NYT: Trading Places: Real Estate Instead of Dot-Coms (bubble?)

[DeepModem Mom]

Trading Places: Real Estate Instead of Dot-Coms
By MOTOKO RICH and DAVID LEONHARDT

Published: March 25, 2005


Real estate-crazed Americans have started behaving in ways that eerily recall the stock market obsession of the late 1990's....

***

Nobody can know whether the housing boom of the last decade will end as the dot-com frenzy did. But the parallels are raising alarms among many economists, even those who acknowledge that there are important differences between homes and stocks that significantly reduce the chances of another meltdown. For one thing, houses are not just paper wealth: you can live in them.

Still, perhaps the most troubling similarity, some analysts say, is the claim that the rules have somehow changed. In an echo of the blasé attitude that "new economy" investors took toward unprofitable companies, the growing ranks of real estate investors are buying houses they never expect to be able to rent at a profit. Instead, they think the prices of houses will just keep rising.

Indeed, the government reported yesterday that sales of new homes jumped sharply in February, in the biggest monthly increase in four years. A strong economy and an improving job market contributed to the gain. But many buyers were also trying to beat rising mortgage rates, which could eventually cool the market....

***

"We're going through something very similar in real estate that we did with stocks," said Robert J. Shiller - a professor of economics at Yale, whose prescient book on stocks, "Irrational Exuberance" (Princeton University Press, 2000), appeared just a few months before technology stocks began their slide. "It's driven by the same forces: that investments can't go bad; that it has the potential to make you rich; that you'll regret it if you don't do it; that it looks expensive but is really not."...


http://www.nytimes.com/2005/03/25/business/25boom.html?hp&ex=1111726800&en=08664a5d74ed1c79&ei=5094&partner=homepage

[xray s]

1. Its about to bust out

0% down loans and zero principle payment loans to keep the juice flowing, tear downs in $200,000 neighborhoods and rebuilding $1,000,000 castles that are completely out of place. 50% to 60% of the homes being built on spec by out of state investors.

Alan Greenspan, man without conscience, advising people to get variable rate mortgages four months ago, knowing damn well that interest rates are going up big time.

The tea leaves are very easy to read.

[lovuian]

2. I agree Interest rates are going to stop this bubble!!!

Lots of people are going to get hurt here!!!

[AirAmFan]

3. I don't know whether the top is in yet, but when the crash comes, it's

going to be devastating IMO.

Sometime during the next few years, people who paid over a million dollars for two-bedroom NYC co-ops are going to approach brokers and get the famous reply: "Sell? To WHOM?"

And, nationwide, millions of people who've taken out second cash-out mortgages and spent the money will find they now owe hundreds of thousands of dollars more than their properties are worth. When substantial fractions of them just walk away, banks will be inundated with foreclosures, and hot-potato mortgage-holders will be begging for government bail-outs.

[Harlequin]

5. worse still

Americans who've been refinancing their homes in order to supplement their incomes (after having maxed out / while paying off) tremendous credit card debts are going to meet "The Perfect Storm" -- no income, no bankruptcy (thanks to the latest law), devalued home, devalued America.

Thanks, BUSH. Asshole.

[bruiser216]

11. bankruptcy

What, did you think the bankruptcy bill was only to protect the credit cards. Something big is coming and the administration knows it.

[Theduckno2]

30. I agree totally,

the recent spate of radio ads for interest only mortgage payments really put the scare into me. They try to infer that you wind up with extra money over a years time (first rule of economics: you don't get something for nothing!). I even see a parallel to purchase of stocks on margin during the 1920s (just a little paranoid), the people get in with very little if any of their own money never recognizing the downside risks. I too, will be watching interest rates going into the summer.

[ausiedownunderground]

45. In OZ we're a year ahead of America in the downturn

It won't be ugly, but some people will suffer. I expect it will be the Greedy"! who invest now!! American interest rates have been held so low for so long we were all starting to get jealous! But it was all part of Greenscam's scam! Oh, by the way, he retires at the end of 2005!! He won't be facing the music! But good luck to any property investor who thinks they're on to a good thing today!! You've been warned!!!

[Marthe48]

4. Didn't this already happen in the late 70's?

As I recall, the insurance companies speculated heavily in real estate and the real estate market crashed, which really tore the hell out of ins. co. profits --one of the resons why they are so anti-lawsuit now, gotta recoup the losses somehow. And if I remember correctly, the real estate bust had something to do with the savings and loan scandal that Neil "our family screws America sideways" Bush was involved/exonerated from. Also the Keating 5, I think.

