That kind of thing always makes me nervous about forecasting a top — as a wiser analyst than me once said, bear markets always begin with full elevators, and right now there may be too many people (including me) standing around talking about a housing bubble for the bubble to pop.
Back to Main
June 7, 2005
Covering the Top
Comments
I’m betting on the big oil price jump of the second half of this year to trigger it all.
b – you’re too fast for me. I can’t put a post in!
Posted by: Jérôme | Jun 7 2005 22:08 utc | 2
forgive my ignorance – when the housing bubble does indeed pop, does that mean that all of us who have bought homes in the last couple of years are screwed? We have a fixed APR, and our house is in a nice part of town – so hopefully we’re OK.
Any thoughts?
Posted by: dc | Jun 7 2005 22:27 utc | 3
No housing bubble here (SE Iowa small town). Average time from listing to sale is over 6 months. People are starting to auction houses that haven’t moved. Over 100 houses listed in a town of 8000. Prices range from $35K (1000 sq.ft) to $260K (20 acres with stocked pond, timber, barn, chicken house, 4 BR, 2550 sq.ft.)
Posted by: tee | Jun 7 2005 22:57 utc | 4
Although rumours and runs can effect house prices in the short term, long term prices are determined by fundamentals. Is the property likely to be wanted by people long term? If so how much (say percentage of median income) does it cost to buy? Things to consider Are the numbers of new families increasing or decreasing in your area? Remember the population bulge called baby boomers are aging the kids have/are growing up so those ppl will be looking for smaller low maintenence housing. Will changes to immigration policy translate into increased or reduced demand for housing?
People will spend a very high percentage of their income on housing in an expanding market but in a stable or contracting one about 45% (which is plenty high) is the max. Many will try and budget at 25-30% but with dual income families that can still be lots of dollars. We are dealing with an item that is about 1 or 2 on the human hierachy of needs (shelter, just after food I think) so that housing is always worth something, but we’ve also seen that high demand rating cause people to make bad long term decisions.
It doesn’t hurt to be rational about it and it is easy for me now with just me and the kids so my house is where I live and I don’t really give a toss what anyone thinks of it. I don’t owe anyone anything on it so if the market round here crashes it won’t make a lot of difference, but if it picks up big time I won’t make much either that’s OK with me tho cause it (pretty much anyway) keeps us warm in winter and dry. It took a long time for me to get to that headspace tho and if I had had to consult with another I (probably) wouldn’t have got away with it. As it is the kids are getting older and noticing that their home doesn’t have alla the ‘features’ that their friends have so Dad cops a bit of flak from time to time. Tough!
Posted by: Debs is dead | Jun 7 2005 23:46 utc | 5
No housing bubble here (SE Iowa small town).
Having lived through the Reagan boom of the mid to late ’80s, I have to say this all seems like deja vu. Which is understandable, because we’ve got pretty much the same policy mix of heavy defense spending, big deficits, easy consumer credit and a (relatively) overvalued dollar.
Result, then and now: Roaring consumption-led booms on both coasts and in the sunbelt, stagnation — or worse — in the manufacturing and agricultural heartlands.
Only now the boom states are being given an extra kick in the pants by extremely low mortgage rates and skyrocketing real estate values. The old economy states, meanwhile, are falling further and further behind.
Eventually, though, the policy mix will have to change — as it did in the late ’80s/early ’90s. Rates will have to go up, maybe a lot, the dollar will have to go down, maybe a lot. Credit will be hard to get, particularly after real estate prices start to fall. In theory, the heartland should do better as manufacturing and farm exports take off and domestic industries become more competitive with imports (thanks to the weak dollar.) The boom states, meanwhile, will go bust as consumption growth slows and the federal tit runs dry.
I’m not sure it will play out exactly the same way this time — the imbalances may be too large for a smooth (or at least semi-smooth)’80s style adjustment. But at the least, the heartland should suffer less than the coasts. Compared to a crappy Florida condo selling for 30% of its peak value, that 20 acres with pond, barn and chicken house could start looking pretty good.
Posted by: Billmon | Jun 8 2005 0:06 utc | 6
Alan Greenspan said today that he has no explanation why long term interest rates are declining while the Fed is jacking up short term rates. There is no rational reason.
The housing bubble will continue expanding as long as there is free money to borrow to spend on the continual turn over of housing that is appreciating at 25% per year. This is irrational exuberance at its worse. Gambling that you can get your money out before the bubble collapses.
Who will be hurt? Lending institutions to the extent that they are not bailed out by the taxpayers and homeowners who are forced to sell their devaluated houses. An economic depression could occur this time since housing is the only force propelling the economy, the federal government is already totally over its head in debt and documented incompetence at the top of government.
