This market will decline for the next 5-10 years. Maybe 5-10% real prices a year. Prices are too sticky. We won't see such a dramatic decline all at once.
I predict we will see a drop of between 50% and 80% in home values in the Seattle area within the next 8 years. If Manhattan can see price drops of 40%, and commercial real-estate can drop 80% in Florida (1990 to 1993) then I don't see why a 50% drop is out of the question in Seattle.
Particularly when one considers that we have an unprecedented credit bubble that has lifted real-estate prices around the globe. As the bubble unwinds lenders are going to be in a whole world of pain that won't be ameliorated by regional variances (i.e. every country and region will hurt). This will make credit harder to get than water in a desert.
Just look at the greater than 25% of Seattle area homes that now have exotic mortgages (e.g. 100%, option ARM, etc). The vast majority of people with these loans get them because they can't really afford their home. This is completely off the charts. Prior to 2000 exotic mortgages made up less than 2% of the market. As a result, you can't even compare the precariousness of our situation with previous Puget Sound downturns.
Realistically I could see A 25% fall but I think that will be for new construction as the builders build existing homeowners underwater. The existing homeowners won't lower their prices much more as selling would involve bringing a hefty check to the table. After the initial set of rate resets in the next two years it's anybody's guess.
For the people that see an 80% decline in prices...well...I think that if that happens you may be "jumping for joy" about being able to buy an affordable house again...however, IMHO, I think that an 80% fall would put our society at such risk that I'm not sUre I would want to stay around.
Bill Gross said that either housing must come down 20% or the Fed must drop rates 50 points, I can't find the link to the article. But it may be floating around on a previous post I made.
Oops guess I was wrong. Here is the article, mortgage rates need to drop, not the Fed rate.
Sorry. Investment Outlook - Bill Gross - Grim Reality
So, since we ain't gonna see mortgage rates decline that much any time soon, guess what has to happen? 20% decrease in home values.
Short answer: around 30 percent from the top (February 2008).
Long answer: when they do correct, RE markets often overcorrect to the down side, the same way they bubble up.
I expect the market to start to drop in March of 2008 as the inventory surges and construction work starts to drop off. This will take a long time to unravel even with an economic downturn.
The bad news for RE investors is the price to rental ratio. If you're getting $1800 a month for a house worth $500,000 one year, and $460,000 the next...and so on...and you don't sell...you're a complete idiot.
So the non-idiots will be selling next year (if they aren't selling this spring). That will add to the inventory, which is already predicted to increase a LOT.
Wilder prediction: Bottom won't happen until 2014-2015. Homes will cost around 30 percent of the peak price in March 2008. I don't plan to buy again until around 2011, which I'm hoping will look like a buyers market with decent inventory.
Worst case scenario: condo boom causes massive gridlock; the crime rate spikes; bird flu; people start to flee major cities. I don't think any of this is likely to happen, but when people say buying a house is risk-free...you just have to laugh.
67% off the peak - median depreciation for normal markets
75% off the peak - zany market depreciation
80% off the peak - headliner case
I'm looking at '96-7 prices. We have two bubbles we have to pay off, and all the appreciation that built during those bubbles will come off. After that, we have a depression to deal with.
If we only roll back 25%, what does that take us back to? 2005 prices? Does anyone actually believe that the largest runup in US history, on the back of the two biggest bubbles in US history will only result in a 24 month rollback of prices?
Eleua - There has never been a market in the US history that has had a 50% price decline for a general area...so what makes you think it will happen in Seattle???
Currently the apt vacancy rate is less than 3% in Seattle, with housing so tight (high demand to live in Seattle) there isnt currently enough places for people to live. The Seattle times recently showed that there is a massive amount of people moving to this region (1.5% increase in the last year, most in 40 yrs).
It would take a major company like Microsoft from up and reloating to the Bahamas or Boeing moving 100% of manufacturing out of state to make any sort of dent like you are predicting.
50 to 75 percent off current peak (depending on area and runup in prices)
My Prediction
20 to 50 percent off current peak (dpending on area and runup in prices)
I have always said that my average "shave" will be 33% based on:
Current value of property = (1997 price) + (3 or 4 percent interest since 1997 to present) + (cost of improvements - (quality of workmanship) - (overpriced materials/labor))
I have looked at a lot of homes and done the math.....I stick by my prediction with the caveat that the local economy stays pretty much the way it is. If we go into a recession then the worst case will manifest itself.
