I disagree. If I was bullish on the economy, I’d still be bearish on housing.

I also disagree that the health changes in the economy are causing housing prices to fall. Housing prices started to fall in 2006 when the economy was just fine as part of an inevitable correction, and would be falling if the economy were healthy right now, possibly at the same rate.

Housing prices are dragging down the economy, rather than the other way around.

Most people that come to this site think that debt is bad when it goes over a certain amount? What is the amount deemed to be safe? I think this would help out a lot of folks and also would help people brush up on their econ skills!

Thanks for having this great web site!

I agree 100%. I’m just trying to say that being popular and being right about the future don’t always mix. I think Maxwell Planck put it well when he said, “A scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it.”

Thus, there is a danger in judging the predictions of those who have a lot of knowledge in the subject matter but have unpopular opinions. I’m probably more guilty than anyone about being pig-headed about my beliefs. But somehow , I still believe diversity of opinions is what makes a group of people strong.

I think it’s important to keep in mind Nouriel Roubini was viewed as a “crackpot” in 2006. Now that his predictions of the housing bubble popping have come true, he’s recognized as a guru on the matter. The chief economists in other countries are even consulting him in an attempt to get their economies turned around.

Thus, it’s probably a good idea to let the bubble-newbies use their own brains to determine who is and who is not worth listening too as opposed to allowing them the power of validating and ranking the long term posters’ opinions.

If you must have a ranking system, perhaps a better idea would be to make a economics and housing test. If you can pass the test with a 95% or higher, you get a special icon to allow newbies to know you have legitimate knowledge on the subject matter. That way, a diversity of opinion can be maintained among the most knowledgeable posters and there will be no incentive to conform to the blah world of mass opinion just to get a higher ranking from a bunch of newbies who know little to nothing about the subject matter. For the newbies who feel they must be allowed to rank, keep in mind, we allow them to vote for the President of the U.S. It’s not as if they’re being left out of the loop.

The MSM media can’t duck Christmas sales figures out in January….I predict a Bear market when the profit figures come out

um, you mean, as opposed to now?

SOFTWAREENGINEER,
I was at Bellevue Square, and Pacific Center in Sea yesterday. Could not park period. Both of these locations were full just like every year. Maybe you need glasses?

I think we should stop posting about miscellaneous economic issues and stick to housing.

Judging by the posts on this thread, we’re got considerably better insight about house prices.

Actually, the two are inextricably linked. The direction of housing prices is intimately tied to what transpires in the economy. The more bullish you are for the broader economy, the more bullish you will be on housing (and vice versa).

I don’t think it is any coincidence that those who argue that Seattle area housing prices won’t see massive price declines are generally the same as those who think that Microsoft and Boeing will continue to do well, or that our recession will be rather short in duration.

My view of housing prices is mainly based on my view of the global macro-economic environment, and the massive contraction in debt that I see sweeping the planet. The “local” circumstances of the Seattle area are almost beside the point.

Judging by the posts on this thread, we’re got considerably better insight about house prices.

When it comes to China and emerging markets – there is a big difference between China and the US. The US innovates and China is playing the catch up game. So it implements what has already been implemented in the West. I am not saying that Chinese people are stupid or anything – Americans would probably do the same in the same situation. Maybe in 10-15 years time you will see lots of innovation there – for now it is producing toys for American companies using technology that was developed here years ago. As long as the pace of innovation slows down which kind of did – the US has a tremendous advantage and can build a robust economy. So it is in the interest of Chinese to make sure people buy those toys here in the US. I am sure they will be willing to forgive any printing of money and will be more than willing to loan money. But this is a conjecture. The US can always finance debt by going into further debt but trying to create a larger economy based on innovation.

I’d guess this market will stabilize when buyers feel like they’re not getting ripped off. Maybe when sellers slash prices to 2002 or 2003 levels that will help?

we won’t know until analysis of sales and comparison to previous years

The black Friday sales info are notoriously mis-leading (and innacurate). All too often retailers have reported great Friday sales but the actual final holiday sales tallies showed things weren’t nearly so rosy.

