California Housing And The Bubble At Hand

Tyler Durden's picture

Submitted by David Stockman of Contra Corner blog,

Janet Yellen is an officious school marm. She constantly lectures us on Keynesian verities as if they were the equivalent of Newton’s Law or the Pythagorean Theorem. In fact, they constitute self-serving dogma of modern vintage that is marshaled to justify what is at bottom an economic absurdity. Namely, that through the primitive act of banging the securities “buy” key over and over and thereby massively expanding its balance sheet, the Fed can cause real wealth—-embodying the sweat of labor, the consumption of capital and the fruits of enterprise—-to magically expand beyond what the free market would generate on its own steam.

In a fit of professorial arrogance, Bernanke even had the gall to call this the helicopter money process. His contention was that the rubes on main street would happily scoop up the falling bills and coins and soon “spend” the economy into a fit of expansion. In other words, according to Bernanke the essential ingredient in economic life is money demand, which is a gift of the state’s central banking branch, rather than production, savings, innovation and enterprise, which arise on the free market in consequences of millions of workers and businesses pursuing their own ends.

Indeed, under Keynesian dogma the latter can be taken for granted; the supply of labor, enterprise and output is automatic and endless until an ethereal quantity called potential GDP is fully realized. To achieve the latter requires that the state dispense exactly the right level of money demand so that the rubes on main street will not stubbornly remain poorer than they need be. This unhappy estate happens, of course, owing to their inexorable propensity to withhold the production and enterprise of which they are capable (i.e. keep plants idle and labor unemployed).

Stated differently, under Yellen’s primitive bathtub economics there is no possibility of inflation unless the central bank mistakenly over-dispenses money demand to the point where actual GDP and the job count overflows potential GDP and the full-employment of labor. Needless to say, we can trust the experts in the Eccles Building to stay on the safe side of this potential GDP divide—-an invisible boundary which can only be seen and calibrated by economics PhDs.

Once upon a time the world knew better. The pre-Keynesian rule was that when central banks hit the “buy” key they always and everywhere create monetary inflation. Ordinarily that resulted in the inflation of credit, which, in turn, caused prices to rise—whether of commodities, services, wages, real estate or financial assets like stocks and bonds.

Accordingly, the old-timers were always on the look-out for inflation and after the calamity of 1929 were especially attuned to inflation of financial assets and stock price manias. William McChesney Martin, the storied Fed Chairman of sound money beliefs and deeds, for example, famously took away the punchbowl in mid-1958 only a few months after the recession ended not because the CPI was yet rising too fast, but because Wall Street speculators on margin credit were getting too frisky.

The disastrous Great Inflation of the 1970s proved the case. After Nixon unshackled Fed Chairman Arthur Burns at Camp David in August 1971, US bank credit grew by leaps and bonds; the US and then the global economy rapidly and dramatically overheated; and commodity prices at first and then the price of labor and consumer goods soon thereafter soared at rates never before experienced during peacetime. During the sound money decade ending in 1963, for instance, the CPI crept up at a 1.2% annual rate. By contrast, during the 10 years after Camp David, inflation averaged nearly 9%.

Unfortunately, Volcker’s hard-won victory over wage, commodity and CPI inflation was thrown to the winds by Greenspan and his successors.  Like Arthur Burns, they hit the “buy” key over and over, causing credit in the banking system and capital markets to expand massively.  When Greenspan took office in 1987, for example, public and private credit market debt outstanding in the US was about $10 trillion or 190% of GDP. Today it is nearly $60 trillion or 350% of GDP.

Those extra turns of leverage—in effect, a national LBO—caused a vast inflation of financial assets. But this self-evident deformation was explained away by the newly ascendant money printers at the Fed on the spurious grounds that the CPI remained “well behaved”.

Well, of course it did. In part, this was due to the fact that the CPI was seriously tampered with during the 1990s under Greenspan’s auspices in a move to shorten the measuring stick so that old people would be deprived of their full social security COLA.

But mainly there was no abnormal CPI inflation because the US money printing disease was adopted by the newly emerging mercantilist exporters of Asia—-a maneuver that brought a billion peasants out of the subsistence economy of the rice paddies and into the east Asian factories and world trade. Needless to say, this 20-year outpouring of cheap labor and factory goods kept the CPI in check–even as the credit swollen US economy borrowed $8 trillion in cumulative current account deficits from the rest of the world.

The monetary and credit inflation, therefore, was channeled into the domestic housing market and the stock market. Twice this century these bubbles have violently collapsed. Both times they Keynesian money printers have had no explanation for the collapse and the resulting trauma among main street “investors” and spill-overs on real economic activity.

