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Bubblenomics And The Future Of Real Estate

Tyler Durden's picture




 

Submitted by Ramsey Su via Acting-Man blog,

Behold the Monet

? Economics is like a Monet painting.  Stand too close and all you see is a bunch of seemingly random paint strokes.  Back up a few steps and an image emerges.  

The painting of bubblenomics started with the Plaza Accord, September 1985, where five nations agreed to manipulate the dominant currencies at the time.  Japan enjoyed a 50% devaluation of the US$ vs the yen, artificially enriching its citizens so they could travel the world in busloads with eighty pounds of cameras around their necks. 

The consequences of that bubble have yet to be corrected.  Twentyfour years of fiscal and monetary accommodation led Japan to sport the world's largest public debt-to-GDP ratio.

? The next big one was the US dotcom bubble, which was generating great wealth during the 1990s.  More importantly, it started the era during which income and savings became “old school”. Everyone could live off and retire on never ending asset appreciation.  When that bubble burst, in came Greenspan with the mother of all bubbles – the sub-prime bubble.  

 

San-Giorgio-Maggiore-by-Twilight-by-Claude-Monet-OSA071

Monet's famous “Twilight of the Bubble”

(Painting: San-Giorgio-Maggiore by Twilight, by-Claude-Monet)

 

 

? Amazingly enough, that mother of a bubble would soon be exceeded by the Bernanke/Yellen yield bubble. In Europe, unbeknownst to the world, the Euro/EC bubble was brewing.  Sub-prime countries like the PIIGS were allowed to borrow in a manner similar to how dishwashers in the US were given loans to buy McMansions.  Marginal economies such as Greece were able to buy Mercedes and import Armenians to do their work while the citizens collected pensions and crowded the coffee bars. The ability to repay was never a consideration.

This massive global bubble financing has unintended beneficiaries.  China, India and other emerging markets could never have had double digit growth rates without the flood of capital from the West and the importing of jobs that were deemed unneeded by asset rich Westerners. Countries like Australia and Brazil benefited from supplying raw materials to fuel these bubbles.  

? In summary, this Monet painting is becoming quite clear.  In the modern world, there are no economies, only bubbles.  There is not a country in the world that is not struggling to survive on yesterday's stimulus plan, other countries' stimulus plans, or waiting for tomorrow's bailout to live another day. 

To anyone who is not in denial, it is obvious that no central banker has a viable solution and no one is willing to take any pain. In reality, there is no stimulus, just a continuous game of borrowing by governments and printing by central banks to keep the peasants from revolting.

 

peasants

Comrades! See that 1%er castle yonder? Let's give 'em a pitchforking to remember us by!

(Image credit: C.l. Doughty)

 

Adjusting the Dials on the Radio

Forget Samuelson or Friedman, this is the way I define the economic jargon.  A stimulus is an investment into something that has future production value, at a cost today.  A bubble is the creation of pseudo demand for something that we do not need, made possible by debt and leverage that we cannot afford.  A bailout is a perpetuation of the bubble, using newly created fiat money and/or more debt to pay off the old.  It sounds awful like a Ponzi Scheme.

How does real estate fit into this picture?  For at least the last two decades, the real estate market is nothing but a byproduct of economic bubbles.  Going forward, the future of real estate is dependent upon on what the almighty policymakers want to do.  Ms. Yellen, unwilling to hide in the shadow of the QEs of her predecessor, is coming up with her own strategies, or terminologies.  

She has been promoting this thing called macro-prudential policies.  If I have ever heard that term in college, it has been long forgotten.  I had to look up the definition and found a good explanation by the IMF.  It is a very interesting paper with no practical use.  Who is Yellen kidding besides herself?  Does she really thinks she understands the subject matter, has all the necessary tools and knows how to deploy all these complex unproven theories in the real world, as if she were adjusting the volume of her radio?  Regardless of whether it is micro quantitative easing vs macro prudential, the bottom line is that the Fed will provide accommodation whenever it is needed.

Getting back to housing, I can only assume that Yellen will continue down the bubble path.  To illustrate how wrong that path is, here is a simple question:  

What is difference between a $100k loan at 6% and a $125k loan at 4%? The answer is: $3.   

In other words, the monthly payment for the former loan is $808, while it is $805 for the latter.  If the Fed members understood simple math, they would understand that all the effort spent trying to drive mortgage rates lower has no stimulating effect at all, if asset prices increase also.  In fact, it is a detriment to the first time buyers and the  same applies to trade up buyers.  

