Posted by: Timothy Ellis (The Tim)

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

150 responses to “Reader Question: Worried About Goldman’s -22150 Forecast”

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  1. Hu Flung Pu

    By Scotsman @ 16:

    RE: Hu Flung Pu @ 9

    We are indeed different from Japan in many ways, and the reasons for our decline are also different- but the end result will be the same. Deflation, led by bursting asset bubbles, declining productivity, outsourcing of high paying jobs, higher taxes and falling government entitlements will be around for some time.

    I don’t think the end result will be the same in magnitude. I doubt our bust will be as bad as Japan’s.

    First, the magnitude of Japan’s bubble was 2.6x ours. That is, if we scale the peak of our bubble [in terms of (RE Values + Stock Market)/GDP] at 100 in 2007, Japan’s was at 260 in 1989. The grounds of Tokyo’s Royal Palace were valued at more than all of the real estate in California in 1989. Japan’s stock market traded at almost 80x peak earnings. Think about that for a moment.

    The reason I point this out is that the relative size of Japan’s bubble trumps every other comparison between their post-bubble experience and however ours turns out. It’s comparing apples and steaks.

    In addition, over 95% of Japan’s bubble debt was held inside Japan, so Japan had to bear the brunt of almost all of the defaults on corporate debt. In contrast, 27% of the US’s debt – of all stripes – is held outside the U.S. So, losses on the U.S.’s bad debts will be far more spread out to the rest of the world than was Japan’s. (That is, we don’t have to eat all of our losses like Japan did.)

    Now, the one thing Japan had going for it that we don’t is a high savings rate. So, that’s one in Japan’s favor. But… the relative size of Japan’s bubble (and implied losses) as well as the distribution of those losses (almost all inside Japan) make an astronomical difference in how bad things are going to be for the US going forward (relative to Japan’s lost two decades).

    Now, I believe we will continue to see some deflation over the next few years here in the U.S. And we’re not going to see much growth over the next 5-10 years. It’s going to be ugly – make no mistake. But… I seriously doubt that we’ll see two decades of deflation like Japan did. Japan was just FAR worse off than we are (despite how weak our own situation is) when all of the relevant factors are weighed.

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  2. Pegasus

    Hu @ 101 Me thinks you underestimate the impact of debt per citizen in the US versus Japan. In Japan the citizens were awash with cash as they entered their collapse. They are now just entering the phase where foreign investment is important. We don’t have the luxury of doing stupid things like they did for twenty years as we are already leveraged to the hilt. We are entirely dependent on foreign investment to survive and our foreign buyers know this and are using it to their advantage. I am sure they won’t take advantage of us while we are struggling to survive(wink, wink). The world and our country will be far different within ten years unless we go to war. Then we have a fair chance of regaining the upper hand. How many will have to die remains to be seen. Certainly more than in Vietnam, Iraq or Afghanistan. Maybe World War II numbers?

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  3. Ira Sacharoff

    RE: EconE @ 100
    ” Smarmy Industry Charlatans” would be such a cool band name.

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  4. Pegasus

    EconE @ 100 WOW…You and patient are correct in a way. The only thing you forgot is that you could pay Tim to advertise here no matter what your agenda and I have never seen Tim censor discourse here other than a few board trolls that post under multiple ID’s. Knowing who advertises here or is tied to real estate does not seem to make any difference here. I can testify to the fact that for months I have attacked the real estate pros that post here like Kary, Ray and others(mainly Kary) and Tim has allowed these attacks to go on. I have waited anticipating some sort of censure but it has never come(yet haha). Tim truly runs an open and fair forum here and I respect that. In order to equalize the playing field against the paying advertisers here I suggest you equal it in donations to The Tim. That way you can feel that you are always on equal footing here when you post.

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  5. Sniglet

    I don’t think the end result will be the same in magnitude.

    Actually, I believe the end-result in America will be far worse than what occured in Japan over the last 20 years. The private and public debt ratios in America are far in excess of what they were in Japan at the outset of their 20 year recession. It is the massive contraction of debt which is unleashingly simply unstoppable forces of deflation.

    Just look at how the M3 money supply has been contracting lately, which is completely unprecedented. Japan never once saw their total money supply contract during the last 20 years, yet this is EXACTLY what we are seeing in America today. The irony is that the more debt the US government creates in an attempt to stave off deflation, the more they speed it up.

    Worse, if the US ever decided to monetize the debt by buying up T-bills en-masse, it would lead to deflation on a massive scale as the value of T-bills would collapse

    Robert Prechter sums it up this way.

    Even if the Fed were to monetize every dime of currently outstanding, dollar-denominated debt, it would create no net inflation. The money-plus-credit supply would be the same. And price levels – especially for investments – are based on the total of monetary assets, not just base money.

