Groundhog day in the housing market

[Pilot Fish]

Re: Groundhog day, every day, in the housing market

I'm still not convinced, although I'm willing to be, that Alt energy or infrastructure will be the next "bubble". However, it does set up an interesting question about the definition of a bubble. In the '90s, they blew up the valuations of dubious dotcom companies that would never make a penny of net profits. In this decade, they created trillions of dollars of "fictitious value" in residential housing (now they may be trying a rerun in the equity markets but that's another story). Most would probably agree that both cases were a serious misallocation of capital.

Suppose then, that significant capital was directed towards alternative energy and it actually produced positive, beneficial results (as opposed to boondoggles like corn ethanol). That would actually be a good thing, right?
Now valuations of the public companies or commodities associated with such an effort might significantly overshoot "fair value"; just like the '90s companies that were actually viable like Cisco, Oracle, Intel etc.. But would that alone make it a bubble or should the title of bubble be reserved for serious misallocations of capital?

Regarding infrastructure, as I said before, I'm not sure that a country that doesn't "build shit" anymore is in dire need of a massive infrastructure upgrade. On the other hand, if there was big money to be made, it's no stretch to imagine the big money boys imposing an infrastructure upgrade on the country whether it needs one or not. But lets be generous and assume that an infrastructure upgrade would result in tangible future benefits to the society and the economy. The same question would apply.

So should we only designate something as a bubble when it results in serious misallocation of capital with no lasting benefits or is it simply any cycle that causes certain asset valuations to get over-stretched to the upside, regardless of the outcome?

[Rajiv]

Re: Groundhog day, every day, in the housing market

The kind of asset bubble economy has also been termed a "Negative ROI Economy" by Catherine Austin Fitts. See the Tapeworm Economy

[Darin]

Re: Groundhog day, every day, in the housing market

Another great article.

I was told - I think here - about Tequila farmers converting their crops to corn because of the "ethanol boom"

http://www.msnbc.msn.com/id/18926019/

Didn't we used to do one bubble at a time?! :confused:

Once up a time, the cure for rabies was to stick a hair of the dog in the bite. Today, the hair of the dog is a drink first thing in the morning to make sure there is no hangover from the last round of bubbly. I wish more fund managers knew how idiotic it was to get a dog bite then put a dog's hair in it. What ever happend to 2 aspirin?

I'm starting to be truly concerned on a greater level. Between the leveraging in the credit in all areas, the atrocious savings rate, and the national account and trade deficits, I am hoping we don't auger. I have very little faith in the CPI, unemployment, or GDP as helpful data and the Fed really isn't inspiring faith in the banks stability system by being such an unregulatory institution. I think the bond market will know what's happening well before the Fed.

The schadenfreude in the real estate market gives me a temporary hollow glee; the anxiety in the overall market quickly trumps it.

[jimmygu3]

Re: Groundhog day, every day, in the housing market

EJ,

Thanks for the great article and amazing site. Your insight is always enlightening.

Why wouldn't we use the CPI stats from shadowstats.com, instead of the rigged government CPI average of 3.3? For the period 1997-2007, shadowstats' CPI more than doubles. This would put the theoretical value line at over $20T in '07, leaving only $4T in fictitious value. If you also account for the fact that houses in '07 are 10% larger than houses were in '97, the gap narrows more.

From 1970 to 1980, the average home price went from $23k to $69k, tripling in 10 years. But nobody called it a bubble- we just called it inflation. Is it not possible that homes are only moderately overvalued in dollars, and that it's merely the dollars that are overvalued? Could it simply be that dollar price inflation in all non-asian products and assets is in full swing, carrying housing along for the ride?

I'm not saying there aren't a lot of problems on the horizon for the real estate market, especially for people with houses they can't afford anymore due to foolish loans from predatory lenders. However, maybe the problem of skyrocketing home prices lies more in Washington's reckless monetary policy than with the notion that real estate is trading 100% above the mean.

Humbly awaiting your reply,

Jimmy

[sparki]

Re: Groundhog day, every day, in the housing market

danke from germany!

also one of my favourite movies

the best scene that fits also to the title...

murray: do you have deja vu´s...?

warden: i´ll ask in the kitchen......

[Ishmael]

Re: Groundhog day, every day, in the housing market

Jimmy:

I believe part of the problem in using the Shadow numbers is the inflation number calculated by them includes asset appreciation in housing.
Which to me makes sense; however, once the bubble starts popping they will have lower inflation numbers.

It strikes me as kind of circular to use numbers with asset inflation in them to deflate the asset. In this case the "official numbers" are probably better.

[Ishmael]

Re: Groundhog day, every day, in the housing market

Guten Abend sparki!

Funny quote.

[jimmygu3]

Re: Groundhog day, every day, in the housing market

It strikes me as kind of circular to use numbers with asset inflation in them to deflate the asset.

Great point, Ishmael. However, housing is only one part of the CPI, and even if you removed the effect of housing, I think we would still see numbers much closer to 8% than to 3.3%.

Applying the 3.3% rule, housing should have increased 38% from 1970 to 1980, putting a median home at $32k, rather than the actual $69k. Should we not have been preparing for a housing crash then? By this logic, you could have said that every house in America was overvalued by 115%!

A bubble is a speculative mania that bids up the real price of an asset above its sustainable intrinsic value. We certainly have some of that in housing. Inflation bumps up the nominal price of assets by debasing the currency. We certainly have a lot of that, too. My point is that citing $12T in "fictitious value" gives the dollar more respect than it deserves. Houses are real and dollars are fake.