As we see holiday shoppers are buying everything and there is a sense of frenzy out there

I am very curious to hear about which stores were seeing this buying frenzy. I was at the Kirkland Costco today and was surprised at how moderate the crowds were. There was plenty of parking near the doors and it was easy to navigate around the store without running into other carts.

This is the first time, for as long as I can remember, when Costco was not jammed to the gills on a week-end. The check out clerk mentioned that things were pretty slow on Friday too.

And some people are concerned that printing $$ will tick off China…. But what can they do? They rely on US companies sending them the know how and if US consumers pull back – who will they produce the toys for? So it is in the interest of China to have a strong US – period. At least for now. They will likely cooperate on everything.

And say you do not give a bailout to say GM. Then you prove a point. Bad management, spending in a stupid way ends up in bankruptcy. But that also results in say 15% unemployment in America. So who needs that? The president will likely try to defend the old system for as long as it is possible. After bailout it is likely GM will boost CEO bonus and will spend like a lunatic on stupid things because govt rewards stupidity. But it’s all just difficult.

When it comes to debt – noone sane probably thinks that govt will pay off the debt. It will likely try to pay off some debt and take in even more debt.

I drove the I-5 through the Convention Center in light [yes, very light] traffic at 6PM, then drove to the University Mall [parking lot was half full gang]. Perhaps the morning sales were more heavy, perhaps not.

I’ve lived in Seattle all my life and can’t remember an after Thanksgiving crowd this grim in 30 years. To tell you the truth, I’ve never seen I-5 so sparce in traffic on a Friday night since I was a kid [riding around in a big 1967 Chrysler] and the population was 20% of today’s Seattle area population.

The MSM media can’t duck Christmas sales figures out in January….I predict a Bear market when the profit figures come out. I read in a consumer magazine to put off electronics purchases [like laptops] until after Christmas and the stores are desparate to unload unsold inventory. But I wouldn’t buy the VISTA product until the US Government replaces their XP computers [they haven't yet]. They’re hoping to skip over VISTA and cross their fingers the next generation O/S isn’t the same S/W compatibility monster VISTA is. I’m thinking, let the next generation O/S past VISTA prove itself for a couple years before you go running to to Circuit City for that $299 laptop….lol

I’m the type of guy that will turn 180 degrees on any issue [conservative or liberal or none of the above]; if given new facts. I’m thankful for this blog and the great job Tim and his cohorts have done digging up interesting factoids not in MSM.

On printing more cash though, its not just done with a printing press….government bonds are sold [at an interest rate the fed pays back] and if inflation occurs, bonds [like the stocks] collapse in value [no one wants them]. Why keep a 0.25% interest rate bond to be patriotic and bailout rich banks and greedy buyers? Any takers for cheap bonds out there? Nada, I thought so.

As far as Detroit not making fuel efficient cars, that’s total nonsense. All foreign and domestic car manufacturers average a horrid 20 mpg per unit sold in America [that's what we want to buy and none of bloggers are going to change the cold hard facts]; +/- 2 mpg. As gas hits $1.80/gal [definitely something to be thankful for] +/- 2 mpg isn’t gonna amount to more than a few Starbucks brews per month anyway. Can I or Detroit force Americans to start buying their 37 mpg domestic subcompacts? Hades no, if your dad bought a Chevy or a Toyota, chances are you’ve been brainwashed to buy a Chevy or a Toyota….politics and buying patterns get passed on to the next generation, whether we admit it or not.

Sometimes that’s not something to be thankful for….lol

Thanks. BTW, great blog and podcasts!

When deflation hits, and people expect prices to keep dropping, the bottom can be very deep indeed.

Yes, building materials, and costs of construction, will drop substantially. We are already seeing materials like wood, steel, and concrete come down hugely in price. Construction wages are also falling precipitously as developers force across the board rate deductions on all their subs. Keep in mind that assets can easily sell for less than the cost of production for long periods of time, until materials/labour come back into line with actual prices. This phenomena happens with commodities and manufactured goods and housing is no different.

Unemployment will clearly rise substantially, and will certainly be in excess of 10% (15% is more likely), which will keep pressure on wages as well as over-all demand.