We lived through the economic nightmare of the 70's but what's coming will make that look like a cakewalk.

[AirAmFan]

7. You have a great memory! I'm afraid Greenspan may go out the way

his predecessor Paul Volcker came in, in 1979.

From http://www.thirdworldtraveler.com/Corporate_Welfare/S&L_Bailout.html :

"Volcker's policies caused a combination of inflation and recession called "stagflation." This put the squeeze on S&Ls. Most S&L mortgages were fixed-rate, so the S&Ls couldn't raise the interest they charged on those.

But because their depositors were withdrawing money by the billions and placing it in higher-yielding money market funds or government bonds, the S&Ls did have to raise the rates they paid on savings accounts and CDs. Finally, because of the recession, homeowners started defaulting on their mortgages in droves, and S&L bankruptcies skyrocketed.

By the time Ronald Reagan took office in 1981, two-thirds of the nation's S&Ls were losing money and many were broke. If all the problem thrifts had been shut down right then, the government's insurance fund would have covered their debts. Instead, the government delayed an average of two years-and, in some cases, as many as seven years-thus allowing bankrupt S&Ls to go on losing billions of dollars. This delay also gave S&Ls a chance to gamble on questionable investments, in an attempt to regain solvency. But first they had to convince Congress to deregulate them...."

[Marthe48]

19. Thanks -- we lived thru it!

My husband and I were talking about this today, it is so hard to believe we are going through the same unfortunate cycle now as we did in the 70's. I hope they bring back the soy/hamburger mix--that was about the best thing that happened the whole decade :)

[kurtyboy]

31. Volcker's policies can hardly be credited for stagflation

Stagflation was underway for five years before Volcker got appointed as Chair of the Fed. Volcker was the percieved asshole who "took away the punchbowl just as the party was getting started" by tightening money supplies to a ball-crushing point--all to protect old money from inflation.

Read Greider's "Secrets of the Temple" for the classic explanation of the Federal Reserve.

By the way, stagflation is now widely thought to have resulted from the oil shocks (OPEC embargoes) of the early and late seventies--no Fed Chairman can take credit for these....

As to the problems in the thrifts, Congress, not Volcker, is to blame for the S&L crisis--with a big steaming dollop of poo going to the policies of Ronald Reagan also. Deregulation of the way thrifts could invest let them engage in speculation at a pace even the dot-com bubble boys could envy--and Congress (along with President "I forgot" Reagan) just let it happen, despite loud warnings from smart people.

Sort of reminds me of a certain Congress and President in more modern times.....

[AirAmFan]

34. Fact check: The oil crisis of the mid-70s doubtless caused INFLATION,

Fact check: The oil crisis of the mid-70s doubtless caused INFLATION;

but the economy actually ROSE from March 1975 until the year after Volcker came into office. Also, oil-crisis inflation fell dramatically by 1976. But, since it marched steadily higher after that initial decline, let's be charitable to Volcker on inflation. Let's agree that Volcker's tight-money policy apparently led to recession on top of an inflationary trend already in place before he came on the scene.

Thus, though alleging causation always is debatable, it's fairly plausible for the source I casually cited (it was a convenient google hit) to argue that Volcker "caused" stagflation. You yourself point out that it was Volcker who instituted the too-tight monetary policy that apparently added recession to the mix. There was no stagflation before Volcker, and there was stagflation on his watch.

See the DEFINITIVE business cycle dating and inflation webpages at http://www.nber.org/cycles/cyclesmain.html and http://www.bls.gov/cpi/home.htm .

[kurtyboy]

37. Well, I can agree with this much--

Volcker's policies exacerbated an existing problem--stagflation--to a stifling, miserable level, but I continue to contend that the oil shocks of 1973 and 1979 were the genesis of stagflation.

