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THE 20 YEAR JAPANESE BEAR MARKET IN REAL ESTATE IS MAKING ITS WAY TO THE UNITED
STATES. HOME PRICES IN THE U.S. ARE NOW IN A DOUBLE-DIP AND HAVE GONE BACK 8
YEARS. LOWER PAYING JOBS, HIGHER EXPENSES, SHADOW INVENTORY, AND BIG GOVERNMENT
SPENDING ALL ALIGN WITH A PATH OF REAL ESTATE MALAISE.



What if real estate prices remain the same for another decade?  As I look at
economic trends in our nation including the jobs we are adding, it is becoming
more apparent that we may be entering a time when low wage jobs dominate and
home prices remain sluggish for a decade moving forward.  Why would this
occur?  No one has a crystal ball but looking at the Federal Reserve’s
quantitative easing program, growth of lower paying jobs, baby boomers retiring,
and the massive amount of excess housing inventory we start to see why Japan’s
post-bubble real estate market is very likely to occur in the United States. 
It is probably useful to mention that the Case-Shiller 20 City Index has already
hit the rewind button to 2003 and many metro areas have already surpassed the
lost decade mark in prices.  This is the aftermath of a bubble.  Prices cannot
go back to previous peaks because those summits never reflected an economic
reality that was sustainable.  A chart comparing both Japan and U.S. housing
markets would be useful here.



Will the U.S. have 20 years of stagnant home prices?



Source:  Pragmatic Capitalism

This chart does a simple comparison of Osaka condo and Tokyo condo prices which
does not reflect the entirety of the Japanese housing market.  Yet the path
seems very similar.  Large areas with a real estate frenzy that hit high peaks
and have struggled ever since.  In fact, if we look at nationwide prices we
realize that Japan has seen a 20 year bear market in real estate:



Japan urban land prices are back to levels last seen in the 1980s.  You have to
ask if there are parallels to our current condition.  The first point we all
have to agree on is that both economies had extraordinarily large real estate
bubbles.  For the United States the answer to this assumption is a big yes. 
We can run off a check list of how our real estate markets run similarities:

> -Massive real estate bubble (check)
> 
> -Central bank bailing out banks (check)
> 
> -Bailed out banks keep bad real estate loans on their books at inflated values
> (check)
> 
> -Government taking on higher and higher levels of debt relative to GDP (check)
> 
> -Employment situation stabilizes with less secure labor force (check)
> 
> -Home prices remain stagnant (check)

Now the similarities are closely aligned in terms of banking policy.  Our
Federal Reserve followed a more aggressive path than Japan in bailing out our
large banks.  Yet all this did was make the too big to fail even bigger and
exacerbated underlying issues in our economy.  Four full years into the crisis
and we are still dealing with a massive amount of shadow inventory.  Remember
the initial days when the talk was about working through the backlog of
properties in a clean and efficient manner?  Whatever happened to that?  Banks
operate through balance sheet accounting and it has made more sense to pretend
the shadow inventory has somehow maintained peak prices while chasing other
financial bubbles in other sectors.  Not a hard way to make money when you can
borrow from the Fed for virtually zero percent.

Japan and U.S. see real estate as poor investments

Our earlier assumption about the double-dip real estate recessions has now
materialized through home price measures:



The above chart may not seem like a big deal to some but keep in mind the United
States had never witnessed a year over year drop in nationwide home prices since
the Great Depression.  Not only has that been surpassed but home prices are now
back to levels last seen 8 years ago.  The lost decade is now nipping at our
heels but what about two lost decades like Japan?



Source:  Debt Watch Blog

For some this may seem outrageous even to consider.  The way I see it is that
Japan was quickly catching up U.S. GDP in 1995 and many thought that it would at
some point surpass our GDP.  This was solidly the number two global economy for
many years until China took that place last year.  Yet the real estate bust has
really been a drag on the economy for years moving forward:



Why has real estate been such a drag on the overall Japanese economy?  First,
Japan’s unemployment rate stabilized after these bubbles burst but it shifted
to a large temporary or contract based employment economy.  One third of
Japanese workers operate under this new world.  Relatively low security with
employers and this has spiraled into lower income and money to finance home
purchases.  The fact that the U.S. has such a large number of part-time workers
and many of the new jobs being added are coming in lower paying sectors
signifies that our economy is not supportive of the reasons that gave us solid
home prices for many decades.  I think this is a key point many in the real
estate industry fail to emphasize.  How can home prices remain inflated if
incomes are moving lower?

The question of affordability has always been at the center of this debate. 
Yet with government mortgages being the only option and banks now actually
having to verify income Americans can only afford so much home when the gimmicks
are removed like layers on an onion.  This is why the double-dip is now fully
here:



How much further will home prices fall?  It can be that nationwide they fall
only slightly more but in the end a lost decade is in the books.  Two lost
decades might be a real possibility given our demographic trends especially with
baby boomers moving forward.

Massive inflation or stagnation moving forward?

One would think that with all the Bank of Japan bailout measures for the banks
and government spending that inflation would run rampant in the Japanese
economy.  That was never the case:


Now it is clear that at least by the above reported data, Japanese inflation has
been virtually non-existent for the good part of 20 years.  How does this
compare with the U.S.?


It is interesting to note that most of our inflation is coming from items
ex-housing.  As I have discussed the BLS does an interesting measure of home
prices via the owner’s equivalent of rent.  The reality is the above year
over year changes in inflation in the U.S. are not coming from home prices.

Psychological aspects

Watching some of the global news I was seeing many young Japanese workers, some
in their late 20s or early 30s, already resigned that they would never buy a
home.  They asked a young professional if he ever planned to buy a home and his
response was (paraphrased):

> “I don’t ever plan to buy.  I saw my mother and father lose their
> marriage over trying to pay for the home payment for years.  That was many of
> the big fights in our family.  In the end we lost the home and I feel I lost
> my family.  Why would I put pressure on myself for something like that?”

The millions of people that have lost their home and will lose their home are
probably in households with children in many cases.  Some may be in college and
looking to buy in ten years.  The notion that housing is always a great
investment runs counter to what they saw in their lives.  Will they even want
to buy as many baby boomers put their larger homes on the market to downsize? 
Will they clear out the shadow inventory glut?  Now I’m not sure how things
are in Japan but many of our young households here are now coming out with
massive amounts of student loan debt.

It was interesting to see the Wall Street Journal coming out recently with an
article stating that the Class of 2011 will be the most indebted ever:



> “(WSJ) The Class of 2011 will graduate this spring from America’s colleges
> and universities with a dubious distinction: the most indebted ever.
> 
> Even as the average U.S. household pares down its debts, the new
> degree-holders who represent the country’s best hope for future prosperity
> are headed in the opposite direction. With tuition rising at an annual rate of
> about 5% and cash-strapped parents less able to help, the mean student-debt
> burden at graduation will reach nearly $18,000 this year, estimates Mark
> Kantrowitz, publisher of student-aid websites Fastweb.com and FinAid.org.
> Together with loans parents take on to finance their children’s college
> educations — loans that the students often pay themselves – the estimate
> comes to about $22,900. That’s 8% more than last year and, in
> inflation-adjusted terms, 47% more than a decade ago.”

Lower incomes, more debt, and less job security.  What this translated to in
Japan was stagnant home prices for 20 full years.  We are nearing our 10 year
bear market anniversary in real estate so another 10 is not impossible.  What
can change this?  Higher median household incomes across the nation but at a
time when gas costs $4 a gallon, grocery prices are increasing, college tuition
is in a bubble, and the financial system operates with no reform and exploits
the bubble of the day, it is hard to see why Americans would be pushing home
prices higher.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated
housing commentary, analysis, and information.



Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated
housing commentary, analysis, and information







8 May, 2011  bailout, banking, credit crisis, debt, global crisis, housing 2011,
housing-data, japan asset bubble, market analysis, mortgages, wall street








87 RESPONSES TO “THE 20 YEAR JAPANESE BEAR MARKET IN REAL ESTATE IS MAKING ITS
WAY TO THE UNITED STATES. HOME PRICES IN THE U.S. ARE NOW IN A DOUBLE-DIP AND
HAVE GONE BACK 8 YEARS. LOWER PAYING JOBS, HIGHER EXPENSES, SHADOW INVENTORY,
AND BIG GOVERNMENT SPENDING ALL ALIGN WITH A PATH OF REAL ESTATE MALAISE.”

 * CAE
   May 8, 2011 at 10:39 am
   
   Employment levels have to highest correlation to home prices over the last 50
   years. At 9% “official” unemployment, we are very far from a home price
   rally.
   
