Real Estate Market / Inflation / Recession / Depression (environment, credit, loans)

[jazzlover]

At the risk of being labeled one of the "permabears," which I actually do not think I am, I will say that I think there WILL be opportunities for things to get better in the US (and Colorado)--right now, I think they are a long ways off and there will be much pain suffered in between.

Before this country can get back on an even keel, several things have to happen:

1. There is a huge amount of speculative excess that has been built up in the US economy--in stocks, real estate, debt, etc. --that is going to have to be essentially liquidated and erased, one way or another. Since most individual Americans own a chunk of it (mortgages, inflated real estate, pension funds that own speculative investments, etc., etc.), no one of us is probably going to avoid a big bite of the **** sandwich that the bursting of the bubble is going to make. For most, it will mean less material wealth, a later retirement, and forgoing of some currently thought-to-be-necessities or entitlements.

2. Our totally energy-dependent, automobile-centered, largely suburban lifestyle is going to have to change--a lot. That change can either begin gradually and orderly right now, or it will come suddenly and tumultuously later. Either way, it's gonna happen. We can't be the energy and resource hogs that we have been for any longer.

3. We have to rebuild a basic manufacturing base in this country. Near complete reliance on foreign sources for most every manufactured item we use is both economically foolhardy and a significant national security risk in the long term.

4. We have to get over the idea of "entitlement" in most everything. Things like education, a job, a retirement, health care--the list goes on and on--we have come to think of as a birthright or guaranteed entitlement. At most, they are usually a privilege and are not an absolute. Along with that, Americans are going to have to reassert the concept of personal responsibility. Everything that happens ISN'T somebody else's (i.e., the bank, the politicians, the boss, the parents, etc., etc.) fault.

None of that sounds especially "fun," but necessity and pleasant are not always the same things.

[Bagz]

Originally Posted by jazzlover

At the risk of being labeled one of the "permabears," which I actually do not think I am, I will say that I think there WILL be opportunities for things to get better in the US (and Colorado)--right now, I think they are a long ways off and there will be much pain suffered in between.

Before this country can get back on an even keel, several things have to happen:

1. There is a huge amount of speculative excess that has been built up in the US economy--in stocks, real estate, debt, etc. --that is going to have to be essentially liquidated and erased, one way or another. Since most individual Americans own a chunk of it (mortgages, inflated real estate, pension funds that own speculative investments, etc., etc.), no one of us is probably going to avoid a big bite of the **** sandwich that the bursting of the bubble is going to make. For most, it will mean less material wealth, a later retirement, and forgoing of some currently thought-to-be-necessities or entitlements.

2. Our totally energy-dependent, automobile-centered, largely suburban lifestyle is going to have to change--a lot. That change can either begin gradually and orderly right now, or it will come suddenly and tumultuously later. Either way, it's gonna happen. We can't be the energy and resource hogs that we have been for any longer.

3. We have to rebuild a basic manufacturing base in this country. Near complete reliance on foreign sources for most every manufactured item we use is both economically foolhardy and a significant national security risk in the long term.

4. We have to get over the idea of "entitlement" in most everything. Things like education, a job, a retirement, health care--the list goes on and on--we have come to think of as a birthright or guaranteed entitlement. At most, they are usually a privilege and are not an absolute. Along with that, Americans are going to have to reassert the concept of personal responsibility. Everything that happens ISN'T somebody else's (i.e., the bank, the politicians, the boss, the parents, etc., etc.) fault.

None of that sounds especially "fun," but necessity and pleasant are not always the same things.

Jazzlover,

It is really funny that you wrote a post because I got a couple of emails from people asking me to respond to your next post. I don't think you are too far off, but in the interest of entertaining my optimistic fans, here goes.

1)Is there really such a thing as "speculative excess?" What is a "huge amount?" Does this mean that a house worth $200,000 is really only worth $100 or $160,000? When "the bubble" breaks, will we be in a depression?

