Moon of Alabama Brecht quote
June 02, 2005

Billmon: Dream House

In other words, the global financial system can best be described as an enormous black box, one which may or may not be able to smoothly absorb the deflation of a record-breaking U.S. housing price bubble. Again, given past experience, my money would be on the "not."

Dream House

Posted by b on June 2, 2005 at 02:49 AM | Permalink


Look at the poll I posted on Kos esterday:

66% of 80+ respondents believe that the US is going towards a crash landing" - serious catastrophic events with permanent/lasting changes/transformations in the country.

This is not a question of IF but WHEN.

There should be far more debate (at last among our circles) on dealing with the aftermath.

Posted by: Lupin | Jun 2, 2005 3:22:12 AM | 1

If Lupin's poll is indeed representative there will be a recession since those that use the witch doctors have a current superstition that runs along the lines of "You only have a recession when people believe a recession is coming".
So we suspend disbelief and say OK we're not just talking in absolutes, the smoothed trends tell us there is definite upward pressure on housing prices, external to the blather the real estate industry peddles to get ppl to sign up, therefore everything we know tells us that every boom is followed by a bust, so where's the edge? In other words what's the advantage for the smarties who have pulled their dough out of real estate and mortgages? One thing I have noticed about these 'corrections' is that altho they occur when the market is saturated, they also only finally happen when the 'lucky ones' are going to make a bundle.
The only thing I can think of is something Billmon appears to negate which is that there will be some advantage to be gained from the changes to bankruptcy.
My twisted thinking goes like this:
Rising native un and underemployment makes the continued use of migrant labor untenable so sanctions combined with increased border security depletes the 'black' labor stock which in turns creates vacancies in the labor market which 'legal' workers won't take up at the right price. The drop in immigration combined with the aging of baby boomers has drastically reduced demand for housing and values plummet. People try and post their keys in to bankrupt themselves and quit paying for some thing that is worth half of what they are being charged. The courts step and say "not so fast you must work at any job you can find anywhere to pay this debt" Presto a supply of indigenous indentured labor. I don't enough about the bankruptcy laws in the US to know whether this is viable.

Posted by: Debs is dead | Jun 2, 2005 4:06:59 AM | 2

Samuelson in an OpEd in WaPo:
The Curse of Cheap Credit

Call it cheap credit's revenge. We seem to have arrived at the curious juncture where the low interest rates that rescued us from the last recession might be the cause of the next -- or, at any rate, might be the cause of some serious economic or financial unpleasantness. It turns out (not surprisingly) that cheap credit, when continued too long, inspires suspect and speculative borrowing. It becomes a formula for its own undoing.
Whatever [the cause of low interest rates], they pose twin dangers. One is that more loans may turn out to be stinkers. Borrowers may miss payments or default. The second is that cheap credit is pushing some prices to speculative (that is, unrealistic) levels. "Bubbles," as we've learned, do ultimately pop. Consider:

· Housing: In the past year, median home prices have risen 15 percent, to $206,000, reports the National Association of Realtors. Since 2002 they're up 32 percent nationally. Credit standards appear to have declined. Despite low fixed-rate mortgages, almost half of new home loans in the past year are adjustable-rate mortgages with even lower rates, says Mark Zandi of That's a record; in 2001 the ARM share was 20 percent. Zandi estimates that 20 percent of new mortgages are "interest-only" ARMs (monthly payments don't include principal), which barely existed a few years ago.
The U.S. economy is doing well. The withdrawal of cheap credit would be less worrisome if the rest of the world were doing as well. Any weakness would be offset by higher demand for U.S. exports. But much of the world is struggling. If something goes wrong in the United States, it could spread globally. Everything is interconnected. Hedge funds own mortgages, junk bonds and emerging-market bonds. Losses in one market can cause losses in others. Of course, that's normal. But will the normal trigger something more threatening? Cheap credit, once a blessing, could become a curse.

I agree that the Feds loose credit policy after the stock bubble fed other bubbles. My fear is that the Fed will continue to do this and will stop rising rates too soon. If they do so, we are now only in early 1999 of the stock market and prices still have way to go before they finally crash.

Posted by: b | Jun 2, 2005 4:25:25 AM | 3

Ever heard of Gresham's law? Bad securities drive out good.
I don't see how it is possible to come to any nuanced view on America's finances when a single sector dwarfs all others. When a single sector accounts for secen times annual GNP. And when that sector is wholly unregulated and completely opaque.
How many of Galbraith's "bezzles" are hiding in the derivatives markets? It is no exaggeration to speculate that there could be several TRILLIONS of dollars of unrealised losses in that upside-down pyramid. Waiting for the suckers to suck it up.
Look at how Lloyds of London insiders dumped their asbestosis liabilities on dumb latecomers. The same thing is going to happen to investors!

Posted by: John | Jun 2, 2005 7:19:18 AM | 4

In my neighborhood, Fun-gomery, AL, residential housing is a really weird brew of social status perception, school districts, white flight, and racial tension.