Thanks for the great explanation. I get most of it, but I’m not quite seeing where you are getting the 80% drop in Seattle real estate prices. Historically speaking, houses have been shown to be affordable at 3 or perhaps 4 times income. So if prices drop 80% of the peak of $407K, the median priced house would be $81K.

Are you implying that we will see massive wage deflation as well as asset deflation? If so, what approximate range do you see the peak unemployment rate in the U.S. hitting during this downturn (which I take it you believe will turn into a full-blown depression)? Do you suppose deflation will also drastically lower the costs of building materials such that the cost of building new houses stays in line with depreciating existing homes?

Thanks :)

do you really see 80% depreciation?

Actually, I believe we will see a greater than 80% decline in median prices of Seattle area real-estate when we finally hit bottom.

Manhattan saw a 40% decline in average prices from the late ’80s through early ’90s, and that was without the help of a global credit bust and economic decline. As always, I refer to Japan as an example for significant price drops too (with urban areas losing 80% of value from peak ‘89 prices). What we are facing now is a credit contraction the likes of which has never been experienced, unless you go back to the 1930s. The only way we will climb out of this mess is when debt is significantly reduced, and people have started saving again. Unfortunately, the only way those things will happen is with the application of massive amounts of pain (i.e. as people/companies default, go bankrupt, etc).

I am not just talking about real-estate. The Dow will be in the sub 2000 range before it hits bottom as well. Of course, all this will take YEARS to unfold. Along the way we will undoubtedly experience nose-bleed stock rallies that last for a few months, and periods where home sales seem to be improving as another wave of bottom feeders are brought in from the side-lines hoping to get a bargain (only to see their dreams go poof when house prices tank even more).

The simple reality is that we have a higher percentage of Seattle area home-owners with little or no equity than has ever been seen. As prices decline, and the economy worsens, these equity poor homeowners become exceedingly vulnerable to default (i.e. they have no cushion should any negative economic event occur in their lives). There is just no easy way around the fact that spent the last 20 years lowering lending standards to such a point that vast numbers of home-owners can’t really afford the homes they live in. This has NOTHING to do with “sub-prime” per-se. The majority of the equity poor home-owners are actually people with good credit and prime mortgages: it’s just that they bought an $800,000 home when they really should have only been considering $400,000 ones.

I don’t see your reasoning. Let me get this straight: Print more money..and prices neutralize in Kirkland? Print money and China is happy with having dollars.

Printing money kills the dollar and ticks off our creditors (China).

Also, your increased debt = stabilization reasoning does not consider that banks issue debt (not the govt ) to consumers… and they are all on the verge of Chapter 11 due to the easy credit of the past 5 years. Do you really think they will be quick to issue loans for overpriced McMansions any time soon?

The Eastside is a mess right now….and its only going to get worse. They govt can throw these incentives out all they want to try to ease the pain, but the reality is that income does not measure up to home prices…and until those align appropriately, this mess will continue.

My unsolicitated advice to potential sellers:

Lower your price 5% a month until some idiot buys it. Prices will never be as high as they were 18 months ago…not in our lifetimes. You may think that you’re low balling yourself, but in fact, you’ll look like a genius in 5 years as prices continue to collapse. I sold my house last year, and I’ll be renting for at least 3 years while this works itself out.

House prices went up in the 70’s because real household incomes were rising. Real household incomes have been falling for years and will continue to fall for years.

If deflation starts happening I am sure they will start printing money or increasing spending rapidly.

Well, deflation is happening, and governments are increasing their spending dramatically. But this clearly isn’t working. As I said earlier, all this increased government spending isn’t anywhere near enough to compensate for the collapsed private markets. There is no clearer signal that we in the grip of major deflation than the extremely low treasury and mortgage rates.

Unfortunately, the world’s government’s really don’t have the option of just “printing” money. If the US government began actually printing cashh in any significant quantity, the dollar would become worthless almost overnight as everyone rushed for safety. T-bill rates would skyrocket to the moon, and the US government would be unable to borrow anymore. There would be no delayed lag effect as in ages past, when previous governments have run the printing presses (e.g. the Weimar Republic, France in the 1700s, etc). All this would happen almost immediately.

Printing presses (and their electronic equivalents) are like an aresenal of nuclear missiles during the cold war. In theory, the weapons can be used, but in reality no leader will ever press the button that initiates global thermonuclear war.