Indeed, the prescription has been to double down with more monetary and credit inflation. In the immediate aftermath of the September 2008 financial meltdown it was widely acknowledged that the US economy was burdened with far too much debt. Yet today total credit market debt outstanding is more than $8 trillion greater than it was on the eve of the last crisis.

So the problem with monetary inflation—a process that has taken the Fed’s balance sheet from $200 billion when Greenspan took office to nearly $4.4 trillion today—is that its deformations, distortions and malinvestments are cumulative.   Worse still, owing to the “recency bias” of players in the Fed’s financial casino, increasingly outlandish pricing errors are taken for granted. They are viewed as part of the bubble landscape, rather than as a screaming indictment of the monetary inflations’ insidious results.

On the theory that perhaps at some point a picture can overcome the dense dogma of our benighted Keynesian money printers in the Eccles Building, the two illustrations below from the Dr. Housing Bubble Blog are offered.  Arcardia and San Marino, California are most definitely not unique national treasures where cracker-box houses should be valued at $1-$1.5 million.  No, they are just at the leading edge of the renewed speculative mania that has been touched off by the Fed’s latest and greatest monetary inflation.

Dr. Yellen, of course, claims there are no financial bubbles to worry about because the Keynesian bathtub of potential GDP has not yet been filled to the brim.  Perhaps she would like to put in a bid for one of these.


The first area we should examine is Arcadia. Arcadia has benefitted from heavy investor demand and continues to be a target for hot money.



325 Laurel Ave, Arcadia, CA 91006

2 beds, 1.5 baths, 1,522 square feet

For Sale:               $960,000


Our final stop takes us to investor magnate San Marino.


san marino

1400 Winston Ave, San Marino, CA 91108

3 beds, 2 baths, 1,862 square feet

For Sale:                               $1,580,000

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AmericasCicero's picture

If that San Marino house doesnt have a retractable roof disguising a helicopter pad, an olympic sized pool, and a private bowling alley then im going to puke

Four chan's picture

i live in the same house on winston st in detroit and just bought it from chase for 13,500. lol no joke.

oh wait mine's all brick and is a bit bigger.


cynicalskeptic's picture

Hmmm.... In Westchester (pricey NYC burbs), a million will get you a third of an acre, well over 3,000 sqft, 5 bedrooms and 3.5 baths - in a place with decent (if not super) schools that are far better than 90% of the US - AND you get walking distance to a train station that'll get you into Grand Central in 30-40 minutes.


WTF is with California?

NidStyles's picture

It's where every immigrant and progressive wants to live. 

sylviasays's picture

"It's where every immigrant and progressive wants to live."

And in select California cities like Irvine and Arcadia, Chinese nationals investing with hot money...

Bunga Bunga's picture

It's the radiation, stupid.

Troll Magnet's picture

Give me a printer snd I'll buy all of them motherfucking houses!
Whaddaya mean there are earthquakes in California?

CheapBastard's picture

They’re throwing in a Free Geiger counter with every house purchase ... and IF YOU BUY WITHIN THE NEXT 48 HOURS, they’ll throw in Free annual leukemia and thyroid cancer check-ups for a lifetime [as long or short as that may be].

localsavage's picture

They will all welcome the early death when they realize that they have a 800k mortgage and only make 80k a year.

quintago's picture

Where the hell is equilibrium? There are simply too many people, with too much money. It doesn't make sense, and soon, they will be parted with their money. That's the system. They giveth, and then they taketh.

People don't learn there lesson, and each subsequent turn of the wheel, the lesson gets bigger and bigger. Next one's going to be a biatch for most of the people out there.

vie's picture

These houses are listed "For Sale"... who the fuck cares what people list their houses for sale at.  A market is only made when someone actually buys it at that price... the fact they're still for sale actually tells you it's not worth that much.

thamnosma's picture

Sylvia, was going to post the same, Arcadia has a very large Chinese population.  Nevertheless, those prices are utterly utterly absurd.  Must be quite a few high cash flow businessmen....

StandardDeviant's picture

Absurd?  Bah; you call that a bubble?

Have a look at London, where your $960k (~£560k, stamp duty not included) might, just might get you a decent two-bedroom flat in the East End.

SmackDaddy's picture

in a lot of places, you arent paying for the house, you're paying for the neighbors (the darker the cheaper)

greatbeard's picture

>> (the darker the cheaper)

Most of my neighbors are dark, particularly the Angus.



Dingleberry's picture

Four chan,

You forgot to include the cost of your Dobermans, weapons, bullet-proof windows and other public safety necessities that are compulsory to live in scenic Detroit.

But you still saved a lot of money per square foot as compared to the shooting gallery out west.