   Reply
   
 * HenryE
   May 8, 2011 at 10:59 am
   
   I’ve been to Japan several times, and I can personally attest to the fact
   that the people there have been demoralized by the last two decades. The
   sense of forward movement that was common in Japan two decades ago has been
   replaced by a sense of lowered expectations and insecurity. In the US, I
   remember this demoralization in the early 1990’s, with that weak economy and
   high crime levels. But then the late 1990’s boom time came and all that was
   forgotten, and even the early 2000’s recession and 9/11 couldn’t shake the
   optimism. But now, the sense that things are going downhill seems to be back
   in the US, especially among the middle class (the moneyed class is doing
   fine).
   
   I live in San Diego and observed a very interesting phenomenon recently in
   the local real estate market. It looks like in early 2011, one or more banks
   sent out a small flood of properties on the market. And these properties sat
   there for a while and got a few price cuts as it became apparent that the
   demand was just not there. Eventually most of those properties have
   disappeared (presumably sold, or maybe delisted). And since then, NOTHING. I
   mean virtually NOTHING has hit the market recently. I assume that potential
   sellers and banks saw what happened and have decided not to shake loose any
   more shadow inventory.
   
   Anyone know if my assumption is correct, or what’s going on?
   
   Reply
   * livinginSD
     May 8, 2011 at 10:09 pm
     
     I can attest to your observation on the tight inventory in San Diego.
     
     It seems a lot of the otherwise sellers hold off selling and banks being
     very slow releasing REOs. They seem to think market will improve in San
     Diego in the next few months or later. Many of the ones on the market are
     so over priced they don’t go anywhere and price reductions are slow to
     come. There is definitely a stalemate between sellers and buyers in San
     Diego market.
     
     Reply
     * Bubblicious
       May 9, 2011 at 8:18 am
       
       The realtors are telling them to pull out and wait for a better market if
       they cannot lower price and there are now a massive number of people in
       this position. There is this enormous shadow market of negative equity
       homes that are not on the market because people want to try and ride out
       the negative equity positions.
       
       When these folks come to the realization that we are taking another huge
       leg down in home price, the rush for the exits is going to be epic.
       
       
       
     * Bubblicious
       May 10, 2011 at 7:32 am
       
       “$6.5 Trillion Lost, One House at a Time
       
       Is anyone surprised that housing continues to slide?
       
       American homeowners have lost $6.5 trillion in equity in those 57 months.
       Here is the data from the Fed Flow of Funds household balance sheet:
       
       Homeowner’s equity:
       2006: $12.8 trillion
       2011: $6.3 trillion
       
       Net decline: $6.5 trillion
       
       It’s difficult to grasp such large numbers, so let’s look at some actual
       houses.
       
       1. Recent sale: $820,000
       Last sold 2007: $1.172 million
       Nominal loss: $355,000
       (does not include transaction costs or losses due to inflation)
       
       Even if owner put down 30%, their equity was wiped out.
       
       Nationally, prices have round-tripped to 2003, but that masks the reality
       that in many locales, prices have returned to 1998 or even lower. ”
       
       http://www.oftwominds.com/blogmay11/6-trillion-lost5-11.html
       
       Well, since wages on average haven’t increased since 1995-1996, why would
       anyone in their right mind expect long-term housing appreciation to
       continue?
       
       Besides crackhead flippers and commission swilling real-tards that is…
       
       
       
     
   * sand
     May 8, 2011 at 10:57 pm
     
     I know at least 15 of my Qualcom colleagues including me have bought homes
     with in last 6 months. You can make the conclusion your self from this
     data.
     
     Reply
     * Engrish
       May 9, 2011 at 2:35 am
       
       Seeing that your command of the “Engrish” language is somewhat lacking*,
       I think I’ll keep my dollars in my pocket.
       
       I would however, like to thank all the foreigners (Asians) for catching
       falling knives.
       
       *”with in” should be within,
       “your self” should be yourself,
       you need to put “the” before “last six months”
       learn to differentiate between “me” and “myself”
       http://www.elearnenglishlanguage.com/difficulties/memyself.html
       
       
       
     * Spartan117
       May 9, 2011 at 7:56 am
       
       You work for Qualcomm yet you don’t know how to spell your own company’s
       name? Sure you do, buddy.
       
       Perhaps Qualcomm, Google, Facebook, and Apple can hire the 44 million
       folks on food stamps so that they can all buy a house in La Jolla.
       
       
       
     * Questor
       May 9, 2011 at 8:37 am
       
       Yes, I know a bunch of people who have bought in the past year or so.
       Many are underwater, with housing double dipping and looking like it’s
       going to drop at least 10% this year. My bet is 10-20% over the next
       year, nationwide. I don’t know what that says about Qualcomm employees,
       but I hope you and your friends put at least 20% down.
       
       Otherwise, it looks like you may be joining this sinking ship:
       http://www.cnbc.com/id/42957613
       
       “Homeowners Drowning in Negative Equity ”
       
       Frontpage article on CNBC today. I couldn’t believe that a MSM
       publication would actually publish something negative from Zillow. Most
       of them aren’t.
       
       
       
     * compass rose
       May 9, 2011 at 10:51 pm
       
       And remember:
       
       “Drowning in negative equity” = “drowning in debt.”
       
       
       
     * surfaddict
       May 10, 2011 at 12:45 pm
       
       Millions of dueschbagz buy cars every year making payments on that
       depreciating asset, why not make house-payments on a depreciating asset
       as well?? The teacher asked what is the differrence between the 2? That’s
       what i say teach, WTF is the difference?
       
       
       
     * Karin
       May 10, 2011 at 6:03 pm
       
       You and your “colleagues” have made a killing from your stock options,
       that why you’re buying. As would I, if I came into a wind fall…
       
       
       
     
   
 * ron
   May 8, 2011 at 11:06 am
   
   Add to your list the air pocket created by easy money (leveraged liquidity)
   leaving the market and looking for easier targets say in commodities for
   instance or anywhere in the world.
   
   Reply
   * Bubblicious
     May 9, 2011 at 8:53 am
     
     Also add to the list ever increasing energy costs and lack of public
     transportation in most metropolitan areas (e.g. Kali), which will directly
     push people out of suburbs/exburbs and back into job/business centric
     cities.
     
     Perhaps the only buying/flipping opportunities at present are buying
     pre-gentrification areas of inner cities, although with .gov support of the
     huddled and entrenched masses, that can be a real gamble…
     
     Reply
     
   
 * J-Dub
   May 8, 2011 at 12:18 pm
   
   Great write up Doc! I’m expecting this double dip to continue down down down.
   I get email updates from redfin on house sales in Laguna Niguel. Houses sold
   there have dropped dramatically this last month as hardly anything is selling
   there now. Sellers will have to drop their prices if they expect to sell.
   
   Reply
   
 * Greg in LA
   May 8, 2011 at 3:13 pm
   
   Great essay Doctor Housing Bubble.
   
   My Japanese friends would all say ditto!
   
   Reply
   
 * hotei
   May 8, 2011 at 7:47 pm
   
   thanks doctor. while i agree there is further downside in usa, i think japan
   has one extra headwind…….the horrible demographic problem. i think that has
   something to do with the duration of the japanese downturn as well.
   
   Reply
   * Bubblicious
     May 9, 2011 at 8:02 am
     
     Uh…I think the USofA has perhaps a worse “horrible demographic problem”
     than Japan, only exceeded by Europe.
     
     1> Boomers retiring enmasse over the next ten years, looking to “cash-out”
     of the RE “investment” and downsize to modest levels
     
     2> Huge pressure on domestic jobs due to 20 years of offshoring (wage
     arbitration anyone?), outsourcing (many stateside with H1B/L1 Visa
     treason), out-of-control immigration policies, hostile tax policies et al.
     — A smart person would want to be mobile, to chase business/employment
     opportunities, no tied to a boat anchor/deflating asset aka a home.
     
     3> Run-away monetary creation that will create an inflationary environment
     for everything, including interest rates at some point, but will NOT
     translate to wages of business profit (see profit margin compression).
     
     Of course, if you’re beneficiary of bailouts for banksters (money from
     nothin’, chicks for free), you’re probably looking for a place to put your
     ill-gotten gains and continue to profit from the stupidity of the sheeple,
     who at this point will mostly have to rent due to inability to obtain
     mortgages.
     
     The demographic situation is only beginning to unfold…
     
     Reply
     
   
 * Tyrone
   May 8, 2011 at 8:51 pm
   
   Throw in ‘Loss of world reserve currency status for the US$’ and we’re in for
   an interesting next ten years.
   I choose to keep a store of wealth in certain tangible assets until the dust
   settles… housing not being one of those tangible assets.
   