    Even so, there is no way that the Fed will buy up the entire world’s stock of lousy IOUs. It has always wanted pristine assets on its books. Remember, it didn’t buy Fannie and Freddie IOUs until it got the Treasury to guarantee them.

    Then there is the so-called moral hazard – not that the Fed cares about morality – meaning that if the Fed were to begin buying everyone’s IOUs, people would immediately issue more IOUs as fast as the could and sell them to the Fed. I coudln’t keep up with the volume.

    But these scenarios are fantasies. In reality, self-preservation will enventually motivagte the Fed just as it morivates every other institution. Buying too many worthless assets would cause the Fed’s self-destruction, and I think it will balk at going that far.

    If the government tried to [inflate by issuing massive amounts of Treasury bonds to the Fed], bond holders would get spooked, and interest rates would go up and stay ahead of the printing. At the same time, other credit prices – municipal, corporate and consumer – would implode. When the supply of credit is far bigger than the supply of money – and it is by a huge margin – the value of old credit can contract faster than new bonds can be printerd. The net result would still be deflation.

    In short, it’s absolutely true that things are different in the US from Japan, and this is precisely why deflation here will be far worse. Not that life will be a bed of roses in other nations. Credit bubbles have been blowing everywhere from Canada to China, and deflation will reign supreme almost everywhere (except in the nations where their debt was largely denominated in foreign currencies).

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  6. Pegasus

    Snig @ 105 Excellent! You have come a long way and I agree with most of what you say(this time). For your reward we are going to lock you in a room for the weekend with pfft who hears no evil, speaks no evil and sees no evil because Krugman the administration ho says so. Good luck. Its going to be a long weekend!

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  7. EconE

    RE: Pegasus @ 104

    I have donated.

    I suspect that Tim has a better understanding of my donation now.

    I’m sure all the realtors have read or watched “The Secret”.

    That s#it is childs play.

    Synanon, Bit#hes!

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  8. patient

    RE: EconE @ 100
    “Don’t you miss the *old* Seattle Bubble?”

    I do. Mostly because there was so much less noise in the comments and I miss prominent commenters like Eleua and unwavering attack dogs like Synthetik. On the other hand the frequency and quality of The Tim’s posts have gone up so it’s a mixed bag.

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  9. Scotsman

    RE: Pegasus @ 106

    Cruel and unnecessary punishment!

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  10. Scotsman

    RE: Hu Flung Pu @ 101

    I think we’ll end up suffering just as much as Japan because:

    1.) we don’t have the underlying internal savings to rely on, our debt must be funded from outside interests.

    2.) Our cumulative debt, not just government debt, is historically huge.

    3.) We have a growing population, not a decreasing population, so the pressure on federal government funding for entitlements will be increasing, not stabilizing or decreasing.

    4.) Our deficit funding will never be able to equal Japan’s- our government(s) will have to cut back participation in GNP by reducing entitlements and pensions which will in turn reduce consumer spending, feeding an ongoing downward cycle.

    5.) For the above reasons, our deflationary spiral once set in motion will be much harder to break. We’ve already reached the point where each new dollar of “stimulus” is actually a net drag on the economy.

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  11. mike

    1. all forecasts are inaccurate.
    22% drop in 2 years is a forecast. all forecasts have a margin of error. some large.

    2. ignore the forecast. or at least de-emphasize it.
    even if it was accurate(it’s not), you said you plan to stay for 10+ years.
    so you should be interested in a 10 year forecast, not a 2 year forecast.
    also 10 year forecasts are even less accurate than 2 year forecasts.
    my point? you have no idea what the future will be in 10 years.
    place less emphasis on the forecast.

    3. focus on what you know today
    a) is your mortgage/housing costs easily affordable based on your income.
    b) is your mortgage/housing costs comparable to rent payments
    c) is this a place you can live in for 10 to 20 years?

    3a) will ensure a high likelihood your mortgage payments can be paid. over time your mortgage should become easier to pay as you get raises over the next 30 years.

    3b) will help make it easier to keep paying the mortgage if your house price drops 22% (over the next 2 years) but rents remain stable. why? because your mortgage/housing costs will still be close to rent. it just means your house is undervalued (prices tend to over correct on the downside). no big deal if you plan to live there for 10 years as you have time for prices to revert to the mean.

    if you are unlucky and see a 22% drop in 2 years in your home price and a 22% drop in rent over the same time(unlikely), you could not have easily predicted this since you would have to have sided with the hyperbolic perma bears on this site.

    so to summarize. it’s foolish to make your decision on a 2 year forecast that may or may not be right. you need to know what’s happening in 10 years time. but no one knows what’s happening in 10 years (such forecasts are incredibly inaccurate). so you have to base your decision on what you know today. can you pay the mortgage? is the house priced fairly with respect to comps and rent? and do you really want to stay there for a long time? if the answer is yes to all 3, you’re in a decent position and you’ve done all that you can to protect yourself. if anything bad happens you have small consolation in knowing you controlled all the variables you can control. everything else was a matter of (bad) luck.

    the key is that your housing costs are close to rent. people get in trouble when this is not true.