There is no incentive to trade.  The true underlying strength of a real estate market comes from strong employment, not only in terms of quantity, but in quality. Buyers buy when they have a good job and believe they are going to get a raise year after year, and vice versa if they think they may be laid off. 

The administration has been claiming job growth in the millions.  Naysayers said these are just part time low income jobs.  There is no disagreement that household income has not improved, per the following chart by the St Louis Fed. Any strength in real estate came from forces other than household income growth.

 

income

Real median household income: QE'd into the dumps, via Saint Louis Federal Reserve Research, click to enlarge.

 

Conclusion – Change Needed

In summary, in my opinion, healthier housing ratios should be no more than 1/3 of gross income, with adjustments based on other debt.  As a general rule, home prices should be between 3 to 4 times annual income. Based on these guidelines, the price of real estate is far too expensive today, or, more precisely, the cost of housing is too high.  

The correction does not have to come from price depreciation, but could come from obsolescing environmentally unfriendly tracts and urban sprawl.  Low density may need to be replaced by high density housing and better urban design to meet the life styles of the future.  I think we may need another crisis before the market will wake up to the needed changes.  

In the meantime, money printing and hype will continue.

 

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Tue, 07/22/2014 - 14:52 | 4989301 insanelysane
insanelysane's picture

Reading through Dickens and just started Tale of Two Cities.  Most people know the beginning and it is often quoted here but a page or two later Dickens wrote:

"France, less favoured on the whole as to matters spiritual than her sister of the shield and trident, rolled with exceeding smoothness down hill, making paper money and spending it."

Dickens, Tale of Two Cities, 1859

Tue, 07/22/2014 - 15:15 | 4989410 daveO
daveO's picture

1790's France, Part Deux. Coming soon to a city near you.

Tue, 07/22/2014 - 15:22 | 4989449 NOTaREALmerican
NOTaREALmerican's picture

Naaa,   huge huge difference.   The Trash Class was living in misery then.  Now?   The Trash Class is trying to determine if they need 50 ESPN channels or an upgrade to the latest model iPhone, which is a tough choice because all their money is used up on the brand-new dick-mobile they bought, with the growling exhaust and tinted windows, with 2% financing for 8 years.

Tue, 07/22/2014 - 15:56 | 4989664 Seer
Seer's picture

"Trash Class?"

2/3 of the world's population lives on $3/day or less.  750 MILLION people in India live on $0.50/day.

I elaborate because you state living conditions back "then."  If we're going to time warp and compare to incomparable things, well...

Tue, 07/22/2014 - 21:07 | 4991114 icanhasbailout
icanhasbailout's picture

"Economics is like a Monet painting" - in alternate universes where Monet is a retarded mental patient.

Tue, 07/22/2014 - 14:53 | 4989307 Hohum
Hohum's picture

And these bubbles occurred because society stopped generating real wealth in about 1971.  Wonder what happened then?

Tue, 07/22/2014 - 15:57 | 4989669 Seer
Seer's picture

Oh, oh!  I know, I know!

1) USD decoupled from gold (went total fiat), essentially a US default;

2) US oil production peaked;

3) Trade relations with China began.

Wed, 07/23/2014 - 03:15 | 4991845 o2sd
o2sd's picture

3) becoz 2)

Production = energy + labour

If energy prices rise, labour prices need to fall.

 

Tue, 07/22/2014 - 14:54 | 4989309 NOTaREALmerican
NOTaREALmerican's picture

If Japan can go 24 years SURELY we can do better than Japan.  

Tue, 07/22/2014 - 15:03 | 4989338 RaceToTheBottom
RaceToTheBottom's picture

It is the patriotic thing to do....

Tue, 07/22/2014 - 15:23 | 4989464 potato
potato's picture

Exactly. The people will just run faster on their hamster wheels to stay in the same place. People in Japan have been dying from overwork for a long time.

This is our future, and it's the opposite of the doomsayers and their doomsday blogs. 

 

Tue, 07/22/2014 - 15:41 | 4989561 Professorlocknload
Professorlocknload's picture

Sure, Japan is a light weight. Look for issuance of 100 year US T-debt. That will be "The Sign."

Tue, 07/22/2014 - 15:59 | 4989673 Seer
Seer's picture

No.  The USD is the world's reserve currency.  Japan didn't completely collapse because of this.

Tue, 07/22/2014 - 14:59 | 4989320 Wait What
Wait What's picture

the only solution is deflation.

bring it... this guy is more than ready.

those of us with productive skills will be fine.

useless 'credit creators' and middle men, not so much.