   Reply
   
 * Latesummer2009
   May 8, 2011 at 10:43 pm
   
   If we didn’t have food stamps, the Great Depression would look like peanuts,
   compared to the 40,000,000 now out of work. Get real folks. This RE market is
   getting worse and has yet to capitulate.
   
   http://www.westsideremeltdown.blogspot.com
   
   Reply
   
 * fromoverhere
   May 9, 2011 at 3:10 am
   
   I am as double-dip as the next guy and think it will continue downward.
   
   One BIG mistake you make is that Japan is at NEGATIVE population growth (0.1)
   and the US legal /counted/ seen growth rate is at 1.2.
   
   Reply
   * DG
     May 9, 2011 at 10:16 am
     
     I think you need to look at how the population is growing. Only 1 group is
     growing and if you look at the high school and college graduation rates of
     that group it spells real trouble for our future prosperity as a society.
     Hopefully at some point they assimilated into our culture, but if they
     continue with the culture they came from that doesn’t emphasize education
     then it will only increase our welfare state. These people aren’t going to
     buy a lot of homes if they can’t graduate from High School and in the end
     it will mean spend more money on prisons and there will be even less for
     housing. I’m also curious if they fiasco of the last 20 years has anything
     to do with why Japan’s birth rate has gotten so low. If you really feel
     that each generation is going to have to lower their standard of living and
     your kids would be worse off than you and your parents wouldn’t that impact
     your decision to have kids at all?
     
     Reply
     * Swiller
       May 11, 2011 at 8:45 am
       
       Agreed DG. The problem is that american “capitalism” has reduced
       education into a mere profit making machine. The Education costs (bubble)
       kept pace with home prices (bubble) but education prices have not fallen,
       and to rub salt in your wounds, all education loans are never, ever
       forgiven.
       
       Add another nail into our society. Education isn’t to raise the cultural
       level of society, it’s ONLY to get a job. SAD. I suppose Taco Bell and
       MacDonalds should make prep “colleges” for thier future employees. That
       way they can work their “education” off and not receive wages. My good
       God, look at how enslaved we are as a people, yet we still vote against
       our own benefit. Sad. My $20,000 credit card that was used to try and
       stay in a over-priced home, I walked from, but if it was used to educate
       me, I would be bound forever. Anyone see a problem here?
       
       With the way things are going you will have people celebrating murder as
       a good thing…oops, already there, sorry.
       
       
       
     
   
 * RentaLurker
   May 9, 2011 at 7:18 am
   
   I was listening to a Real Estate Economist on Marketplace this AM 5/9/11. He
   forecasted stability in home prices within a year and possible upward
   momentum in two years. Where is this going to happen; Tulsa, OK; Williston,
   ND; or possibly Detroit, MI? I am not seeing that for the $500-$600K 1300SqFt
   shanties in OC.
   
   Reply
   * Marc
     May 9, 2011 at 9:52 am
     
     They have been calling for that time-frame since 2008. I really wish there
     were some accountability with economists, politicians, etc that make these
     kinds of predictions. It seems to me that they are all trying to,
     intentionally or just incompetently, by grabbing straws out of thin air,
     boost the economy by touting nonsensical optimistic predictions to get
     people to spend and buy houses.
     
     I foresee two rough scenarios, in both, someone who doesn’t really deserve
     it majorly gets screwed while those who do deserve to be screwed and then
     locked up, ride into the sunset to rob the world once more when all is
     forgotten.
     
     Either, home prices will crater below prices long not seen because of an
     overabundance of housing that exceeded real demand for a decade and organic
     demand growth cannot absorb quickly enough. Which will lead to long running
     flat-ish home prices for many many years.
     
     Or, passively intentional inflation through government policy, taxes and
     market skewing favorable tax structures, government subsidies, etc. will
     artificially pin housing prices to a new norm, screwing all those who saved
     and were responsible and all those who saved for retirement. Oh, and it
     will screw all the young people who will have to pay higher Social Security
     and Medicare and Medicaid taxes because Baby-boomers are going to be damned
     if they are going to have to pay the consequences of their failure.
     
     Variables may include; immigration reform that further “grows” our economy
     through assimilation of ever more people who can make each piece of the pie
     ever more expensive and buy up the overabundance of housing; and tax and
     policy structures that are favorable to population growth by making
     children less costly and even financially rewarding, increasing costs of
     pregnancy prevention, etc.
     
     We, in America, don’t like to solve problems (assuming we had the capacity
     to if we wanted); we prefer extending the due date of action by ways that
     exponentially increase the consequence in exchange for ever shorter
     extensions.
     
     It’s the same as in personal finance; you know the person, the one that
     gets a payday-loan for the lapsing payments on homes and cars they can’t
     afford.
     
     Reply
     * RentaLurker
       May 10, 2011 at 8:22 am
       
       I think most of the grumbling bears in these woods would agree that the
       housing market will not correct in an efficient manner for many of the
       reasons Marc listed.
       
       Taxes? Tea partiers won’t pay taxes, social security, medicare… or any
       other “big government program.” Tax breaks for corporations and the
       wealthiest equate to freedom and getting the government out of the little
       guy’s lives. At least that is what the ideologues are shouting.
       
       “Patriot: the person who can holler the loudest without knowing what he
       is hollering about.”
       -Mark Twain
       
       
       
     
   * Bubblicious
     May 10, 2011 at 7:43 am
     
     “Real Estate Economist”
     
     “It is difficult to get a man to understand something when his salary
     depends on his not understanding it.” Upton Sinclair
     
     Reply
     
   
 * mlimberg
   May 9, 2011 at 7:26 am
   
   Maybe we need to look deeper into economics and value. Does or will economies
   and values follow laws of physics and life science models like carrying
   capacities? Will values flat line like the number of life forms able to live
   in a given environment? It’s well understood that in nature, a given area
   will only support so many of a certain species.
   
   Also, matter can neither be created or distroyed. Is the same true with
   wealth? Do we have a finite “pie” of wealth that moves from “family” to
   “family” over time? Let’s consider a given “life cycle” of family wealth. 2
   to 3 generations work to build wealth. 2 to 3 generations maintain that
   wealth. 2 to 3 generations blow the family fortune…. in general. All of this
   happening when other “families” are building, some other “family” is blowing
   it.
   
   Big picture folks. One data point does a trend not make….
   
   Reply
   * Bubblicious
     May 9, 2011 at 9:13 am
     
     The big picture is that the banskters convinced .gov to print money to
     reload the banks with the anticipation that wages would follow, thus
     supporting home prices.
     
     It hasn’t materialized, and it won’t until the 30+ year bubble in housing
     prices is deflated and banks realize their losses.
     
     Of course the meddling of artificial price support has only made matters
     worse…
     
     http://online.wsj.com/article/SB10001424052748704810504576309532810406782.html?mod=WSJ_hp_LEFTTopStories
     
     “Home values posted the largest decline in the first quarter since late
     2008, prompting many economists to push back their estimates of when the
     housing market will hit a bottom.
     
     Home values fell 3% in the first quarter from the previous quarter and 1.1%
     in March from the previous month, pushed down by an abundance of foreclosed
     homes on the market, according to data to be released Monday by real-estate
     website Zillow.com. Prices have now fallen for 57 consecutive months,
     according to Zillow.”
     
     As John McClane would say, “Welcome to the party, pal”…
     
     Reply
     
   
 * RentaLurker
   May 9, 2011 at 7:33 am
   
   Dr.
   
   Thanks for another fine article with excellent macro graphs.
   
   Reply
   
 * Ron
   May 9, 2011 at 7:49 am
   
   The truth is California has been living off phony home equity gains for 40
   years. Nothing was ever produced to create this money, Nothing. But, they all
   spent this counterfit cash into the economy like it was real. California has
   flourished under this scheme of ever increasing Real Estate prices, but the
   free ride is over. Now they’ll have to learn how to actually produce
   something to have prosperity.
   
   Reply
   * Gardena
     May 9, 2011 at 12:18 pm
     
     Take the characters on Real Housewives of OC for example. The bimbos
     fiananced their fake boobs, spa trips and dining in expensive restaurants
     by working in industries like selling insurance, selling houses, selling
     import cars, and selling mortgages and mortgage insurance. I hope their
     ride is over and their boobs are sagging.
     
     Reply
     
   * JC
     May 9, 2011 at 1:00 pm
     
     Your correct. Lump into the mix of policies coming out of Sacramento and
     DC. RE in California is in for another leg down starting this summer.
     Problem will be even worse if QE is halted by the Fed. Any upward trend in
     home prices may start happening in the 2015-2020 time frame. The toxic
     sludge that was the no mortgage down to minimal down is still in the
     system. As long as that is the case, kiss any correction goodbye.
     