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  12. Kary L. Krismer

    By patient @ 96:

    There’s a string of commenters here who make their living from homes being sold in this area, escrow, lenders, agents. Sorry but I’ll put more weight on GS than any of them. When your paycheck depends on transactions it’s very hard to be objective even if you want to.

    I don’t recall any of us making a prediction of the future, or telling you what to do, but rather than put any weight on what we say you put weight on the questionable opinion of a questionable entity.

    I wonder how much money you spend on psychics? I can only assume that when your car breaks down, you go to a psychic. When you get sick, you go to a psychic. When you have a legal issue, you go to a psychic. Because if you went to an auto mechanic, doctor or lawyer, their paycheck would depend on their being objective, and rather than rely on what they say, you’d go to someone that obviously had no credibility at all.

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  13. Kary L. Krismer

    By Pegasus @ 104:

    I have attacked the real estate pros that post here like Kary, Ray and others(mainly Kary) and Tim has allowed these attacks to go on. I have waited anticipating some sort of censure but it has never come(yet haha). Tim truly runs an open and fair forum here and I respect that. In order to equalize the playing field against the paying advertisers here I suggest you equal it in donations to The Tim. That way you can feel that you are always on equal footing here when you post.

    Tim is fortunate in that most of the debate here is civil, and most of the arguments are actually debates of real issues, not just personal attacks. It makes his job relatively easy (or else he’s very heavy handed in a way that is completely invisible.)

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  14. Kary L. Krismer

    By EconE @ 107:

    I’m sure all the realtors have read or watched “The Secret”.

    Nope. And other than the fact that I know a lot of agents apparently have, I don’t know what it is about.

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  15. Kary L. Krismer

    By mike @ 111:

    c) is this a place you can live in for 10 to 20 years?

    As I recall, the place at issue is rather small, so that might be a hard test to meet. If it was 1000 square feet, and no more than one kid, that would be possible (at least for me), but under 800 square, that would be tough.

    One option though in that area would be rental, but if that’s the plan, they should be sure they want to deal with the hassle of renting.

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  16. Hu Flung Pu

    By Sniglet @ 105:

    I don�t think the end result will be the same in magnitude.

    Actually, I believe the end-result in America will be far worse than what occured in Japan over the last 20 years. The private and public debt ratios in America are far in excess of what they were in Japan at the outset of their 20 year recession. It is the massive contraction of debt which is unleashingly simply unstoppable forces of deflation.

    Just look at how the M3 money supply has been contracting lately, which is completely unprecedented. Japan never once saw their total money supply contract during the last 20 years, yet this is EXACTLY what we are seeing in America today. The irony is that the more debt the US government creates in an attempt to stave off deflation, the more they speed it up.

    Worse, if the US ever decided to monetize the debt by buying up T-bills en-masse, it would lead to deflation on a massive scale as the value of T-bills would collapse.

    One way to think about the US debt problem is looking at it from a balance sheet perspective (using 4Q09 numbers):

    Liabilities = $14.6 trillion in Federal Debt*
    $ 2.3 trillion in State and Local Debt
    $18.1 trillion in Private Debt**

    Equity = $37.5 trillion (Household Net Worth)

    [2010 GDP will be roughly $14.5 trillion. Since YE09 both Equity and Liabilities have increased by $2-3 trillion. That is, the government has taken on more debt, but asset markets have also improved. I don't expect the latter to last.]

    * Excludes Social Security and Medicare because we have total control over how they get financed. That is, we can choose to cut benefits or increase taxes if we want to.
    ** This is NET private debt, which excludes the double-counting of certain financial debt (e.g., securitizations) that we see in the oft-seen chart that puts gross US debt at 350% of GDP (actually, total debt is closer to 250% of GDP)

    So, what we have is an entity with a debt-to-equity ratio of about 1 to 1. Not ideal, mind you. But not about to keel over, either. For perspective, recall that most LBOs take on debt-to-equity ratios of 4 to 1. The average debt-to-equity ratio for companies in the US is .5 to 1; that is, there is twice as much equity as debt. So, the US is leveraged more than a truly healthy company should be, but well below the levels of a company that’s just gone through an LBO. Moreover, because of low interest rates, overall debt service in the U.S. (public and private) is not out of control from a historical perspective (although admittedly that could change!). So, if I’m a Director of US, Inc., I’m definitely concerned. But I’m not about to jump out of the window.

