll?
Sometimes people come on and post very stupid comments, so in case… ha ha, very funny, ok, we get it. very funny.
another thing I would like to add, people have been saying there is going to be a crash since 2003, ridiculous! It isn’t happening! Even since 2005 there has been 2-3% appreciation and more in some markets.
OK. Get ready for the invisible hand of economics to take a bite out of your ass dude.
I hope you go out and buy a couple more on the way down.
Didn’t you notice the collapse in volume of sales?
What is it about a house that goes up in utility over its life? It performs the same function the entire time. Some areas are slightly more desirable but they were when you purchased it too.
So, what is driving the price up? Inflation and marginal utility. Watch what happens as people have extra houses they don’t need.
Debt levels are played out. Done. Half last years borrowers were Alt A/Sub Prime IO or Neg AM. Can’t service the debt so its finished. Kaput. Done.
Hope for a miracle from China… that’s about all you’ve got.
Jamiel,
Misdirection. There was a bubble in 2003, it was just getting started.
BTW, just show us who in 2003 said it was a bubble. I haven’t yet seen a single person outside of hardcore economists who monitor far more details than they need to.
You’re the one smoking crack. Everyone admits there is a housing bubble now except for head-in-the sand permabulls who are about to get taught a serious lesson in economics.
Chuck Ponzi
It’s amazing that there are sooo many sellers out there still play this game “House being listed at 359,000 to 379,000″. I mean… what the hell… this is not 2004… In fact, the last five years would not have existed if not for the credit bubble… lol… what the hell… I don’t care what people say about their income… I can’t see the median income in IE being much higher than 60k… and as the Real Estate agents loose their jobs… hmmm… let see what happens..
Jamiel is right. THe problem is with wage inflation. Most people make over $50k at least here in LA, a good number even over $75k. Dual incomes mean $100-200k households are dime a dozen. If you don’t believe go to match.com do a search by income and you’ll get a ton of results. This is the general population folks, what better test than that.
I’m sure nobody on match.com lies about their income.
Right, I always trust Match.com for income verification. Maybe that’s what the banks were using? People never lie about income … except to get loans and/or a date on Match.com!!!
Too funny!
The national median home price is closely correlated with the national median household income. And these two numbers will likely track more closely over the next few years (e.g. modest decrease in the median home price of 5% possibly compounded for a few years).
However, in any given market, like the Irvine area, the median home price can be a steep bell curve, while the median household income can be very flat. Which means there are more “high income” households than homes above the median. i.e. constricted supply.
So speculation is fun, but if you’re renting in the Irvine area, you can feel comfortable holding-off on purchasing for a couple years. But a 30%+ drop within a couple years is highly unlikely without much more serious economic problems like increasing unemployment.
This thread started out with someone suggesting we are close to hyperinflation and/or currency collapse. That would totally suck. Heck, increased inflation in any case would suck for people (like me) who played things cautiously and saved instead of buying into the housing bubble.
Could we possibly see a straight deflationary scenario where housing (and other assets) just starts costing less? That seems to be what some of you are saying (unless I am misunderstanding). Or do you think it likely that any real deflation in housing assets will simply be wiped out by increased inflation?
I admit to being completely confused by the micro- and macro-economic issues at play here. This severely hampers my efforts to plan for the coming years. Like Chuck says, risk is built into the system, even if you do nothing… but I would add that at least you can feel temporarily better if you are pretending to do something to mitigate risk.
redsys
Don’t worry about being confused… Even the guys that get paid big bucks are confused as well. Just look at the talking heads on CNBC or other news programs. It’s pretty much a free-for-all in life.
We could see a strict deflationary environment in assets. That would only happen under a handful of scenarios. We already have rampant inflation that is being hedonicized (just made up the word) out of the CPI ever so cleverly to keep official inflation from looking higher. But, let’s be honest, food, gasoline, housing, healthcare and etc. are all SUBSTANTIALLY HIGHER than a few years ago. Yet CPI is between 2% and 3%.
If the world begins to get enough of our treasuries or begin to lighten their load of our debt, all of those dollars need to go somewhere. That would mean a very weak currency (for international trade) where nobody wants the dollars already in circulation via debt instruments, then it’ll be nearly impossible not to feel the effects of past monetary inflation… it will finally come home to roost.
If not, then, yeah, it’s possible.
What’s screwing everyone up is mortgages. People are confusing housing values with ease of mortgages. Housing prices are where they are simply because of the ease of ‘buying money’ and not because the houses are actually worth as much as they are selling for.
If buying money was hard or impossible, houses would be way lower. If there was a law that said the only way you could buy a house is to write a check for the entire amount from your savings account, houses would be dirt cheap.
IF the rules of money change, housing values will adjust, they have to.
I think that the FEDs response to the housing colapse will be another round of extremely easy money and low short-term interest rates – just as they responded to the stock market crash and 9/11.
In general, I wonder if inflation is the only political answer to our country’s debt problems.