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Guest Post: Bubble Symmetry And Housing
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
If bubbles eventually revert to their starting level, Phase 3--capitulation and a return to pre-bubble prices--still lies ahead for the housing market.
Way back in 2006 at the height of the housing bubble, I prepared this chart proposing the housing bubble might exhibit symmetry, i.e. the decline would mirror the rise. I also proposed that the decline would be characterized by phase shifts that corresponded to the decay of whatever reason was being given for the "recovery" in housing, for example, "this must be the bottom."
Let's compare this idealized bubble symmetry with a chart from reality: housing in the bubblicious Los Angeles market.
Here's another look at the L.A. market as measured by Standard & Poors:
Hmm, what would have happened if the Federal Reserve hadn't dumped trillions of dollars into the mortgage market, and the Federal housing agencies hadn't subsidized mortgages and housing with 3% down payments and tax credits?
Perhaps all the trillions of dollars of intervention has accomplished is extend Phase 2. Central bank and state manipulation distorted the symmetry of housing's decline, but did they stave off Phase 3 permanently?
If bubbles eventually revert to their starting level, Phase 3--capitulation and a return to pre-bubble prices--still lies ahead.
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Isn't that just called a bell curve?
6 minutes to 1600. get the champaigne bottle ready
I think the author was trying to get to this..
http://en.wikipedia.org/wiki/Mean_reversion_(finance)
"Mean reversion should demonstrate a form of symmetry since a stock may be above its historical average approximately as often as below. If a stock exhibits mean reversion, it violates the efficient markets hypothesis because the mean reversion process affords an opportunity to make predictions of stock prices that perform better than random predictions would."
Yes, but mean reversion only applies to REAL prices, not nominal prices, so to compare widely separated values from a multi-decade graph of NOMINAL dollar prices for anything is comparing apples to oranges, and is essentially futile and meaningless.
The real (purchasing power) value of the US dollar in the middle to late 1980s, at the far left end of the author's last two graphs, was well more than double its value today. So adjusting for that decline in the dollar's value, one can clearly see that in the LA area given as an example here, the REAL, inflation-adjusted real estate prices have already fallen to, or perhaps even below, a 25 year low.
In his last graph, with the values of the price index given (~82 in 1998 vs. 113 in 2013), the author implies that the rate of dollar debasement has been only 38% since 1998, which is laughably and insultingly low. Even without referring to ShadowStats numbers, which I think somewhat exaggerate inflation on the high side (but not as much as the official CPI exaggerates them to the downside), one can conservatively estimate the real rate of dollar debasement ("inflation") as at least 75% since 1998.
When the banks are finally forced to push the houses off their books then we will find a natural bottom. As long as they can keep them on the books we will keep up this game until every neighborhood looks like Detroit. The bank will have vacant houses that are ready to fall over on their books valued at $100,000 +.
Let's not forget the mortgage interest thats counted as income even though they are not collecting a mortgage payment
Pretty much.
There is a house down the road from my mom that has been vacant and in the foreclosure process for three years. Someone set it on fire last month. Now worth less than $10k, I'd have paid in the $30k range for it pre fire.
What I've found is if a local bank holds the loan they get it off the books really fast. If it hasn't been held by a local bank, they sit and rot. There hasn't been a fannie/freddie foreclosure sold in my town in the last 12 months, but I can drive you to quite a few that are vacant and owned by them.
I bought a house in November, 2009. It had been owned by an old couple until about 2002, when they both died. Their daughter sold it to "Bob" in 2003. "Bob" paid too much for it ($265,000) and also took out a $45,000 second mortgage. "Bob" was one of those shady independent mortgage brokers who were all over the place in those days. By 2007, he had lost the house to foreclosure. The house wnet through a bunch of hands, got assigned to MERS, and eventually sold off to a connected insider (a local flipper). The flipper eventually sold it to me, for just over $200,000 (I had a $100,000 downpayment; proceeds from the ridiculous overpayment I got for my starter home--even in 2009. I forget which round of the Housing Finance "Recovery" that was). I bought the gold-standard title insurance policy, of the options offered to me. The only title transfers the County lists were between the old couple's daughter and "Bob," and then between the flipper and me.
