Gearing up for housing correction version 2.0 – 7 charts showing a 10 to 15 percent decline in home prices for U.S. housing in 2011.
The housing market is going to experience some serious pangs of withdrawal in 2011. With a mixed government we can rest assured that there will be more pressure on doing very little to stop the bleeding in the housing market. The banks will get their share as usual, but for the folks losing their homes and squatting I’m not sure if 2011 is going to be their year. To preserve the banking industry, the Federal Reserve has jumped into the abyss head first by announcing some $600 billion of money printing part two. They don’t call it money printing since they are basically giving banks incredible liquidity to gamble again in the stock market and stocks are responding with great joy. But what does that mean for the poor Joe and Jane on Main Street who have a $2,000 mortgage and have lost their income? Not much and that is why the foreclosure rate is still near peak levels and shows no signs of abatement. Given the current trends and political winds, it is likely that real estate prices will experience a 10 to 15 percent drop nationwide (certainly in California) by the end of 2011. Let us examine 7 charts carefully to see why this case is likely.
Chart #1 – Post-tax credit blues
The tax credit euphoria is now over. Enough people were sitting on the fence perched like pigeons waiting for a crumb to hit the ground. When the tax credit was announced, this was enough to get people to buy. Yet this wasn’t based on sound economic fundamentals. This is like running into an AA meeting and announcing you have free liquor for anyone outside. Many will resist but some won’t. As the chart above clearly indicates, some took the bait and now the excitement has worn off. The toxic mortgage juice is gone but a free giveaway is always a method of churning up demand. Yet with the new Congress and anger at bailouts (surveys found that most Americans are largely mad at banks and Wall Street) do you envision more bailouts coming in the pipeline?
Chart #2 – Home prices still too high
Adjusting for inflation and looking at the longer-term, home prices are still too high even on a nationwide basis. This is hard for many to believe because they are hypnotized by the fact that mortgage rates are in the 4 percent range. That is great but that is costing us over $2 trillion in Federal Reserve gimmicks that are putting the health of the U.S. dollar at risk. This isn’t some kind of hidden agenda. The Fed openly talks about this! They want to create inflation (aka deflate the dollar) and somehow inflate our economy out of debt by guess what, more debt! Japan has already tried this story and it didn’t exactly work as planned.
What people also forget about the above is that as home prices moved lower, so have incomes. This race to the bottom is not healthy. Long-term mortgage rates hover in the 8 to 9 percent range if we look at 40+ years of data. In other words, even reverting back to the mean would create a doubling of mortgage payments for future buyers. So who are you going to sell your home to in 5 to 7 years? Sure you can take on a 4.5 percent interest rate today but are you certain someone in 2017 can? Unless you plan on staying put for a decade, buying a home today is speculation. Just looking at the above, home prices have at least a 10 to 15 percent correction coming.
Chart #3 – Save less and spend more
Source:Â Lending Tree
The above chart pretty much encapsulates the last 30 years of our economy. Save less and spend more. It doesn’t take a rocket scientist or central banker to figure out that if you spend more than you earn, you will have problems. Now recently, the saving rate has trended up but this is because people fear the Wall Street casino and have put money back into savings accounts. Also, access to credit has been cut for millions of Americans so many actually have to save to buy things. This applies to virtually everyone except the politically connected banks who have the Fed that can magically print $600 billion for them. Where is your slice of that buy? The above model is unsustainable and those thinking we’ll be back to it just don’t look at what is currently happening in the market.
Chart #4 – Investors and homeowners underwater
Source:Â CoreLogic
This is an excellent chart because it highlights a misconception in the market. You would assume as an “investor†you would have a better sense of measuring a value of a home. Yet with the HGTV and home flipping trance, many thought that all it took to turn a $100,000 profit on a flip was some stucco and Ikea furniture. With easy financing, everyone with the desire to do this had the ability to go all out. The above chart shows that those investors are more underwater than regular homeowners in today’s market. The above chart is for the shadow inventory which shows us we have a pipeline of homes gearing up to come online. And guess what? Foreclosures sell for less. In other words, a 10 to 15 percent decline is very likely.