We are in uncharted waters with this housing runup. Remember, the entire purpose of the housing bubble was to mask the effects of the tech bust. We have two bubbles to pay off, and it isn't going to happen with a teensy weensy little 24 month correction.
The two bubbles were mammoth, and the aftermath will be even greater. We will be in a doozy of a recession, with the stock market in full retreat, energy prices going up, dollar imploding, unemployment rising, and the biggest generation of Americans sucking the remaining wealth from the top and a huge swath of Third World immigrants sucking it from the bottom. That's assuming we are not at war.
Home prices follow peoples' ability to pay. If we get an inflationary recession with declining wages, you will be lucky to get 35 cents on the dollar for a suburban home.
Run the price of a home with 12% interest rates, and a 10% reduction in total PITI. How many people have 20% down for a home (sans transported equity)?
Run the price of a home with 12% interest rates, and a 10% reduction in total PITI. How many people have 20% down for a home (sans transported equity)?
If we see interest rates at 12%, it would mean that inflation is running at 7 or 8% per year given that interest rates = Real cost of money + inflation.
So if you have inflation going at that rate, I think it's very unlikely you'll see home costs come down anywhere near 50 or 75% in nominal terms. More likely they come down far less in nominal terms but fall more in real terms. The situation in Japan was massive drops in a period of deflation. Interest rates were 1 or 2%. Same case with the depression
I think it's improbable that we will have massive inflation and huge nominal drops in home prices
Agree 100% DJO. If you stop and think about it, either inflation with zero growth or decrease of prices will solve the bubble. Or a combination of the two.
In the last century, we've had hyperinflation once (70s) and deflation with crashing property values once (30s). The rest of the time we have modest inflation with prices on all commodities constantly adjusting between the range of too cheap and too expensive.
So in short, 50% declines during a major depression are historically possible, and hyperinflation is possible. However, the most likely event is normal inflation with adjusting prices until things come back in line.
Yes, we have never seen anything like this before! I know, I've heard it. But that is almost always true when a bubble pops. We'd never seen a bubble on companies with no assets and no income prior to '99, but that doesn't mean that when the bubble popped we all suddenly had to go back to living in cottages heated by a coal stove and dragging water from the nearest river.
but that doesn't mean that when the bubble popped we all suddenly had to go back to living in cottages heated by a coal stove and dragging water from the nearest river
I think it's improbable that we will have massive inflation and huge nominal drops in home prices
I think that is EXACTLY what we will get.
I like your idea, but it has a major flaw.
IF (and that is a HUGE "if") we have wage inflation at the same time we get inflation in other parts of the family budget, I would agree with you. This is what we had back in the '70s. Back then, we made stuff, were in labor unions, and didn't have a huge immigrant class undercutting wages.
Not so today.
If the family income remains stagnant, but prices for food, energy, medicine, retail, etc, go up, the available funds for homes goes down. This is true in a steady interest rate environment.
Hike rates to combat inflation, and you have even less money to put toward housing.
The likely scenario is we get inflation, with declining wages and a recession. There is absolutely no way home prices increase in that kind of scenario; they will crater.
Even today, the gov't tells us inflation is 2% or some rediculous number. Never mind that inflation is probably running 10%, the gov't runs policy on a ludicrous rate of 2%.
The FED quit publishing M3, or the total money supply (Gee, I wonder why?). It isn't that hard to figure out, and M3 has been increasing 14%/year for the past few years. IF our economy is only growing 1%, then where did the rest of the money go? I-N-F-L-A-T-I-O-N.
Also, look back on the past 25 years. What has happened? Rising home prices would be the story most people would tell. I would say that the story has been falling interest rates and savings rates. Back in the early '80s we had double digit interest rates and personal savings rates in excess of 10%. Today, interest rates are 5%, and personal savings is negative (almost -4%). This, more than anything else, caused home prices to escalate. When the opposite happens, expect inverse results. The absolute worst thing for Wall Street is for Americans to start saving again.
With that in mind, you now understand the totality of FED policy under Greenspan and Bernanke.
