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Post by unlawflcombatnt on Jun 23, 2007 3:45:40 GMT -6
In an article from FinancialSense.com, titled Irrational Housing, the author provides an good overview of how the Housing Bubble evolved and how it has lead to a global credit expansion. He also describes how it has been perpetuated by the irrational behavior of many of the market players, and how it will eventually collapse. Some interesting specific points are made, such as the appreciation of California median home price from $178,000 in 1999 to $548,000 in 2005. (This is a 200% increase, or a 3-fold increase in price in 6 years). Nationwide, the median home price increased from $113,000 in 1999 to $215,000 in 2005. (This is a 90% increase, or a 1.9-fold increase in 6 years.) At the same time, median current-dollar wages increased only 19% during those same 6 years.
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Post by rjfliberal07 on Jun 23, 2007 20:10:06 GMT -6
This leads me to believe that with only a 19 percent increase in people's wages, then a home should be only worth about 211,000 in California and only 134,000 for the U.S as a whole. This would imply that for supply and demand to meet again, prices would have to drop 337,000 dollars for a California home and 81,000 for the U.S as a whole. That appears to look strikingly like the Percent Decline the Nasdaq experienced during the Dot Com bubble bust of early 2000. Also I figure with a recession or depression coming, and just the fact the markets get irrational on both ends of the spectrum, I believe these housing prices could fall even further below what they were in 1999.
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Post by unlawflcombatnt on Jun 23, 2007 23:01:49 GMT -6
That's exactly what I think as well. Stable prices should drop back at least to the level that matches wages. And I agree with you that there'll probably be some overshoot on the down side.
I would add in to this the large surplus of homes built during the last few years. I think the excess supply might well bring prices down below the equivalent income level for quite awhile. This is especially true in California, and especially true since much of the income growth was due to increased home construction, home sales, and financing. Wage increases will probably slow down considerably as the boom in home construction declines. The result will be the previously stated 19% wage growth will slow down, and home prices will decline accordingly.
It appears from looking at a lot of graphs, that home price appreciation really exceeded the rate of wage growth as early as 1996-97. (That's when Congress passed legislation allowing deduction of mortgage interest payments from Federal income tax.) If excessive price appreciation began at that time, then the "stable" home price level would be even lower the 1999 level (+19%).
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Post by rjfliberal07 on Jun 24, 2007 11:41:28 GMT -6
Also I think that if one saves his or her money, they can find some good bargains once the dust settles. If I had a nice chunk of change laying around, I would only consider buying a home once all the real estate ads on the radio and t.v are gone and once people start saying real estate is a horrible thing to pursue.
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Post by Ken on Jun 25, 2007 7:38:05 GMT -6
Unlawfl, home purchasing power and overall consumer purchasing power will be debt driven. That was the whole point. Our largest export is debt and dollars. It dwarfs our material exports. and that is and always was the overall plan. Back when "Reaganomics: supply side economics in action" was written, the whole focus was to attract capital from abroad. Its fun to read now because you can get a grasp on how deluded that Kemp Roth crew really was. And they are back in full force. Newt, Laffer, Kudlow and Norquist. The core belief is something I touched on earlier. Capital formation. By creating anti-labor pro Wall Street policies the formation of capital would create investment in hard plant assets, employment and wages would rise as a result. To some extent that did work. The side effects were horrible. By Norquists own admission, the effort to drown the country in debt would bring an end to New Deal policies. It didnt, but it did bring the economy to a screaching halt in the early 90's. The part that did work was the attraction of foreign capital. The Plaza Accord's devaluation of the dollar did little to reduce the trade deficits. The new reliance on Japan and middle east capital to prop up the ridiculous deficits made the US a beggar nation . Emerging economies, junk bonds and high risk unregulated S and L's loaded the economy with new dollars. Foreign capital flowed into secondary debt markets and market rates began to fall and that was the part everyone liked. Everyone got what they wanted. Consumers could finance the american dream. they didnt need higher wages. and look where we are today. Who would have believed it. Look at the recent washington actions. Bankruptcy reform. The american people didnt need it. You only lose 1 maybe 2 steps in the money multiplier. So why reform it? The US is the borrower. The foreign lenders are dictating terms. To keep rates low they are demanding changes to US Law Hell the investment banks love Dubai and dont be surpised to see this happen either. deseretnews.com/dn/view/0,1249,665192493,00.html This is all designed to trickle up the wealth of the masses. Who need wages when you can inflate the value of consumer assets and blatantly understate inflation. Give a 50 year loan with a $500.00 a month payment. That'll boost the demand for housing Toss on an equity line to boot. How bout a couple credit cards. You'll need it to finance the drive into work from the suburbs. How this mess we are in is any surpise to anyone is beyond me. Its not like it started yeaterday.