Chart #5 – With no juice delinquency has shot back up
For those who thought the market was standing on its own two feet the above chart says it all. Remove the tax-credit, HAMP, artificially low mortgage rates, and other short-term bandages and the problems reemerge. I know the real estate industry would like to bring tax credits back even though they are obviously an expensive waste of taxpayer money but that isn’t likely to happen. And even if it does somehow come back, all it will do is prolong the inevitable. Ultimately higher paying jobs is what will get the housing market back on its feet or maintain current home values. Did we hear any realistic plans about creating jobs from either of the parties this year? In fact, some argued we should rid ourselves of the minimum wage! That sure sounds like a wage growth strategy. Income growth is going in the opposite direction as wealth is being concentrated in fewer and fewer hands. Income inequality is at its highest level since the Great Depression. This is a fact. How many vacant or underwater homes can a banking executive purchase? I doubt that they will be eating up the entire excess inventory in the market unless they find it in the Hamptons.
Chart #6 – Banks don’t trust you
This chart shows how banks feel about you. Banks are willing to doll out taxpayer backed mortgages in Fannie Mae, Freddie Mac, and FHA insured loans yet they will not touch their precious load of dough. Losses are raging in these three which now make up over 95 percent of the entire mortgage market. If these government backed loan mills relaxed standards and went option ARM like, you can bet on it that banks will flood the system with loans to anyone yet again. They don’t care about long-term sustainability. As the options of crap they can doll out limit and as the losses mount, there are fewer options to finance a home if you don’t have the income. And right now, many Americans are dealing with the worst economy in a generation. Until that changes, we can expect home prices to move lower.
Chart #7 – End of consumer debt?
We’ve reached peak debt. It is unlikely that we will be allowed to take out $50,000 in zero percent credit card debt, finance a BMW with zero percent for 7 years, and buy a $750,000 home on an option ARM all on an income of $100,000 in the next few years. Those days are over. The Fed ironically is trying to re-create that environment. But you can’t create an environment full of grift and embezzlement unless you want to deal with the ramifications. The housing bubble was a criminal enterprise. Forget all these theories and economic models trying to explain it away and dilute blame, the housing bubble needs to have some serious RICO investigations. It was a sophisticated and complicated money laundering operation. The banks robbed the taxpayers and just look at the home prices above. The purpose is rather clear. Home prices will decline further in 2011 but the question is by how much. 10 to 15 percent seems to be a reasonable expectation given the headwinds we are facing with foreclosures, jobs, and the deleveraging of debt. Now that the too big to fail have sunk their fangs into the taxpayer wallet and are guaranteed not to fail, they’ll be more open to dumping homes on the market at fire sale prices.
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81 Responses to “Gearing up for housing correction version 2.0 – 7 charts showing a 10 to 15 percent decline in home prices for U.S. housing in 2011.”
So wait the FED is giving the banks an additional 600 billion dollars by printing money? Do they have to pay it back? Did congress have to approve it? How is it not a bailout?
The FED is not giving the banks $600 billion, the Fed is buying $600 billion in treasury securities, which means that the FED is essentially printing money. The difference between the treasury printing T-bills and and the FED printing money is miniscule. Whether the treasury borrows money by printing T-bills or the treasury borrows money by printing $100 dollar bills is slight. During the civil war the US government borrowed both by issuing bonds and printing greenbacks.
Cool. Thanks for the explanation. 🙂
I believe there is a large difference between the Fed printing money and using the printed money to buy Treasury debt compared to the Treasury just issuing more debt.
In the case of the Fed printing money – the printed money becomes a liability on the Fed’s balance sheet (there is no interest cost for the printied money and there is actually no printing cost because the transaction happens electronically without printing paper dollars). The Fed then uses the “printed money” to buy Treasury debt. The huge benefit (or charade or whatever you want to call it) is the Treasury then does not have to sell this debt in a free market where this added supply of debt would cause interest rates to go up.