I get this line of thinking all the time. Perhaps I will do an entire posting on how inflation actually hurts home prices. Mabye The Tim can put it on POF.
I just need to get in a snarky mood so my tone doesn't disappoint the SB regulars. Perhaps I can incorporate a bunch of sophmoric sexual inuendo and really piss off people. :P
The likely scenario is we get inflation, with declining wages and a recession. There is absolutely no way home prices increase in that kind of scenario; they will crater.
I'm not sure that most would call this the "likely" scenario. I am not often accused of being a cheery optimist - but I don't think we're headed for the Weimar Republic here.
Rather than growing inflation I suspect there are greater odds that we will see out and out deflation, putting pressure on both real-estate and wages. In fact, we are already seeing the first deflationary symptoms appear now that the credit bubble is starting to contract. I don't think it has escaped this forum's notice that US real-estate has experienced a nation-wide price decline for the first time since the 1930s this year.
And why shouldn't we be faced with deflation seeing as how we have just lived through the largest explosion of credit in history? Yes, asset prices have been rising (e.g. oil, real-estate, gold, stocks), but this has been due to the inflationary effects of a credit boom, all of which can retract with a vengeance. Liquidity generated by a credit bubble is quite a different animal than the lquidity created by "printing" money: credit derived liquidity can contract and vanish.
I don't see any way we can avoid a global recession at this point. The speculative excesses are too extraordinary to be worked off in any orderly fashion (just look at all the vacant skyscrapers dotting China's landscape that people invest in with the intent to flip, but can't afford to live in). Furthermore, the hands of the central banks are tied, they have no desire to commit suicide and instantaneously destroy their currencies through flagrant debasement. Just look at how impotent the Bank of Japan was in dealing with their bought of deflation in the '90s.
When the recession does hit, the Puget Sound will feel it with a vengeance. When the major aviation and tech industries in our region start laying off staff due to massive declines in sales, a 50% drop in real-estate prices will seem like nothing.
The US Peso is really in for a major whacking, which will drive up energy, food, and raw materials (inflation).
Interest rates will climb rapidly, which will put downward pressure on anything purchased on time (housing and education).
After the US consumer gets thoroughly pounded, there will be massive defaults, and a destruction in money.
We still need to import much of what we need, so that will be inflationary in an environment of a shrinking US Peso.
The bottom line is anyone using US dollars will need to be far more productive relative to his consumption prior to any meaningful turnaround in the economy.
You can't consume your way to wealth on a national scale anymore than you can on an individual scale.
I certainly see an inflationary recession with declining home prices and job losses.
I'm with you (partly). Deflation in home prices does not mean overall deflation. When the US Peso is losing much of its value to buy other necessities, I can't see how that isn't inflation.
For deflation to occur, you would need the US Peso to gain ground on the aggregate living expenses. I can see how a huge credit bust would trend that direction, but absent capital flowing to production in sufficient volume for US consumers to realize cash-based gains against those products, I can't get there from here.
With the US being increasingly dependent on foreign made goods and raw materials, a declining dollar is highly inflationary. Also, Uncle Sugar is promising to payout $44T in freebies to Discoballers over the next 25 years. Add in the gigantic sucking sound from Third-World immigration, how does the US gov't get out of the situation? They monatize.
Deflation in home prices does not mean overall deflation.
True. In and of itself a collapse in real-estate prices does not "deflation" make. However, if housing prices collapse (and the credit derivatives and securities that go with them) I think we will see the entire class of similar assets crash as well.
Let's put it another way: the greatest economic phenomena we've seen over the last 6 or 7 years is the collapse of credit spreads between the investment grade and junk variety. Worse, fancy machinations have allowed many issues of "junk" debt to masquerade as AAA. When these spreads once again increase to historic norms we are going to see a rash of defaults throughout the world, ranging from dodgy third world sovereign debt and leveraged buy-out credit swaps to Alt-A mortgage securities and municipal/state bonds.
The way I see it, much of the appreciation in asset prices over the last 5 years has resulted PRECISELY from the low credit spreads that made it attractive to borrow like there was no tomorrow. Hedge funds, for example, have been leveraging up like mad to make all matter of trades ranging from copper to mortgages.