Quoting my macroeconomics textbook here, "The price of oil rises. Faced with higher energy and transportation costs, firms decrease production. Aggregate supply decreases, and the aggregate supply curve shifts {downward}. The {dollar} price level rises, and real GDP decreases {...} Because real GDP decreases, the economy experiences recession. Beacuse the price level increases, the economy experiences inflation. A combination of recession and inflation, called stagflation, actually occured in the United States and the global economy in the mid-1970s and early 1980s." (p 360)

Bade and Parkin, Foundations of Macroeconomics 2004, Boston: Pearson Addison Wesley

In the 1980s, the text goes on to assert, the effect was worse, resulting from the accompaniment, "By a large decrease in aggregate demand that resulted from the Fed's monetary policy." (p 361)

From the same text, the growth of "Real GDP" in a Volcker-less 1974-75 was -.6% and -.4%, respectively. In 1980, with Volcker aboard, the change was -.2%. In 1981, the change was a rosy +2.5%, which was nearly eliminated (but not quite, in inflation-adjusted dollars) by a drop in 1982 of -2.0%. IN 1983 and '84, still under Volcker, the growoth rate was +4.3% and +7.3%--the best growth rates for the US economy in decades, and the second number has been unmatched since (The best year of the Clinton economy was 1998--and its +4.4% growth rate in real GDP {1996 dollars}) To sum up, in the years 1973-78 (pre-Volcker) the real US economy grew by 14.7%, and in the period of 1980-1985 (Volcker), the real economy grew by 15.1%--pretty much a push--even with the worst of the oil shocks considered.

Bottom line--Volcker shouldn't be saddled with the stagflation label.

Note in the first cited passage the direct connection between the price shock and recession--without any reference to monetary policy. Further note that the stagflation also occured in the "global economy", which was more-or-less operating independent of US Fed policy (obviously, not entirely independent--but certainly moreso than in today's economy).

But yes, it is true that the Fed policies of Volcker made things "worse" than otherwise--but on the other hand, inflation was reigned in for the first time in ten years (as of 1983), albeit with the assistance of Ronald Reagan's wildly irresponsible fiscal policies---

Damn, it's all weaved together so tightly that it's hard to pick out causal demons, as you rightly assert.

EDIT: The elliptical and paraphrased portions of the text were references to charts that I could not reproduce here.

[woosh]

33. a few points

1. Greenspan has used low interest rates to encourage consumers to take "equity" out of there house and pump it into the economy. If anything has created an artificial market or bubble, it's this policy. The fed should have ratcheted up interest rates 2 years ago, but couldn't do so for political reasons.

2. The last housing crash coincided with a recession, which helped in people defaulting on their mortgages. This next POSSIBLE crash could be fueled not by borrowers defaulting on their first loan, but people defaulting on their second mortgage. The banking industry (more specifically, mortgage-lending industry) has had some very bad lending practices, and this is contributing to the rapid rise in prices.

[ozone_man]

13. It was the late 80's.

The late 70's was marked by a period of huge inflation (misery index) and probably house increases too. It was the late 80's when we had the real estate bubble, S&L bailouts, etc.

I think this bubble will make that one seem like a mole hill. We are definitely experiencing a resurgence of irrational exhuberance like the run up of the Nasdaq to the top in 2000. A lot of the money from stocks went into real estate, while the stock market has reinflated it's bubble. This time I think both going down in synchrony.

[AirAmFan]

16. It was both! Real estate markets crashed in the late 70s AND late 80s

My question is, what happened to the real estate crash that was due in the late 90s?

Real estate is cyclical, and cycles are extremely deep. Just ask Donald Trump, whose net worth has gone from a billion plus to MINUS a billion.back up to several billion on the positive side.

[ozone_man]

18. I stand corrected then.

I was not into real estate in the 70's, but I was in the 80's. Certainly there was a huge real estate price increase (bubble) in the 70's due to inflation. S&L, Keating were in the 80's though, so I wonder if this poster meant that decade.

[MrTriumph]

6. More trash talk from Wall Street apologists

The stock market stinks so what does the industry do to try to get more money into stocks? Besides trying to get private accounts, they try to scare people to prevent them from putting money into real estate. Hey, there's only so much money to invest, right?

Well, get real Wall Street apologists: Real estate has proved a much more stable investment again and again and again.

I heard a Wall Street lackey on the radio the other day saying how stocks were a more liquid asset. Well, screw him. Yes, you can get your cash out of stocks more quickly IF the stock hasn't lost it's value. In addition, real estate is a longer-term investment vehicle. Duh! That's good thing, not bad thing.

Wall Street apologists always have a pithy retort to any problem with the stock market. Crime at the top? No problem. Market down? No problem. Blah-blah.

