Wages have not kept up with inflation for the most part for a long time for the majority of workers, even middle-class ones. It’s only recently with rapid and sustained price spikes that people are starting to pay attention (the MSM press that is). That and the lack of credit to make up for it, wisely or not.

Markor, you supposition in #71 reads more like an ivory tower textbook analysis than from someone who is taking ALL the factors on the ground into account. If people are charged rents that too closely reflect the current, or will eventually become, higher than per square foot house costs and amenities, not to mention location and density, transportation options, etc, do you think those landlords will get it, especially after the first year?

Looking at your statement in isolation seems much more plausible than after scrutinizing it. Unfortunately, A lot of landloards are operating that way.

Wrong, the purchase price of housing is not included in CPI at all. It’s not supposed to be, because it’s an asset price (like stocks), not a consumption price.

I said

Housing cost is a component of CPI – probably the largest (although via some bizarre imputed rent formula)

a bit of selective quotation, perhaps? I’d better not mention lipstick on a pig!

Lehman Bros survived the great depression, even the civil war, but could not survived Joe 6 Pack buying the American Dream..

And we say good bye to Meryl Lynch…Bank of America is taking over.

NOW, everything is contained…..maybe.

It seems a bit tautological to suggest that housing follows CPI when it is one of the largest components driving CPI.

Wrong, the purchase price of housing is not included in CPI at all. It’s not supposed to be, because it’s an asset price (like stocks), not a consumption price.

This is the reason we saw a >100% increase in the price of housing in the last few years with no effect on CPI.

The consumption price of housing is rent, which is included in CPI.

For the last several months, as many other areas across the country sank deeper into the housing downturn, local real estate agents, housing market experts and financial leaders touted the Puget Sound region’s strong employment growth as a key factor keeping the area’s economy afloat.

But a forthcoming report from the Puget Sound Economic Forecaster, which has not yet been released, predicts that job growth is slowing and will decline during the last part of 2008, a casualty of the worsening housing market and the tight credit markets across Washington.

The forecast, scheduled for release in the upcoming September newsletter, is more grim than even the most recent state predictions. The state forecast shows growth slowing to 1 percent or less in King, Snohomish, Kitsap and Pierce counties from 2007 to 2009.

I found about this article through the Q13 News. This is not good for housing. Fewer jobs, means fewer buyers. 1% growth is anemic. I think we are far from the bottom. The good news is that housing prices should be closer to reasonable and affordable next year. Housing prices right now are still way too high for the average person. I would like prices to decline another 15% to 20% before I buy.

Sniglet posted a coherent, eloquent, well-informed post and you respond with that garbage…get a life….nobody cares about the difference between and positive and negative feedback loop except you and the other worthless cronies you work with. Your post oozed with arrogance…unjustifiable arrogance.

1. lending must become available
-gov backed the biggest lenders and instantly made $ available to those still looking to buy a house.. standards don’t need to be eased to the degree that they were… but the biggest factor for lenders is most likely not the quality of the borrower, but the quality of the asset that backs it… so banks will begin to lend at more reasonable rates once they feel they forsee home prices stablizing.
2. Fed interest rate drop and corresponding mortgage rate drop… to further increase affordability
3. short and long term incentive for people to keep their homes that are currently ‘underwater’… gov must be creative here
4. In the medium term (5 years lets say) realty fees must drop by 1/2 or more… this will instantly add 3% to house prices since the fees will be pocketed / saved
5. weak US dollar to spur domestic production vs. foreign imports and domestic jobs
6. containment of ‘toxic paper’ ect within the investment world… package it and resell it (at the right price for the level of risk in the package… this time)
7. government program to convert ARM”s to 30 year fixed or alike
8. return bank CEO’s and executives bonuses to the banks since they were ill-gotten
9. first trends showing ’slowing’ declines, then stabilization… to change future expectations from ‘the future may contain 80% price drops to… the worst is behind us and future looks like we are returning to the historic trends’
10.

I don’t think 80% declines are reasonable to expect… as mentioned my DJ, this would put prices back to the 80’s… and most people would agree that the 80’s should not be relived.:-)

If prices were to fall that much, that would put 95% of all homeowners underwater… actually, that’s kind of an interesting question: are there stats available on equity levels across the US (or even better, specific to Seattle)?

As prices fall, more and more owners will be submerged by their debt…. there is likely a ‘tipping point’ where the vast majority are underwater… which would likely propagate the issue further thus taking with them the few who were left over. If that were the case, I’d be most happy if I was one of the ones with only 5% equity today since almost no-one will be left above water.

Hmmm…. this could get pretty crazy pretty fast.

deejayoh: Most analysts believe housing prices are driven by incomes. And from what I have seen (and shown here multiple times) there is a very tight correlation between local measures of housing prices and income. I’ve tracked it back ~30 years, and the fit was great up until 2003-04.

Unemployment could easily spike as the economy craters. And the average homeowner is now far deeper in debt (as a percentage of income, and including federal/state debt) than they were between 1973-2003, which surely will affect house prices too.

Before that, housing followed CPI pretty closely.