I just can't see how a general collapse in asset prices (of all sorts) can be avoided when this gravy train of cheap credit collapses, and many assets are thrown on the market at fire-sale prices when current dodgy loans default. Just what will happen to all the assets of the the recently privatized corporations will be dumping when they fail to make good on the debt they have been newly saddled with (which will certainly happen when their revenues decline in the coming recession)?
I think that will happen after the US Peso gets smoked and we are all paying 3x what we are now paying for raw materials.
Sorry, but I just don't see how the raw materials are going to keep rising in price since the inflation they've been experiencing is merely an extension of the credit bubble as well. No, I think all asset prices (including oil, copper, uranium, etc) are going to come crashing down in dollar terms just after housing.
If nothing else the contraction in construction and manufacturing around the world (that will result from the recession) will lead to a significant decline in demand.
Having hailed from British Columbia (and Alberta) originally, I still recall the wrenching dislocations caused by the collapse in commodity prices in the early '80s. I look at what is happening in Fort McMurray today and get a terrible sense of deja vu from Tumbler Ridge circa 1981. Tumbler was a modern town thrown up to service the growing coal sector and became a virtual ghost town in just a few years. I know that the world is running out off oil and all that, but none of these crack-up booms ever end well. Further, I well recall just how giddy Calgarians were of the unbridled economic prospects ahead off them in the early '80s, just before they were knocked down and left for dead.
Either way, housing is totally screwed. If the ROW economy is able to right itself after the American consumer pukes, then we are totally screwed and we will be in an inflationary hell.
If not, your scenario is probably not far off.
The Tim proclaimed me the King Cynic on this forum, and I gladly defend my title against all comers.
Sorry, but I just don't see how the raw materials are going to keep rising in price since the inflation they've been experiencing is merely an extension of the credit bubble as well. No, I think all asset prices (including oil, copper, uranium, etc) are going to come crashing down in dollar terms just after housing.
Three billion Indians and Chinese are desperate to prove you wrong. They don't care much about our housing markets and even if their economy gets screwed because we can't buy as much from them, they'll find ways to keep their foothold into 20th century living and keep consuming more than they did just a few years ago. They've been using their surplus reserves to lock up long term contracts with energy producers around the globe, so they might just be able to launch their own consumer economy once ours falters.
On top of all that, you can check my site to learn about peak oil, and once you do that, then you can imagine that peak mining isn't far behind, and thus peak copper, aluminum, zinc, etc. It's not that supply of oil or other raw materials will go down that fast, it's just that demand for them will keep growing as supply stays flat or contracts. This is because a global recesssion or depression would have to slow the 10+% growth rates in India and China to less than zero before it could convert supply losses into a net price drop. I don't see that happening without a complete [worse than 1929] global crash.
Then we can talk about the rampant global inflation trends on top of all those fundamentals. Yes, Bear and the CDO crisis might be a liquidity hiccup, but we all know the cough medicine the central banks will pass out for that malady, no?
The way I see it, 80 will soon be the new floor on oil, even as the ongoing recession starts its coming-out party. They used to call this stagflation.
Comments
Particularly when one considers that we have an unprecedented credit bubble that has lifted real-estate prices around the globe. As the bubble unwinds lenders are going to be in a whole world of pain that won't be ameliorated by regional variances (i.e. every country and region will hurt). This will make credit harder to get than water in a desert.
Just look at the greater than 25% of Seattle area homes that now have exotic mortgages (e.g. 100%, option ARM, etc). The vast majority of people with these loans get them because they can't really afford their home. This is completely off the charts. Prior to 2000 exotic mortgages made up less than 2% of the market. As a result, you can't even compare the precariousness of our situation with previous Puget Sound downturns.
Things are going to get NASTY.
For the people that see an 80% decline in prices...well...I think that if that happens you may be "jumping for joy" about being able to buy an affordable house again...however, IMHO, I think that an 80% fall would put our society at such risk that I'm not sUre I would want to stay around.
Sorry.
Investment Outlook - Bill Gross - Grim Reality
So, since we ain't gonna see mortgage rates decline that much any time soon, guess what has to happen? 20% decrease in home values.
If they can go up that fast, they can go down that fast.