It really was a brilliant short term strategy by the Fed. Just like building an excess supply of houses we did not need to sustain our economy was brilliant and allowing people to use their homes as an ATM was brilliant…all brilliant in the short term. But like a lot of this other short term brilliance that has fueled our economy…this Quantitative Easing is just another short term “bubble” that will not sustain time.
QEII is another government bailout for the banks. The Big Banks are still insolvent and will still collapse unless they get QEII (Bankster Bailout II) then they will line up again for QEIII and QE4 and then QE5 and so on until the dollar collapses.
I have seen some call for the reinstatement of mark to market to force the banks to move the shadow inventory off their books and rev up the economic engine. Some say that huge amounts of money are on the “sidelines” waiting for the right time to invest. So I guess not just the banks are hording cash. My question is would this help the economy or would the pressure of mark to market cause the banks to fail? I also don’t understand what the banks own as it relates to the mortgage backed securities? Do they own the property and pay the investor a percentage of the interest on the loan?
The banks are just middle men that do the accounting and collecting. Entities like Ginnie Mae, Fannie Mae and Freddie Mac (but not limited to them) buy up mortgages from the banks and package them up into securities. Once packaged, the entity sells them to the investors. The payments to the investors ultimately come from the borrowers who repay their debt until they are paid off (ideal case).
I’m no pro in economics (so please correct me if I’m wrong or overlooking anything), but I think mark to market will bring the banking industry to a screeching halt, which may be much more hurtful to the economy. Mark to market will cause banks to incur massive losses, and therefore freeze up further lending. Lack of lending will drive home prices lower (since no one can afford a home without a loan), which will push home prices further, causing more losses on the bank’s balance sheets. The cycle will continue until banks dry up and wither from all the losses.
This is not to say that this will wipe out all banks, or that not even one of the major banks will survive somehow (you can thank the Fed for that). However, access to credit will be severely crippled, and the economy will slow down even further. The equities market will take a severe backlash. Many more jobs will be lost as businesses (large and small) that rely on some form of debt will start to fail.
I’m basing this all from the assumption that banks in general have greatly over-leveraged themselves in real estate. I could be wrong, and the hit that banks take from mark to market may be less dire. From the way the Fed has announced an open ended round of QE2, I feel that at the very least, what I described above is a distant possibility.
Your analysis is sound, but I would argue that we should use the FINREG resolution authority and break up the TBTF banks. They can we wound down like any other institution. Loans could be moved to community banks. New money could buy the notes at FMV and people could be kept in homes as renters, maybe even in shared upside with new note owner.
Lower house prices is a good thing.
We haven’t saved the people, we have sacrificed them. That won’t work and extend and pretend will end sooner rather than later for the bankers.
^ teafight, i don’t think banks have the legal authority to rent out distressed properties, but fannie mae came out with a very restricted version of a rental plan last november. it could be that the government is playing the role of lab rat before new legislature rolls out to let banks do similar. the program doesn’t seem very well advertised, and finding any stats on participation rate seems near impossible. we’ll have to wait and see how it plays out.
Isn’t that why they’re hoarding cash – because as foreclosures proceed, they suffer losses. They’re ripping through the foreclosures in low income areas because there’s this demand by investors to either flip the properties or buy up rentals. The banks wait for demand to appear before they push hard to foreclose. It seems targeted at the people most likely to end up in homeless shelters.
All companies, not just banks, must disclose to stakeholders and shareholders material changes in values as soon as they are aware of it. Even if it is an estaimate. I would sell stocks of companies holding a large portion of subprime mortgage backed securities because I think their losses have not been fully disclosed yet nor factored into their stock’s price : If someone quits paying on their home loan, say $900k, and the the underlying asset that secures the loan is worth only $500k, marking to market would reslut in booking a $400k loss at this point in time on the books.
