housing starts -- up, again ! (prices, homeowner, economy)
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I find this statement kind of interesting. Can someone explain this above statement so an idiot can understand it better. Especially the last few lines. Thanks.
i guess he is saying that all the investment in real estate over the past decade could have been better spent developing businesses.
i dont think ive seen anyone put it that way, worth thinking about i guess.
The housing bubble resulted in investment capital being directed towards housing instead of towards other things (such as factories, mining, software, etc). This was due to easy money making it a profitable endeavor at the time and also just a plain old mania. Investment capital was ploughed into companies that build houses, companies that build granite counter tops, and so on in preference to other areas of the economy.
As house prices fall that capital is freed up. For example, lots of investment was made into companies involved with housing - from builders, to granite counter top makers, to home depot - as those companies go bankrupt their assets are available to use in other areas. If they don't go bankrupt then they at least stop using up as much of the new investment resources.
Then there's the issue that housing is basically a consumer essential, like food and clothing. The longer its price stays high the less consumer spending there is for other things (during the bubble this wasn't a problem due to enough people cashing out their equity and hence having negative housing costs - for the short term anyway - and hence higher consumer spending). For the "consumer spending will save us" folk, that's bad.
In a nut shell large amounts of capital in the US are tied up in housing where it is far less productive than it could be. The way capitalism works is that such investments go broke which frees up the capital for other entrepreneurs to use as they buy it up in the resulting fire sale. The longer house prices stay high the longer that process takes and the longer the capital is unproductive.
ok I understand, well done. Here are a few questions: who or what is the investment capital? The first paragraph you have says the investment capital was put towards my question who or what is the investment capital?
My second question is you said as companies go broke it frees up assests for other areas. I dont get that, if they go broke how do they have money?
I am just trying to learn alittle about money/economy. Thanks so much you did a good job and I do get alittle bit of what your saying. Thanks Marilyn
ok I understand, well done. Here are a few questions: who or what is the investment capital? The first paragraph you have says the investment capital was put towards my question who or what is the investment capital?
Money invested in housing, building, or assets and securities backed by housing (e.g. mortgage bonds)
Quote:
My second question is you said as companies go broke it frees up assests for other areas. I dont get that, if they go broke how do they have money?
They're broke because the value of their assets is less than the value of their debt. So someone else takes the assets away and uses them more efficiently, or benefits from having acquired those assets cheap and invests their money elsewhere.
The doomsday stuff is me venting at people who keep pretending that a decline in housing prices is "the end of the world", "doom and gloom", etc. It's not. But that's somewhat disconnected from the second half.
sholden summed it up pretty well. To answer your follow up questions:
1) "Who or what is investment capital?"
Investment capital is just money invested in something. For example, if you buy a share of stock, you have just invested some of your capital in that company. In the broader economy, the movers and shakers of capitalism are the big banks, who can invest very large amounts of money by buying stock, bonds, commodities, mortgage backed securities, buying/selling derivatives, etc.
2) "My second question is you said as companies go broke it frees up assests for other areas. I dont get that, if they go broke how do they have money? "
The company that goes broke does not have any money - they probably have to liquidate their assets, if they can't reorganize in bankruptcy court. The money from sale of assets is freed up. It goes back to their creditors, who can take the loss and then invest somewhere else. That's basically how capital is freed from poor investments. The investor takes a loss, and then moves on. Even if they take a total loss, they are at least freed from having to think about the investment, and can now focus on other things.
But more importantly, clearing up dead companies or bubble companies frees up everyone else to invest in a more stable marketplace with better information available to all. If, for example, the government subsidizes housing, that becomes the best investment because the government is assuming risk and pumping money. It makes much more sense to invest there than in something that is actually productive - say, manufacturing. Manufacturing might not be a bad investment, it just isn't as good as a government guaranteed and subsidized investment earning 10% each year. So, the entire system adapts to this fact, and soon everyone's investment strategy is accounting for the fact that housing is gold.
Right now, things are still in turmoil. Even if I have money free to invest, figuring out who has exposure to the bubble and who has to go down is not easy. It's pretty clear that the banks are sitting on toxic assets still - we know that there's 600k+ foreclosures not even on the market yet, which represents a pretty significant writedown yet to occur. This and other things create uncertainty and make it difficult for anyone to make a rational investment. How do I know who is going to go down next when everyone is desperately trying to pretend like none of this is happening any longer?
The doomsday stuff is me venting at people who keep pretending that a decline in housing prices is "the end of the world", "doom and gloom", etc. It's not. But that's somewhat disconnected from the second half.
sholden summed it up pretty well. To answer your follow up questions:
1) "Who or what is investment capital?"
Investment capital is just money invested in something. For example, if you buy a share of stock, you have just invested some of your capital in that company. In the broader economy, the movers and shakers of capitalism are the big banks, who can invest very large amounts of money by buying stock, bonds, commodities, mortgage backed securities, buying/selling derivatives, etc.
2) "My second question is you said as companies go broke it frees up assests for other areas. I dont get that, if they go broke how do they have money? "
The company that goes broke does not have any money - they probably have to liquidate their assets, if they can't reorganize in bankruptcy court. The money from sale of assets is freed up. It goes back to their creditors, who can take the loss and then invest somewhere else. That's basically how capital is freed from poor investments. The investor takes a loss, and then moves on. Even if they take a total loss, they are at least freed from having to think about the investment, and can now focus on other things.
But more importantly, clearing up dead companies or bubble companies frees up everyone else to invest in a more stable marketplace with better information available to all. If, for example, the government subsidizes housing, that becomes the best investment because the government is assuming risk and pumping money. It makes much more sense to invest there than in something that is actually productive - say, manufacturing. Manufacturing might not be a bad investment, it just isn't as good as a government guaranteed and subsidized investment earning 10% each year. So, the entire system adapts to this fact, and soon everyone's investment strategy is accounting for the fact that housing is gold.
Right now, things are still in turmoil. Even if I have money free to invest, figuring out who has exposure to the bubble and who has to go down is not easy. It's pretty clear that the banks are sitting on toxic assets still - we know that there's 600k+ foreclosures not even on the market yet, which represents a pretty significant writedown yet to occur. This and other things create uncertainty and make it difficult for anyone to make a rational investment. How do I know who is going to go down next when everyone is desperately trying to pretend like none of this is happening any longer?
thank you, you did an excellent job and I get it! Thanks Elford too. Thanks all. I am going to need you people in a few years so stick around, or lets get married with a prenupt. of course. Marilyn
at its core, it is based on a return of consumer confidence -- this recession was always 50% psychological...
Confidence that we can continue to spend and live beyond our means?
Confidence that foreigners will continue to subsidize our consumer debt addiction by trading increasingly worthless pieces of our paper money for actual products?
Confident that the gov't will bail everyone out when it comes time to socialize the losses (ya know, if the whole privatize the gains thing doesn't work out)?
The last thing we need is consumer confidence. What we need is a little consumer common sense. And that means cutting back on our hyper-consumptive lifestyles, buying less, saving and investing more.
I'm tired of bailing people out for their stupid mistakes.
confidence and common-sense are not mutually exclusive.
I for one believe that most have now "learned their lesson".
and I'm certain that your lifestyle hasn't been impacted one iota by the "bailouts"...
so you can't retire at 45 like you wanted, get over it -- none of us can
Are you even trying to make senes? This isn't coherent.
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