     Reply
     
   
 * CAE
   May 9, 2011 at 9:32 am
   
   The end game is upon us. With our aging demographic and continued employment
   loss, the US will have to maintain a policy of easy money and more QE. This
   will not bode well for real estate as employment is a key factor for paying a
   mortgage. The kids coming out of college arent finding good jobs and this
   will continue. So it’s monetary debasement with rising commodity costs. For
   as far as the eye can see.
   
   Reply
   
 * SEAN
   May 9, 2011 at 9:54 am
   
   One thing not mentioned that is rather importent is property taxes. In south
   Florida where I have been looking at condos & townhouses, property tax levies
   are at 2006/07 valuations. A condos tax bill should be around 2% MAX of an
   assessed value & most of the ones I’m seeing are 3% min & with maint it’s
   reaching nearly 10%.
   
   Interestingly the cheepest units seme to have some of the hiest tax levies
   reaching 15%, but if you go up the price scale the tax levy either stays the
   same or in most cases drops to less than 1% or at worst 1.5% including maint.
   
   What this means is the person who buys a cheep unit is most likely going to
   subsidise the purchaser of a more expensive unit by paying a higher
   percentage of their income in property taxes.
   
   Reply
   
 * The Painester
   May 9, 2011 at 10:00 am
   
   Why are government dependent institutions (i.e. too big to fails and
   Fannie/Freddie) allowed to just hold homes off the market? They should be
   required to liquidate REOs within 1 year of foreclosure or suffer some kind
   of bookkeeping penalty. The value is what the value is, they shouldn’t be
   allowed to sit on these indefinitely.
   
   If a map were made composed of homes that are 9+ months post foreclosure that
   are still in the lender’s name and you played that map on a time lapse with
   black dots representing such homes, it would probably look like a cancer
   growing over the face of homeownership.
   
   Like the Doctor, I think home prices are resetting to fundamentals. When you
   lose your equity suddenly you don’t care if prices fall another 30 to 40
   percent. With this growing contingent of negative equity homeslaves
   approaching critical mass you may see the following solution arise to reset
   home prices so our economy can regain its stability as people will have more
   money available for other parts of their budget that is now being confiscated
   for the Too Big To Fails.
   
   So here’s the revolution. We take what’s left of our 401k accounts and crappy
   CD rates and we create a new non-government mortgage fund called the Freedom
   Fund.
   
   The Freedom Fund lends money at 95% LTV (yeah I said 95% LTV) to mortgagors
   under the following lending criteria:
   
   1) 15 year fixed rate mortgages only
   2) Full doc underwriting 32/38 debt ratios – you know; old school
   3) Primary residence only
   4) Terms 6.5% 15 year fully amortized
   …and here’s the big one…
   5) Ignore walkaways on the credit for those buried by the bankster fraud.
   
   Let me give you number 5 again:
   
   A Walkaway is Okay – A Walkaway is Okay – A Walkaway is Okay!
   
   That chant would make the banksters crawl out on their windowsills.
   
   You see, they’re trying to lock you into a plywood prison by giving you a low
   modified rate while keeping your balance high – that’s called indentured
   servitude. Like the Doc says you should always pick a low balance and a
   higher rate instead of a high balance at a lower rate.
   
   Now think about it. The best borrowers are the ones who are solvent and
   haven’t defaulted regardless of their submergence and can’t get a short sale
   approved because they are financially solvent – they were just unfortunate
   enough to get caught up in the false market created by the banksters. They
   are the victims of a false market contrived by the banksters by mislabeling
   sub-junk loans as AAA and sticking them in low risk investment funds around
   the world. Why would you want to reward them for their fraud by being their
   slave?
   
   As you may have noticed, HUD issued guidance to treat short sales as
   foreclosures in underwriting. Fannie and Freddie extend the wait to 7 years
   if you have a foreclosure. That’s how they are trying to keep you locked in
   that plywood prison.
   Bankster.gov is doing all of the underwriting now and they say if you walk
   away and try to escape their chains you are going to be a dirty disgusting
   filthy untouchable renter at best.
   
   The Freedom Fund turns the tables on the banksters by freeing their best
   slaves. Those slaves go from paying a $700,000 30 year 3% ($2,951.23)
   interest rate modified Slave Note to a $338,790 15 year 6.5% ($2,951.23)
   Freedom Loan.
   
   The 5 percent down is not all that risky for fund investors because the
   quality of the borrowers is high and the fact that the Freedom Note would pay
   down to $294,557 by only the third year; while with the Slave Note, your
   balance is $654,809 by the third year. So with the Slave Note, after 3 years
   your balance has reduced by $45,190 or 6 percent while with the Freedom Note,
   even though the rate is over twice the Slave Note, it reduces its balance by
   $44,233 or 13% – yes 13 percent!
   
   The conservative 15 year amortization schedule and 32/38 debt ratio
   underwriting prevent this loan fund from causing price spikes in the market
   because it holds down the amount the borrower can qualify for to about 3
   times annual earnings.
   
   What CD investor wouldn’t prefer a 5.5 to 6 percent yield over the nothing
   they get right now?
   
   How much would the economy benefit by redirecting the interest earnings from
   the banksters to the retirees. The banksters have stolen their proper yield.
   This corrects that and helps float the economy.
   
   I noticed there are a lot of real estate and lending professionals who
   comment on this blog. What is your take on the Freedom Fund as a tool of the
   revolution to cram the market manipulation hangover back down the throats of
   those who financed it via freeing their best mortgage slaves and resetting
   the market.
   
   P.S. We would also have to hold pitchfork and torch rallies around the
   congressional offices to dissuade them from bailing these F’ers out while we
   smother them with their own misdeeds.
   
   Reply
   * ACG
     May 9, 2011 at 6:55 pm
     
     @The Painester
     You have my vote. Sounds like a good sound plan for sustainability. This
     plan of yours could never work if you intended to steal the wealth of a
     nation under what ever prominent guise of the decade.
     
     Reply
     
   * AnnS
     May 9, 2011 at 10:19 pm
     
     Why are government dependent institutions (i.e. too big to fails and
     Fannie/Freddie) allowed to just hold homes off the market?
     
     Oh nonsense. That IS NOT HAPPENING – at least not in my 3 county area. This
     is a smaller area so I can track exactly when things are set for austion
     and how fast they show back up as REOs.
     
     Now this state has a redemption period where the debtor gets to stay there
     after the foreclosure auction – 6 months if it is less than 5 acres and 12
     months if more than 5 acres.
     
     I can SHOW you the auction notices and the date these properties sold, the
     date the redemption period ended and when they came back on the market. And
     they are back on in 4 – 6 weeks after the redemption perdio ended and the
     lender got possession.
     
     Every one that went to auction (and is less than 5 acres) more than 6
     months ago is back on the market.
     
     And these are REOs owned by Chase, BOA, Wells Fargo, regional banks (like
     PNC and Huntington, local banks and yes VA, FHA and Fannie and Freddie.
     
     This ‘there is a conspiracy to create a shadow inventory’ nonsense is
     complete silliness and absurd. Some properties take longer to come back on
     once the lender gets possession beacuse (a) they have to make it
     presentable and/or (b) the sheer number coming back slowdown the process
     and/or (c) there may be title problems.
     
     BTW, in this, the VA with its 0 downpayment loans has 1 (yep 1) REO, FHA
     with its 3 1/2% down had 1 (yep 1 REO), Freddie has 4 REOs and Fannie has
     14. The other 50 or 60 REOs are the product of Wall St and securitization.
     Here it is NOT the government-backed 0 -3 1/2% down loans that are
     defaulting. Not is it the loans by the community banks – they have only 2
     or 3 between the 3 -4 community banks here. What is defaulting are the
     loans written by the Big Banksters and sahdy otufits like OptionOne,
     Countrywide etc – most of which those lenders kept and a smaller number
     they peddled to Fannie/Freddie who are making them take them back.
     
     Reply
     * Spartan117
       May 10, 2011 at 11:23 am
       
       When TBTFs are allowed to mark to market their securitized assets, they
       have little to no incentive to liquidate other non-performing assets on
       their books, including underwater mortgages, notes, etc. Banks are in no
       rush to offload inventory, as that would simply cause another panic out
       of their SIVs. And so long as FASB allows mark to model, they will
       continue to leak out shadow inventory. Sorry, but I don’t buy your
       premise on iota.
       
       
       
     * Foolio
       May 10, 2011 at 2:13 pm
       
       AnnS, your “tri-county area” is undoubtedly flyover/filler state crap.
       And that’s why the banks are quick to take it back and unload it as soon
       as possible, because it most likely didn’t run up significantly to begin
       with thus the losses won’t be steep (and most likely the bulk of these
       properties were already FHA/VA/FME/FRE backed or will be now). In prime
       areas the banks are looking at jumbo loan balances that they and they
       alone are on the hook for the losses – often to the tune of 6 or even 7
       figures EACH.
       