If increasing national debt leads to inflation, at what point does that inflation overwhelm deflation?

Actually, an increase in national debt is DEFLATIONARY. It sucks money out of the rest of the economy, causing asset prices to decline even more (i.e. “deflation”).

The key thing to keep in mind is that debt is deflationary, and is not the same thing as printing money. At some point debt has to be repaid. Sure, increasing debt can also increase the money supply, but it also will lead to a contraction as well (i.e. when the debt is repaid). If the government was actually just “printing” money, instead of borrowing it, then I would agree we might be headed to a period of high inflation. But this is not what is happening.

Also, it is important to keep in mind that all this increased government spending (and the debt to back it) is a drop in the bucket when compared to the amount of debt creation which has VANISHED from the private sector. The global credit markets have been operating in the tens of trillions of dollars range for years ($40 to $60 trillion per annum), and this spigot of debt creation has virtually ceased to exist over the last 10 months. All the increased stimulus/spending of the world’s governments doesn’t come close to making the difference.

Consequently, this leads us towards deflation, since the velocity of money is contracting at a furious rate.

Even the people who are railing on banks to start lending more completely miss the point. As a matter of fact, the world’s banks have INCREASED their lending dramatically this year. The problem, however, is that it just doesn’t make up for the loss of the private credit markets. But this phenomena is very opaque, and difficult for people to understand.

A given bank may actually be initiating a lower total volume of loans this year, but a FAR higher percentage of those loans are staying on the bank’s books. Over the last 20 years banks have begun to HEAVILY rely on the private credit markets to goose their lending capacity. A bank may lend $10 million to a company wanting to expand it’s manufacturing capacity, and then turn right around and re-sell that loan to mutual funds on the private market. In this way the bank becomes little more than a retailer, making a commission for the initial under-writing and on-going servicing of the loan. The actual loan itself, however, is owned by a 3rd party, and isn’t on the bank’s books at all.

Many companies became reliant on going directly to the private credit markets themseles, and side-stepping banks altogether, to get credit. Many firms became reliant on constantly selling their recievables as asset backed securities, and continuously rolling over that debt with new recievables every month. Unfortunately, this has almost completely ceased to happen over the last year, driving borrowing costs for these firms up enormously as they now have to go directly through banks (which always charged higher rates than the private markets).

In the last year, however, banks have had to place almost all the loans they write on their own books. The total loans the banks have on their books is increasing dramatically, but the actual value of the the loans that they issue is down.

This is why we are facing deflation. The global credit markets are MASSIVE, and the virtual disappearance of them is a problem that no amount of stimulus or government spending can replace. The US government could undertake another $5 trillion in stimulus spending and it still won’t help.

So I am sure the policy will go along the lines – substantially increasing govt spending, even more debt, more printing money. And maybe if they make a mistake and get inflation out of hand or the $$ value starts evaporating – then maybe they will try to defend the old system less. For now I am sure they will go into the mode of printing and bailing out. This could help stabilize real estate prices or may even make them go up if people sniff that the $$ is worthless.

Sniglet: We are entering a period of severe deflation that will last for YEARS and will see the dollar appreciate against virtually every other asset there is (commodities, real-estate, stocks, foreign currencies, etc).

If increasing national debt leads to inflation, at what point does that inflation overwhelm deflation? If the bailouts for Bush’s buds hit $10 trillion on Monday and $15 trillion on Wednesday, would you still be saying that we’ll see deflation for years? Seems to me that gov’t is trying real hard to create inflation. Can’t they just borrow enough fast enough to create it?

But it is the Chinese or other countries that are loaning the money – they are at risk here and maybe Americans who hod the debt because in the future the govt may simply print the money or start inflation to help combat any crisis. So people who loan money should be afraid. And the govt has really good HP printing machines – they are very efficient at printing new money. They can also do electronic transfers in order to conserve the environment. So the US govt will do everything to make sure the debt stays managable.

The way to make the system keep going the way it is – and Barrack Obama will want to make sure to keep people happy – is to bail out everybody and boost spending like crazy. This way you get rid of deflation. You keep people in jobs and hence the govt revenue does not go down.