Posted by: Jim S | Jun 8 2005 0:51 utc | 7
I have been intuitively (perhaps slightly rationally) thinking of selling here in New England and immediately purchasing in the heartland (Iowa, I know it, I lived there) with good agricultural possibilities (most anywhere in Iowa.) I think if the shit really hits the fan, as so many are now predicting (e.g. Michael Ruppert), food & shelter would both be available. Add a small solar and/or wind energy source and I could continue to frequent this blog and run my refrigerator and stereo.
New England housing dollars converted into a heartland home and land would buy considerably more than I have here. And then I’d hopefully be relatively immune from the debris of the bubble’s bust. Seems Billmon concurs
Posted by: Juannie | Jun 8 2005 1:01 utc | 8
I have a good union job, I make about the average wage-and I can’t afford to buy a house! I can afford to rent, however-and that is the true market price of these places.
If you can’t make money off the rent, you paid too much.
10%-20% returns per year are not sustainable.
That said, the #$%^#@^ baby boomers always mess the timing up a bit. As a late boomer/gen x, I am getting damn tired of living in their shadow….
Posted by: doug r | Jun 8 2005 1:42 utc | 9
Billmon is exactly correct. Housing prices in southeast Michigan, Detroit area actually went down last year. Manufacturing states always do worse under rethugs. Michigan had the lowest unemployment since Johnson when Clinton was in office. (Carters admin couldn’t provide the midwest with the same economy as Clinton because he started tightening the budget, inflation hangover from Vietnam and Nixon taking the US off Bretton Woods. The inflation that followed and then the late seventies oil shock took the US economy to places not seen. 1979 through 1981 was not a recession, it was depression.)
I was always a believer that Fed policy determined most of the economy. But with a two trillion dollar Fed budget, fiscal policy is having a big impact in the midwest.
Jim S, what we are seeing is an inverted yield curve between long term and short rates. This usually means recession. Thats why many believe Greespeak has one more quarter point rate hike and he’s done. Otherwise the economy will tank again since it is addicted to low interest rates now.
Posted by: jdp | Jun 8 2005 2:09 utc | 10
dougr:
I fee your pain, as a 30 year old it has been difficult. I have had opportunities to buy a house in early “hot” markets i.e. SF Bay Area and DC, but those prices were just barely beyond my reach in the late 90’s and early 00’s. Now in DC the prices are out of control. The rents in my native Seattle or second native SF are back in control, but there are no jobs. I am stuck in DC paying twice the rent that I would pay in those areas for an apartment. My brother who is a few years older and had more time to save just bought a nice house in Lake Forest Park (a nice northern suburb of Seattle) and he pays a mortage that is only 50% more for a 4-br 2700 sq. ft. house that I pay for a 600 sq. ft. apartment. I am tired of getting screwed.
Posted by: Bubb Rubb | Jun 8 2005 3:20 utc | 11
Calling All Angels
The Flint Voice
TUESDAY, JUNE 7, 2005
*Flint, Michigan*
This broken-down Michigan auto town doesn’t offer much when it is
comes to economic prospects. Bill Playor works with what he has.
“My dream is to build an auto factory theme park,” Playor declared the
other day in an outburst that stung like the bitter chill of late May in a
place whose history is inseparable from General Motors’ notorious
system of union busting.
Playor meant an auto factory for tourists. “Extreme tourism,” he explained.
Then he spun an improbable vision of hard times and hard work, where
tourists could eat balogna and cheese and work in shifts along an archaic
assembly line, devoid of robot welders and mandatory safety gear, in an
accurately reconstructed auto factory producing 1969 Pontiac Firebirds,
one of several models the dies and components for Playor has recovered.
“Americans can work here,” he went on. “We will give them a chance to
earn a decent paycheck with benefits, like in the good old days before
downsizing and outsourcing and so-called free trade.” Then the factory
cashier will pay them an envelope stuffed full of cash – with monopoly
money naturally, not real greenbacks.
Whether Playor’s idea is madness or an act of civic desperation is
hard to say, but reaction to the idea, which he first floated in 2003
during a town meeting that included survivors of General Motors
heydays and subsequent brutal layoffs, has been mixed.
“I think it is sacrilege,” said Maria Campobella, a teacher who conducts
expeditions for highschoolers to the ever-disappearing remains of
America’s factory towns.
“It is worse than sacrilege,” said Stanley Jazwinski, co-director of
the local branch of AFL-CIO, the auto workers organization that has
done more than any other to offset the horrors of Motor City’s demise.
Playor, though, is not easily daunted. He is blunt and brusque,
planning this theme park with an authoritarian and mercurial temper.
He publicly excoriated aides at a parade honoring the children of former
plant managers and furiously berated a group of Japanese investors
for arriving late for a meeting with him.
A dictatorial will might have been enough for William Crapo Duran to build
the greatest motor vehicle powerhouse on earth – the vast networks of
factories that employed millions through two world wars and the great
depression in the 1930s – but Playor faces hurdles Duran could never
have imagined.