       So those are the homes they are holding on to, because these loans were
       originally jumbo and not government backed, many of these loans are on
       their own books still, and each one would result in a loss equal to 10 or
       20 or more of your hillbilly three county area properties.
       
       
       
     * Jocko
       May 10, 2011 at 2:17 pm
       
       Yes Ann, I’m sure the banks are quick to put the mobile home/trailer on 5
       acres on the market, given that the original mortgage of $10,000 or so is
       now only worth $8,000.
       
       
       
     * AnnS
       May 10, 2011 at 2:41 pm
       
       Saprtan117
       
       It is NOT a ‘premise’ — it is the actual honest-to-god records in the
       Registrar of Deeds Office and the REO listings in this area.
       
       “Premise” is the delusion that there is some mass conspiracy to sit on
       REOs and not get rid of them as fast as possible.
       
       Shall I give you the time frames and % of price cuts done by various
       lenders in this area to dump the REO’s? They are so ver ver predictable
       …… 4-6 weeks to first cut of 9.87 -11.11%, another 4 -6 weeks and another
       cut of antoher 7/5 -10%,….another 6 weeks and now they are 23 -30% of the
       original list……. ANd they always end up taking offers that are 7 -15% off
       the list price du jour….
       
       Hey never let real facts get in the way of conspiracy theories on any
       subject….
       
       
       
     * Spartan117
       May 11, 2011 at 1:01 pm
       
       Sure, Anns. What area are you referring to? A suburb next to a large
       metro? Please, do tell us.
       
       
       
     
   * RentaLurker
     May 10, 2011 at 9:07 am
     
     Excellent!
     
     Reply
     
   * Somis Guy
     May 11, 2011 at 6:05 pm
     
     Your Freedom Fund sounds interesting! I applaud your positive contribution
     to this Blog. There has been far too much finger pointing here and your
     idea is a refreshing read. I’m certainly taking this seriously and will
     give it some thought, I hope others here will do the same and make this
     idea work. Real answers, great idea, Well Done!
     
     Reply
     
   
 * Randy
   May 9, 2011 at 10:05 am
   
   The problem is that in a normal, non-financially oriented economy, the
   housing market follows the job market, not vice versa.
   
   Thus, when IT/Nasdaq went bust in ’01-’03 and numerous high paying tech jobs
   were offshored, why weren’t worker bees concerned with the run up in housing?
   
   I think the above answers the question, the real economy is gone. Everything,
   including services can be done abroad or in-shored into cheaper markets (see
   N Carolina, Texas, etc). Thus, this mile high RE market, Boston to DC or San
   Fran to LA/SD, is simply not sustainable w/o a lot of foreign investors
   catching the knife in these post-bubble years.
   
   The end result, however, is if folks will eventually need to relocate for
   work, ie a shale oil field in the Dakotas (FYI, these markets will continue
   to grow, not services), then there’s no way that that house near South Jersey
   will stay at $600K without massive stagflation.
   
   Reply
   * Newsboy
     May 10, 2011 at 7:07 pm
     
     Hey, for the treasonous scumbags in the Banking Tribe this was just another
     opportunity to to be creative in the face of the recently diseased rules
     the of Glass Steagall Act (Thanks Gramm-Leech & Clinton).
     
     No job, no problem!
     
     Let’s get you 125% LTV on a home that’s already 250% above value, package
     it up in a nice CDO and sell it to some bloated state pension fund (or
     perhaps those silly Chinese).
     
     Voila! Instant money creation resulting in big commishes for all the FIRE
     economy leeches all around!
     
     You say it’s 2006 and the game is up?
     
     No worries, let’s do it until there are no more knife catchers and pass the
     toxic debt 100 cents on the dollar to ol’ Uncle Sugar!
     
     You see, when you’ve got friends in high places you never have to lose.
     
     Think I’m exaggerating? Just look at what good ol’ boy Ben Bernanke did
     when we had a 12-15% contraction in GDP for 2008, 2010 and into 2011!
     
     He reloaded the banks with even more capital (up to $4 trillion now) so we
     could keep the illusion of liquidity up and pump a thinly traded equity
     market with our secret HFT government approved bullshit programs….
     
     More creativity!
     
     What’s that you say? You’re worried that runaway inflation and destruction
     of 20-30% of businesses might never return, leading to eventual systemic
     collapse?
     
     No worries, we bankers are like cockroaches!
     
     We’re already swapping U$D for commodities and having them stored for us
     offshore!
     
     Who needs a bunch of whingers like those Tea Party morons and their stupid
     USofA anyways?
     
     HahahaHAhahaHA!
     
     Reply
     * RentaLurker
       May 11, 2011 at 7:46 am
       
       indeed. +1.
       
       
       
     
   
 * G
   May 9, 2011 at 10:17 am
   
   Looking for a home, first time buyer and loan approved but feel a bit nervous
   about it all. Should we wait a while knowing the market may continue to
   worsen? Will prices lower enough to buy us something a little better/closer
   to the city we currently live? Low interest rates now, will they go lower?
   These concerns/worries and more. Is it just first time buyer jitters?
   Appreciate your input.
   
   Reply
   * Questor
     May 9, 2011 at 4:14 pm
     
     Not enough info here. How much will you be putting down? How many months of
     expenses will you have in the Bank after the home is purchased? This
     includes all your new expenses, including property taxes and insurance. And
     why do you want to buy right now?
     
     Reply
     
   * Pbamma
     May 9, 2011 at 9:55 pm
     
     Take your time! I was in your shoes 6 months ago. I thought I should take
     advantage of the low interest rates at the time, but since learned lower
     home price is better than low interest rates. (interest rates and home
     price are basically inversely proportional) At best, home prices will stay
     the same through this year. Read this blog, see a ton of homes, learn about
     housing, loans, the home buying process, curbing your emotions, etc…
     
     We are in a buyers market, and we will be for quite some time. Wait till
     you get comfortable by learning all you need to know. Then you will know,
     you know.
     
     Reply
     
   
 * CalAsian
   May 9, 2011 at 11:02 am
   
   The thousands who were displaced during the quake will eventually move to
   Tokyo.
   
   That will help the Tokyo RE price to go up again.
   
   Reply
   * Jocko
     May 10, 2011 at 2:20 pm
     
     What the hell, CalAsian? Last time you posted you said all the Japanese
     quake, tsunami, and nuclear meltdown victims were going to move here
     bringing suitcases full of cash. WHAH HAPPAH?!?
     
     Reply
     
   
 * Sean
   May 9, 2011 at 12:14 pm
   
   1) We are not Japan.
   2) See note #1.
   
   It’s apples and oranges. Japan’s stock market did not bounce back, the US
   market is almost there. We have a wealth of resources and a country full of
   people willing to work. Sure we may need to have a slightly lower standard of
   living, but we live in an extremely comfortable time.
   
   Sure, drama sells as it’s exciting. But the reality is that people can sit it
   out in there homes. Banks can hold these assets for 10 years as the
   government bailed them out.
   
   What everyone better realize is that inflation is coming. Bookmark this and
   quote me on it. We will have inflation. And that is going to push prices up.
   So that cash you have in your pocket will be worth less in the future and
   that is going to drive the cost of everything up. Including homes.
   
   Also: Banks aren’t stupid! They would not hold on to these homes if they
   didn’t have a reason. And they have the funds and life is not passing a bank
   by as they wait to sell. The bank will be 200 years old when there is nothing
   left of us. It’s hard to lose when you have endless time on your hands.
   
   Reply
   * DwnTwn Atty
     May 9, 2011 at 6:14 pm
     
     Show me full employment (or more) and rising incomes, then we can talk
     inflation. Until then, the inflation story is completely unconvincing.
     
     Reply
     
   * James T in MA
     May 9, 2011 at 8:41 pm
     
     Our stock market never actually bounced back. Subtract out the POMO
     (Permanent Open Market Operations) money from the Fed propping up the
     market and what would you have? A hell of a lot less market rebound than we
     appear to have had. It was rigged.
     
     Reply
     * Questor
       May 10, 2011 at 12:08 am
       
       +1. Anyone who thinks the stock market has bounced back from anything
       other than the Fed putting money into it, shouldn’t be in the stock
       market at all. It’s unbelievable the general ignorance of many Americans.
       
       And supposedly QE2 is going to end. Hmmm. What does that mean for the
       stock market, if it’s true?
       
       
       
     
   * CC
     May 9, 2011 at 10:02 pm
     
     We have stagflation: inflation plus deflation equals stagflation!
     