Give it rest Wall Street. Real Estate investment out performed you again.

[OrangeCountyDemocrat]

8. Ummmmm.....

I think you're missing the point here. Real Estate may be the hot thing now, but it will change, and this article is pointing out that all the speculation taking place right now, i.e. using real estate as a solid and secure investment, is dangerous. As interest rates rise on variable rate mortgages, some people may be in real serious trouble, if they overextended themselves.

[MrTriumph]

42. No. I get it. I just disagree....

Having lived through the worst real estate bust in American history (including the Depression) from '86 & 87 here in Texas, I can testify just what a bust feels like.

If the economy really tanks, sure we could have another nasty event. But barring a collapse (the '86 & '87 bust was forced by the devastating collapse of the oil business) real estate will slump but not bust. Having seen the ugliness of neighorhoods with countless deserted homes, a bust is a different event from a slump.

Next time you catch the MSM telling you about the oncoming real estate bust, you should ask who benefits from these reports (actually it is speculation based on opinion). Make a note of who the talking heads they interview work for.

[Robert Oak]

9. link was broken for me, here it is

http://www.nytimes.com/2005/03/25/business/25boom.html?pagewanted=1&ei=5094&en=a7317cf9a6c619c6&hp&ex=1111813200&partner=homepage


anybody think "pyramid game" with these particular markets being so hyped up?

[Voltaire99]

10. Oooh! Everybody's doing it!

"It just seems like everyone is doing it," Laurie Romano, a 26-year-old self-described real estate investor, said with a giggle as she explained why she was attending an open house this month for the Nexus, a 56-unit building going up in Brooklyn's chic Dumbo neighborhood. She and her fiancé, a dentist, had already put down a deposit on a Manhattan condo earlier in the week and had come to look at another at the Nexus.

Multiple condo purchases for these sickening vultures. Wal-Mart for the rest.

And a bubble that can take us all with it.

Welcome to a nation without responsible leaders, where getting yours is the highest virtue.

[woosh]

12. I worked for a company that Shiller founded for 4 years

and he's been talking about this bubble bursting since 1999/00. Not that he's gone out on a limb or anything, but at this point, it's too late to turn back and say "perhaps this bubble won't burst after all". There is definatly speculation out there, and also some scary stuff in the mortgage-lending industry (ARM's, home equity lending at 125% of a homes value), but I think perhaps the defaltion may be limited to regional. over-speculated markets, as opposed to a giant pop like the tech market.

[Cheney Killed Bambi]

14. NYC

I've been trying to buy a one bedroom apartment in NYC the last few months. If you don;t want to live in a hellhole, you've got to spend at least $600,000. Yes, you've read that right. $600,000. For an apartment. A one bedroom apartment. And a small one at that.

:-(

[pokercat999]

20. Don't forget the monthly maintenance fee of

$500.00 or so.

I'm a new Realtor in Northern VA (DC Metro Area) this market is crazy. Inventories of existing houses are so low we are getting 20/30/50 or more contracts on every listing. Prices are just plain nuts and the offers people have to make to even get their contract looked at are mind boggling.

Buyers MUST wave almost all their rights, bend over and get ready to take it right up the old chute if they want a house. An increasing number are buying using interest only loans figuring that the market will continue to climb so when they are ready to sell they will make money. Most real estate professionals in this area expect the prices to continue to climb for a while. How long nobody knows but we all know the market will change. No one KNOWS if the market will crash tomorrow or climb for another ten years then level off or what. In the mean time regular middle class and young folks are being squeezed completely out of the "American Dream" of owning their own home.

[AirAmFan]

24. It's more like $2000 a month maintenance for many NYC co-ops. $500

is a CONDO maintenance fee. In NYC, taking on a $600K mortgage just gets you in the door. In many cases, on top of the morgage for your apartment, you've got to pay for a big building maintenance and security staff, plus the building's own mortgage!

[pokercat999]

40. OK tell me what makes living in NYC worth that?

I mean really? I've been to 5th Ave it's a slum. The people are the ONLY redeeming quality but there's just too danm many of them.....IMHO

I can't see why anyone with a choice would choose NYC.