Meanwhile, in September of 2009, "Bob," now renting an apartment, stopped at a local pawnshop and went inside. It was being robbed at that moment, worse luck for him, and the robbers shot him dead as he walked in the door.
Every month, I get notices in the mail, addressed to "Bob." I take out a Sharpie and write, "Return to Sender: Addressee deceased 9/28/09" on them and send them back, but every month, I get a new one. I got a few phone calls too, for a while. I've had my phone number for 18 years. "Bob" never had anything to do with the number. The collector on the phone told me the phone number was associated with the account. I told him "No way that's true, bud. You just looked up the address and got my phone number that way. Why don't you Google "Bob?" Then you'd know why you haven't gotten paid." I haven't heard back from him since. If you Google "Bob," the whole first page is newspaper stories about how he was murdered in the pawn shop.
How much you want to bet at least "Bob's" 2nd mortgage is still on the books as an active, collectable debt? And sitting in somebody's retirement fund as some kind of MBS? As long as bad debt is allowed to masquerade as good debt, none of this crap is going to get squared away and we'll never get true price discovery anywhere.
Great story, Swmnguy!
I'm old enough now to have lived thru 4 major recessions, each of which was triggered by, or greatly exacerbated, from the government being in the residential real estate business (RREB). "It never goes down in value" has got to be one of the most successful propagandistic memes in capitalist....errrr, creditist history.
The ONLY WAY TO FIX THIS SHIT, is for the RREB to be somewhat structured like the retail automobile biz, circa mid-1970s, when they'd just been fucked by OPEC & Asian competition, simultaneously. Like cars, we have to admit RRE is not an "investment"...it's just the biggest consumer durable.
And like the car-biz, a system of restricted wholesale RRE auctions needs to be implemented, that rapidly disposes of excess inventory while efficiently valuing the bottom line pricing for lenders.
"RRE is not an "investment"...it's just the biggest consumer durable."
True 'dat. In 2009 my income cratered (I'm self-employed). We have two kids who were sharing a room in our little starter home. They're teenagers now, so we had to get more space. I needed to make the move before anybody could see my 2009 tax return. We figured out exactly how much we could pay each month, and looked only at houses that would result in that payment or lower.
My credit union, which is very conservative, offered me up to the Jumbo Limit ($417,000 at that time). Somehow I kept a straight face (that was 4 times my income as shown on our 2008 tax return). I told our realtor I wouldn't buy anything that netted out to more than $1,000/month payment, with tax and insurance figured in. We looked at a lot of dumps.
When we sold our little house, we got $30,000 more than we had expected, so all of a sudden we could look at more costly homes. Our realtor and the credit union thought we were nuts for not buying as much house as we possibly could. With that pre-approved $417,000, plus the $100,000 we netted from our starter home, we could have bought quite the house. Ah, but then we would have had to pay for it.
Things have gotten better for us since 2009, but they could get bad again in a hurry. In our market, we couldn't rent much for less than $1,000/month. It's not an investment. It's a bill. And lucky for us, it's a bill we can afford to pay for now. I'm sure the realtor and the mortgage officer still think we're the dumbest people they've ever dealt with, shorting ourselves like that. But none of them ever did see my 2009 tax return. And we have a warm place to stay and keep our stuff in, which matters a lot in Minneapolis in the winter, for $1,000/month, all in.
NOT an investment.
Sorry, it's an investment whether you like it or not. It may or may not be a good investment. But the longer you keep it the more the odds are in your favor.
I have a feeling, based on nothing more than your post and 35 years as a real estate investor, that you are going to end up OK. In fact I think you will be pleasantly surprised.
Hmm. Interesting comment. You know, the more I think about your comment, the more I think you're right. The way we use the word "Investment" has gotten so perverted even I'm thinking of it wrong. What a house ISN'T is a casino play that will pay off in a jackpot. That's what we tend to refer to as an "Investment" these days. A real "Investment" is when I buy a better laptop that can run the drafting program I use when I'm away from my office desktop drafting station, so when my clients call and I'm on the road I can turn a drawing around for them and make $1,000 I couldn't otherwise have made. A couple of those and the laptop is paid off and flat-out making me money. It isn't the kind of sexy ROI that gets a guy a place in the Hamptons, but it is actual "Investment." And it does get a guy a serviceable place in Minneapolis.