Tue, 07/22/2014 - 15:28 | 4989497 Professorlocknload
Professorlocknload's picture

With "useless credit creators" in control of money creation, deflation can't happen. Not until after the Crackup Boom and a collapse of their currency, thus their control.

We are a long way from that scenario. We still must go through the fazes of building more bridges to nowhere and new cities being built with nobody living in them.

Sprinkle in a war here and there to mop up some excess fiat, and the process could take generations.

Tue, 07/22/2014 - 16:04 | 4989693 Seer
Seer's picture

"those of us with productive skills will be fine."

Assuming, that is, one KNOWS what those woudl be.  Further, there's the issue of whether, if you're considering bartering, there's folks that you can trade with.

Yes, Madison Ave workers are going to have a tough time of it, but even IF one is skilled, and IF there is actual demand for your skill[ed output], things are going to be more "tough" than "fine."

Tue, 07/22/2014 - 22:38 | 4991430 Wait What
Wait What's picture

"Assuming, that is, one KNOWS what those would be"

it's why breadth of knowledge is so important. from botany and engineering to linguistics and programming, ppl who can couple a vibrant intellectual life with hunting, SERE, and hand-to-hand skills are an asset under almost any circumstances.

the trouble with 'modern' life is that specialization has made most ppl lazy when it comes to skills that might be useful under less than ideal circumstances. once sufficient currency is aqcuired to get comfy those skills are sacrificed in exchange for countless hours of mind numbing entertainment.

Tue, 07/22/2014 - 15:01 | 4989326 Seer
Seer's picture

It's the "price" that's likely too high, that or "wages" are too low.  "Cost" really isn't known for sure.

1985, what's that before Obama's time? </sarc>

Tue, 07/22/2014 - 15:02 | 4989334 Seer
Seer's picture

Btw - If we're expanding/growing then it's ALWAYS a function of a bubble.  Stupid fiat only makes it easier...

Tue, 07/22/2014 - 15:04 | 4989349 RaceToTheBottom
RaceToTheBottom's picture

Can I trade my Obama-phone in for a pitchfork?

Tue, 07/22/2014 - 15:18 | 4989430 NOTaREALmerican
NOTaREALmerican's picture

No, but you can order one on your Obama-phone.   Have your credit-card number available,  operators are standing-by.

Tue, 07/22/2014 - 15:06 | 4989361 Gusher
Gusher's picture

The market would love to respond to provide more affordable housing but it can't because the government has driven the cost of building a new house thru the roof...but it's for our own good. right?!  Love what Rick Santelli says about government - whatever they get involved in they drive prices higher. Healthcare, tuition and now housing to name 3.  When will we learn? When the whole country collapses?

Tue, 07/22/2014 - 15:33 | 4989515 Utah_Get_Me_2
Utah_Get_Me_2's picture

Yes. That's the plan after all. One or two more engineered crises and the MRAPs will be guarding your local post office in no time. Nationwide EBT system collapse coupled with the engineered border collapse and a 6000 point drop in the Dow should about do it.

Tue, 07/22/2014 - 15:15 | 4989400 socalbeach
socalbeach's picture

I would answer this question differently,

"What is difference between a $100k loan at 6% and a $125k loan at 4%? The answer is: $3.  In other words, the monthly payment for the former loan is $808, while it is $805 for the latter.  If the Fed members understood simple math, they would understand that all the effort spent trying to drive mortgage rates lower has no stimulating effect at all, if asset prices increase also.  In fact, it is a detriment to the first time buyers and the  same applies to trade up buyers."

If a Fed member bank owns a $125K mortgage on a property worth $100K, the loan is underwater and the bank could lose money from a short sale or foreclosure. If the property value goes up enough, the bank will get paid, either through the monthly payments, or payoff of the loan thru a sale.

Tue, 07/22/2014 - 15:25 | 4989468 ebworthen
ebworthen's picture

And in the midst of decreased earnings and inflated housing/energy/food prices we get the "Affordable" Care Act to complete the rape and pillage of the Middle Class.

Unsustainable.

Tue, 07/22/2014 - 15:34 | 4989522 Professorlocknload
Professorlocknload's picture

" unsustainable" can last longer than most can remain solvent. Guess we can bet against the "owners," or glean what we can from their bureaucratic fumbling.

Tue, 07/22/2014 - 15:52 | 4989634 Seer
Seer's picture

The "solvency" is based on the very system that is unsustainable, in which case the attempts at staying "solvent" only allows the System to carry on longer.

