« Europe is Giving Up on the Future | Main | The Next Big Thing in Entertainment - Part III »

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d83452455969e200d834b8118e69e2

Listed below are links to weblogs that reference The Housing Bubble - 20-Year Gains May Never be Repeated:

Comments

jeffolie

Yes the next 5 to 20 years will be bad for housing. I agree interest rates were artificially low for ARMs which now constitute 25% of all mortgages nationally. ARMs were over 70% of the mortgages in 2005. Negative amortization in option ARMs means the amount amount owed goes up.

I will not repeat our constant disagreement about exponental economic growth very much. The exponent does not have to be 2, it could be much lower such as 1.2.

GK

The trendline of world economic growth is what I am charting. The trendline for the world economy is about 4% growth a year. 100 years ago, it was only 1.5% a year.

Housing as an asset class is past, however. Very few, if any places in the US will see returns greater than 5% a year over the next 20 years.

jeffolie

It all boils down to the job situation, and the job situation boils down to how much the US consumers can still afford to keep spending, just a reminder, our consumers account for 2/3 of the US economy.

So I say housing price in SoCal will come down at least 50% in general, I always laugh when I heard people saying that LA has a supply problem, WTF are they talking about. Bay Area is the only place on the west coast with a true supply problem because the valley is confined by natural mountainous barriers on both sides, so desirable pockets of Bay Area may not come down that much, but 20-30% is still very possible. Once you get into places like Tracy, Danville, etc. expect half off at least. The high-end properties north of 2M in the Bay Area will take a serious haircut, there are simply not that many multi-millionaires to support that kind of price, and the last time I checked, 0 down neg-am loan is not offered to a 5M property.

For AZ, NV, oh well, I won’t be surprised if I see price shaved off 80% Tokyo style.

GK

Even the Bay Area does not truly have a supply problem, because if it did, rents would also be high.

Rents are very low in the valley. This can only mean one thing - that former renters have become buyers, and former home owners have bought second homes for investment, renting them out and increasing rental supply (driving down apartment rents).

But I don't think the recession will be any more severe than the 2001-03 recession, as technology will boom in exact correspondence to the housing decline. Jobs lost in RE will be offset by new tech jobs (nanotech, software, gaming, energy, etc.).

RE and high-tech have almost an exact inverse corelation. Hence consumer spending will not be destroyed any more than it was in the 2001-03 recession.

jeffolie

Hedging the housing bubble

S&P to launch home-price indexes; CME derivatives next

BOSTON (MarketWatch) -- Homeowners and real estate investors nervous about a bursting of the housing bubble will soon have new tools to hedge against a pullback in home prices.

Standard & Poor's said Wednesday it plans to unveil several home-price indexes in the second quarter for 10 cities. They'll serve as the basis of cash-settled futures and options contracts expected to launch in April.

The 10 metropolitan indexes include large cities such as New York, San Francisco, Chicago and Washington D.C., and there will also be a weighted composite index of home prices, S&P said. Chicago Mercantile Exchange Inc. will list futures and options contracts on the indexes, according to a statement. CME spokesman Allan Schoenberg said the exchange has set a launch date of April 26 for the derivatives.
The indexes will be called the S&P Case-Shiller Metro Area Home Price Indices and use calculation techniques developed by economics professors Karl Chase and Robert Shiller, author of the influential book "Irrational Exuberance."

KnightErrant

A housing bust is a sure thing, at least here in SoCal. A lot of people who bought at the height of the bubble will find themselves owing more than their house is worth. That said, houses, as an asset class, is still a solid long-term investment. It is just the "flipping" for quick profits that is gone. That will not be missed.

As to trends. The only thing a trendline tells you is where you've been, not where you're going.

jeffolie

If you don’t disagree that Americans are made of special materials, and therefore entirely different people in psychology and emotional reaction from the Japanese, then housing can easily come down 50%. In fact, in the 1990 crash of SoCal, housing of select areas did come down 50% and more! I know of a family who bought in LA in 1989, he didn’t see his home returning to the original nominal value until 1999! At the lowest point, his home was worth 40% of what he paid. I won’t even venture to compare the state of affairs in 1991 to 2006.