I stand corrected.
Without adjusting for the ongoing depreciation of the US dollar (i.e., "inflation"), those multi-decade graphs are all but meaningless.
Contrary to the author's assertions, after adjusting for the REAL rate of inflation, and not government-provided CPI fantasies, the housing prices in the LA area he discusses HAVE in fact sunk below the price levels of the 1990s.
This.
Not really an acurate accounting of things either as wages have not kept up with inflation. The affordability index trumps all when measuring RE in my opinion.
"The affordability index trumps all"
Enuf right there!
Where do you get the real rate of inflation?
shadowstats.com
Does CHS expect CEO renumeration to fall equally, adjusted for inflation since 1998....fat fucking chance.
As I said earlier today...many of these purchases are all cash. No crazy loans. No pulling out equity and leveraging it. No arm's that are going to blow up later on.
Of course there are some flippers out there. I think big money is being turned into real assets that have less of a chance of being corzined down the road in some bank or even in cash. Maybe it's not a bubble, but it is a sign that the music is going to stop.
I see lots of houses being put up as rentals after being sold. Disturbing.
I see dead people.
Boy did I walk into that one with Kito the other day.
so what's the wedding date anyway?
Oh Francis you are the only one for me.......love , Jason Collins....
Correct. Ppl with cash would rather get rental dividends and protect return of asset in real estate, than risk it in bonds or stocks. They then park excess net cash from rent into PM bullion. Both are real assets, with damn little counterparty risk. Compared to alternatives.
The title companies for commercial real estate are very busy: buy/sell and refi action by the rich. While the sun shines (banks happy to loan to them).
And you can bet that there are plenty of owners that aren't all that seasoned in renting. This will result in more rapidly degrading properties, esp as more and more people's wages drop (or job losses- months to boot someone out = BIG LOSS).
Bottom Line: increased downward pressure on housing prices.
Many years ago I called the bottom pretty close simply by looking at the chart of future arm resets. But I still didn't buy.
Why not? Because property taxes are a huge fucking bear trap. Every state/local/county gov is broke and will be raising taxes to pay their dumb ass pensions and health care benefits... which is simply THE LARGEST BUBBLE of all -- and not getting enough attention -- yet!
What happens if they have blown all of their cash and prices fall again? What may have been disinflation could very well end up as a deflationary collapse. The housing bulls better hope this is not just a dead cat bounce.
We probably need to define "they". The middle class speculators playing the flip game will get annihilated like they always do. The Big big money will just have converted possible corzinable dollars etc into physical property.
Had one landlord that I didn't really like all that much. He and his wife were from out of the area and had bought the home in 2004 for $210,000. When I was renting he was probably full of himself, with its assessed value in the range of $300,000. The assessed value today is $173,000, which is around what someone paid for it in 2001.
I'd sold a house for $265,000 in 2005 (about double what I'd originally purchased it for 10 years prior) and moved into that rental. That house, even after someone put in tens of thousands of dollars, is currently assessed at $239,000 (which is up from 2012, and which also brought with this an increase in property taxes to the tune of 15%!).
The assessed value on my property has gone down this year, resulting in LESS property taxes (people still believing that it can't happen?). Neighbor up the street is paying out over $10k per year in property taxes (have gone down for them for this year); has less than 1/10th the property I have- it's ALL house (McMansion). I'm paying roughly 1/5th as much in property taxes.
The only bad scenario is : higher property tax combined with rental price fixing (and they do that each time things go berserk) leading to negative cash flow, and if you fail enough the value of the home can depreciate as well.
And boom, you're bankrupt. According to the soviet history, you'll end up in jail as the scenario go along the way, for being unable to pay your taxes with the funny digits of your bank accounts, and you will get a loan to pay the upkeep costs of your incarceration. This loan will be bought back by the central bank with new funny digits.
And if you die before satisfying your funny digits maker, your children will inherit your fancy bankrupt balance sheet, as death is a terrorist way of evading taxes, your family will pay for your sins.