I've watched the housing bubble in California build and break 3 times and each time it rebounded just fine. Each time, within 5 years, the average lifestyle was better than before the burst. A correction here and there does not mean wholesale lifestyle changes for most people. It simply means that people learn that the get rich quick schemes don't work.

2)Why are the lifestyles of other people "going to have to change." Sounds a bit like nannyism. People will live to their means till they can't afford it anymore. With record low unemployment (to the point where businesses are bringing people into the country illegally) I don't think this will HAVE to change for a while. On the positive side, the oil prices are bringing jobs to Colorado (a new wind turbine plant in Loveland and oil shale on the west slope.) The only reason we are energy and resource hogs is because we are relatively wealthy. Sounds to me like you are advocating poverty.

3) If we don't have a manufacturing base, it is because we do other things more efficiently while other countries manufacture more efficiently. I actually sell a product for $40 in the stores. I sell it to the stores for $20. The stores don't make a $20 profit. They pay for real estate, marketing, shipping, employees etc. and the profit stays in the USA. I pay $4 for the materials and $4 for the labor. My overhead is $4. I spend $4 on advertising and PR. I make a $4 profit which is given to my investors. They make about 11% on their investment. If I make it in China,the labor goes to $2 and transportation is $1.50 so I save 50 cents. My investors then are making a more reasonable 14%. The real question is - How does that effect our economy? Only $2 out of the $40 is going overseas. The rest is going to real estate, marketing, sales, advertising, and labor in the United States. I export this all over the world, and the Colorado Economy is much better off. As the dollar weakens, it may be that we make it here again. In any case, it is getting easier to export right now.

I don't think there is much national security risk as long as we stay technologically advanced and we still do have some strategic resources. For example, we export allot of food.

4) I agree with you on this one. With freedom comes responsibility. If we are free to waste our resources and take risks, we must be responsible for ourselves and our failures. We are not entitled to the things you listed, but it is nice to have a safety net. That is what allows us to take risks and stay ahead of the rest of the world. You are exactly right. The people who suffer should be the ones that made the bad decisions. Where is YOUR retirement invested? What are the ratios for those companies? How much is YOUR house worth? Why? How leveraged is YOUR home loan? If you answered these questions correctly, you have absolutely nothing to worry about and your future is also bright If not, you might have an expensive lesson in your future, but here in the USA, there is always that safety net, so you will probably pull through it just fine.

[multitrak]

Originally Posted by Bagz

I wanted to point out that the scale makes it look worse than it is.

and

You are correct that future values might be either lower or higher, but the scale on the graph makes it look like the market crashed to almost zero and your last statement on the post was pretty scary.

you misunderstood the scaling for the s&p500/case-shiller housing index. the indices have a base value of 100 on January 2000. so there is no "zero" value, and each index fluctuates above and below 100. so yeah, it looks bad because that's how the data plots out. if folks need more info, then they can google "s&p500/case-shiller index" and get the details.

Your conclusion apparently based only on this graph you was "the denver housing index clearly shows why it's better to rent than buy, at least for now..." Had you not stated that, I would have considered your post simply dissemination of information.

well, i did both at the same time...linked a source to housing data and proffered an interpretation. big deal, no harm, no foul. and oh yeah, i reserve the right to be optimistic and pessimistic simultaneously...

[Bob from down south]

Originally Posted by Bagz

1)Is there really such a thing as "speculative excess?" What is a "huge amount?" Does this mean that a house worth $200,000 is really only worth $100 or $160,000? When "the bubble" breaks, will we be in a depression?

I've watched the housing bubble in California build and break 3 times and each time it rebounded just fine. Each time, within 5 years, the average lifestyle was better than before the burst. A correction here and there does not mean wholesale lifestyle changes for most people. It simply means that people learn that the get rich quick schemes don't work.

The 1980s Southern California bubble took ten, not five, years to recover.

If you're calling this housing situation--especially in CA, a "correction," I cannot accept that you have even a shallow understanding of the true depth of the problem. If you want to see speculative excess, go to Dr. Housing Bubble Blog and look for "Real Homes of Genius." Speculative excess is defined and put on display right there.