Once the market starts going down, market psychology will again overshoot. I have no problems seeing the nominal value of housing in the bay area return to 2001 price easily.

GK

I agree that the Bay Area price can drop to 2001-02 nominal levels. At the very least, people have to accept that the gains of the last 2 years can be reversed.

The Nasdaq crashed from 5000 to 1500, but that was still a retrenchment bacl to just 1998 levels - or two years prior to the peak.

Housing can also retrench to levels 2 years prior to the peak. That it would be a 30-35% drop does not mean it cannot happen. This is what people don't often get - that the rate of decline can match the rate of rise, and that the last 2 years of gains before the peak can evaporate easily, no matter what the percentage is (like with the Nasdaq 1500-5000-1500 cycle).

GK

Knight-Errant,

A word of caution about long-term investments in housing.

Stocks have 'always gone up in the long term'. That being said, anyone who bought at Nasdaq 5000 is still 60% down, and may not break even until 2015, or 15 years after buying. A zero return over 15 years is still bad.

The same can happen in housing. People buying now may still not be ahead of inflation 15 years from now. Look at Japan. Hell, look at the 1989 peak. Even by 2001, the return ahead of inflation was not great over those 12 years. It only looks good against the 2005 bubble prices, which we know will also come down.

Buying at super-peaks can erode even 20-year horizons.

Plus, the article explains how the decline in mortgage rates that helped housing for the last 20 years will not happen again - there is no more room for further declines.

jeffolie

One consequence of the bust rarely discussed is the impact on state and local governments. Property taxes will decrease as houses are sold at lower prices; plus, assessments will be revised downward.

As owners "feel poorer" they will spend less and sales taxes will decline making state and local governments hurt even more.

randolfe

"Stocks have 'always gone up in the long term'. That being said, anyone who bought at Nasdaq 5000 is still 60% down, and may not break even until 2015, or 15 years after buying. A zero return over 15 years is still bad.

The same can happen in housing."

The difference between housing and equity markets (or bonds or any liquid market) is that an "investor" cannot effectively follow a long-term dollar-cost-averaging and rebalancing diversification scheme in housing. Buying at the superpeak of NASDAQ 5000 only exposed investors who bought 100% of their holdings at that point to the full 60% drop. Most investors accumulate over a long-term period, periodically rebalance, and only suffered a small portion of that drop. An investor following a market cap weighted average formula from 1990 to 2006 will only have less than 10% exposed to the worst of the Nasdaq correction.

None of this is practical with RE, which is one reason RE is a unique asset class. It is ironically both more theoretically risky and historically less risky at the same time.

Jim Miller

This is interesting stuff

Joe America

The US housing market is a rigged game.
Risk of default is covered by the government not the lender, buyer or seller. This pushes prices unnaturally higher.

If the government was not doing this people would have to save and buy houses with cash. Prices would be lower. In order for a leader to cover the risk it would have to charge a much higher interest. Few people would take these loans. This is what happens in countries where the market is not rigged. When this scheme was originally formed the nuclear family was the norm, the divorce rate was around 5%. This is no longer the case.

The FED continues to pump money into the economy. It will make housing a good investment (you might break even) with the inevitable higher inflation this will bring.

Housing is a very bad investment for men if he gets married and buys a house. This is because guys will put most of there wealth into the house with a good chance of loosing it all. Divorce is a very high probability and family court usually gives the house and children to women regardless of her actions. Effectively guys have lost their rights to property ownership. It will take at least another generation for guys to catch on.

People have been defaulting on there debts for the last several years, this is what is causing the "economic recovery" the number of jobs is still decreasing but seems to have found a bottom more or less. The winding down of the wars will cause higher unemployment which is happening now.

Equities are a good investment, all that FED money has to go somewhere, its not going to EBT cards. And EBT card holders are not savers investors or builders. They are takers only.

Oligarchy is coming to America from the bottom up not the top down. Its not the Oligarchs that are taking over its masses at the bottom with there lifestyles (see single moms) they don't save, invest or build. They do not pay there debts. Essentially they are dishonest takers who contribute nothing hence default into poverty.

The comments to this entry are closed.