Banks want to spread out their losses (they probably already booked a lot this year) and delay realizing the losses, to be able to carry them forward (NOL’s) to take maximum advantage of reducing high bracket taxable income with these losses. Individuals with passive investment in real estate loans may only be able to writeoff $3k a year of such losses and may never get to use up the NOL’s like companies can. Correct me if I am wrong.
Mark to market would render many banks immediately insolvent – and they SHOULD BE because they ARE insolvent. It’s not like the banks are making a lot of home loans or other loans at this point anyway – over 90% of all home loans in the U.S. are now directly from or backed by government entities!
Looks to me like they may be reinflating a stock bubble with a devaluation in the dollar, screwing the average person for the benefit of those bankers yet again…
Assuming your article here is correct – that there will be a 15% housing price drop next year (and I believe this is correct) – then who would be foolish enough to buy a house in this current market?
Tiger,
The correct answer would be: a fool. Only a fool buys into a fool’s market. Sounds like I’m being sarcastic but I’m not. Low interest rates + bubble mentality is still causing many to make dangerous decisions that could ruin their financial futures.
Taking on any debt or not paying off debt are dangerous in an economy that makes your job insecure. Given that legislation is making it more difficult to escape debt, you may one day find yourself in a debtor’s prison for not paying your debt. The Industrial Prison Complex in the USA is very profitable, which is why our laws are aimed at incarceration as a solution to most societal problems.
Factual StoryTeller. At a construction expo in Vegas I sat in on a seminar called,
“Americas Prison Growth Industries “
I will buy a house . I know we did not hit a bottom yet , but I sold my townhome in 2007 (almost at market peak and I have been renting ever since ) . I am just tired of renting . I will buy a house next year , sometime you have to .. Its not just me I have 3 kids and I’d like to sattle .. If I were single – I would wait longer ..
I am of an opinion that it will take 5-7 years for market to bottom out , how long can you wait ???
Buy a house if you plan to be in it for the next 10 years and it is cheaper than renting.
How many Americans know their job won’t be cut in the next 10 years?
(continued from previous message) When you consider that places like (in your previous article) Pasadena and other similar markets are still priced a bubble valuations, a home buyer could potentially LOSE BIG TIME. If one were to lose 15% next year after buying a $500,000 home today, that’s a $75,000 loss! Not chump change, to be sure.
In my opinion, next year will be the beginning of phase 2. I believe the housing correction will continue for years. Housing may end up becoming a CATASROPHIC SITUATION, but even if it doesn’t a 15% correction next year would be painful.
That 15% is an average. There will be properties that already hit bottom that won’t fall much more – they local incomes support the purchases. There will be properties that shed 20% or more, in the nicer parts of CA.
But like I said before, with QE-2 by the fed, and potentially QE-3, QE-4… all homes could soon be worth ONE MILLION DOLLARS, OR EVEN 10 MILLION DOLLARS. However, those dollars would be worth a dime, or maybe even a penny.
No way houses will hyperinflate. Real estate being leveraged debt will be exempt from inflation when interest rates increase. The increase in the monthly mortgage will have the effect of further suppressing real estate prices. Not only that, we are entering a 15 year period of global deflation. 300+ trillion in derivatives remain globally as the asset/debt deleverage continues. QE2 may temporarily arrest it-thats all.
Only when salaries begin to reflect hyperinflation will all assets begin to hyperinflate. Until then the only inflated assets will be the overseas assets and commodities the bankers are buying with diluted dollars created by the private and corporate Federal Reserve. Onc eyour salary goes up due to hyperinflation, that is the end of the US dollar once and for all.
No hyperinflation but, thinking global economy, our real estate in LA coupled with the great climate, makes So.Cal RE a bargain to foreigners, and that keeps LA RE up. Who can compete with money from oil, China, Asia, etc.
10-15% reduction? Where? Most places with low crime rate are still over inflated by at least 30-35%. How long will I have to wait for those areas to come down to normal prices? Does anybody know what the average reduction is so far for 2010?