In reply to Fonzanoon's assertion re all cash sales: I've posted this before, but it's still the case. "All cash" purchases, are often so in name only.
Here's how it works in Silicon Valley: A Chinese person buys a $1.4 million house with cash (that he has taken illegally out of China). Buying with cash gives him an edge in the bidding process. After the closing, he takes out a mortage on the house, and extracts the cash. He lends the cash to Chinese person #2, who buys a house using that cash. Then, Chinese person $2 takes out a mortgage, extracts the cash, and lends it to - Chinese person #3!!!!
You can use the same $1.4 million a lot of times, and each time it's an "all cash" purchase.
What is slightly different this time is the number of foreign (flight capital) purchasers. The Chinese are going to buy up California. We have become a banana republic that offers residence to wealthy foreign purchasers.
I don't know how this is going to end this time around, but rest assured it won't be pretty.
William by me almost all of the purchases are Asia/Middle east money.
If someone buys a house for a million in cash that was sitting in some offshore account...and that house takes a 35% hit if the market tanks....or, they leave it in that offshore account and one day wake up and it's completely gone...which would they rather choose?
in Atlanta I know a developer who had over 30 - 500,000+ homes to sell and could not for years. Then last November - Feb 2013 all sold to Chinese for cash, and most above the asking. As I looked into it, so much of the country is having this happen. Now the Chinese buyers are really really stupid to pay cash, easily the law will change and take the homes ($500,000 is the min they are purchasing). Of course much of the money is looted from their government and companies and probably US bribes for access.
With the way the US is cutting off China of all resources via Africa (africa-com), Libya of course, now USA's BFF Vietnam, Japan and Marines stationed in Austrialia and Phillipines getting us military, you can see how the Gov/Wall Street Bank etc will change the law and steal the homes.
Big winners are the real estate agents/vultures, developers of high end homes. Bubble mania is all the Fed has while the looting continues unabated.
Housing supplies have risen a lot in price since the last bubble, so low end homes are not being built like before.
Bubbles never end pretty...that's the sin quo non of "bubble mania." still looking for someone with a traders mindset here (buy low/ sell high) and that's why you all...as wonderful as you all are..are...is it aghast? Agof? Aloof? ALONE! these things are done by MASSIVE teams of professionals folks! AND THEY OWN MEDIA!!!! "Israel wiped off map?" buy low/sell high! Maria B knocked up by a donkey? Buy low sell high! California falls into the Ocean? Buy low/sell high! It's really a thing of beauty when you see it. "after you clear your first million...next stop ten."
Why are they stupid for giving us worthless dollars back in exchange for real estate that may be worth more than that money when this bubble finally bursts?
I believe that the operative word is "may." Which may also be accompanied by "not." Again, who the heck is going to sucking up $500k properties in the future? Do you see some magic happening in which jobs are going to spring forth and wages are going to jump up?
No, it's pretty much the way it's worked for a LONG time. You market heavily to other cultures because they're not all that familiar with the game. It becomes the lure of it all; they start to try and out-compete each other. I have to constantly remind my Filipino wife that "sale" (or, "cheap") doesn't mean "value." Such people are easy to set up as lemmings. BUT... nearly everyone is or has been in the lemming pool; those that left learned what "bigger sucker" means. And, as is always the case, there's always the end of the line, the last sucker. This time it's the Chinese, as there are no other suckers around. And to be a non-resident AND from a country that is increasingly shifting toward the bad-guys list, well...
Well told!
Foreign purchasers are floating the London market as well.
The Japanese tried that once and it didn't turn out so good for them. Let's see if the chinese are any smarter
True...but the chicks and their big hair from the same period...that was hot.
[deleted by myself]
The author gets it right, when it comes to housing, people think they're buying a house when what they are really buying is a monthly payment. Remove the Fed from what we laughably like to call the bond market and require the Federal Government to compete for financing and the resultant increase in rates would crush the housing market. You'd see prices fall to levels last seen in the late 80s.
If you are paying all cash then there is no monthly payment other than taxes and possibly insurance. As was documented by "Housing bubble 2.0" many of these purchases are all cash...which then makes low interest rates useless.