Originally Posted by Bagz

2)Why are the lifestyles of other people "going to have to change." Sounds a bit like nannyism. People will live to their means till they can't afford it anymore. With record low unemployment (to the point where businesses are bringing people into the country illegally) I don't think this will HAVE to change for a while. On the positive side, the oil prices are bringing jobs to Colorado (a new wind turbine plant in Loveland and oil shale on the west slope.) The only reason we are energy and resource hogs is because we are relatively wealthy. Sounds to me like you are advocating poverty.

No, millions of people have been living far, far beyond their means, and right up to the breaking point. If you are a Dave Ramsey fan, you must have heard some of the many calls he gets from people who have buried themselves in debt, and who live beyond their means...not until they, as you say, "can't afford it anymore," but until they can't get away with it any more.

I don't accept the existence of "record low unemployment." The numbers we use today do not reflect underemployment nor do they reflect the large numbers of folks who have capitulated in their search for work.

And if you're telling us that being wealthy is justification for wasteful, piggish consumption of the world's limited resources, then you deserve to be amongst the most shocked and surprised when those limitations hit home.

Originally Posted by Bagz

3) If we don't have a manufacturing base, it is because we do other things more efficiently while other countries manufacture more efficiently.

I don't think there is much national security risk as long as we stay technologically advanced and we still do have some strategic resources. For example, we export allot of food.

Clearly you do not realize how much lead time is required to build manufacturing capability. It isn't just about building factories, which require tool-and-die expertise that is dying off at an alarming rate in the US, it's also about the experience base in the workforce, which simply cannot be developed and fielded overnight.

Originally Posted by Bagz

The people who suffer should be the ones that made the bad decisions. Where is YOUR retirement invested? What are the ratios for those companies? How much is YOUR house worth? Why? How leveraged is YOUR home loan? If you answered these questions correctly, you have absolutely nothing to worry about and your future is also bright If not, you might have an expensive lesson in your future, but here in the USA, there is always that safety net, so you will probably pull through it just fine.

The people who suffer will (does) also include those who behaved prudently. Home loans to responsible, creditworthy people are becoming harder and more expensive to get as a result of this rampant foolishness. And as a result, home prices will be depressed even further as the pool of buyers who can get financing is strangled off.

I don't think that many of the people who own their homes outright in the midst of all those for sale and foreclosure signs would agree that those who played it straight have nothing to worry about. I don't think state government retirees seeing their pensions threatened by shrinking property tax revenues see a worry-free future. I don't think CA teachers see a bright future on the other side of extensive layoffs and program cutbacks.

On the day after the Battle of the Little Bighorn, I am certain that Gen George Armstrong Custer's troops didn't care very much about his positive attitude. I think they would have appreciated it a bit more if he'd been a tad more aware of the real risks in front of them...and behind them...and flanking them...

未来はとても明るい。
"Futule is so blight" -Inaflashi Imanomora, Hiroshima Japan, 5 Aug 1945


It's all about risk awareness. A sunny positive attitude in the face of real danger does not keep you safe or secure.

[Bagz]

[quote=Bob from down south;3169336]The 1980s Southern California bubble took ten, not five, years to recover.

If you're calling this housing situation--especially in CA, a "correction," I cannot accept that you have even a shallow understanding of the true depth of the problem. If you want to see speculative excess, go to Dr. Housing Bubble Blog and look for "Real Homes of Genius." Speculative excess is defined and put on display right there.

At this point it is clearly a correction.. When forclosures get to 20%, we can call it a serious problem.

No, millions of people have been living far, far beyond their means, and right up to the breaking point. If you are a Dave Ramsey fan, you must have heard some of the many calls he gets from people who have buried themselves in debt, and who live beyond their means...not until they, as you say, "can't afford it anymore," but until they can't get away with it any more.

We were talking about using too much energy, not spending too much. People who spend too much will eventually either not retire or declare bankruptcy. At that point the burden shifts to people who lend too much. As far as energy goes, people will use what they can afford until they cant afford it any more. In the mean time, Other sources of energy are becoming more affordable.