    Also, as you point out, US, Inc. can print money if it wants to (at a cost, of course!). And, in fact, we’ve already dipped our feet into the debt monetization waters. And communicated to the markets that there might be more coming, and what’s happened… rates have stayed low. Why? Because we’re the best house on a very bad block where monetary policy is concerned. Sad, but true. Also very relevant.

    So, despite our economic shortcomings – and the pain we have ahead of us – I’d MUCH rather be in the US’s shoes right now than in Japan’s in 1989. Recall – just to put it into a different perspective – that US assets were overvalued (relative to long-term fair value) by about 65% in aggregate at the 2007 peak. That’s a big overvaluation and caused a major misallocation of capital and is going to lead to serious problems, but… Japan’s assets were overvalued by over 400%, with all that implies. The two bubbles are simply not comparable. Not even close. As tough as things are going to be over the next decade, I’m glad we’re not Japan in 1989.

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  17. Hu Flung Pu

    By Scotsman @ 110:

    RE: Hu Flung Pu @ 101

    I think we’ll end up suffering just as much as Japan because:

    1.) we don’t have the underlying internal savings to rely on, our debt must be funded from outside interests.

    2.) Our cumulative debt, not just government debt, is historically huge.

    3.) We have a growing population, not a decreasing population, so the pressure on federal government funding for entitlements will be increasing, not stabilizing or decreasing.

    4.) Our deficit funding will never be able to equal Japan’s- our government(s) will have to cut back participation in GNP by reducing entitlements and pensions which will in turn reduce consumer spending, feeding an ongoing downward cycle.

    5.) For the above reasons, our deflationary spiral once set in motion will be much harder to break. We’ve already reached the point where each new dollar of “stimulus” is actually a net drag on the economy.

    See post immediately above. I agree with points 1-4. But they don’t necessarily lead to the conclusion in Point 5, at least when we’re having a discussion about how we will fare RELATIVE to Japan. No one wants to acknowledge that the relative size of our asset bubbles is of immense importance. Overvaluation of 65% is NOTHING compared to overvaluation of 400%+. Just think about the relative return to long-term trends from those two different levels… they’re not comparable. It’s like comparing climbing Mount Adams (a very high peak, at 12,000 feet, which would be a tough climb) with climbing Mount Everest at 29,000 feet. They’re both VERY high… but not comparable in terms of how you’d approach climbing them.

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  18. David Losh

    RE: Hu Flung Pu @ 116

    Well, yes, that is a lot of pu slinging.

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  19. k2000k

    RE: Scotsman @ 110

    I don’t see how number 3 can be negative. I would say a decreasing population would put far more strain on society as there is an increase in geriatrics withdrawing money from social security and Medicaid but fewer workers putting money into it. Not only that, but with a decreasing population you will eventually not have the tax base needed to support existing infrastructure. That is a major obstacle many parts of Europe, Japan, and China will be facing in the coming decades.

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  20. Hu Flung Pu

    By David Losh @ 118:

    RE: Hu Flung Pu @ 116

    Well, yes, that is a lot of pu slinging.

    Indeed, I realize it’s a lot more fun (and convenient for debate) when we can ignore the tedium of “numbers” and “math.”

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  21. David Losh

    RE: Kary L. Krismer @ 112RE: EconE @ 107RE: EconE @ 100RE: EconE @ 57

    I’m never opposed to making predictions about Real Estate. Real Estate is the safest, most secure, investment you can make. Just because a bunch of people entered Real Estate sales in the past fifteen years, doesn’t change the fundamentals.

    More wealth is made, today, by owning Real Estate than anything else. Disprove that. While all the day traders are hopping around about the paper secured by Real Estates, those people who own, control, and utilize the dirt are the only true players in the market place today.

    Real Estate, based a bubble, put the majority of dirt into the hands of banks. People willingly signed over a vast amount of dirt, globally, and are paying banks for that privilege.

    A Real Estate doesn’t change. The Real Estate market doesn’t change. While other things may fluctuate, the core value of a Real Estate is it’s return on the investment.

    The only way you buy, is to pay it off, because that’s the only way to build equity. That never changes.

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  22. patient

    RE: Kary L. Krismer @ 112 – Psychics, really? You can do a bit better than 5 year old level of comments. I would have expected at least 10 year old level.

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  23. David Losh

    RE: Hu Flung Pu @ 120

    Ah, the math, yes by all means let’s focus on the number magic.