Long answer: when they do correct, RE markets often overcorrect to the down side, the same way they bubble up.
I expect the market to start to drop in March of 2008 as the inventory surges and construction work starts to drop off. This will take a long time to unravel even with an economic downturn.
The bad news for RE investors is the price to rental ratio. If you're getting $1800 a month for a house worth $500,000 one year, and $460,000 the next...and so on...and you don't sell...you're a complete idiot.
So the non-idiots will be selling next year (if they aren't selling this spring). That will add to the inventory, which is already predicted to increase a LOT.
Wilder prediction: Bottom won't happen until 2014-2015. Homes will cost around 30 percent of the peak price in March 2008. I don't plan to buy again until around 2011, which I'm hoping will look like a buyers market with decent inventory.
Worst case scenario: condo boom causes massive gridlock; the crime rate spikes; bird flu; people start to flee major cities. I don't think any of this is likely to happen, but when people say buying a house is risk-free...you just have to laugh.
67% off the peak - median depreciation for normal markets
75% off the peak - zany market depreciation
80% off the peak - headliner case
I'm looking at '96-7 prices. We have two bubbles we have to pay off, and all the appreciation that built during those bubbles will come off. After that, we have a depression to deal with.
Nope. Not me.
Currently the apt vacancy rate is less than 3% in Seattle, with housing so tight (high demand to live in Seattle) there isnt currently enough places for people to live. The Seattle times recently showed that there is a massive amount of people moving to this region (1.5% increase in the last year, most in 40 yrs).
It would take a major company like Microsoft from up and reloating to the Bahamas or Boeing moving 100% of manufacturing out of state to make any sort of dent like you are predicting.
50 to 75 percent off current peak (depending on area and runup in prices)
My Prediction
20 to 50 percent off current peak (dpending on area and runup in prices)
I have always said that my average "shave" will be 33% based on:
Current value of property = (1997 price) + (3 or 4 percent interest since 1997 to present) + (cost of improvements - (quality of workmanship) - (overpriced materials/labor))
I have looked at a lot of homes and done the math.....I stick by my prediction with the caveat that the local economy stays pretty much the way it is. If we go into a recession then the worst case will manifest itself.
We are in uncharted waters with this housing runup. Remember, the entire purpose of the housing bubble was to mask the effects of the tech bust. We have two bubbles to pay off, and it isn't going to happen with a teensy weensy little 24 month correction.
The two bubbles were mammoth, and the aftermath will be even greater. We will be in a doozy of a recession, with the stock market in full retreat, energy prices going up, dollar imploding, unemployment rising, and the biggest generation of Americans sucking the remaining wealth from the top and a huge swath of Third World immigrants sucking it from the bottom. That's assuming we are not at war.
Home prices follow peoples' ability to pay. If we get an inflationary recession with declining wages, you will be lucky to get 35 cents on the dollar for a suburban home.
Run the price of a home with 12% interest rates, and a 10% reduction in total PITI. How many people have 20% down for a home (sans transported equity)?
If we see interest rates at 12%, it would mean that inflation is running at 7 or 8% per year given that interest rates = Real cost of money + inflation.
So if you have inflation going at that rate, I think it's very unlikely you'll see home costs come down anywhere near 50 or 75% in nominal terms. More likely they come down far less in nominal terms but fall more in real terms. The situation in Japan was massive drops in a period of deflation. Interest rates were 1 or 2%. Same case with the depression
I think it's improbable that we will have massive inflation and huge nominal drops in home prices
In the last century, we've had hyperinflation once (70s) and deflation with crashing property values once (30s). The rest of the time we have modest inflation with prices on all commodities constantly adjusting between the range of too cheap and too expensive.
So in short, 50% declines during a major depression are historically possible, and hyperinflation is possible. However, the most likely event is normal inflation with adjusting prices until things come back in line.
Yes, we have never seen anything like this before! I know, I've heard it. But that is almost always true when a bubble pops. We'd never seen a bubble on companies with no assets and no income prior to '99, but that doesn't mean that when the bubble popped we all suddenly had to go back to living in cottages heated by a coal stove and dragging water from the nearest river.
LOL! but if it comes to that, I'm gettin' the Pursuit Special!
I think that is EXACTLY what we will get.
I like your idea, but it has a major flaw.