And yes by doing a total bailout you do encourage even more reckless management and reckless spending. Maybe GM after this bailout will produce even less efficient cars that churn 1 gallon for every 10 miles.

But – the alternative is total collapse of the country – a meltdown. Massive unemployment, soup kitchens and depression and not a recession. So it is for the good of all people to make sure everybody gets a bailout ASAP. You inflate the market even more.

If the govt starts the presses going – the hous prices may even soon stabilize or go up.

The Chinese govt needs to quickly step in also and give all the money they were hoarding for such a long time to the US so that the US can prop its economy ASAP.

http://news.yahoo.com/s/ap/20081128/ap_on_bi_ge/meltdown_coming_soon

I see a lot of predictions of deflation and some predictions of inflation. It would help me to understand the situation better if some of you would spell out a bit more of the mechanics behind your predictions so that I can get a better handle on how you perceive the big picture. Or at least link me to a good article or website that represents your views fairly closely.

That way maybe I can perhaps ask a few relevant questions and get to understand your viewpoints a little better.

Thanks. :)

By the way, John Paulson – the hedge fund guy who made about $5 billion last year – shorting the LCDX and MBS market was of a contrarian view as well. He was down nearly 50% before going up 350%.

Long term view Sniglet – although we agree on Real Estate prices in this rat hole of an area. Hopefully, the dollar will hold up so we can pay cash for out next home! I’m looking in Gig Harbor and the whole place is for sale. All these poor families living in hyper inflated homes. I am praying for the collapse so that I can start buying property with my hard earned money. Cash – NO MORTGAGE. The mortgage market is slavery for a phony dream. I’m not dumping my hard earned money – like most of these phony real estate agents want you to.

I’m in awe of seeing New York real estate prices here. People here make approximately 50-80% less than New Yorkers, but pay just a little less (about 20% less) for Real Estate. NUTS!

“So, yesterday the media finally added up all the money and guarantees promised in all the alphabet soup programs in the past year. The tally? More than $7.7 trillion! And this morning we learn we get to add another $800 billion for a new total of $8.5 trillion!

$8.5 trillion! How much money is that? Well, the 7th Day Economists say, “it’s only a little more that half a year’s GDP!”

And here’s my response to that: Yes, but let’s get out our calculators, shall we? Let’s divide $8.5 trillion by the size of the entire population of the United States…

$8.5 trillion divided by 305,160,073 (current as of today) = $27,854 FOR EVERY MAN, WOMAN AND CHILD IN THE UNITED STATES.

For my family of four? That’s $111,416! Let me ask you this? Can the average family support that debt? If the answer is no, where do you think this all ends? But wait, that’s just the recent debts and obligations.

And before I get too far, I want to remind people that when it comes to comparisons to GDP, my bull**** flag is flying a mile high! WHAT DOES DEBT HAVE TO DO WITH GDP ANYWAY? The answer is NOT A "golly" THING! There is NO relationship, no tie whatsoever between debts and GDP and to make that comparison is pure ALICE IN WONDERLAND.

Here’s the same Alice in Wonderland argument, but in a different way: Let’s say that you live in a neighborhood of 100 homes. You and your spouse earn $100K per year (which is way above average). In addition to the $500k you owe on your house, you owe another $1,000,000 on credit cards! But you say, “in comparison to the GDP of my entire neighborhood, that $1 million is just a drop in the bucket so it doesn’t matter!

HUH? You owe a million bucks in unsecured debt but only earn one tenth that? How does that compare to the output of your neighborhood? It doesn’t!

……. Ah ha! Foreigners hold nearly SIX TIMES the debt as our own “Federal” banks – niiice…..

Now it’s time to talk about the future obligations of Medicare and Social Security. Before I get into the numbers, YES, WE CAN simply eliminate those programs and make them go away. WILL WE? YES, WE CAN cut our military spending in half to get back within some level of sanity… after all, we do spend MORE MONEY ON OUR MILITARY THAN THE REST OF THE WORLD COMBINED. But WILL WE? And again, who is the insane one in this fantasy that unfortunately is no fantasy at all?