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Post by Ken on Jun 25, 2007 7:40:18 GMT -6
This is the article I was referring to in my rant
>snip DUBAI, United Arab Emirates — Hussein Ali Mubarak sits in prison, surrounded by murderers and burglars. His crime: defaulting on his bank loans. More than 1,200 people in Dubai's central jail — about 40 percent of the prison population — have been convicted of not repaying money borrowed from banks so they could get married, buy a car or house, or invest in the stock market. Jailing debtors — a practice more common in 18th-century England — illustrates the downside of this Persian Gulf city-state's frantic economic boom. Surrounded by so much oil and real estate wealth, many residents succumb to the temptations of a lifestyle they cannot afford. Banks are willing to give consumer loans with virtually no collateral, and because Dubai lacks a central credit-check authority and a personal bankruptcy court system, it's easy for people to get into financial trouble.<end snip
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Post by unlawflcombatnt on Jun 26, 2007 3:47:47 GMT -6
Unlawfl, home purchasing power and overall consumer purchasing power will be debt driven. That was the whole point. Our largest export is debt and dollars. It dwarfs our material exports. and that is and always was the overall plan. Ken, Great assessment. I couldn't agree more. Consumer spending is being funded by debt, not by wages. The whole idea that tax cuts will lead to more investment which will create jobs has been disproven. It's demand for production that creates jobs, by creating demand for workers to provide that production. Little investment will take place, regardless of the amount of available investment capital, if there is no demand for the production that investment facilitates. The Reagan-esque tax cuts may have reduced inflation during the Reagan years by increasing production through increased availability of investment capital (and resultant increased investment). But again, increased capital availability (through tax cuts and easy money) increases investment little if there is no concomitant increase in demand for production. Of course, increased consumer borrowing ability (in lieu of increased wages) has helped bolster consumer spending and demand during the Bush II years. But replacing wages with borrowed money is not a sustainable path for the economy. The end of the credit-fueled economy and consumer spending may be drawing near. Home equity extraction is declining with higher interest rates and lower home values to borrow off of. Real wages are stagnating again, after a brief uptick in the last half of 2006. The overall Consumer Price Index increased at over a 7% annual rate last month. Problems created by limited real wage increases during the Bush pseudo-recovery are going to surface as credit-financed consumer spending dries up. Without compensatory wage increases, consumer spending will sink as well.
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Post by blueneck on Jun 26, 2007 5:42:10 GMT -6
If there was any capital investment at all from the supply side cuts it was mostly overseas, very little reinvested back in the US. However most of the to windfall to the wealthy gets squirreled away in offshore accounts and other tax havens, precious little ever "trickles down".
We have returned to the 'robber baron' system that was prevelant in the early 1900s.
Greedspan's reliance on too easy and artificially low credit is largely responsible for this mess.
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Post by Ken on Jun 26, 2007 8:53:04 GMT -6
This is from Bruce Bartlett. One of the engineers of fiscal policy under Reagan and author of Reaganomics: Supply-side economics in action www.alibris.com/search/search.cfm?qwork=5571074&wauth=Bartlett%2C%20Bruce%20R&matches=22&qsort=r&cm_re=works*listing*titlein case you wanted to get your dander up reading it. Bartlett was recently interviewed and asked to give an opinion on the state of the economy. Here is an excerpt from the piece For an interview with a reporter about the state of the economy, I looked up a few numbers that are interesting. I compared the state of the economy today to where it was at the exact same point during the previous business cycle. Thus, according to the National Bureau of Economic Research, the most recent recession ended in November, 2001. If you count forward 21 quarters to the first quarter of 2001 [2007], we see the following:
Real gross domestic product: Up 16.4 percent Real gross private domestic investment: Up 10.2 percent Payroll employment: Up 5.3 percent Standard & Poor's 500 stock index: Up 34.2 percent
Viewed in isolation, these numbers don't seem too bad. For example, real GDP has risen at a 3.1 percent annual rate since the end of the recession. But in areas such as this, there are no objective criteria for saying what is a good performance from a bad one; only experience can guide us. Thus it is interesting to look at the same numbers above counted forward the same number of months from the end of the previous recession, which the NBER tells us ended in March, 1991:
Real GDP: Up 17.9 percent Real investment: Up 51.2 percent Payroll employment: Up 10.8 percent S&P 500: Up 82.2 percent It cant get any more plain than that. The fiscal incentive for investment is there however it hasnt delivered this time. I of course dont consider the stock market (S and P in this case) in a proper valuation of economic growth. It only reflects undisciplined liquidity and asian monetary manipulation.
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Post by Ken on Jun 26, 2007 11:34:13 GMT -6
I of course dont consider the stock market (S and P in this case) in a proper valuation of economic growth. It only reflects undisciplined liquidity and asian monetary manipulation. I take part of that back. It partly reflects that. But there is a consumption bubble. I havent ssen much on estimating what it is but I can think of 2 methods. Friedman would look at monetary growth however that would ignore the concentration of income, wealth and commerce. a second way would be to look at the historic savings rate and calculate consumer spending effects (sector multiplier) on GNP. Backing those numbers out of consumption would reduce corporate revenues and profits. That would put PE ratios back at late 90's levels. First quarter growth would definitely been negative and you would have a very difficult time coming up with positive growth.
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