The little guy can't get a loan
The big guy does not need a loan.
How many different ways can the banks tell the middle class to go fuck themselves?
Damn few retail buyers are paying cash. The local pros and the bigs are paying cash, but even the local pros are coming around looking for investors to discount the land contracts or purchase money mortgages they entered into on the flip when there was no financing anywhere. When they come around here, they leave sad ... occasionally mad ... because I want their paper discounted to a point a month, cash on cash.
There is some semblance of a retail market out there, but make no mistake, it is subsidized both directly by the Fed's purchases of Fennie and Freddie mortgages, and indirectly by the Fed's purchases of Federal government debt.
"If you are paying all cash then there is no monthly payment other than taxes and possibly insurance."
Opportunity cost.
Could that money have been more productive in some other way? Low interest rates, as we've seen, allow folks to assume greater risk.
I opted to have a monthly payment (fixed) so that I could engage in a bit of nautical activities, which, well...
The other "plus" about carrying a mortgage over cashing out is that by cashing out you lose out on the remote possibility that the mortgage collector might not come around one day: one gets out from mortgage payments AND has managed to engage in some nautical activities.
There is opportunity cost to everything. My only point was that paying all cashe eliminates leverage. It takes away from the bubble argument.
The point you miss is that like nearly all real estate investors, most cash buyers of single family homes subsequently turn around and attempt to refince their cash back out.
San Francisco's minimum wage should be at 50$ per hours, below that it's pure slavery.
What is the average 3 bedroom 2 bath house actually 'worth'...around $20,000 in materials if you could buy them and build it all yourself, so the 'bubble valuation' of that house today is around 20X leveraged....hey go ahead and try to backfill in that hole all you like but bottom line is it's a bubble and sooner or later it will explode.
Can you come and work on my house pretty please? I just did a complete reno on a 1400 sq ft 3 bed 1 bath bungalow and garage. The bill came to $120,000. If you can save me half that on my next reno I don't mind if you buy the materials for $20,000 and make $40,000 for yourself.
I remodeled a 3/2 that same size back in 07. It was all paneling and ceiling tiles with ugly carpet. Did most of the labor outside of floating sheet rock/building cabinets. Every room was to studs. I had right under $30k in it with new appliances/cabinets 4" crown throughout. I think in outside labor was around $5k, so most all of it was materials.
I'm remodeling a 3/1 right now that isn't a total gut, but the bathroom is. Leaving paneling, leaving ceiling tiles, all flooring/paint/new doors/granite in kitchen/appliances/replumbed and adding CH/A I'll have right around $20k in repairs/updating. It will appraise at around $60/sq, I paid $17/sq for it.
Shit, concrete is $120 a yard in a lot of places. Thats not even touching the current craziness going on in lumber prices. Good shingles in the upper $70's a square. If you gave me a simple house plan I could get most all of it built, but I'd still sub out floating the crete and the rock. No way you could come out without major bulk buying power in even the $4x range a sq/ft doing it all yourself and using anything but the most basic of materials in current times. While copper prices might be down as a commodity, romex hasn't seen much drop at all. Most finished goods that go into a home are actually quite high at present times. Chinese cabinets are becoming much more common now though, and they are quite reasonable.
Ahem, LAND. You don't mention the land.
I've got many acres. My land is valued at a LOT more than my home.
I think inflation should be adjusted to match the current home value, rather than the home value being adjusted for inflation in his last chart.
The reality is that the published CPI is a joke. Yes, there's been massive printing to "support" home prices. That's resulted in a much higher real CPI.
Present home prices might even be supportable given the printing. Of course, it's an inflated asset class, but that's what CPI is supposed to measure, no?
Yes, the prices are unaffordable by common people, and that's just one more sign we're nearing the end of this farce.
"More than 4,220 units of housing began construction in San Francisco in 2012 — following a year in which just 269 net units were added. . . . Twenty-two tower cranes dot the city. By year’s end, there will be 26. Many of these cranes are for public projects rather than private development, yet these numbers are staggering by any historic standards. Local union halls’ out-of-work lists are empty, and some unions are even calling in workers from other parts of the country. "
http://www.spur.org/publications/library/article/san-francisco-boom-back
Is this in China?