I don't accept the existence of "record low unemployment." The numbers we use today do not reflect underemployment nor do they reflect the large numbers of folks who have capitulated in their search for work.

MAny people dont believe these numbers, but the fact is that though they may not be precise, they are accurate and they are lower than ever. This is why I referred to the illegals. The fact that we have 20 million illegals shows that the labor shortage is real.

And if you're telling us that being wealthy is justification for wasteful, piggish consumption of the world's limited resources, then you deserve to be amongst the most shocked and surprised when those limitations hit home.

IF your doom and gloom predictions come true, I might deserve such a shock, but if the future turns out not so bad, I deserve the rewards
for the risks I took while everyone else was complaining rather than producing.

Clearly you do not realize how much lead time is required to build manufacturing capability. It isn't just about building factories, which require tool-and-die expertise that is dying off at an alarming rate in the US, it's also about the experience base in the workforce, which simply cannot be developed and fielded overnight.

Clearly you do not realize the power of capatilism when opportunities arrise. I am very aware of the requirements of producing products - I do it for a living. Just before WWII, we built an industrial complex and trained 1,000,000 men in under a year without the technology we have today.

The people who suffer will (does) also include those who behaved prudently. Home loans to responsible, creditworthy people are becoming harder and more expensive to get as a result of this rampant foolishness. And as a result, home prices will be depressed even further as the pool of buyers who can get financing is strangled off.

This is blatentely false. I just refinanced my home for 4.75% How is this more expensive or harder to obtain? CREDITWORTHY people are not having problems. What is wrong with lower prices? The price of houses will drop to levels that are affordable under reasonable guidelines. The second post on this blog was people complaining about the rising prices of homes in Colorado Springs because the next generation would not be able to afford them.

I don't think that many of the people who own their homes outright in the midst of all those for sale and foreclosure signs would agree that those who played it straight have nothing to worry about.

All of those...5%?

I don't think state government retirees seeing their pensions threatened by shrinking property tax revenues see a worry-free future.

Pensions are not threatened unless they are invested in companies that lend too much money KNOW WHERE YOUR MONEY IS.

I don't think CA teachers see a bright future on the other side of extensive layoffs and program cutbacks.

When was the last time CA teachers were laid off? Welcome to the real world. I will have no sympathy for teachers until they become accountable. That is another thread for another time.

On the day after the Battle of the Little Bighorn, I am certain that Gen George Armstrong Custer's troops didn't care very much about his positive attitude. I think they would have appreciated it a bit more if he'd been a tad more aware of the real risks in front of them...and behind them...and flanking them...

LOL You are comparing these few financial problems in a single sector to an all out annihilation? If that isn't a scare tactic, I don't know what is. I am aware of the risks, and that is why I follow the advice of Mr. Ramsey.

[Bideshi]

OK, so we've hit a little iceberg. Nothing to worry about really; the bar is still open, the band is still playing, and all will be fine.

[multitrak]

Pensions are not threatened unless they are invested in companies that lend too much money KNOW WHERE YOUR MONEY IS.

now you're being simplistic! pensions are not like self directed ira's or 401k's where you can move your money around to the better funds.

When was the last time CA teachers were laid off? Welcome to the real world. I will have no sympathy for teachers until they become accountable. That is another thread for another time.

well, i have no sympathy for jerk parents who impose no personal accountability upon their kids and allow them to run wild in the schools. kids must learn discipline in the home. it's not the teachers job to teach and be a parent to those wild kids at school. teacher tenure is necessary to prevent said jerk parents and a*****e administrators from getting good teachers fired for simply doing their jobs. if a kid can't be controlled, then he/she should kicked out of school...PERIOD! let the idiot parents deal with em. accountability flows both ways...

[Bob from down south]

Originally Posted by Bagz

At this point it is clearly a correction.. When forclosures get to 20%, we can call it a serious problem.