     You’re hypothesis requires people able to pay higher prices in general, and
     on homes in particular. Who are these people, where are their jobs? As
     interest rises homes become less affordable. Prices go down. I could go on
     and on about what’s wrong with that post.
     Anyway have at it. Maybe you can be the next Donald Sterling.
     BTW who is going to maintain these empty homes waiting for the rising tide
     of inflation that convince people to buy them?
     
     Reply
     * RentaLurker
       May 10, 2011 at 9:16 am
       
       High unemployment and high inflation will have negative impact on home
       prices IMO – it is coming. Will the fed fight Stagflation like Paul
       Volker fed did with high fed fund rates? Will supply and demand market
       forces wrest the shadow inventory from the bankers in the next 5 years or
       will the supply chain remained clogged with squatters and inflated
       balance sheets?
       
       
       
     * pbamma
       May 12, 2011 at 9:22 pm
       
       inflation plus deflation does not equal stagflation. Stagflation is a
       macroeconomics term. Read up.
       
       The definition of stagflation is (Inflation + Stagnant economy). In other
       words, the prices of goods go up, but employment/wages go down or stay
       flat. Agreed, we definitely appear to be in stagflation.
       
       http://en.wikipedia.org/wiki/Stagflation
       
       
       
     
   * Questor
     May 10, 2011 at 12:13 am
     
     Here’s a question for you, Sean. What has changed since the Fall of 2008 to
     prevent that crash from happening again? All I see is the Banks gambling
     even more, since they have no other way to make money. Plus, they have
     learned that the U.S. will cover their gambling losses.
     
     If nothing has changed, then why are you under the impression that it won’t
     happen again? Because if it does, the continuing deflation in the money
     supply will accelerate even worse. And that’s not good for the housing
     market.
     
     Reply
     * Questor
       May 10, 2011 at 4:26 pm
       
       You know, the housing bulls are really rather funny. They will never,
       ever answer the above question.
       
       They’ll spend tens of thousands on a down payment. Go in debt to the
       order of hundreds of thousands. Or stay in their sinking real estate
       while shelling out thousands every month that they could be saving. But
       they’ll never give my question any serious brainpower and at least think
       through the consequences before committing themselves to eternal debt
       peonage.
       
       It just goes to show how delusional they are.
       
       So come on, you housing bulls! Take your best stab at answering the
       question! The alternative is to face up to the reality that housing has
       only begun to sink, and that there is are no fundamentals to support
       upwards price pressure on housing.
       
       For the housing bears here, feel free to use this same question whenever
       you want to shut up a housing bull. It’s always effective.
       
       
       
     
   
 * compass rose
   May 9, 2011 at 2:22 pm
   
   Slam dunky kudos to The Doctor…who quickly answered his own question, “How
   can home prices remain inflated if incomes are moving lower?”
   
   Debt, my man, debt. In the rush to FIRE economy how could anything be better
   than DEBT? Particularly if you get the debtors to re-contract for that debt,
   and more, every so many months, resetting the terms of their interest payback
   to the beginning of the curve each time? As Ron said, this was all Monopoly
   money…that people agreed to pretend was real. The problem with speculation is
   that once you have more than a few people dancing atop the Milk the Suckers
   ponzi pyramid, it ceases to be a pyramid shape….
   
   There was never anything under this but FIRE, so of course we’re all either
   toast or smelling it. I have to reach way back to the memory of that shining
   Camelotian time when everyone on Wall St. and in the culture of Bigg Bidness
   was looking to the East and Japan in particular as the absolute model of what
   we should remake the US economy into.
   
   Japan might still be ahead of China with its GDP had they resisted the
   temptation to go all funny money on themselves….
   
   But here’s what’s been bothering me the most lately: the wholesale move not
   back to productivity, as Ron points out (and DHB has on many occasions, and
   other readers/commenters as well).
   
   What bothers me is the wholesale move in our nation/economy in the US, and
   particularly CA and probably the Left Coast in general, is toward the
   license-and-rent economy, which at bottom is serfdom. In this system you rent
   your very right to exist. Not only do you have to pay for the basic
   sustenances of food and housing, but also water, and quiet, and movement
   necessary to do your job to get your cash to pay for everything you can no
   longer make yourself. You buy your house, then forever have to rent a place
   to put it from your municipality/county, just like at a trailer park.
   Ownership? Good heavens, all you own, someday, maybe, is the title to what
   sits atop the soil.
   
   Even health “insurance” is nothing more than renting your right to have a
   place in line to MAYBE get health care if something happens to you, but don’t
   bet on it.
   
   Doc, I think that when many people react strongly against renting their
   dwellings, they have some element of this concern in their overall palette of
   concerns: at what point does life become nothing but laboring away, hoping to
   be able to rent yourself a tiny space in the increasing number of for-profit
   queues people are forced to stand in.
   
   Re: LateSummer’s example of food stamps:
   
   Food programs are widely considered welfare to the people using them. In fact
   they are welfare to the food industry: it is a direct transfer of government
   (tax) bling to the pockets of General Mills, General Foods, Cargill, ADM,
   Monsanto, and the other Big Food/Big Pharma companies. It is tax bling to the
   grocers as well. These companies can keep marking up food for profit,
   squeezing those who pay money for it AND pay taxes so those who can’t afford
   the food can give Munchy Bucks to their local food vendor, and those dollars
   are credited to the food industry.
   
   And think of Wal-Mart, which touts itself/is celebrated as a model of
   competitive enterprise…but could not exist if it weren’t one of the biggest
   recipients of welfare (its workers can’t afford to live on their WM wages):
   http://ufcw.blogspot.com/2009/09/walmart-tops-state-assistance-rolls-in.html
   
   Sorry this is all over the place, but there are multiple converging streams
   here. And as DHB constantly reminds us, there is absolutely no reason to
   believe that in an economy built on gambling, scamming, and computer
   automated profit skimming, ANYTHING is going to accrue bubble-type benefits
   to just you and me, anytime soon. Least of all your house.
   
   Reply
   * darkages
     May 9, 2011 at 8:25 pm
     
     True Rose-
     The pain of the masses and yet Wal-Mart and Exxon continue to use their
     monopoly power to extort the nation for bragging rights to see which
     corporation and have the biggest 11-digit profit in one quarter. You might
     think even Rush and Kudlow would take pause that perhaps unfettered
     capitalism may not be the self-correcting, perpetual-motion answer to all
     humanity—but no, once a fool has his mind made up, no amount of evidence
     will change it.
     As the doctor demonstrates, all people follow predictable, repeating
     mathematical subroutines. There is no financial method to correct these
     simple facts:
     1) People care most about themselves and passing their genes into the
     future, whether they realize or admit it.
     2) People care about their family and will sacrifice all others to save
     their own; hence, commit rational behavior—the knowing destruction of
     others to improve their own situation.
     3) The accumulation of wealth as sport, at the expense of others. I
     personally feel that Bill Gates has learned the most important lesson in
     life—it is more blessed to give that to receive.
     Dark Ages is not a silly username—it is a compelling fear that we are
     repeating the mistakes of all great civilizations, with arrogance that we
     can merely crush nations that will not continue to take our paper for their
     tangible goods. I don’t know whether folks dismiss this ranting as
     nonsense or actually are concerned that this is where we are headed. I
     cannot imagine a rainbow behind this cloud, although I was in North
     Carolina recently and saw a beautiful rainbow to the east, while death and
     destruction were occurring underneath that storm.
     
     Reply
     
   * kid charlemagne
     May 9, 2011 at 10:35 pm
     
     Agree Rose-
     All of the welfare is wealth transfer from the many to ultimately the few
     causing multiple layers of damage:
     1) Taxing the middle class to pay for the food stamp
     2) Millions of abuser drive prices of food up
     3) Working pay higher food prices
     4) Disincentive to work hard when others get free ride.
     5) Middlemen and ‘investors’ use subsidized profits to bribe officials for
     more subsidies and moral hazard.
     
     Reply
     
   * RentaLurker
     May 10, 2011 at 9:26 am
     
     Great rant – Why I love getting my mental health care at Dr. HB’s!
     
     Reply
     
   
 * glisten
   May 9, 2011 at 3:17 pm
   
   Interesting shifts here in Europe. Here is an article that is apropos. Mr.
   Soini is right in tune with Dr. HB.
   
   http://online.wsj.com/article/SB10001424052748703864204576310851503980120.html?mod=WSJ_hp_us_mostpop_read
   
   He says no bailouts because all they do is benefit the banks as a way of
   shoring up weak governments. Sure feels like that right here at home.
   