Housing cost is a component of CPI – probably the largest (although via some bizarre imputed rent formula). It seems a bit tautological to suggest that housing follows CPI when it is one of the largest components driving CPI.

Most analysts believe housing prices are driven by incomes. And from what I have seen (and shown here multiple times) there is a very tight correlation between local measures of housing prices and income. I’ve tracked it back ~30 years, and the fit was great up until 2003-04.

If you are suggesting there is a better relationship and there was some disconnect as far back as the 90’s (when Seattle had huge gains in income, btw) providing some supporting data seems to be in order.

victorchai // Sep 14, 2008 at 12:44 pm

are you saying we are at the bottom?deejayoh, since I see tons of listings at 180/sf….

Victor – that’s radarlogic’s data – for 3 counties, and it’s an average. Are you suggesting that 180/sq foot is now the average? Do you have any data that would support this? Cuz radar logic says the average is still in the 300 range. Maybe you should call them and report your observations?

and hzg, thanks for the math correction. I caught that after my 2 minute timer expired. point is still the same. Anyone calling for us to take of 4x? Still takes prices back to the 80’s.

Watch out MER!

deejayoh // Sep 14, 2008 at 11:09 am

Some charts that support my point
Radarlogic show’s long term price trend diverged in 2004
http://seattlebubble.com/blog/wp-content/uploads/2008/04/radar-figure-1.png
Comparison of Disposable Income/Interest rates to OFHEO Index
http://seattlebubble.com/blog/wp-content/uploads/2007/11/washington.png
Comparison of income growth to median prices for KC SFH
http://seattlebubble.com/blog/wp-content/uploads/2008/01/housing-vs-income.png

In hard economic times it is also not uncommon for multi-generational families to re-consolidate to a single residence. So, as people sell, get foreclosed on, or walk away, they don’t necessarily enter the rental market. Some will also leave the rental market for this reason. It depends in large part on jobs and how our economy holds up. From my view, it isn’t looking all that great.

Mathematically, a 50% decline would wipe out a 100% increase in prices. An 80% decline would wipe out a 500% increase in prices.

Prices in Seattle were tracking incomes up to about 2004. Since 2004 we have seen a 64% increase in prices. Reversing that would equate to a 39% decrease in prices – assuming incomes had not risen at all (which they had)

And using Merced as a proxy indicating what might happen here? Puhlleazzze! Prices in Merced rose over 2x what they did in Seattle. The increase was almost all based speculative/infestor buying in new developments, it is entirely an “outer ring” commuter town, and the foreclosures rate is one of the highest in the country. It’s an apples and oranges comparison

Sniglet, I know you have your tin-foil hat on pretty tight ;^) (and to your credit you put your money where your mouth is) but I just want to put some facts in front of our newer readers so they can make an informed call.

economist: That’s not the reason. If someone can’t afford to buy a house or condo to live in, it has to be rented out by an investor. One or the other. As long as the total number of dwelling units keeps up with households there is no upward pressure on rents.

True, someone must own the house that is rented. But I don’t see why owners can’t charge more for rent when more people can’t afford to buy. Consider a pool of landlords before the bubble. During the bubble, house prices have risen dramatically. The pool of landlords should be able to charge more in rent for something that is perceived to be worth more, and now they have a more captive audience of renters who can less afford to buy. If renters’ wages have not risen, they can pay a greater percentage of their income in rent, and eat out less or whatever. But likely their wages will have risen due to the bubble, as homeowners have spent more freely, and renters have demanded higher wages to keep up with rising rents.

The growth of the economy was not driven by an increase in real wealth, but by a decline in the savings rate. The country was living beyond its means, financed by foreign lenders. Both the public and private sectors.

The loss of wealth in bursting bubbles is not due to the fall in the price of the bubble asset itself, which never represented real wealth to start with, but to overconsumption by bubble asset owners (“wealth effect”) and losses by lenders whose loans were secured against the assets.

I think you’ve missed the point. We lived in a land of easy credit where paper value can easily be converted to cash. When the paper value of the assets increased, people borrowed against it. And spent it. And that fuelled the economy just like getting a plain check for the money.

When the paper value decreased, in foreclosure the lenders have to write the bad debt down. And the homeowners lose equity that they can borrow against, roll into a new home, or just make them “feel” rich enough to spend. That is the opposite effect.

That’s not the reason. If someone can’t afford to buy a house or condo to live in, it has to be rented out by an investor. One or the other. As long as the total number of dwelling units keeps up with households there is no upward pressure on rents.

The reason rents went up during the bubble is that a lot of rental stock was lost to demolition or condo conversions. But now that the new units are finished and have to be rented out, rents are falling.

economist: The only real wealth represented by the housing stock in the US is its rental value, not its aggregate market price.

And let’s keep in mind that rental value is dependent somewhat on market prices. There’s upward pressure on rents during a housing bubble, when more people can’t afford to buy. So during a housing bubble, a house’s long-term value as a rental is even less than current rents show. Rent is relatively cheap in south Florida, compared to during the peak of the bubble there.

economist: Notabull, there’s also:

3) People who can afford the payments but walk because the house is underwater and renting is cheaper.

