Contrarian view - anyone want to comment?

[Spartacus]

I kept reading for a while that the UK and Australian housing bubbles were even worse than the US.

Yet neither has deflated enormously from the "tops" around 1 to 2 years ago.

Seems in Australia only Sydney has been hard hit, and Kirchner thinks that it was not a bubble collapsing but rather people being drawn out of Sydney to other, growing areas - IOW, Sydney prices rose on well-known economic fundamentals before, and Sydney prices are now falling on economic fundamentals, and none of this has anything to do with bubbles.

http://www.institutional-economics.com/

[jk]

Re: Contrarian view - anyone want to comment?

I kept reading for a while that the UK and Australian housing bubbles were even worse than the US.

Yet neither has deflated enormously from the "tops" around 1 to 2 years ago.

Seems in Australia only Sydney has been hard hit, and Kirchner thinks that it was not a bubble collapsing but rather people being drawn out of Sydney to other, growing areas - IOW, Sydney prices rose on well-known economic fundamentals before, and Sydney prices are now falling on economic fundamentals, and none of this has anything to do with bubbles.

http://www.institutional-economics.com/

re the uk, my understanding is that although prices went way up, they did not have the construction boom we've had, so supply has been more constrained.

in general, though, i think the biggest difference is that those markets went over the top while the u.s. economy was still relatively healthy. and the u.s. consumer has been the growth engine for the whole world. given that about 10% of u.s. employement is related to real estate in one way or another, and that 2% out of the 3.5% growth we've had is real estate driven, the u.s. housing market turning is a much bigger deal that the uk and australian market combined.

[jk]

Re: Contrarian view - anyone want to comment?





below is a chart from David Rosenberg, North American economist for Merrill Lynch. Quoting: "The chart below is rather intriguing - the NAHB homebuilders index leads the S&P 500 by 12 months and with a near-80% correlation - a correlation that over time has actually strengthened, owing to the growing influence that the real estate market has exerted on the overall economic and financial landscape over the past five years. In fact, we can trace almost two-percentage points of the 3 1/2% average annual rate in real GDP over that time frame to the boom in housing construction and home prices - the direct impact on homebuilding, the spin-offs to other sectors like real estate services, architecture, engineering, legal, etc and the multiplier impact from the 'wealth effect' on consumer spending, especially on home improvements and household furnishings."



jk comment- if this follows true to form it says the s&p will be at 600 a year from now!



from ecri:

The Weekly Leading Index (WLI) remained at 135.2 in
the week ending August 18, but its smoothed growth
rate fell to -1.6% from -1.4%.
WLI growth has now dropped to a 179-week low, further
dimming U.S. growth prospects.

jk comment -let's see, where was the market about 179 weeks ago? that's 3.5 years, so the dow was about 7900. [by the way, ecri's future inflation guage hasn't budged throughout the process of its growth indicator deteriorating. it still says there's plenty of inflation in the pipeline.]




from hyman minsky, writing in 1982, as quoted in doug noland's credit bubble bulletin at prudentbear.com
During a period of successful functioning of the economy, private debts and speculative practices are validated. However, whereas units that engage in hedge finance depend only upon the normal functioning of factor and product markets, unit which engage in speculative finance also depend upon the normal functioning of financial markets. In particular, speculative units must continuously refinance their positions. Higher interest rates will raise their costs of money even as the returns on assets may not increase…

In addition to hedge and speculative finance there is Ponzi finance – a situation in which cash payments commitments on debt are met by increasing the amount of debt outstanding… Ponzi financing units cannot carry on too long. Feedbacks from revealed financial weakness of some units affect the willingness of bankers and business to debt finance a wide variety of organizations… Quite suddenly a panic can develop as pressure to lower debt ratios increases.”

jk comment- the housing atm - based consumer economy, viewed as a whole, is a ponzi finance operation

[Spartacus]

Re: Why have the UK & Aus markets not popped?

My question is, if the UK & Australia, which had worse housing bubbles (prices moving more sigmas off the norm) than the US, and their bubbles seem to be "deflating" without a lot of harm, why can't the US do the same.

I'm also wondering WHY the UK & Aus bubbles are still floating. My personal provisional answer is gobal liquidity and carry trades in the mortgage markets, but that doesn't 100% satisfy me.

The Australian market's refusal(ex Sydney) to fall is easier to explain because of the perception that Australia is a huge commodity producer. But why has the UK held up so well?

[jk]

Re: Contrarian view - anyone want to comment?

i think the uk is having a soft landing because it has a relatively small economy, and the us and the rest of the world has yet to head into recession, and because there wasn't so much new construction there. below is an excerpt from paul krugman's blog at the new york times, responding to a comment on a column he did on housing:

Paul Krugman
If you look at the most leading of the indicators on housing, stuff like new home sales and applications for permits, they're off more than 20 percent from a year ago. If that translates into an equivalent fall in residential investment, we're talking about a fall from 6 percent of the G.D.P. to 4.8 percent. And this may be only the beginning; I wouldn't be surprised to see housing investment drop below its pre-bubble norm of 4 percent of G.D.P., at least for a while.


Add to this the likely effect of a housing bust on consumer spending and you've got a direct hit to G.D.P. of, say, 2.5 percent or more. That's bigger than the slump in business investment that led to the 2001 recession. And the main reason the 2001 recession wasn't as deep as some feared was that the Fed was able to engineer... a housing boom. What will the Fed do this time?

[Spartacus]

Re: Contrarian view - anyone want to comment?

I also don't know enough about the UK to really comment.