    As I just put over on the open thread Japan is a post war reconstruction that we blew the heck out of with atomic bombs. Run those numbers for me.

    The premise of the Case Schiller Index, that is widely regarded here on the Seattle Bubble, is market psychology.

    Rather than bore you with any form of reality, let’s just say that Japan is a rock, surrounded by water, that we buy stuff from. They can go back to being a protectionist country, close borders, and be a direct conduit to God at any time, and I’m not sure any one would notice.

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  24. Kary L. Krismer

    By patient @ 122:

    RE: Psychics, really? You can do a bit better than 5 year old level of comments. I would have expected at least 10 year old level.

    And I would expect you to realize that everyone you deal with in business transactions is motivated by their own self-interest, and not think that’s somehow special to those in the real estate business.

    But I used psychics for a reason. The stuff that spews out of a psychic’s mouth has no more credibility than ANY study of what the world is going to be like in two years on ANY topic. The gullibility of people to read this type of BS and believe it never ceases to amaze me.

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  25. Hu Flung Pu

    By David Losh @ 123:

    RE: Hu Flung Pu @ 120

    Ah, the math, yes by all means let’s focus on the number magic.

    As I just put over on the open thread Japan is a post war reconstruction that we blew the heck out of with atomic bombs. Run those numbers for me.

    The premise of the Case Schiller Index, that is widely regarded here on the Seattle Bubble, is market psychology.

    Rather than bore you with any form of reality, let’s just say that Japan is a rock, surrounded by water, that we buy stuff from. They can go back to being a protectionist country, close borders, and be a direct conduit to God at any time, and I’m not sure any one would notice.

    OK, gotcha… still no numbers from you and you’re not going to actually refute the numbers I’ve provided. “Rather than bore you with any form of reality”… Pot, meet Kettle.

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  26. David Losh

    RE: Hu Flung Pu @ 125

    He Hu Flung Pu, no numbers are required. The United States, for a vast number of reasons, has a foot print all over the world. That’s what makes it a problem.

    Japan can close borders, we can’t. We depend on the world, as much as the world depends on us. Our problem is compounded.

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  27. patient

    RE: Kary L. Krismer @ 124

    “And I would expect you to realize that everyone you deal with in business transactions is motivated by their own self-interest, and not think that’s somehow special to those in the real estate business.”

    And that’s exactly what I refered to. The self-interrest for local real-estate businesses is strong and obvious where as GS self-interrest to specifically lie about Seattles depreciation in a nation wide analyzes is just not there. Thereby I put a lot more weight on GS analyzes than of any local escrow, lender or agents opinion on Seattles future depreciation. You being a local agent understandably have an issue with that so have a go at it but to compare GS data based analyzes with a phsychic makes your case infinitely weaker.

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  28. Kary L. Krismer

    RE: patient @ 127 – But that’s where you’re wrong. If you were going to follow your logic, you would accept the advice of the psychic over your doctor because the doctor has a self-interest in what he tells you.

    Also, you’re assuming that the GS study has any validity at all, and that therefore it is somehow of more validity than other sources. If you understand that all of these predictions are just BS you wouldn’t put them ahead or below anything else. You would totally ignore them.

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  29. Hu Flung Pu

    By David Losh @ 126:

    RE: Hu Flung Pu @ 125

    He Hu Flung Pu, no numbers are required. The United States, for a vast number of reasons, has a foot print all over the world. That’s what makes it a problem.

    Japan can close borders, we can’t. We depend on the world, as much as the world depends on us. Our problem is compounded.

    Ah, “no numbers are required.” How convenient. Look, to be clear (again), I’m not saying that the US doesn’t face major problems. MAJOR problems. And, in several ways, we are worse off than Japan coming out of our respective bubbles. No debate there. Our economic future is pretty sketchy. But, the “numbers” are important because the RELATIVE size and impact of these differences is critical. My point is that despite the problems we face… the fact that Japan’s bubble was several magnitudes worse than ours is by far the most important distinction where future deflation and other related economic issues are concerned. You’re arguing that because we’ve got a broken arm, a broken knee and very high blood pressure that we’re going to go down the same road as Japan. I’m saying that Japan had the equivalent of a major heart attack requiring quadruple bypass surgery. They’re not directly comparable, although both are very unhealthy situations. I’d much rather be us… although I’m very concerned about the situation in which we find ourselves.

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  30. patient

    RE: Kary L. Krismer @ 128 – Weak Kary and wrong. Your not making sense, at all.

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  31. David Losh

    RE: Hu Flung Pu @ 129

    He Hu Flung Pu should consider change of name.

    http://jutiagroup.com/2010/06/08/will-japan-be-the-next-debt-crisis/

    It’s really simple. At the end of two decades Japan has yet to recover. They can default, no one would care, they would be bailed out. The United States does not have that luxury.