It's about survival, doing what is necessary.  Reminds me of this (one of the best quotes from any movie):

Sometimes when you win, you really lose, and sometimes when you lose, you really win, and sometimes when you win or lose, you actually tie, and sometimes when you tie, you actually win or lose. Winning or losing is all one organic mechanism, from which one extracts what one needs. - Gloria Clemente, White Men Can't Jump

Tue, 07/22/2014 - 16:11 | 4989721 cfsiii
cfsiii's picture

In 1985, 264 ounces of gold bought you a house (single family home average = $84,275 // average gold price = $317).

Today, using a 12.5 year average for gold (average duration for housing) of $897, 264 ounces would buy the equivilent of a house worth $236,800. Today's existing home sale price in the US is $223,300; not that far off.

So what's the problem?

Tue, 07/22/2014 - 16:18 | 4989760 ebworthen
ebworthen's picture

You only went back to 1985 instead of 1885.

Tue, 07/22/2014 - 16:36 | 4989868 Goldilocks
Goldilocks's picture

Bearnaise & Count de Monet
http://www.youtube.com/watch?v=YBRu522wsu8 (0:42)

Tue, 07/22/2014 - 17:24 | 4990121 Ghordius
Ghordius's picture

"...healthier housing ratios should be no more than 1/3 of gross income, with adjustments based on other debt.  As a general rule, home prices should be between 3 to 4 times annual income."

+1 good, old rules. Max 1/3 income is the rule for renting, too

the problem is: is Tom's house too expensive for Tom, or Tom too poor for Tom's house?

Tue, 07/22/2014 - 17:56 | 4990295 RaiZH
RaiZH's picture

Does this mean one day I'll be able to move out of my parents basement? 

Tue, 07/22/2014 - 22:03 | 4991319 Playtime's Over
Playtime&#039;s Over's picture

We live in such a corrupt era. When will numbers on a ledger mean anything ever again?  Our banking system is corrupt to the bone. We'd be much better off with private currencies that compete. They would have to have something of value backing them.  As oppossed to our current Ohopium currency. Built on magic gobblin farts. Oh but that would put a crimp in the thievery and kabash the parasite lifestyles. 

Tue, 07/22/2014 - 22:48 | 4991469 AdvancingTime
AdvancingTime's picture

Because of the uncertainty in today's market and the direction events might take the subject of "value and worth" continues to garner a fair amount of interest and remains relevant. History is chucked full of  distorted markets, debts unpaid, promises unfilled, and bubbles.

These "interesting times" play havoc with the value of things and what they are worth. Like some of the cruel games children play you don't want to find yourself without a chair or holding the "hot potato" when the game ends. More on this important subject in the article below.

http://brucewilds.blogspot.com/2014/05/value-and-worth-constantly-change...

Tue, 07/22/2014 - 22:46 | 4991461 AdvancingTime
AdvancingTime's picture

I contend the primary reason that inflation has not raised its ugly head or become a major economic issue is because we are pouring such a large  percentage of wealth into intangible products or goods. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.

The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas.

 It is important to remember that debts can go unpaid and promises be left unfilled. If this happens where does it  leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years.  More in the article below.

http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....

Tue, 07/22/2014 - 23:49 | 4991622 hedgiex
hedgiex's picture

The top 10% holds 90% of the wealth (repeat 90%). They have no special love for US when it comes to their investments. This group are not all money launderers. Much of their wealth are trapped within their own corrupt crony economies.

The wealth seek for safer havens and are not interested in papers but bricks and mortars in good locations not industrial wastelands. The wealth is not interested in providing jobs or invested in low tech industries (they have better targets back home).

At this time of US high indebtedness, you still want to decide where money should flow. Shouldn't the huge reserves accumulated by the creditor nations be recycled back to US ? Where's the creativity to ensure some trickle down benefits in unlocking foreign investment flows not just to the markets ?

The Baby Boomer generation never learn...first with conspicuous consumption and now by insisting on where their creditor money should go.

Tue, 07/22/2014 - 23:49 | 4991623 hedgiex
hedgiex's picture

The top 10% holds 90% of the wealth (repeat 90%). They have no special love for US when it comes to their investments. This group are not all money launderers. Much of their wealth are trapped within their own corrupt crony economies.

The wealth seek for safer havens and are not interested in papers but bricks and mortars in good locations not industrial wastelands. The wealth is not interested in providing jobs or invested in low tech industries (they have better targets back home).

At this time of US high indebtedness, you still want to decide where money should flow. Shouldn't the huge reserves accumulated by the creditor nations be recycled back to US ? Where's the creativity to ensure some trickle down benefits in unlocking foreign investment flows not just to the markets ?

The Baby Boomer generation never learn...first with conspicuous consumption and now by insisting on where their creditor money should go.

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