[obxhead]

50. the American dream died a long time ago

The housing market will crash. It's not if it's when.
"figuring that the market will continue to climb" is the danger as there is ALWAYS a peak. Right now I would only look for for the quick flip and make it real quick

Or is it a flop :)

[XemaSab]

22. That's how San Francisco and the Bay Area are

and in my little town in the mountains, people are cashing out their million dollar homes in the Bay Area, so the bottom of the market here is 200,000 and climbing. It looks really nice to people from much of the rest of the state... 200K will get you a big new home with some land, which is what you would pay for a dirty, leaky refrigerator box in the bay area. It's a nice place for retirement or to have a vacation home.

However, since there's no job market up here in the boonies, people who work locally can't help but feel squeezed. I have a decent enough job, salaried with bennies, and I'm feeling daunted at the prospect of entering the real estate market. I can't imagine what all the people who work in the service industry (which is basically the entire local economy) are going through.

It's even worse for people in the Bay Area. I can't even begin to think about what the real estate market there is like. I rent a nice 2 bedroom apartment for 725. I know people who are getting a ROOM in a HOUSE for well over 1000 in San Francisco.

We're going to have a whole generation of people in California who are not homeowners.

[FourStarDemocrat]

39. NYC and its suburbs high prices will stay relatively stable..

Because of the very limited amount of land/space available to build new homes on- in fact whatever lots that have been vacant are close to all being bought out in recent years. There will always be a demand for housing in NYC and Long Island. My own home's value has risen 60% since fall of 2001. For me and my family it's good, since that's about the closest I think we'll get to having a "nest egg" in this economy.

[AirAmFan]

17. Do you have links to public data on real estate values in individual markets,

data that go back to at least the 60s? Such data might illustrate whether the current real estate cycle is ripe for a tumble in metro areas DUers care about.

[LiberallyInclined]

15. I'm guessing that the bubble will burst in late may...

since we intend to put our house on the market in mid-june.

[Cheney Killed Bambi]

21. LOL

That's exactly how I feel. The market will crash six to eight weeks after a put down a contract on a new apt.

[LiberallyInclined]

29. our house has tripled in value since we bought it 9 years ago-

but i think the value is pretty secure, because it's income property(2-flat) in a desirable neighborhood in chicago.

[lovuian]

23. I think Gas Prices Location and Inflation & Interest Rates

are all going to play a big part of this!!!

[Marthe48]

25. I'm wondering about secondary market

We went to the Outer Banks on Vacation 3 yrs ago and there were row after row of these huge private homes, they had to have a $1000000+ price tag. I was thinking who could afford to buy all of those new, and who could afford to buy them after the first owner decided to sell? I wouldn't want to rent one of them for a week in low season either.

[Digit]

26. Northern Va market is insane!

I was a Realtor selling in the Northern Va market since 1979. I left the area in 1996 when the market was down.
I can recall a one bedroom condo in Skyline Towers selling for the high $60s back in the early 90's. Now, my Realtor friend who used to live in a one bedroom condo there at that time just purchased one for investment for $175,000 (directly from owner, as is) and will be reselling it for $225,000 once he puts in a new kitchen. This is on the first floor, so it is not like it is an upper floor.

Those who live in the greater Washington DC market can tell you how insane prices have become. You have to bid way over the asking price to even get a property. Agents will put in the listing that bids are to be received by (X) at (X)pm. Basically, the highest qualified bidder with the least amount of conditions get the property.

This is the kind of speculation which is concerns me.

Some areas in Florida are supposedly hot, NYC is hot and I don't know where else.
Areas in Ohio are hurting, as well as parts of Michigan.

In the future, I wonder if places where it is sunny, like in the south...will be the places most sought after with the advent of peak oil and heating concerns. Not the SW, where there is a lack of water, but the south.

Wish I had a crystal ball.

[katamaran]

27. I argue about the housing market with my boss all the time....

My boss makes about $35-40K a year. He bought a two bedroom condo about five years ago for $75K. It's now worth over $150K. The place hasn't gotten any better, in fact, it's going downhill. It's just this damn market we have here. In addition to his condo, he has just bought a ONE BEDROOM condo that's not even built yet, and is paying over $225K for it. He's not selling his other place...he plans on living in the old place and renting the new place out for $2000 a month. Please tell me how the sam hell does someone who only makes $35-40K and already pays $800 monthly on one mortgage get a loan for $225K?!? The mortgage companies are a little too eager to lend, methinks.