The one thing I'd like to know is, how badly did lending standards deteriorate, and (concomitantly) how many dangerous loans were made, totalling what fraction of outstanding debt?

i think the uk is having a soft landing because it has a relatively small economy, and the us and the rest of the world has yet to head into recession, and because there wasn't so much new construction there. below is an excerpt from paul krugman's blog at the new york times, responding to a comment on a column he did on housing:

[blazespinnaker]

Re: Contrarian view - anyone want to comment?

I'm with you, I'm a doubting thomas about the market crashing as well.

Especially since a lot of this could be just high inflation. With heliben in charge, I don't see much chance for a reverseal or deflation to occur.

[EJ]

Re: Contrarian view - anyone want to comment?

Some economists in the UK foresee a more severe downturn in the US than in the UK. That said, they also expect that, as usual, when the US sneezes, the UK will catch a cold.

US housing slump fuels crash fears

Foundering American property market could spark global slowdown worse than dotcom collapse

Heather Stewart, economics correspondent
Sunday August 27, 2006

The downturn in the US housing market will force businesses to slash 73,000 jobs a month in the new year and could be more damaging to the world economy than the dotcom crash, economists have warned.

After official figures last week showed that the number of new homes sold in July was 22 per cent lower than a year earlier, while prices were almost flat, fears are mounting that the 'orderly' housing slowdown predicted by the Federal Reserve will become a full-blown crash.


'Things do seem to be getting worse very quickly. Freefall is a strong word, but I think it's the right one to use here,' said Paul Ashworth, chief US economist at Capital Economics.


House prices have been rising at unprecedented double-digit rates in recent years, giving homeowners massive windfalls and supporting a wave of investment in new construction. However, the number of unsold new homes is now at a 10-year high.


Ashworth reckons 30 per cent of all the jobs created since the end of the last recession in 2001 - 1.4 million - have been in sectors related to the housing market boom, from construction to DIY stores. As the boom runs out of steam, Capital calculates that 73,000 jobs a month will be lost.

[snip]

'For a wealth-dependent US economy, the bursting of another major asset bubble is likely to be a very big deal,' he said, warning that, with US fiscal and trade imbalances now larger than five years ago, the fallout for the rest of the world could be more devastating than the aftermath of the dotcom boom. 'A bursting of the property bubble poses equally serious risks for America's key trading partners and for the rest of an increasingly integrated global economy,' he added.

[jk]

Re: Contrarian view - anyone want to comment?

[IMG]file:///C:/DOCUME%7E1/jeff/LOCALS%7E1/Temp/moz-screenshot-45.jpg[/IMG][IMG]file:///C:/DOCUME%7E1/jeff/LOCALS%7E1/Temp/moz-screenshot-46.jpg[/IMG]

August 26, 2006

http://up.nytimes.com/?d=0/34/&t=10&...aph2%2ehtml%3f

[metalman]

Re: Contrarian view - anyone want to comment?

i believe in the mega pump 'n dump of the usa economy theory.

economic landing caught on camera...

http://video.google.com/videoplay?do...ne+crash&hl=en

[Finster]

Re: Contrarian view - anyone want to comment?

[IMG]file:///C:/DOCUME%7E1/jeff/LOCALS%7E1/Temp/moz-screenshot-45.jpg[/IMG][IMG]file:///C:/DOCUME%7E1/jeff/LOCALS%7E1/Temp/moz-screenshot-46.jpg[/IMG]

August 26, 2006

http://up.nytimes.com/?d=0/34/&t=10&...aph2%2ehtml%3f

With all due respect for Dr. Schiller (and I do respect him), there are two major flaws with his chart. First, these are not housing values, but housing prices. The value of something is independent of what currency you measure it in. The price of something is merely the ratio of its value to the value of a currency unit. Price changes may reflect either changes in the value of the thing or of the currency, or both. Prof. Schiller should know better than that, having acknowledged the variability of currency many places in his own work and himself having proposed the use of alternative constant units for measuring real values.

Second, his chart is plotted with a linear vertical axis. A price move from $400K to $500K therefore shows up to be five times as large as an identical proportional move from $80K to $100K. The higher prices go, the faster they appear to be accelerating. This is egregiously misleading - even a steady rise of 5% annually on this type of chart always results in an exponential curve that appears to be launching into orbit.

The only way we could know by looking at such a chart whether price action was truly accelerating would be to plot it semilog. Prof. Schiller should know that, too.

[EJ]

Re: Contrarian view - anyone want to comment?

With all due respect for Dr. Schiller (and I do respect him), there are two major flaws with his chart. First, these are not housing values, but housing prices. The value of something is independent of what currency you measure it in. The price of something is merely the ratio of its value to the value of a currency unit. Price changes may reflect either changes in the value of the thing or of the currency, or both. Prof. Schiller should know better than that, having acknowledged the variability of currency many places in his own work and himself having proposed the use of alternative constant units for measuring real values.

Second, his chart is plotted with a linear vertical axis. A price move from $400K to $500K therefore shows up to be five times as large as an identical proportional move from $80K to $100K. The higher prices go, the faster they appear to be accelerating. This is egregiously misleading - even a steady rise of 5% annually on this type of chart always results in an exponential curve that appears to be launching into orbit.

The only way we could know by looking at such a chart whether price action was truly accelerating would be to plot it semilog. Prof. Schiller should know that, too.

Shiller has a good handle on the concept of inflation adjusted pricing. For example, his S&P vs Earnings chart takes inflation into account.

Shares a lot in common with the Real DOW chart we display on itulip.