Four chan's picture

1 weapons are fun.

2 see 1

Gusher's picture

All real esate is local and you overpaid for your Detroit real esate. Just sayin...

knukles's picture

Oh man, like uh, thats in LA, man.
What a dump of a city.
One time when the previews were on at our local cinema, they were showing something about the destruction of LA and our crowd went crazy with joy, screaming, yelling, cheering.
Nobody north of LA cares for LA

Plus, that house aside from being overpriced is too far away from the La Brea tar pits.
BTW, does anybody but me know waht La Brea means in spanish?
Tar Pit
So it's the "tar pit tar pits."

Whadda shithole

JohnG's picture

Yeah but El Segundo has the nice view of a ten square mile Chevron refinery.....

sylviasays's picture

Richmond in the SF Bay area also has a nice view of the 2,900 acre Chevron refinery...

fedupwhiteguy's picture


El Segundo:

try staying out at Dockweiler sometime. If the wind is blowing offshore you get a miriad of lovely /s smells!! You get the jet fuel exhaust from LAX, oderous maximus from the water treatment plant, power plant (next door) emissions, and finally the Cheveron refinery emissions. Lucky campers!!!!

tempo's picture

traffic and schools determine value in So. CA. I live in Orange County and these are the facts. No new freeways will be built. Traffic congestion is terrible and gets worse by the day so you can't move out to Riverside. Only a relatively few public school district provide a safe and quality learning experience. Many Asia are buying homes for cash in Orange County as a way to "bug out" when the civil unrest hits. Homes in certain desirable areas sell in one day for cash to Asians. Its not about Americans buying their first home. Its about mature Asians (Koreans) wanting a safe place to escape when (not if) the US can no longer defend their homeland.

Lin S's picture


The IE is collapsing: Trader Joe's closes down and is replaced by 7/11 with a big EBT sign in the window.  Same goes for the new super Wal-Mart: "welcome EBT customers."  Section 8 housing zones seem to be expanding, and English is seldom heard now.  More and more able-bodied men wandering through neighborhoods instead of working, heads on a swivel, as though looking for something.

People who can are moving to the beach.  Those who cannot are leaving for Idaho.

Staying in CA means standing waist-deep in massive socio-economic fuel load, terrified of a stray spark...

mjcOH1's picture

"Section 8 housing zones seem to be expanding"

A couple of friends have recently told me they now rent only to section 8 tenants. Enough people have walked out on their mortgages the last few years where getting paid has become a chronic problem. They view free housing as an entitlement after a year or so of not paying the mortgage. And after a year of stiffing the bank, there's not much reluctance in fleecing some poor schmuck trying to run an apartment block.

Lin S's picture

Good info (disturbing, but useful).  Thanks for this...

One And Only's picture

I would absolutely buy those homes with the money of someone other than myself.

Very well written article.

SF beatnik's picture

A friend and I view houses in Albany, CA, near SF.


It's open house day. A steady of stream of people arrive to inspect.


Small houses, tiny yards, asking prices $800,000 a piece, give or take $2,000. 


Two houses look as though 1080-square foot manufactured double-wides have been fastened atop existing boxy structures. 


Improbable, but I ask the realty reps at each location whether the houses are entirely stick built. They say they don't know.  (Eight hundred grand, and they don't know? WTF?)


Commiting to pay $800,000 at this late date is insane, unless you're pretty sure the U.S. is headed for hyperinflation.


It's mania. The Bay Area has only so many people who hold real jobs. And their numbers are probably declining.  Banks no longer lend to deadbeats.  And investment firms who buy to rent are starting to lose money because there only so many families who can afford to pay $4000 per month to rent.



Soul Glow's picture

It's not a fear of hyperinflation.  Most people dare not question the King, the Dollar.  You are witnessing the death rattle of the American Dream.

Must.  Take.  One.  More.  Breath.

Bay of Pigs's picture

That would be King Doelarr my friend.

FREE Lennon Hendrix!

graneros's picture

I wish like hell your post was wrong.  It's not. It's just not. We have simply arrived at one of those very ugly points in our history. I have no doubt that the feeling we are collectively experiencing is identical to that which those who were alive in 1914 or 1939, or thousands of other times in history when the winds of change are working up to gale force.

Lin S's picture

An unsettling yet poignantly-stated post.  Well said.

conscious being's picture

Re. Impending world war with attendant slaughter.

Maybe 10 years ago, I read SteppenWolf by Herman Hess.  Great read.  Trippy and insightful.  Towards the end, the narrator goes off about the impending, unstoppable slaughter that's about to emerge.  I checked the copyright page at that point and saw the book was first published in 1928!!