“We need investment, and lots of it,” he said, articulating what could
prove to be the project’s biggest hurdle. “We’re hoping the novelty of
an historically accurate all manual auto assembly line staffed by high-paid
workers with full health and pension benefits will become an amusement
point-and-scoff theme park for our Asian imitators.”
Can Playor hope to attract the millions of visitors he needs to Flint?
The most significant financial investment in Flint since the collapse of
the General Motors plant, after all, has been a program by the AFL-CIO to
relocate people out of here, encouraging them to abandon the Far North
for better prospects elsewhere in the New South, Gulf Coast and West.
Playor has grander visions, talking about importing replicas of the
Firebird classic, first built in China, then shipped by ocean carrier
to Flint and disassembled for his theme park auto factory, where
visitors can rebuild the cars on the assembly line again, and so
experience the thrill of a steady manufacturing job and a good wage.
An auto showroom outside the plant will sell the Chinese built replicas.
“We want our visitors to have fun and relive old car memories, but we
don’t want them driving around in those memories!” Playor laughed.
“Capitalism in its worst form,” he said, “is about revisit this place.”
Posted by: tante aime | Jun 8 2005 3:54 utc | 12
@tante: All news feeds in the US are, effective immediately and until further notice, being operated by the editorial board of The Onion. Criminy.
It’s weird that even now work is dependant on where you live. Anyone with a decent net connection should be able to work but the trouble is that includes people living in even more economically depressed areas than Flint like Manila or Minsk. For just about every cardboard box condo in California there is an empty home somewhere in the old industrial areas and it makes you stop and think. Why? Who gains from this incredible waste of resources? The totally depressing answer is. The same old suspects. As the US manufacturing economy winds down the greedheads seem to be making an end run on every average american’s one big asset, their house. Just from reading this thread here we can see many people have left sturdy homes for which they would get a pittance to live in flimsy dogboxes which cost 3 or 4 times as much. And people are borrowing from the greedheads to do it! It’s actually quite scary cause these filthy parasites are only half smart and while they’ll make lots short term they haven’t thought this thru. Do they understand what happens when a big chunk of people lose their shelter?
Posted by: Debs is dead | Jun 8 2005 4:21 utc | 14
Even more scary than mortgaging from greedheads is placing our national treasure into the hands of the Fed, a private chartered corporation, that we have unwillingly and unwittingly handed over the task of charging ourselves interest to use our own money in order to “stabilize” trade and prevent another Gay 90’s, 1930’s meltdown.
Then they stole our silver and gold that had backed it, margined our own assets against US through fractional reserves, and Bernanke’d their fiat greenbacks like Confederate paper into a whirlwind of collective inflation, deflation, pump and dump and deepening debt, swaying to the drumbeat of the politicos and their deficit-and-spend cabals, in so doing, the Fed is creating the very meltdown that they were chartered and entrusted to prevent!
Who are these folks? Where is all the trillions in blood-money usury we’re gouged going to? It’s our estate, folks! These are our assets! The Fed is a Ponzi scheme of Carpetbaggers, and can be voted out anytime we call an election!
Posted by: tante aime | Jun 8 2005 6:09 utc | 15
I thinki California will be the canary in the mine. A friend of a friend of mine just sold a cardboard shack of a place in Studio City for half-a-milion. When Ahnold screws up the state, the pile of plate will come dowm crashing. I already detect a fair amount of stress/anxiety among the youngish Hollywood types who can’t afford to buy. This is as bad as I ever seen it in 25 years.
Posted by: Lupin | Jun 8 2005 7:14 utc | 16
London started raising rates 8 months prior to us. They are now starting to deflate, therefore October-December is our window for similar action. Currency market sell-offs, oil price gouging, goofy foreign policy decisions ie new invasion actvities, and also false flag operations, can easily ignite the spark that burns down Rome.
You want to build world confidence in the dollar? You want to keep the bubble going? Impeach Bush & co. A long public impeachment trial with lots of convictions would encourage enormous investment in the US. More warmongering will force retalitory financial action from China and the Asian tigers.
Acknowledgement of the Downing Street Memo now, saves the US and the world much blood and treasure down the road. If we had an impeachment trial after the Abu-Ghraib revelations we wouldn’t as a nation or a world audience be in this boat. Team Bush foolishly gambled and lost, and now the bill had come due.
Posted by: patience | Jun 8 2005 7:31 utc | 17
From Southern Maine. Building a house is expensive; building materials, zoning, and building codes among other things are also pushing up the price of a home. (I’m no deregulator. Building codes protect us and our investment.)
Americans have been moving to the coasts since WWII, so much so that they have finally gotten top Maine.
My question is, How will gas prices impact the real estate market. Will the suburbs fail if transportation costs (gas prices) zoom? Will prices in the cities rise as the prices in the burbs fall?
And when we all lose our houses where will we go?
Posted by: Singing Bridge | Jun 8 2005 22:16 utc | 19