   Reply
   
 * original thinker
   May 9, 2011 at 7:15 pm
   
   Sean, inflation-will-solve-the-problem theorists always fail to point
   out that housing will be the asset that will not go along for the ride
   when everything else adjust itself to maintain value. That’s how
   we will someday be able to meet your inflated asking price. You’ll
   receive a nominally identically but deflated cash value. By then,
   you’ll also be very happy to take it. It will be the best offer you can
   hope for. You see, the gap in affordability will never go away until housing
   gives back its bubble value. Twist and turn the argument as much as
   you like, the game is over. You’ve lost the money. Sorry.
   
   Reply
   
 * shifty
   May 9, 2011 at 11:42 pm
   
   “Banks aren’t stupid!”
   
   actually , banks are really stupid
   
   see the 2005-2007 when they gave 0 down loans to as many people w/ bad credit
   as they could , and then maybe a few more for good measure
   
   Reply
   
 * Bubblicious
   May 10, 2011 at 11:06 am
   
   “banks are really stupid”
   
   Oh really?
   
   Are we talking about the same banksters that passed off their toxic debt onto
   the US taxpayer?
   
   Are we talking about banksters like Angelo Mozilo, who cashed out is living
   like a king offshore?
   
   Are we talking about the same banksters that are buying out-of-control US
   debt from the Treasury and immediately flipping it back to the Fed for a nice
   vig?
   
   No, banksters are not stupid at all.
   
   The electorate my muets petit mouton are the ones that are truly stupid.
   
   Keep voting for the (D) & (R) oligarchy for change you can bleed (or was it
   bleet?) in…
   
   Reply
   
 * lineup32
   May 10, 2011 at 11:49 am
   
   buying a home under the illusion that home prices always rises was an
   essential element in the RE easy money game but now that assumption is no
   longer considered a universal truth as a result the easy money RE game has
   now developed some serious air pockets in housing prices. Inventory
   levels,jobs and income levels all play vital parts in creating home prices
   but at the end of the day if you are not convinced that the home will
   increase in value (price) over time then the buying decision becomes more
   complex and everyone impacted by the buying decision generally will not want
   to lose money! even the wife!!!!!!
   
   Reply
   
 * After the A-Bomb
   May 10, 2011 at 1:42 pm
   
   Seeing this real estate swindler was just sickening to me – look at his video
   and listen to the guile of his deception/con job. He is trying to tell
   potential home buyers that “there is no such thing as a bargain” and that you
   have to pay the full rip-off price for a house at the current over-inflated
   valuations.
   
   http://www.youtube.com/watch?v=OXRzGzSTz-A
   
   Listen to him say….”THESE ARE THE FACTS.” This video is very entertaining and
   very informative. It shows you how much of a shyster these real estate agents
   can be. He says “there’s a whole bunch of us (realtors) out there who know
   real estate – it’s what we do for a living. We’re licensed and WE HAVE TO
   TELL YOU THE TRUTH, BY LAW. Boy, what a shyster.
   
   Well Danny – let me tell you something. There are many, many other people out
   there who are intelligent and REFUSE TO BE TAKEN TO THE CLEANERS. Real estate
   is WAY overpriced in many areas, so if you say that we basically “need to pay
   at least 97% of the asking price,” I say you are the epitome of an
   UN-professional. You do not have the best interests of you buyers at heart.
   You only have your own selfish interests in mind.
   
   http://www.marketwatch.com/story/housing-crash-is-getting-worse-2011-05-09?
   
   Reply
   
 * Bambino
   May 10, 2011 at 2:03 pm
   
   All the underwater home owners are hoping for a hyperinflation so they will
   have a chance to erase the debt, not much different from the federal
   government.
   
   All those dollar bills Uncle Ben and the gang printed got to work their way
   into the circulation eventually. But with 9% unemployment there won’t be any
   wage pressure any time soon. Dream on homeowners.
   
   Reply
   * Newsboy
     May 10, 2011 at 7:16 pm
     
     Uncle Sugar and his bro’ Ben the Bernank aren’t printing dollar bills,
     they’re issuing T-Bills that are just zeros in the computerized banking
     system and unpayable by the US Gov.
     
     The tax receipts are imploding, and jobs won’t be recovered due to collapse
     of industries outsourced or vaporized by technology.
     
     For the moment TBTF is kicking the can, but eventually it’ll be the *END
     GAME*…
     
     When that happens, THEN you’ll get currency collapse and hyperinflation,
     until then its business as usual (fake inflation via debt creation).
     
     Enjoy the good times while they last, because things aren’t even *BAD*,
     yet.
     
     Reply
     * RentaLurker
       May 11, 2011 at 7:59 am
       
       Who the hell is buying 3 month T-Bills? Maybe TIPS? What garbage…
       Monetarist can kicking back and forth with TBTF – a game for the
       hedgefunds to protect the uber wealthy and corporations to keep up
       buisness as usual.
       
       It isn’t a R or D issue, it is a monetary/fiscal policy issue combined
       with deregulation such as the above poster mentioned with calamitous
       policy decsision to repeal Glass-Steagle and other interests driven
       forward by financial industry lobbyists.
       
       
       
     
   
 * Somis Guy
   May 10, 2011 at 5:23 pm
   
   From: Somis Guy
           To the Doc and all who use this site…, The time has come. Our
   Land Lord wants us out within the next three months. They have been more than
   fair and resonable… 
           We live on the western side of Ventura County and for many
   reasons we would like to stay in V.C. Or close to… However the inventory and
   quality of rentals has fallen to an all time low while the price of homes for
   sale is far too high. There are very few decent homes listed in our range. 
          We hope to buy a 2,000 sq., Ft., or larger single story, move in
   ready, single family residence with Good Bones and plenty of yard ( acres )
   with privacy, (no Tracts or busy streets) and must be quiet area. We want to
   live modestly and without the cost and hassles of Mella Roos, HOAs or the
   many City ordinances. A ranch or farm land preferred. We hope to move once
   and to stay for at least 10 to 15 years before we retire, then move out of
   the area for good.
            I feel that the market is at it’s worst as far as the quailty
   of available homes at “Fair” prices – we realize that we will lose money,
   that’s a fact! Also, the sale will unfortunatly bolster the false values of
   the market. As the Doc’s readers know far too well, the stars have aligned
   and the wave is comming soon, prices will move further downward to a point of
   equalibrium with incomes, inventory, supply and demand. It looks like the
   banks will fight the whole way down delaying a natural correction. Folks have
   far too much debt into thier properties to make Short sales, preforclosers,
   forclosures sales work and finding folks who’ve lived many years in the same
   home with a good amount of equity to negociate with are very rare and thier
   homes are seldom Gems. 
           I guess I may be answering my own questions. Sorry people, I
   hate to give in, but renting here is – at this moment – not an option. 
           Any ideas? I know by following this Blog that you all are the
   best Informed, well educated ( street smart ) and practical! I’m open to any
   thoughts in or outside the box. 
         For the sake of helping others, we will be posting any ideas that
   help and those that do not. Stay strong Folks  – we wish you all the best.
   Peace, love, health and Happiness!
   Semper Fi
   
   Reply
   * surfaddict
     May 11, 2011 at 8:33 am
     
     Move to Landers. You can get what you want for $25K today. Kinda hot there
     though…
     
     Reply
     
   
 * Daniel
   May 10, 2011 at 10:21 pm
   
   Hello all
   I must be missing something here. I am a first time buyer, interested in
   Culver City (LA).
   When I look at this link and scroll down I see trends that do not purport a
   falling market. Avg time on market for a house has decreased, median prices
   increasing now.
   Is this all smoke n mirrors or is this an example of a micro market that is
   trending upward? Is this the quiet before the storm (downward)?
   
   http://www.movoto.com/statistics/ca/culver-city.htm
   
   Sincere comments appreciated
   
   Reply
   * Newsboy
     May 10, 2011 at 10:50 pm
     
     Knife Catchers…the SoCal meme “It’s different here” will soon be replaced
     with “WTF was I thinking”.
     
     Nearly “Nearly eight-in-ten (77 percent) workers report that they live
     paycheck to paycheck to make ends meet”, no more so than in ol’ Sunny Kali.
     
     http://www.declineoftheempire.com/2010/09/living-paycheck-to-paycheck.html
     
     Enjoy the ride down, it’s gonna be one for the history books…
     
     Reply
     
   * Chris
     May 11, 2011 at 6:19 am
     
     I don’t visit moveto much so can’t say anything about the accuracy of their
     numbers BUT I will say that both zillow and redfin’s numbers suggest a
     declining market in Culver City.
     
     http://www.zillow.com/local-info/CA-Culver-City-home-value/r_51617/#{scid=mor-site-topnavlocalsub}
     
     http://www.redfin.com/city/4557/CA/Culver-City
     
     Culver City has always been squirrlly maybe because it’s so diverse… You
     have expensive neighborhoods and decrepit ones… a bit like SM but more so…
     I think you have to look at specific zip codes to get a better sense of
     what’s going in the specific neighborhoods you are interested in…
     
     Reply
     
   * RentaLurker
     May 11, 2011 at 8:09 am
     
     Select and read several Dr. HB articles on employment and shadow inventory
     data dating back 7-8 quarters, if that doesn’t give you a different lens
     through which to view the market then BUY, BUY, BUY!
     