Loads of these in California.

deejayoh: And if a 40% premium was reversed in a day, it would only mean a 28% decline in real estate prices. But of course, it won’t happen in a day – it will happen over a couple years, during which time incomes will continue to rise – mitigating some of the decline.

Talk of 50-80% declines in home prices is tin-foil hat territory, IMHO

I tend to agree with Sniglet #52 on the not-so-low probability of a > 50% drop. Economist provides a clue above. People will increasingly walk away from their mortgages as prices drop, creating a feedback loop (positive or negative I don’t know). Buying could be cheaper than renting for a long time, as strange as it sounds. Or rents could fall as house prices fall. Or homelessness could spike… All sorts of things can happen as a multi-$trillion Ponzi scheme unravels, that seemed impossible a few years ago (but not during the Great Depression).

No it’s not. An increase in house prices is not an increase in real wealth, nor is a decrease a decrease in real wealth. Real wealth is the ability to produce something or buy something.

Homeowners sell houses to each other. Thus any gain someone gets from selling their house is at the expense of another homeowner. It is impossible for everyone in the US to sell their houses, because there would be nobody to buy them. The only real wealth represented by the housing stock in the US is its rental value, not its aggregate market price.

The increase in “wealth” due to the housing bubble (or any other bubble) is a complete illusion – they are Ponzi schemes. A return to prices based on fundamentals does not represent any change in real wealth.

We reach the “affordability” point with a 25% decline, so let’s assume that housing prices are headed there. With the destruction of 25% of paper wealth, that’d erase $4.2 trillion (on paper) from homeowners and lenders net assets.

That is like $14,000 for every US citizen. What if everyone in the US got a check for $14,000 instead of $600 – imagine how that would drive our economy. Well this is the opposite.

Losses on the stock markets have wiped out about $10 trillion worldwide. Derivatives markets are 12x the paper value of stocks, but I don’t understand them. But anyway, it all came off someone’s balance sheets.

Keep in mind that the total net worth of the US in 2007 was $57 trillion, meaning we lost something like 8-12% of our national net worth.

Our economy won’t take that sort of “account deduction” without shedding some jobs and cutting some salaries, just like you trim your own expenses if you lose some money. Then, unemployed people dump their homes on the market and people getting paid less has the effect of lowering affordability, go back to step 1.

This is the sort of myopic thought which helped to drive prices into the stratosphere. It’s the idea that real estate only goes up. What makes you think that house prices can double and even triple, but they can’t be halved? Such an event would not be an apocalypse, but rather a healthy return to a more sustainable market where people can afford shelter and still live within their means. The apocalyptic event was when people were buying $800k homes when their salaries couldn’t even afford half that.

Any circumstances that see the price of an $800K house in Seattle falling to $400K would not constitute a downturn, a recession, or a depression. They’d constitute an apocalypse. If you bought such a house, you’d also need to buy guns to defend it.

House prices in Merced, California, have already fallen 50%. There is no need to defend your house, because there are so many empty houses that people can move into pretty much at will.

http://www.nytimes.com/2008/08/24/business/24house.html?em

So basically you’re claiming either that (a) Seattle is so special that only some kind of catastrophe can bring down prices 50% or (b) people in Seattle are a lot less civilized than people in Merced.

Talk of 50-80% declines in home prices is tin-foil hat territory, IMHO

That’s me. Although the tinfoil does tend to cause scalp itch sometimes, especially when I am sleeping.

Of course, anyone suggesting that the GSEs would go bust 8 years ago was considered a quack. The unthinkable seems to be happening with alarming regularity lately.

Positive loops generally latch up in one state.
Negative loops can be used to control and stabilize an otherwise inaccurate or unstable system.

When you steer your car, you steer to the left when the car is too far to the right and vice versa. Negative feedback.

I find it a little humorous that Jon suggests that “No one but an engineer is interested in a real negative feedback loop” in the context of the topics presented here. The Federal Reserve forms a feedback loop when they do the voodoo that they do. They THINK and WISH that it will be a negative feedback loop leading to a stable, on-track result. But they pay no attention whatsoever to the well known principles that make a stable system. Ever read about the Fed considering Nyquist? or Gain margin? or Phase Margin? …..nope. It’s no wonder that their efforts are so ineffectual and often counterproductive.

Whether you look at median incomes or rent vs ownership costs Puget Sound homes have no basis in reality. Prices will have fall significantly just to bring ownership costs in-line with renting.

Read back through the posts on this blog. Both of these measures have been discussed at length, and looking at the numbers indicates that at the peak, King County was overpriced by ~30-40%. They triangulate quite nicely, actually,

And if a 40% premium was reversed in a day, it would only mean a 28% decline in real estate prices. But of course, it won’t happen in a day – it will happen over a couple years, during which time incomes will continue to rise – mitigating some of the decline.

Talk of 50-80% declines in home prices is tin-foil hat territory, IMHO

x(t) = k*x’(t)

The solution to this differential equation is:
x(t) = (1/k) e^kt

If k is negative then x(t) is a decaying exponential and is a negative feedback loop.
If k is positive then x(t) is a growing expential and is a positive feedback loop.

Negative feedback loops can be as interesting as positive feedback loops.