Oops! My bad. I missed "San Francisco!"
This is how it's done, the New Deal II. Instead of govt-directed spending it's money flooded to the private sector for make-work projects.
The Fed has only kicked the can down the road. The final capitulation across all world markets will happen if there is no large war. Global war might be the last can kicking event and the losers will pay if humans survive.
..
All you have to do is plot the percentage of the population in the work force and the average median wages. Both are declining. They will run out of people to buy houses at any price close to where they are at within 10-15 years. Most of the jobs created are low paying service jobs. None of those will ever pay enough to buy a house. Retired people do not buy houses. The prices will naturally collapse down to whatever level they need to in order to match supply and demand. You cannot have inflation continue year after year and wages drop at the same time. Even rents will collapse. At some point you have a vacant building as renters cannot afford the rent either. If you want $2000 for your 1 bedroom apt and no takers you start lowering it until there are some. Perhaps that level is now $1000.
gen x is the problem. there are not nearly enough of them to absorb the reduction in spending of the retiring baby boomers but the there are 90 million millenniels right behind them just beginning to enter their spend every penny phase. if the gen x generation gets crushed along with retiring boomers with an inflationary assault the milleniels may have an opportunity to save the show in their new inflation adjusted paychecks that will pay for 10 dollar gas and 500000 dollar 3/2 tract homes.
The CIO's of CALPERS and CALSTERS were on with Maria Bartiromo saying they are moving money into...Real Estate!
Brilliant.
The top is now officially in. The top callers have spoken.
Dumbest of the dumb money. The last muppet is in. Guess what happens next :)
here are some interesting charts. http://www.jparsons.net/housingbubble/
note the inflation adjusted and nominal price chart. except for the bubble the inflation adjusted price kept up with inflation. it also spiked in the long foregotten late 80s(post dollar devaluation and the original flash crash of 1987) real estate bubble and the late seventies stagflation era. following the trend of these charts and the current market has recovered from the bubble to historically accepted prices. the question is whether or not the huge amounts of fiat sloshing around the world will find a home in real estate and create another bounce or is there so much money sloshing around that the curve could actually shift(not just spike), due to much higher persistent cost push inflation that all this fiat says must happen, eventually forcing higher wages even in unskilled labor? might it be that the plan all along was to instigate a sudden 20-30% inflation rate to bring all the numbers(debt to income, revenue, good assets) in line.
by replacing 40 billion dollars of garbage on banksters book every month with clean money the fed is creating the illusion of sound assets totalling 10 times that number or 400 bil or almost 5 trillion in a year. no wonder they are talking about ending qe to infinity and beyond. no wonder the banks are risk on. no wonder there is so much money sloshing around. no wonder anyone with money is buying real estate(even with leverage). there is going to be an inflation shit and fan convention very soon.
i wonder how much of those garbage mbs tranches the fed is buying are euro originated. and what of an exit plan? with higher interest rates? do they have some model that says the new economy(the one they created) can support it? or do they really think they can stop it by unloading the fed balance sheet or flood china and india with inflation instead of the west?
Some of that garbage RMBS that the FedRes is paying full value is levered at
a lot more than 10:1 .If the servicing agreements to the trusts are honored that
is.Sure we trust the FedRes to get those payments from its owner banks,and I have
a tower in Paris for sale cheap, damn I might even securitize it.
I was told by a gentleman from India that Indians don't get bank loans to buy homes; it is unheard of. He said that Americans are insane to take out 15/30 year loans to buy homes. In India, they pay for real estate with gold. That will eventually be the case here.
The cost of materials to build a house do not vary greatly from one part of the country to another. I am not sure about how much labor varies across the country. the real giant variation is in the land price. Location premium historically was closely related to job availability like large employers. Today the largest employer is the govt. and the are located in capitals. DC is booming. With huge parts of the population on pensions or welfare that can live anywhere because their check will be forwarded, location has diminished in importance for many. Areas like San Francisco have de facto segregation by economically forcing minorities out, other areas have the same effect because of white flight such as Detroit. All this is beyond the skill set of any community organizer.