     Maybe you can knuckle down a bank foreclosure with an all cash deal that
     will not kill you as the market drops and then flattens over the next
     decade.
     
     Reply
     
   * Questor
     May 11, 2011 at 10:42 am
     
     It might help to actually read some of the comments here. See mine above
     about housing bulls, and answer my questions first. Otherwise, you look
     just plain silly, and you’re about to make a serious mistake if you buy a
     house.
     
     Reply
     
   * pbamma
     May 12, 2011 at 9:34 pm
     
     DHB has done several an article on Culver City and the surrounding areas.
     Don’t doubt that the RE spring summer season will want the affluent-esque
     Culver RE participant to push this area up during this time. If you can
     wait, do so. Don’t get mixed up in with the buying season this year. I
     would think we’ll see some interesting price drops in the still bubble
     areas this fall/winter. Of course I’m a guy stashing away money in a rent
     free place just watching, reading, learning and waiting.
     
     Reply
     
   
 * dangermike
   May 11, 2011 at 9:44 am
   
   good article, Doc. It kind of reminds me of a point Mish made a while back
   about exponential functions and the dangers of apparently small imbalances
   over time. Basically, if wages are increase slightly slower than inflation
   (which is bound to happen when the CPI is as cooked as it has been for
   several decades), the effects will become massive over time. For instance, if
   real inflation was 4.5% while median wages increase, let’s say, 3.5% per year
   in the same time, most people will say it’s not a big deal. Just a penny on a
   dollar. But if this is consistently the case for 25 years running, that
   $25,000/year job would now be pulling in about $59,000 but the $75,000 house
   purchase back then would now be demanding about $225,000. The d-to-i ration
   to maintain the same household on the same job, then, moved from 2.4 to over
   3.0. Another 5 years down the road and it’ll up to 3.2. But if those 5 years
   are between 2008 and 2013, the chances of maintaining any momentum in wages
   is slim. Adjusted for inflation, everyone I know working the private sector
   is actually losing ground versus inflation, even with the rare down year
   factored in. I won’t pronounce it dead just yet, but the American dream
   certainly is taking a pounding.
   
   Reply
   
 * Mark
   May 16, 2012 at 2:40 pm
   
   The Gary Shilling prediction for housing is troubling. I’m wondering if
   people can weigh in on an investment decision I’m considering. I think Gary
   is wrong about not investing in real estate—if you take into account 20%
   down mortgage using cheap money locked in for 30 years . . . .
   
   I’m considering buying a house (jumbo loan; 20% down; good metro-NY area
   with easy commute to city–so likely to hold its value; really low interest
   rate for a jumbo; 30-year fixed loan; good debt-to-income ratio).
   
   Ignoring the obvious benefits of living in the house, and ONLY looking at it
   from an investment perspective, I STILL think it is probably one of the best
   investments I can make.
   
   Here are my assumptions:
   
   1. Agree with Gary that global recession is a higher probability than most
   financial cheerleaders out there contemplate.
   
   2. BUT, due to unfunded private and public sector unfunded obligations
   explosion and pending debt bomb, as well as the likely global recession with
   occasional bouts of mediocre growth, the only tool our weak politicians and
   Fed will likely resort to is the printing press.
   
   3. So, even with huge, current deflationary pressures, we will likely create
   sustained and relatively high inflation in the medium term to eat away at the
   substantial debt burden and try and to inflate our economy.
   
   4. I don’t know whether G. Shilling is right or not on deflation. I think
   he is right on the economic slowdown, but not necessarily on the inflation
   piece (can have slowdown AND inflation). But, I’ll give it the following
   probabilities: 20% chance of another decade or so of Japan-like deflation;
   80% chance of sustained, lasting inflation for decades (sustained bouts of
   stagflation).
   
   5. Historically, housing has generally kept up with inflation (whereas stocks
   have generally performed negatively in real terms—which takes into account
   inflation). For example, look at the negative real returns on stocks during
   the 70’s; compare that to real value of housing that stayed flat during the
   70’s (housing prices moved up in line with inflation).
   
   6. I’ve assumed NO appreciation on my house.
   
   7. The low interest rates that I can actually obtain right now will not be
   around much longer. With inflation and growing lack of confidence in US,
   interest rates will rise. This assumes the 80% scenario of inflation. It is
   possible Gary is right and we stay in low interest environment for a couple
   more years, but it is still likely to go up, along with inflation, at some
   point in the not too distant future.
   
   8. I don’t mind having a house for the long-term (e.g., 30-year loan). Even
   if we move, I will easily be able to rent it out.
   
   The practical question is, is my down payment on a house a better investment
   than the alternatives. I think it is for either the 20% deflation scenario or
   the 80% inflation scenario. Here is why:
   
   1. The cheap money won’t be here much longer. Would like to use it while I
   can (am lucky that I can get approval for). Gary might argue that low
   interest rates will last a lot longer . . . and maybe go lower. . .
   
   2. Assuming NO appreciation on the house, and ignoring my monthly home
   payments (only looking at initial deposit (investment) and my ending house
   value 30 years from now), I get approximately 5% real return in almost every
   scenario on the initial deposit. Varying inflation from 0% to 10% annually
   has wide impacts on nominal rates and final house values (assuming house
   keeps up with inflation), but the real value stays almost 5% annually in most
   case.
   
   3. Even if I assume a 10% or 20% immediate reduction in value in the home
   (immediate after purchase), my annual return on my deposit is still not too
   far from 5% (4.8% and 4.4% respectively).
   
   4. While 5% real annual return doesn’t seem like much, it is a highly
   stable and secure return. How would stocks fair in that same time frame?
   Taking into account a 2% annual inflation rate, you would need a 7% nominal
   annual return on stocks to keep up with a 5% real return on a house. What if
   inflation goes to 4% or higher? Can you imagine a sustained nominal return on
   stocks of 9% or higher (to achieve a 5% real return on stocks)??
   
   But the above analysis only looks at the beginning investment (deposit) and
   ending value (30 years from now). The real value kicks in for the “fee for
   services” for the benefits of living in the home.
   
   1. Assume I am paying a good (not overpaying) “fee for service” (mortgage
   payment = rent proxy) on day one. Every day we will use the house
   “service” at the FIXED loan payment amount (cost)—for the next 30
   years. But, the government will conveniently print money and inflate its way
   out of debt—allowing me to gain the increasing nominal value for my house
   service as it goes up, while I continue to pay the same fixed monthly fee
   (cost). Over the years, the value compared to my fixed cost sky rockets (and
   in this case, the nominal value for the service is what matters). NOTE: I’m
   assuming I have to pay a fee for my living accommodations no matter what, so
   am not taking the stream of fees (mortgage payments) into account in the
   previous investment NPV/FV calculations.
   
   2. Should I choose to move and rent, the growing differential (between value
   and cost) becomes my growing rental income year in year out. And, this rental
   income goes up even if there is NO appreciation in the house’s value (the
   house, and rent the house can generate, merely moves up and keeps up with
   inflation; the real values stay flat). If I were to add the likely stream of
   increasing amounts on rental payments to my previous return calculation, I
   would get well over 5% annual returns previously mentioned.
   
   So, I’m struggling with Gary Shilling’s analysis because I think that he
   misses the real investment value we will obtain from real estate from:
   
   1. The benefits of 20% down using cheap money locked in for 30 years.
   
   2. The likelihood that we will get socked with substantial inflation when the
   government fights off what Gary predicts, as well as how it deals with debt
   bomb.
   
   3. The value of real estate as it compares to alternative investments in a
   sustained inflation environment.
   
   Yes, maybe real estate does go down 20% and maybe I should market-time for
   that. But, if he is wrong and I miss the cheap money opportunity, then when
   interest rates do spike, will I wonder if I had foregone a good investment in
   real estate???
   
   Thoughts?????
   
   Reply
   * david ridley
     July 15, 2013 at 7:21 am
     
     I totally agree, i have been saving up a deposit, time to buy, just missed
     interest bottom thou
     
     Reply
     
   
 * Livin' in Leschi
   April 11, 2018 at 10:29 pm
   
   Luckily, your forcast didn’t play out.
   
   Reply
   




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