We argue about housing all the time. He's just contributing to the machine that keeps buying, buying, buying. He's taken one home off the already tight housing market that will now result in someone else not being able to own a home. His parents did the same thing a few years ago, and now they are going to buy a house for their other son (who lives several states away), put it in his name, and rent it out so they can "give him a good credit rating." And no, they're not WASP freepers...they're first-generation Asian liberals. Go figure.

He sees it as "This is the American dream...making money. Why not do it? Real estate never goes down (which is BS), so it's an investment. I'm sure you can find something affordable yourself and do the same."

Two bedroom houses in high crime areas go for almost $200K around here (SE VA, BTW). Houses that were worth $100K ten years ago are now worth $400K. The cities are assessing the houses so high so they can get tax money off the owners. Real estate taxes went up anywhere from 20-40% across the region, yet salaries are not keeping pace.

Meanwhile, I make $30K, my boyfriend makes $30K, and together we can't even get a loan for a SHACK much less anything in a safe neighborhood that doesn't flood every time it goddamn rains. We're going to wait until the bubble bursts and then try to buy from someone who's desperate to sell. We may be losing an entire aircraft carrier battle group soon to replace the Kennedy, so suddenly about 5000 houses will open up.

I'm just venting. It's impossible for young people who make less than $50K to start their lives together anymore.

[Digit]

28. Cary, NC is nice and full of yankees...prices are reasonable.

I had moved my mother down there and she loved it while she was alive.
They are not in a hot market by any means. There are not even alot of jobs to be had unless you are in the medical field, but jobs are seemingly hard to come by no matter where you are.
The natives refer to it as Containment Area for Relocated Yankees, =
CARY, get it?
http://www.townofcary.org

[zann725]

32. This article is like Fox News...total crap!

Take for instance, "A strong economy and an improving job market contributed to the gain." NOT! And since neither are true, how can anything else being said here be true either?

The rental market is "soft"...and has been for a while. People simply can not afford to pay the rents asked (not with lowering wages, and the poor job market).

So: "Sell? To Who?...or "Rent? To Who?" Are both true. I don't "buy it" that sales are up. At least not in L.A. I don't care what the numbers "say." We know what they did with Social Security "numbers." All I know is I see "For Sale" signs everywhere. And NONE of them seem to be "moving." And quite frankly, I think they're up for sale, because people's mortgages (and interest)have become unaffordable. The "bubble" is already here. Question is, when will it burst?

[bettyellen]

35. .

[spooky3]

36. Big difference: It costs little to trade stocks; costs a ton to sell a

house. People can't buy and sell houses as frivolously as they can stocks. This reduces demand and keeps house prices from varying as wildly as stock prices did/do.

A lot of economists think that as long as jobs are plentiful and interest rates are low, prices will be at least stable and likely continue to increase, though not at the current high rate of increase.

[AP]

38. I don't know if that's going to be enough...

The first thing I want to say about this is you can sell a house pretty quickly if the buyer waives a lot of warranty requirements and rights to inspect, which is basically what's happening.

Now, here's a graph:



The black line is the change in wages and the turquoise is the change in home prices.

These skyrocketing increases in home prices without a corresponding increase in wages is unprecedented in the last 35 years with the exception of a short period in the mid-80s, however, even then, wages didn't decrease -- it was only that the rate of increase dropped. Every time they've gone below zero (ie, shrunk), so have home prices. That hasn't happened yet. So something is fucked up.

What is it that's making people gamble on buying a home even though they're not getting richer?

Well, it's probably two or three things. First, their homes have increased in value so much, that people are feeling richer. The big money they make selling their homes they roll back into buying another home, thinking that things can only go up. Second, credit is making people feel rich. Who cares if your salary isn't going up? Buy your consumer goods on credit and use your salary to pay your mortgage. 40% of Americans who carry credit card debt have an average debt of 10K. That can't go on forever. Debt is expensive and it just grows. At some point it's going to get in the way of owning a home. A third reason people can afford more home without having more cash is the 110% home mortgage. You don't even need cash to get into heavy mortgage debt now.

Now, another thing that's important to note: the two times in the last 30 years when real property values tanked heavily were in TX when the oil industry caved, and in Los Angeles when the CA economy tanked (I think because of earthquakes and the defense industry's evisceration as the cold war lost fuel). So, the thing that causes home ownership to become a money losing proposition on a broad scale is a really really bad local economy.