I should probably sell my house NOW while it's at a peak in value, while people are willing to buy, and able to finance, before the big bubble goes POP. Got plenty of equity; hardly any personal debt, so I'm in good shape. Downside: where will I go? someplace over-priced and over-rated?

Maybe it's Thoreau time: buy some land and live off it...

Posted by: Jeff | Jun 2, 2005 10:08:56 AM | 5

And that, Jeff, is why your house isn't an asset in any useful sense of the word. You can't sell your house and cash it in unless you're willing or want to make massive changes to your life. I hate the bullshit about people's houses being the only asset they own.

Posted by: Colman | Jun 2, 2005 10:21:10 AM | 6

I recall buying my 1st house, and having heard for so many years what a great tax advantage it was, and then tax time came, whereupon I said: 'WTF!?!'

Posted by: Jeff | Jun 2, 2005 10:23:30 AM | 7

To quote Deep Throat “follow the money”. Who thought up and promoted “no equity” loans? Being an old fart, you always paid a little on the principal so after 4 years you owned a beat up car or in my case in two years a house. Since housing is the only thing propelling the US economy, someone in the Bush Administration must have said “to hell with regulatory standards and the future”. “If financial institutions want to sell interest only loans, go ahead”. Who said it and when?

Interest only loans are spurring the housing bubble. If the US had a rational government they would be stopped. ARMs which are almost as dangerous should be limited to families living in their homes not speculators. The 1929 Crash and Depression were triggered by speculation on the stock bubble paid for by loans.

Housing bubbles always burst. But, as Lupin’s poll suggests, due to the incompetent free market ideologues in charge, the blast is going to knock the hell out of the US economy.

Posted by: Jim S | Jun 2, 2005 11:11:36 AM | 8

Jeff, sell. And *rent* a less glamorous or spacious place. Do it NOW.

-- just free advice from da end of da bar. cheers!

What to do with yr. money I will leave to more knowlegeable others.

Posted by: Noisette | Jun 2, 2005 11:45:50 AM | 9

There ought to be a way to prevent the worst. Acting as if the terrible thing is already happening and there is nothing anyone can do about it may not be the best solution. It's so sad that many of those who will be fatally hit by the blast have acted on good faith - and that modest measure of greed I am willing to grant everybody.

And besides being sorry for the Amis in advance, I have a feeling that the positive correlations of Western economies are far higher than the media want us to believe. Gulp. But Jérôme and Bernhard are the resident experts on that.

Posted by: teuton | Jun 2, 2005 12:50:25 PM | 10

One feature of real estate speculation bubble: prices tend to be sticky--homeowners unlikely will sell in a collapsed market unless forced to do so (the ARM debacle for ex.). So, the damage to economy depends on asset deflation accompanied by declining wages/unemployment, I suppose.

Posted by: slothrop | Jun 2, 2005 12:58:00 PM | 11

So, if you're going to create a bubble, do it in real estate, because homeowners will soak up deflation by merely paying loans rather than sell (?)

Posted by: slothrop | Jun 2, 2005 1:07:03 PM | 12

U.S. housing market?

As a renter and an already-a-bottom-feeder, I say burn baby, burn.

Maybe by the time the thing hits bottom I'll be making enough coin to take advantage. Living in Cali where the median price just hit 500 g's, I've got absolutely no hope of owning a home today.

Burn baby, burn. :-)

Posted by: Caleb | Jun 2, 2005 1:21:19 PM | 13

What's wrong with inflation?

Okay, it spirals. What else?

The joke will be on all those bondholders, because inflation beats paying off a million dollar mortgage on a hundred thousand dollar house. Plus it pays for decades of irresponsible consumption at the expense of now-developed countries that needed the business anyway.

If inflation is accompanied by a massive domestication of sourcing, it will be far more palatable than depression.

A shock from overseas disenchantment will start it. By the time we stop it, there will be a lot of liquidity under the bridge, happily.

Posted by: macdust | Jun 2, 2005 2:09:29 PM | 14

fwiw: From Conspiracy Planet by way of BlondeSense

"There was an interview on CNBC of the renowned funds manager Julian Robertson. He is one of the greatest of the old-timers. 53 years on the Street. He manages the Robertson group of funds. They used to call him, still do call him ‘Never Been Wrong’ Robertson. He has predicted every economic cycle, every debacle, every bull market, and every bear market. "Of course, he’s a very old man now. But his reputation on the Street is like nothing you could imagine. When the segment of his interview was through, his comments alone took the Dow Jones down 50 points. Just on his comments alone. That’s how powerful this man’s reputation is. "Robertson was actually a teary-eyed, an old man. When Ron Insana asked him about his predictions, he said that he’s worried about the speculative bubble in housing and the fact that more than 1/4 of all consumer spending is now sustained by that bubble, plus the fact that 20 million citizens could lose their homes in a collapse of the speculative bubble in housing, and that the Fed and, indeed, central banks worldwide would act in concert out of desperation to reinflate the global economy in the process, creating an inflationary spiral unheralded in the economic history of the planet. "Insana then asks, “Where does it end?” And he said, “Utter global collapse.” Not simply economic collapse; complete disintegration of all infrastructure and of all public structures of governments. Utter, utter collapse. That the end is collapse of simply epic proportion. "In 10 years time, he said, whoever is still alive on the planet will be effectively starting again".