Conservatively our own government admits that the obligations of Medicare and Social Security add up to about $56 TRILLION with Social Security being the much smaller problem of the two at “only” about $10 Trillion. Heck, President Bush spent more than $13 trillion with one signature when he signed Medicare Part D into law! By the way, when others calculate these obligations, they come up with numbers as high as $100 trillion, but let’s stick to the more conservative $56 trillion number, okay?

Now we’re talking some serious numbers, 56 followed by twelve zeros. Do the math, that adds another $183,510 for every man, woman, and child in the United States!!

Add that figure to the previous and now we are up to $246,332 for every person or $985,328 for my family of four.

…………….

DERIVATIVES:

Three decades ago modern derivatives did not exist. By 2006 the notional value of the world’s derivatives had grown to over $500 trillion and the highest report just prior to the latest collapse put the world’s notional value of derivatives at an astounding $1.4 QUADRILLION.

Now, just for comparison, the total output of all men and women of the entire globe last year was a GDP of a little over $60 trillion. $1.4 quadrillion is approximately 23 times global GDP! This is a very squishy number and is most likely much smaller now that the financial system is imploding, but it is still an unfathomably large number, in the many hundreds of trillions.”

Reading this post and checking some of the data really made me come to the conclusion that we as a nation are in deep, deep do-do. Either we default on the debt or we pay it and based on the numbers I don’t see how we pay it.

A good friend just went in for surgery and it reminds me to REMIND ALL MY FELLOW BLOGGERS to keep your health in check.

Keep up on your annual physical!

http://www.youtube.com/watch?v=xHKTE75dgE4

I meant to say, “combating deflation.”

Happy Thanksgiving to all my SB brethren (even you, Jonness). I’m pretty certain T-day 2009 is going to be very different than what you observed today (and I’m not talking about the SeaChickens.)

You need to understand that the .gov is not “printing” money in the quantities needed to come anywhere near combating inflation. It is impossible.

All the flaws in your analysis descend from this misunderstanding.

We are in the throes of the worst deflation in several hundred years and the US.gov is powerless to stop it.

China to delay aircraft delivery -report
Thu Nov 27, 2008 9:40pm EST

HONG KONG, Nov 28 (Reuters) – The Chinese government will ask mainland airlines to delay delivery of new aircraft and may stop approvals of new purchases of aircraft amid a slowdown in air traffic demand, the South China Morning Post reported on Friday.

The Civil Aviation Administration of China (CAAC) is preparing to ask carriers to negotiate with aircraft leasing firms and makers such as Boeing (BA.N: Quote, Profile, Research, Stock Buzz) and Airbus (EAD.PA: Quote, Profile, Research, Stock Buzz) on delaying delivery of new orders, the newspaper said, quoting Xiamen Airlines general manager Hu Bin.

“A meeting has been called by CAAC at the beginning of next month to discuss an adjustment of the delivery schedule,” Hu said.

“The market is flooded with excess supply, resulting in ruthless price cuts in airfares and shrinking sales,”

This graph shows the CSI for a 120 year period.

http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

Housing prices went up, even adjusted for inflation during the 1970s. I think that is what it will be like during the next few years: high inflation and unemployment.

Increasing real wages are not essential, because you pay back a loan with inflated dollars. Interest rates are high, but that means the deduction is high as well and becomes very significant. We haven’t seen them recently, but mortgages can be indexed to have payments that rise over time with inflation.

That fact, though, is that the economy has been living on borrowed time for a while, and now we’re getting a scare. It’s like the 400lb man who’s been gorging on cheeseburgers and milkshakes for 20 years, and just had a serious heart attack. You have basically two choices: try to clean up your life and live a lot longer, or get patched up and continue what you were doing before. Except in this case, we’re going for option 3: start injecting ourselves with speed at the same time, so we can keep partying again immediately as we “just get back to normal”.

FYI, enormous crippling national debt is bad, and the country cannot just increase it as they please (although they will act like they can). At some point we’ll have currency collapse, and it could happen sooner than anyone imagines, and when it happens it will be bad times in the USofA. Also, for reference, over 50% of the national debt is now owed to foreign individuals and governments; but given your previous commentary, I doubt you grasp the significance. I can only hope that for the good of the country, you don’t vote.