    We will have to address our debt issues, both public, and private. Given your numbers, and I’m not disputing those, we have the ability to resolve our debt. In our case we have to.

    Let’s pretend that the United States throws up it’s hands, says they just can’t, or won’t, pay down the deficit. What happens?

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  32. Kary L. Krismer

    RE: patient @ 130 – How can you know that I am wrong if you don’t understand what I’m saying?

    I posted a link to two studies above that thought Seattle would go up slightly over the time frame. I think all three studies are BS. Which of the three are you going to believe, and why?

    BTW, FYI I was calling out NAR on their predictions even prior to our peak.

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  33. Hu Flung Pu

    By David Losh @ 131:

    RE: Hu Flung Pu @ 129

    He Hu Flung Pu should consider change of name.

    http://jutiagroup.com/2010/06/08/will-japan-be-the-next-debt-crisis/

    It’s really simple. At the end of two decades Japan has yet to recover. They can default, no one would care, they would be bailed out. The United States does not have that luxury.

    We will have to address our debt issues, both public, and private. Given your numbers, and I’m not disputing those, we have the ability to resolve our debt. In our case we have to.

    Let’s pretend that the United States throws up it’s hands, says they just can’t, or won’t, pay down the deficit. What happens?

    No disagreement on any of this. As to your last question, paying down the deficit… it’s not going to happen anytime soon. Clearly, a lot of our debt will be monetized. That’s just the way it’s going to go down. (The vast majority of it we’re capable of paying down if we so choose, but with a lot of pain.) And the foreign holders of our debt will moan and groan… but they’ll take it (well, within reason) because they have no other choice. (Who would have thought that rates would be so low and that our currency would be as strong as it is given the sh*t we’ve thrown at the rest of the world? Personally, I’m surprised.) It’s kind of like that old joke about the two guys in the woods who come across a bear and one says to the other, “Stay perfectly still,” and the other guy turns around and runs. The first guys also turns around and runs and yells, “The bear is faster than us. Why are you running?” And the second guy says, “I don’t have to outrun the bear; I only have to outrun you.” The US – despite all its problems – remains one of the least bad places for investment. We suck. But almost everyone else sucks worse. So, we’ll experience pain. No doubt. But nothing like Japan has experienced. (Our finances are pretty bad; but they’re not *that* bad.) In the land of the blind, the one-eyed man is king.

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  34. David Losh

    If by monetization you mean inflation, that’s exactly the point where sniglet made a believer out of me. Our chance to inflate was at the end of the Bush II era. It didn’t happen, didn’t take hold, because all paper instruments are over priced, and under securitized.

    We, globally, haven’t started to unwind the economic mess. We are stuck with years, amybe decades, of paying down over priced Notes.

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  35. Dirty_Renter

    Q: Do you know what you get when you fix up an old house?
    A: An old house that’s fixed up.

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  36. Brian Porter

    As Tim says in his article, prices could go up or down depending on what happens to the economy. I think prices will go down a little maybe 5% over the next 12 months, but I believe that we will be entering an inflationary period similar to the 1970’s in 2011. I don’t think that we can print money like crazy and maintain budget deficits of close to 2 trillion dollars without inflation or the dreaded “stagflation”.

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  37. Rhonda Porter

    RE: Pegasus @ 92 – LOL thanks Ira and Kary — you’ve made my morning :)

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  38. Ravenna Or Bust

    RE: Robert Douglas @ 99
    Thank you Robert for touching on the bulk of what I was asking about in the beginning. I was hoping to get some dialogue going about how Seattle home prices might be affected… on the neighborhood scale. Few people offered to weigh in on this directly, but thank you for those who did.

    By mike @ 111:

    3. focus on what you know today
    a) is your mortgage/housing costs easily affordable based on your income.
    b) is your mortgage/housing costs comparable to rent payments
    c) is this a place you can live in for 10 to 20 years?

    This is some sound advice. GS can try to predict what will happen, any one of us can take our shot at prediciting what will happen… but in the end, even the best study is still a prediction. All we know about ourselves is what we know today.

    Granted someone will call me out on the first part of this post applauding a form of prediction, and the latter part invalidating predictions as a whole.

    … meh :)

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  39. Sniglet

    b) is your mortgage/housing costs comparable to rent payments

    This seems to be a pretty vague concept. Your mortgage costs can ALWAYS be brought down to comparable rents if you have a sufficiently large down-payment.

    How large of a down payment ought one to use when calculating costs for doing a proper rent vs buy comparison?