The thing about that that is relevant today is that it's the real estate industry that is driving the economy now. Real estate isn't influenced by things going on with the economy. It IS the economy. It's not manufacturing or oil or defense alone or collectively that is pushing the economy forward. It's home equity and second and third mortgages that are supporting consumer spending (which drives 2/3rds of the economy). In CA, apparently, 50% of the economy is driven by real estate and 1 in 50 jobs are directly related to real estate and 1 in 200 Californians is a real estate agent.

So there's a very fragile cycle there. If real estate prices drop for any reason, it'll be the equivalent of an earthquake or an oil shock. It'll spiral down.

Anyway, that's my very amateur interpretation.

[NYC]

41. Thanks for that graph.

I'm wondering how accurate that employment line is. We keep hearing about more jobs, which we don't actually see. We keep getting very specific reports about layoffs.

Also, I wonder if the employment line in any way reflects the $ value of employment. Some people have lost high paying jobs, and are now employed in low paying jobs.

Anyway, thank you very much for the graph and your analysis.

[AP]

44. the black line is increase/decrease in real wages (not employment)

I'm not sure if it's aggregate or average wages, however.If it's aggregate, then increased employment would make it go up. If it's average, then it mostly captures increasing salaries/raises.

In any event, it's a measure of how wealthy people are from their labor (rather than from selling/taking loans against their assets or from their unsecured credit).

[NYC]

46. Thank you.

That's what I wanted to know.

[southernboy]

43. kick n/t

[spooky3]

48. My point was that you cannot draw a clear parallel to

stock bubbles because the COSTS of buying and selling real estate are significantly higher. In my area (No VA), I (like anyone here) could sell my house in a day; that's not the point. The point is that it costs 6% realtor fee (and even in lower costs areas, this will be at least $12000 on the average house), plus fixing up costs, plus taxes, plus attorneys' fees, etc., etc., to sell. And that does not include the costs (and stresses) of moving. For the buyer there are different but comparably expensive costs. If you sell a place so you can buy another in the same area (versus a cheaper one), you get bitten twice. So, many people do not want to sell and instead live with their house's flaws or fix them up, if they can. They don't just decide in the morning they want to sell the house they bought a week earlier, or even two years earlier, as they might do with a stock purchase, because they will lose (a LOT of) money if they do, and have to endure a lot of hassle. With fewer willing sellers but more willing buyers, this pushes prices up. This has a lot of implications, such as that the stock bubble, where people could easily indulge their emotions and hunches since trading is cheap, may be fundamentally different from the house market. Also, conditions are somewhat local for houses--versus stocks, for which you are competing internationally. Thus, house prices are influenced by some different factors from those influencing stock prices--though some factors would be the same.

As I said in my original post, I don't disagree that if there is a really really bad local economy that real estate prices would be unaffected. I had said that if jobs were plentiful and the interest rates stayed low, that economists think there won't be a drop in prices. But if those conditions change, and I do see changes as likely at least in some places, then there will be some effects.

[enid602]

47. housing

I think our bout with stagflation in the '70's will seem like a walk in the park compared with what we're facing now. Remember, there was a looming dollar crisis at that time. The dollar seemed perilously high after record spending and deficits generate by Vietnam, and the Carter Admin took the potentially politically suicidal (yet reasonable) step to raise taxes. Similarly, Bush, Sr and Clinton raised taxes to thwart another potential dollar crisis after the end of the Cold War. With government debt and ongoing deficits at all-time record levels, our current administration has no inclination to support our floundering currency.
In the likely event that foreigners will not continue to hold their rapidly depreciating dollar-denominated investments (which pay a measly 2% interest rate), we could actually see hyper-inflation. Last time I heard, mortgage interest rates are directly tied to the prime rate which is totally dependent on the T-bill rate. How much would your house sell for if 30-year interest rates climb to say 20%?

[kineneb]

49. So if we look at the following factors...

1. Overvalued housing in many areas
2. Borrowing against housing to finance purchases
3. Real estate being the major driving force in US economy
4. Manufacturing sector almost gone
5. Large ratio of imports to exports (see #4)
6. Shift of economy to lower-paid service jobs/offshoring of tech
7. International moves to euro and away from dollar
8. Oil prices/"peak oil"
9. Overextension of US empire in foreign wars
10. Intentional destruction of "safety net" in US

...I don't know what is going to happen, but it looks to be ugly.

(just trying to place all the puzzle pieces on the table, and it makes my brain hurt)