OK, so you think one in five homes needs to be in foreclosure before the problem is "serious?" Anyone else but me think that's INSANE??

Originally Posted by Bagz

We were talking about using too much energy, not spending too much.

Here's what you said: "People will live to their means until they can't afford it any more.

Originally Posted by Bagz

MAny people dont believe these numbers, but the fact is that though they may not be precise, they are accurate and they are lower than ever. This is why I referred to the illegals. The fact that we have 20 million illegals shows that the labor shortage is real."

Yes, that's why they get revised up/down month after month, sometimes as much as 50%. Because they're accurate. Right, got it.

It just might be that we have millions of illegals because of the sharp income and standard of living gradient that exists across our southern border. Those people didn't come to serve our unmet needs, they came because there's opportunity that exceeds that where they live.

Originally Posted by Bagz

IF your doom and gloom predictions come true, I might deserve such a shock, but if the future turns out not so bad, I deserve the rewards
for the risks I took while everyone else was complaining rather than producing.

I said you deserved to be shocked if you indeed think that wealth entitles you to wasteful, piggish consumption.

Originally Posted by Bagz

Clearly you do not realize the power of capatilism when opportunities arrise. I am very aware of the requirements of producing products - I do it for a living. Just before WWII, we built an industrial complex and trained 1,000,000 men in under a year without the technology we have today.

You need to re-read your history books if you believe that the industrial might of 1940s America was built overnight. We geared up for the war by converting production in existing factories from cars to tanks and airplanes. Without the mills and their workers already in place, WW II would have gone much differently. Production of video games and movie DVDs does not replace the capabilities of foundries and mills and machine shops on a dollar-for-dollar basis.

Originally Posted by Bagz

This is blatentely false. I just refinanced my home for 4.75% How is this more expensive or harder to obtain? CREDITWORTHY people are not having problems. What is wrong with lower prices? The price of houses will drop to levels that are affordable under reasonable guidelines. The second post on this blog was people complaining about the rising prices of homes in Colorado Springs because the next generation would not be able to afford them.

Well goody for you, but one datapoint does not make a trend. Creditworthy people are indeed having difficulties obtaining loans--especially in some areas.

Originally Posted by Bagz

All of those...5%? Pensions are not threatened unless they are invested in companies that lend too much money KNOW WHERE YOUR MONEY IS. When was the last time CA teachers were laid off? Welcome to the real world. I will have no sympathy for teachers until they become accountable. That is another thread for another time.

If you're working for (or already retired from) a company with a defined-benefit plan, you have no vote as to where it's invested. In fact, if you're a Florida teacher, you have no vote in where the state pension fund is putting its money. And the issue isn't just companies that lend too much...it's also companies that borrow too much.

Originally Posted by Bagz

LOL You are comparing these few financial problems in a single sector to an all out annihilation? If that isn't a scare tactic, I don't know what is. I am aware of the risks, and that is why I follow the advice of Mr. Ramsey.

I think the employees at BSC might see it that way. I know the employees at Enron probably did.

The point is that denial or unawareness of risk CAN put you in harm's way. Putting on your happy face, and telling everyone that you and your engineer buddies are rich and happy and don't see a problem for the rest of the world doesn't change the fact that for the majority there are dangers lurking.

Read Greenspan's current assessment of the situation. It's grim. He says "The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war." The end of WW II is econ-speak for "The Great Depression." They don't like to even say the D-word. Full text of greenspan's comments here.

FT.com / Comment & analysis / Comment - We will never have a perfect model of risk

I question how bright your future can be when the world around you is in dire trouble. I don't think anyone can truly isolate themselves if/when this gets out of hand.

Your post reminds me of a Saturday Night Live skit. "We're not in a recession, because...........I'm RICH!"

[Bideshi]

Originally Posted by Bideshi

OK, so we've hit a little iceberg. Nothing to worry about really; the bar is still open, the band is still playing, and all will be fine.

Hey, where did the bartender go?

[katzenfreund]

Ok, please let's stay on topic and not get personal here