IF (and that is a HUGE "if") we have wage inflation at the same time we get inflation in other parts of the family budget, I would agree with you. This is what we had back in the '70s. Back then, we made stuff, were in labor unions, and didn't have a huge immigrant class undercutting wages.
Not so today.
If the family income remains stagnant, but prices for food, energy, medicine, retail, etc, go up, the available funds for homes goes down. This is true in a steady interest rate environment.
Hike rates to combat inflation, and you have even less money to put toward housing.
The likely scenario is we get inflation, with declining wages and a recession. There is absolutely no way home prices increase in that kind of scenario; they will crater.
Even today, the gov't tells us inflation is 2% or some rediculous number. Never mind that inflation is probably running 10%, the gov't runs policy on a ludicrous rate of 2%.
The FED quit publishing M3, or the total money supply (Gee, I wonder why?). It isn't that hard to figure out, and M3 has been increasing 14%/year for the past few years. IF our economy is only growing 1%, then where did the rest of the money go? I-N-F-L-A-T-I-O-N.
Also, look back on the past 25 years. What has happened? Rising home prices would be the story most people would tell. I would say that the story has been falling interest rates and savings rates. Back in the early '80s we had double digit interest rates and personal savings rates in excess of 10%. Today, interest rates are 5%, and personal savings is negative (almost -4%). This, more than anything else, caused home prices to escalate. When the opposite happens, expect inverse results. The absolute worst thing for Wall Street is for Americans to start saving again.
With that in mind, you now understand the totality of FED policy under Greenspan and Bernanke.
I get this line of thinking all the time. Perhaps I will do an entire posting on how inflation actually hurts home prices. Mabye The Tim can put it on POF.
I just need to get in a snarky mood so my tone doesn't disappoint the SB regulars.
I'm not sure that most would call this the "likely" scenario. I am not often accused of being a cheery optimist - but I don't think we're headed for the Weimar Republic here.
And why shouldn't we be faced with deflation seeing as how we have just lived through the largest explosion of credit in history? Yes, asset prices have been rising (e.g. oil, real-estate, gold, stocks), but this has been due to the inflationary effects of a credit boom, all of which can retract with a vengeance. Liquidity generated by a credit bubble is quite a different animal than the lquidity created by "printing" money: credit derived liquidity can contract and vanish.
I don't see any way we can avoid a global recession at this point. The speculative excesses are too extraordinary to be worked off in any orderly fashion (just look at all the vacant skyscrapers dotting China's landscape that people invest in with the intent to flip, but can't afford to live in). Furthermore, the hands of the central banks are tied, they have no desire to commit suicide and instantaneously destroy their currencies through flagrant debasement. Just look at how impotent the Bank of Japan was in dealing with their bought of deflation in the '90s.
When the recession does hit, the Puget Sound will feel it with a vengeance. When the major aviation and tech industries in our region start laying off staff due to massive declines in sales, a 50% drop in real-estate prices will seem like nothing.
The US Peso is really in for a major whacking, which will drive up energy, food, and raw materials (inflation).
Interest rates will climb rapidly, which will put downward pressure on anything purchased on time (housing and education).
After the US consumer gets thoroughly pounded, there will be massive defaults, and a destruction in money.
We still need to import much of what we need, so that will be inflationary in an environment of a shrinking US Peso.
The bottom line is anyone using US dollars will need to be far more productive relative to his consumption prior to any meaningful turnaround in the economy.
You can't consume your way to wealth on a national scale anymore than you can on an individual scale.
I certainly see an inflationary recession with declining home prices and job losses.
P.S. (More about this chart in a future post...)
I am starting to feel lonely... That's ok, I can handle being Seattlebubble's only resident deflationist.
I'm with you (partly). Deflation in home prices does not mean overall deflation. When the US Peso is losing much of its value to buy other necessities, I can't see how that isn't inflation.
For deflation to occur, you would need the US Peso to gain ground on the aggregate living expenses. I can see how a huge credit bust would trend that direction, but absent capital flowing to production in sufficient volume for US consumers to realize cash-based gains against those products, I can't get there from here.