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  40. Hu Flung Pu

    By Sniglet @ 139:

    b) is your mortgage/housing costs comparable to rent payments

    This seems to be a pretty vague concept. Your mortgage costs can ALWAYS be brought down to comparable rents if you have a sufficiently large down-payment.

    How large of a down payment ought one to use when calculating costs for doing a proper rent vs buy comparison?

    Personally, I would use zero down payment along with whatever rate you’d qualify for on a 30-year mortgage (to finance the whole purchase) and then adjust for the tax deductibility of interest and property taxes. That way, you’re getting very close to apples-to-apples. You’re not putting any money down but you’re taking into account the tax benefit. (And if you’re REALLY confident that you’ll be able to get out of the house at a price at least as high as your purchase price, you could even subtract the principal portion of your mortgage payment because that will turn out to be a forced savings account – albeit a highly inefficient one.)

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  41. LA Relo

    RE: Scotsman @ 14

    You have to assume that any lifestyle costs are already factored into the determination that the home in question is affordable.

    I think what you are saying is if you want until the prices drop more you could afford a better lifestyle. That’s true, but if you can already afford that lifestyle and find a home you like that you plan to stay in for a worthwhile period of time, then it doesn’t matter if the home loses value.

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  42. MacroInvestor

    RE: Ravenna Or Bust @ 26

    Now that we’ve seen the details, I think you definitely should pass on this deal. Seriously, $299k for a 760 square foot house with 2 bedrooms and 1 bath? (Basement is for storage, unless the ceilings are high and it is finished as nicely as the house — meaning you can’t see the furnace, water heater and ducts). You are going to outgrow this tiny little place in no time. And, it needs work? There is a good chance you will not be happy for 10 years.

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  43. MacroInvestor

    RE: Ravenna Or Bust @ 30

    “RE: Pegasus @ 28 –

    Pegasus, I don’t why I’m willing to fan the flames right now, but I am.”

    Ravenna — true, the folks here don’t know you. Pegasus used insulting language. He or she may be a jerk. But you came here asking strangers for advice. The fact is, you are agonizing over your decision. You are not comfortable or confident. I think you know deep down the deal is not such a great one.

    There is a very good chance prices will go down 20% more. A large number of arm loans reset in the next 2 years. That means lots more distressed properties hitting the market at all levels and all neighborhoods.

    Personally, I am waiting. I think Ray Pepper has the best advice, though he sounds way too self assured about future predictions. I am waiting for prices to start steadily rising again before I jump in. I don’t want to be trapped like your short seller is. I’d rather pay a little more in a healthy market, knowing I have a better chance of getting out whole if my circumstances change.

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  44. MacroInvestor

    RE: drshort @ 74

    “RE: Ron Nelson @ 65 –

    http://www.utexas.edu/visualguidelines/capitalization.html

    You could be Carl frggin Segan but with you grammar / capitalization I cant take a thing you write seriously.”

    It’s Carl Sagan. Guess we shouldn’t take YOU seriously.

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  45. MacroInvestor

    RE: Sniglet @ 105

    Sniglet, you have a good command of the facts, but where do you come up with 80%? That seems rather extreme. Do you just throw out large numbers like that for shock value? I’d like to see your logic there. Somewhere around 20% down, depending on the neghborhood, is going to get us back on parity with rents/income. That is my guess for where the bottom sits.

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  46. Ross Jordan

    By Sniglet @ 105:

    I don�t think the end result will be the same in magnitude.

    [...]deflation will reign supreme almost everywhere (except in the nations where their debt was largely denominated in foreign currencies).

    Deflation won’t “reign supreme” in any country that can control their money supply; most notably the US. Just ask heli Ben:

    “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”

    “people know that inflation erodes the real value of the government’s debt and, therefore, that it is in the interest of the government to create some inflation.”

    Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money.

    As much as central bankers always dismiss the possibility of printing; I think when push comes to shove, if we actually see deflation; there will be little hesitation to print… especially given that so much of our debt is foreign held (and USD denominated).

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  47. Sniglet

    Deflation won’t “reign supreme” in any country that can control their money supply; most notably the US. Just ask heli Ben

    I think that Messr Bernanke is greatly mistaken if he feels the Fed has the ability to stop deflation. As I outlined earlier in this thread, the options available to policy makers are severely limited. In fact, monetization and the creation of even more debt will only accelerate the deflationary forces that have been unleashed.

    Sure, in THEORY policy makers can create hyperinflation, but any leader who attempts to cross that Rubicon, to out and out printing of currency on a MASSIVE scale will be crucified. The grass-roots political will to support currency destruction doesn’t yet exist (it may after a decade of massive deflation, but we aren’t there yet).