What I'm trying to say here is that this Cassandra problem, where clued in people can see the impending horror approaching, but are powerless to stop it, or make the wider public wake-up an see what awaits ... It seems to be part of the human condition.  Same as it ever was.

i_call_you_my_base's picture

Housing is not a reasonable hedge against hyperinflation. And it's because housing is not like other assets - someone has to live in that home and someone has to pay for it. Under hyperinflation, if wages don't inflate at the same rate, no one could afford to live in it anyway. Owning property is a reasonable proposition if society is still together, or it can be a hedge against armegeddon, but if that's your play, it would be stupid to buy in SF.

One And Only's picture

What if I buy a home and rent it out?


If there is enough acreage, rent out the home and either i. lease the land to a farmer, or ii. turn it into productive land via crops or other agricultural means?


i_call_you_my_base's picture

Rent will still track with wages. If your math is wrong over time it won't shake out. You can't charge 120% wages if your buy was in the wrong spot.

It's hard to predict what hyperinflation would mean. The economy would probably crater and most people would lose their jobs anyway. So good luck getting the rent you thought you could. 

conscious being's picture

It's hard to predict what hyperinflation would mean?

Well, it sure is likely to mean higher RE taxes.  Unless you takd the Bundy approach, you can't win on Homeland RE going forward.


goldsansstandard's picture

In hyperinflation taxes are simple to evade just by the built in delay between assesment and tax due date.

In the book When Money Dies , the history of Weimer inflation, they described how for all practical purposes , tax revenue disappeared in real terms for just the reason cited above.

malek's picture

Well the floor for rents in CA is section 8.

Lots of folks will then be quick to tell you "hey, you can make monthly money by buying that $800,000 mini house and renting it out to section 8 folks" (at least the state always pays on time - so far), but the forget to mention that you will need a 30 year mortgage to get to such low monthly payments... good luck with that!

One And Only's picture

If I owned a property I would never rent to section 8.

I'd burn the property down and collect the insurance if a gun was put to my head by the USG.

I would be particular to who I rent to.

I would also look to invest in homes in countries other than the U.S if it came down to that.

sylviasays's picture

Upside: The amount of a Section 8 housing voucher will be between 90 percent and 110 percent of the Fair Market Rent.

Downside: Section 8 tenants 

Four chan's picture

learn from donald sterling dont rent to blacks or mexicans. its messed up but hes right, they will turn your investment to garbage.

New World Chaos's picture

Any Section 8 tenant should be a red flag. There is a good chance they will have an entitlement mentality and/or poor coping skills. Either way, expect extra expense and aggravation from them. Breaking things is just the beginning. They could turn your house into a meth lab / toxic waste dump / smouldering crater.  Or even just get caught dealing.  Cops have been known to use "civil forfeiture" to steal houses even if the owner isn't the one dealing drugs from the place.  California is desperate for cash.  This will only get worse.  Cops and starving bureaucrats will become the worst gangs around.  Your house will be a big fat target.

At some point, liberal states will impose rent controls indexed to the rigged CPI, then they will impose eviction controls to force you to babysit the FSA for them.  See New York.

At some point it may even become standard FSA policy to redirect the Section 8 payments to their dealer, dick you around for as long as they legally can (a few months?) and then stripmine your house for copper right before eviction.  They will never be punished for this.  It would work well as part of the puppetmasters' grand plan to trash America, bankrupt the middle class, and reward sociopaths at all levels of society.

malek's picture

While all of this is true (and you forgot marihuana farming), you fail to mention why a normal, non-section-8 renter would never do such things.

SF beatnik's picture

Roger, all that.


They'lll wreck the place and then they'll sue you for not fixing it up fast enough.



tecno242's picture

You have not studied the Hyperinflation in Germany.  During any inflation of signifigance, large debtors are the winners while savers of currency or those on fixed income are the losers.

In a hyperinflation, large debtors holding real leveraged assets such as real estate are big winners because at some point in the inflation they can satisfy the debt for an entire house for the price of a loaf of bread.

Precious metals can be risky because government may choose to ban citizens from possessing it during the inflation to try and save the currency, as they have done in the past. They will no such thing with real estate.

Beware being a saver when government is the largest debtor.


CheapBastard's picture

"When Money Dies," the author says CEOs were big winners since they could get a hard foreign currency fo rthier products. Also, portable hard assets were big winners like silver, gold, etc. Houses were lost b/c taxes skyrocketed with hyperinflation and usually the house owner could not pay the property taxes and maintenance, etc.

Bottom line, hold at least some hard currencies backed by a solid hard assets [besides someones promise tp pay] and some hard portable assets imo.