With the US being increasingly dependent on foreign made goods and raw materials, a declining dollar is highly inflationary. Also, Uncle Sugar is promising to payout $44T in freebies to Discoballers over the next 25 years. Add in the gigantic sucking sound from Third-World immigration, how does the US gov't get out of the situation? They monatize.
True. In and of itself a collapse in real-estate prices does not "deflation" make. However, if housing prices collapse (and the credit derivatives and securities that go with them) I think we will see the entire class of similar assets crash as well.
Let's put it another way: the greatest economic phenomena we've seen over the last 6 or 7 years is the collapse of credit spreads between the investment grade and junk variety. Worse, fancy machinations have allowed many issues of "junk" debt to masquerade as AAA. When these spreads once again increase to historic norms we are going to see a rash of defaults throughout the world, ranging from dodgy third world sovereign debt and leveraged buy-out credit swaps to Alt-A mortgage securities and municipal/state bonds.
The way I see it, much of the appreciation in asset prices over the last 5 years has resulted PRECISELY from the low credit spreads that made it attractive to borrow like there was no tomorrow. Hedge funds, for example, have been leveraging up like mad to make all matter of trades ranging from copper to mortgages.
I just can't see how a general collapse in asset prices (of all sorts) can be avoided when this gravy train of cheap credit collapses, and many assets are thrown on the market at fire-sale prices when current dodgy loans default. Just what will happen to all the assets of the the recently privatized corporations will be dumping when they fail to make good on the debt they have been newly saddled with (which will certainly happen when their revenues decline in the coming recession)?
I have that effect on most people. It is a free service I provide. You don't have to go to your local shrink to feel better.
Sniglet,
I'm with you on all counts. I think that will happen after the US Peso gets smoked and we are all paying 3x what we are now paying for raw materials.
Over the past 25 years, the biggest growth field has been in finance related products. I see that ending in a huge way.
We need to make stuff and quit buying Third-World dreck.
Sorry, but I just don't see how the raw materials are going to keep rising in price since the inflation they've been experiencing is merely an extension of the credit bubble as well. No, I think all asset prices (including oil, copper, uranium, etc) are going to come crashing down in dollar terms just after housing.
If nothing else the contraction in construction and manufacturing around the world (that will result from the recession) will lead to a significant decline in demand.
Having hailed from British Columbia (and Alberta) originally, I still recall the wrenching dislocations caused by the collapse in commodity prices in the early '80s. I look at what is happening in Fort McMurray today and get a terrible sense of deja vu from Tumbler Ridge circa 1981. Tumbler was a modern town thrown up to service the growing coal sector and became a virtual ghost town in just a few years. I know that the world is running out off oil and all that, but none of these crack-up booms ever end well. Further, I well recall just how giddy Calgarians were of the unbridled economic prospects ahead off them in the early '80s, just before they were knocked down and left for dead.
Maybe I am just getting too old and jaded...
Either way, housing is totally screwed. If the ROW economy is able to right itself after the American consumer pukes, then we are totally screwed and we will be in an inflationary hell.
If not, your scenario is probably not far off.
The Tim proclaimed me the King Cynic on this forum, and I gladly defend my title against all comers.
Three billion Indians and Chinese are desperate to prove you wrong. They don't care much about our housing markets and even if their economy gets screwed because we can't buy as much from them, they'll find ways to keep their foothold into 20th century living and keep consuming more than they did just a few years ago. They've been using their surplus reserves to lock up long term contracts with energy producers around the globe, so they might just be able to launch their own consumer economy once ours falters.
On top of all that, you can check my site to learn about peak oil, and once you do that, then you can imagine that peak mining isn't far behind, and thus peak copper, aluminum, zinc, etc. It's not that supply of oil or other raw materials will go down that fast, it's just that demand for them will keep growing as supply stays flat or contracts. This is because a global recesssion or depression would have to slow the 10+% growth rates in India and China to less than zero before it could convert supply losses into a net price drop. I don't see that happening without a complete [worse than 1929] global crash.
Then we can talk about the rampant global inflation trends on top of all those fundamentals. Yes, Bear and the CDO crisis might be a liquidity hiccup, but we all know the cough medicine the central banks will pass out for that malady, no?
The way I see it, 80 will soon be the new floor on oil, even as the ongoing recession starts its coming-out party. They used to call this stagflation.