    Just look at how reluctant leaders have been to inflate so far. All the monetization and stimulus efforts have only been deflationary in nature. As much as policy makers may talk about helicopter drops, they have thus far been completely unwilling to actually embark on massive money creation.

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  48. David Losh

    RE: Ross Jordan @ 146

    I’m not the sharpest tool in the shed, but it makes sense to me that the price of assets, globally, are over priced. If we adjust our currency by printing money every one would have to do the same. Our debt is no different than Europe’s debt, or Asia’s debt, or South American debt, and by all means let’s not forget Africa, along with the Middle East.

    It would be a currency war. That would be the best case scenario.

    If you wanted worst case it would be the price of oil going up, it would be the price of commodities going up, our debts would be paid with dollars that are worth less. Wealth shifts, once again, to those that hold debt, and punishes those that are frugal.

    It’s much better to pay down debt, for every one. It would be prudent to have a sound fiscal policy, at the government, that addresses the public debt, and let the private sector fend for itself. I know that sounds cruel, but at least that’s a chance.

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  49. Ross Jordan

    By Sniglet @ 147:

    Deflation won�t �reign supreme� in any country that can control their money supply; most notably the US. Just ask heli Ben

    I think that Messr Bernanke is greatly mistaken if he feels the Fed has the ability to stop deflation. As I outlined earlier in this thread, the options available to policy makers are severely limited. In fact, monetization and the creation of even more debt will only accelerate the deflationary forces that have been unleashed.

    Sure, in THEORY policy makers can create hyperinflation, but any leader who attempts to cross that Rubicon, to out and out printing of currency on a MASSIVE scale will be crucified. The grass-roots political will to support currency destruction doesn’t yet exist (it may after a decade of massive deflation, but we aren’t there yet).

    It’s not a choice between hyperinflation and a deflationary spiral, everything in between in an option (hyperdeflation; high deflation; moderate deflation; low defation; flat; stagflation; low inflation; moderate inflation; high inflation; hyperinflation). Inflation is directly proportional to net change in money supply (after lending multipliers and various other things that affect the equation of money supply). Anyways, the point is, Ben Bernanke, being able to decide how much new cash is added (or subtracted) from the economy — as well as setting policy that affects reserve requirements, lending requirements, interests rates etc can control the amount of inflation that occurs.

    Causing inflation is not without side effects, of course — and you can’t devalue yourself to riches. All I’m saying is that its a very simple matter for Bernanke to avoid deflation if he wants to; and given the degree of contracts (both at government, business and individual level) that implicitly count on inflation happening (and which blow-up if significant deflation happens) — there’s a lot of interests that will push for at least a low level of inflation (1-5%). I think that’s also the most likely range we’ll see for the next while. Even in the worst of the current recession, we still had positive inflation in all but a few months (and net across the year was positive). So, though housing may be in a deflationary environment, general economy (counting housing too) is still inflationary.

    Just look at how reluctant leaders have been to inflate so far. All the monetization and stimulus efforts have only been deflationary in nature. As much as policy makers may talk about helicopter drops, they have thus far been completely unwilling to actually embark on massive money creation.

    Who said massive? There’s really no need for massive inflation … and I think even the crazy-don’t-get-economics politicians want to avoid massive inflation. But, Bernanke has added a ton of new money to the economy, and the overall economy has stayed net inflationary after a significant deleveraging of the banking system (read deflationary). So if Bernanke’s been able to offset the deflationary effects of the banking crisis with the inflationary new money that he’s added to the system, then he has, in fact, caused inflation.

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  50. Ross Jordan

    By David Losh @ 148:

    RE: Ross Jordan @ 146

    I’m not the sharpest tool in the shed, but it makes sense to me that the price of assets, globally, are over priced. If we adjust our currency by printing money every one would have to do the same. Our debt is no different than Europe’s debt, or Asia’s debt, or South American debt, and by all means let’s not forget Africa, along with the Middle East.

    It would be a currency war. That would be the best case scenario.

    If you wanted worst case it would be the price of oil going up, it would be the price of commodities going up, our debts would be paid with dollars that are worth less. Wealth shifts, once again, to those that hold debt, and punishes those that are frugal.

    It’s much better to pay down debt, for every one. It would be prudent to have a sound fiscal policy, at the government, that addresses the public debt, and let the private sector fend for itself. I know that sounds cruel, but at least that’s a chance.

    I’d certainly not argue that it would be much better for every one to pay off their debt. And don’t get me wrong, I’m not suggesting the US is going to go Zimbabwean and print and endless supply of new cash. All I’m saying is that Bernanke is likely to do everything to avoid a long term deflationary environment; and that includes printing new money.

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