Jimmy

[chrisk]

Re: Groundhog day, every day, in the housing market

Nuts! Bubbles are accidents, they can't be predicted.

This was true, according to Greenspan. However, now something has changed: Chinese stocks are clearly a bubble, for example. Just ask Greenspan. (Or better yet, buy many copies of his new tell-all book, entitled "Look At Me, My Speech Impediment Is Cured".)

[Ishmael]

Re: Groundhog day, every day, in the housing market

Jimmy:

In response to our question of why not to use the Shadows CPI here is my two cents worth. In general, I think one of the reasons for the difference between the Shadowstats is the cost of housing. The CPI uses the adjusted rental number while the Shadow stat includes the inflation we are seeing in housing prices. Accordingly, you have a rather circular argument that housing prices should not decline because inflation which includes the appreciation of housing prices justifies the price.

Personally, I would think any kind of inflation adjustment should exclude the housing element of it to avoid this circular argument. Weirdly enough, even though I do not accept the official CPI it seems to make more sense in EJ's analysis than the Shadow stats.

[Ishmael]

Re: Groundhog day, every day, in the housing market

Jimmy:

Oops, I thought my first post was not there.

Another, thought is the way CPI is calculated was changed in the middle 80's. In fact most of the adjustments by the Shadow group is to just change the current numbers back to the way the CPI use to be calculated.

I thought Shiller has already shown that home prices have tracked the CPI pretty closely until the middle of 90's.

[jimmygu3]

Re: Groundhog day, every day, in the housing market

Ishmael,

You're right that research suggests that housing prices have tracked CPI. Then the government started monkeying with the CPI methodology in order to underreport it and housing has broken away from the rigged CPI, as has gold, oil, healthcare, and education. Housing (including utilities) accounts for 42% of CPI. I find it hard to believe that housing is the only thing pulling that shadowstats number up, creating the circular argument you talk about. Prices are up on everything we can't import from China.

As you can see in the logarithmic chart below, median US home prices rose faster in the '70s and '80s than they did in the '90s, and the boom in recent years only resumes rates similar to the '80s.



Again, we are talking about a fiat currency of a country with a massive current account deficit, trade deficit, budget deficit and national debt. We have a Fed chairman who has indicated he'll resort to a "helicopter drop" of money if necessary to keep liquidity available. Why is it so surprising that real assets are rising in price when denominated in this Monopoly money?

Jimmy

[WDCRob]

Re: Groundhog day, every day, in the housing market

think that depletion of topsoil will stop anyone?

And, really...what depression would be complete without a Dust Bowl?

[Rajiv]

Re: Groundhog day, every day, in the housing market

Again, we are talking about a fiat currency of a country with a massive current account deficit, trade deficit, budget deficit and national debt. We have a Fed chairman who has indicated he'll resort to a "helicopter drop" of money if necessary to keep liquidity available. Why is it so surprising that real assets are rising in price when denominated in this Monopoly money?

From yesterday's The Clusterfuck Nation"

The longer we put off making these new arrangements, the harder we're going to slam into a wall of reality, and when it occurs a lot of things will shake loose in this country. It will become self-evident that the things we've invested all our wealth in will not retain value -- especially suburban real estate and all the activities related to car dependency, from the interstate highway system to national chain retail. It will also become obvious that we can't base our economy on building more of this stuff.

Our current military adventures in the Middle East, are predicated largely on keeping the old arrangements going. We're in Iraq because we built Dallas, Atlanta, Orlando, Houston, Phoenix, Los Angeles, and Long Island the way we did, and the only way we can hope to keep these organisms going even a little while longer is to keep open our oil supply line to the Persian Gulf. The truth is, these organisms will not survive the oil-scarcer future in the form they're in. The American people need to come to grips with this. No amount of chest-thumping around the globe will change it. In any case, sooner or later we'll exhaust our military and bankrupt ourselves trying to project our influence into these places overseas -- meaning, sooner or later we will withdraw back into our own hemisphere.....

A basic rule of reality is that you can't get something for nothing. Sooner or later the financial sector will have to come to grips with this rule, meaning that that debt is not wealth and the revolving reallocation of debt in the form of credit does not amount to wealth creation. The US will arrive at a magic moment when the full force of this reality reasserts itself, and it is likely to make itself manifest in the collapse of the entity most closely associated the idea of wealth: the dollar. Assets vested in the dollar's legitimacy will follow its fate. The implication is that an awful lot of the presumed wealth held by Americans could vanish into thin air.

[Christoph von Gamm]

Re: Groundhog day, every day, in the housing market

Groundhog day, every day, in the housing market

Economists' reactions to the latest housing market news makes me feel like Bill Murray in the 1993 movie Groundhog Day

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and oh what a surprise: Heli-Ben is surprised on the depht of the housing market slump http://money.cnn.com/2007/06/05/mark...ion=2007060509
Bernanke weighs on Wall Street
Stocks fall Tuesday on Fed chairman Bernanke's comments of extended weakness in the U.S. economy, a day after the Dow and S&P 500 hit new records.
June 5 2007: 9:37 AM EDT

NEW YORK (CNNMoney.com) -- Stocks sank in the first moments of trade Tuesday on bearish economic comments from Federal Reserve Chairman Ben Bernanke.

The Dow, Nasdaq and S&P 500 all sagged in early trade.

The U.S. economy is set to grow at a sluggish pace in coming months on continued weakness in the housing sector, Bernanke said. Bernanke said housing weakness would be a bigger drag than had been expected.