Posted by: beq | Jun 2, 2005 2:10:10 PM | 15

I have a question: Billmon writes that "Adjusted for inflation, the housing bubble has entered previously unexplored regions of the stratosphere". But IIRC, housing in the CPI (and I assume housing ought to make up a major chunk of the CPI) is only counted by looking at rental rates, not house prices, and IIRC rents have remained more or less flat in this bubble due in part to the boom in house construction. OK, my question is: is that even worth considering, and if so, does that make the picture look better or worse?

Posted by: ArC | Jun 2, 2005 2:20:36 PM | 16

Well, the American consumer temporarily dodged a real bullet last fall with the narrow defeat of John Kerry. You know of course, had Kerry been elected, Greenspan would have suddenly become concerned about the "irrational exuberance" of the housing market and done his part to ratchet up interest rates, which is all it will take to make this market fall like a house of cards on a windy day.

You know the crash is coming, you just can't be sure when ...

Posted by: bcf | Jun 2, 2005 2:32:04 PM | 17

To take this to the "me" level for a second..

Could someone please explain to me what all this means exactly for; a small family who owns both a house in San Francisco (fixed 30) and a small plot of land back east to build on later, carries no other debt, has good jobs, don't speculate in real estate..etc..

Outside of a global meltdown where our other portfolio stuff get's donkey punched, I'm not sure I care if property values correct.

Am I high?

Posted by: ass clown | Jun 2, 2005 3:27:17 PM | 18

Would I rather have an interest-only ARM at $1600/mo. or a fixed at $2800/mo. if the housing bubble pops? Seems like the collapse of the housing market would put downward pressure on interest rates, not upward pressure. A collapse would probably hurt employment fastest and lead to defaults by those who have the highest monthly payments.
If people have significantly over-extended themselves or are just speculating, well...

Posted by: biklett | Jun 2, 2005 4:28:43 PM | 19

Well, the American consumer temporarily dodged a real bullet last fall with the narrow defeat of John Kerry. You know of course, had Kerry been elected, Greenspan would have suddenly become concerned about the "irrational exuberance" of the housing market and done his part to ratchet up interest rates, which is all it will take to make this market fall like a house of cards on a windy day.

You know the crash is coming, you just can't be sure when ...

Posted by: bcf | June 2, 2005 02:32 PM | #

It was Kerry and the Democrats who dodged the bullet very deftly. The crash will occur on GWB's watch. It will take many years to undo the damage done by the Neocons.

You are correct when you suggest that it all depends on the apparent value of the Buck.

Posted by: pb | Jun 2, 2005 5:01:28 PM | 20

bicklett, i don't think those figures add up. if your paying $1600 on an interest only arm (4.5 aprox at present)your notes got to be around 400g's. w/ rates for fixed hovering around 5.7 your fixed payment for that same amount would still land you under$2000 per mo. the chance of rates not going up is next to nil. so if your rates hit 8% (a screaming deal in the 80's) who's going to be falling over? and 12%?

Posted by: annie | Jun 2, 2005 5:05:34 PM | 21

Annie- Actually it's 500k and the numbers are approximates. 280K house ten years ago, now probably worth 850k and some magic beans. If I didn't live in SF proper, I'd be worried. Earthquakes are another story...A big one anywhere on the West Coast would probably be enough to blow the bubble wide open.

My point is that the knee-jerk tut tutting of interest only ARMs is silly. There are times when they make sense on a micro scale, if not a macro scale. I'll be paying for the Fannie Mae bailout soon enough.

Posted by: biklett | Jun 2, 2005 6:42:56 PM | 22

My point is that the knee-jerk tut tutting of interest only ARMs is silly. There are times when they make sense on a micro scale, if not a macro scale.

They may make sense for the borrower, especially if all they're looking for is a tax-deductible form of rent. The question is whether they make sense for the lender - a question which will become much more pointed once the bubble bursts.

Posted by: billmon | Jun 2, 2005 7:40:43 PM | 23

There is historical evidence to back up your poll expectations of a crash. The stock market has been following the direction/slope of 100 years ago (for the past eight years)and guess what's coming up?

Posted by: Nine Shift | Jun 3, 2005 7:35:31 PM | 24

yep......the shit really hits the fan after the banks take a hit. money supply dries up fast.

Posted by: lenin's ghost | Jun 5, 2005 3:48:59 AM | 25

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