I’ve been waiting since 2008. Three years and almost ZERO downward movement. I keep hearing how prices are falling but I don’t see it. San Marino, South Pasadena, sections of Arcadia and Pasadena are not moving downward.
All of this cheap home BS is where inventory is high. Inland empire and ghetto areas. So you may wait another 5 years trying to save an extra 100K on a 1MM home. Big deal, I can earn the extra 100K faster than waiting for the prices to fall.
I would like the market to tank and these area to drop. Because when you buy that 1M home, you are stuck with a property tax bill of $13,000 year for LIFE! And that will only go up.
You’re looking at the nicer areas of the SGV. San Marino is one of the wealthiest areas in the nation. These will be affected less, as the people buying into these area buy with cash, are older, and are basically selling off business assets to buy a nice big house, which also shelters their wealth a bit.
Prices will move in the middle class areas where family incomes are in the 70k to 100k range, where houses are bought largely or entirely on credit. These will pull down the areas where doctors and lawyers live, like in South Pas, but not necessarily affect San Marino.
The banks are foreclosing mainly in areas of high demand, where the abovementioned rich folks are focused on buying up rental property. The hit to the balance sheet is a lot less.
I think the 10-15% figure is in terms of a national aggregate. If you’re thinking of prices in Orange County or LA, and particularly in their parts that have been highlighted on this site, then yeah, a much more drastic drop is warranted. But drive an hour inland and you’ll find markets that are actually kind of making sense right now. And there are still areas in the midwest states where you can buy a house with a $400-$500 monthly mortgage payment.
Home ownership is not for everyone. I’d rather have money and diversified investments.
Add up what it costs to have a piece of the ownership society.
First, save a $100,000.
Second sign a $400,000 mortgage.
Third, yearly, send $5000 to the city for “property taxes”.
Fourth, maintain the property, for an annual cost of $3-5,000 a year.
Finally,should the value of the property go down below your mortgage debt, your credit will be destroyed if you make the truly intelligent decision and walk away. As if losing 100k wasn’t enough.
We need to become an “experience society” rather than an “ownership society”. Rent or Own? Down deep we all know we are only renting our little corner of the earth anyway.
Your questions are really about removing private property rights entirely, which is the backbone of the US Constitution. The international central bankers behind the United Nations are very interested in seeing that happen through new eco-legislation designed to protect the world from people. This gives them more power and control.
Actually I’m OK with real estate — in moderation. Take an 81 ml aspirin every day and you increase your life span. Take the whole bottle and you’ll just get sick. We’re a society that has a hard time with moderation, a little is good , and a lot must be great.
Real estate should be one corner of our lives. Sacrificing 50% of your yearly income to the interest gods just seems out of whack. Aren’t there other things we need to do with our lives?
You present housing in a consumerist model.
I have options for productive work in my house/on my land that I could not afford to rent at many times the price. I answer only to me (and my partner) as landlords.
Over 25 years of renting (each) we tried building the capacity to live frugally and productively. It’s hard when you’ve got landlords saying no, you can’t have a woodshop, no, you can’t put gardens in there, no, you can’t blast that wall out to build pantries, no, you can’t heat with wood/stack 12 cords of wood in the yard, no, you can’t have a flock of setting hens, or an outdoor summer/emergency kitchen, no, you can’t resist my choice to use pesticides in the house and lawn, no, you can’t feed wild birds, no you can’t landscape using permaculture principles….
For those trying to live sustainably, frugally, and productively, ownership can still have high value if they’re careful with the Fiat Funkies end of the game. But that kind of value can’t be measured in the Monopoly Money formulas of the NAR and financial industry. How do you put a dollar value on not having to breathe organophosphate pesticides in the house? Or choosing the best possible contractor, rather than the cheapest/easiest/most lucrative for the landlord?
Agreed.
That’s why I 100% own my home, off the grid, built with adobe mud and strawbale, solar/wind-powered, water harvesting, permaculture, etc.
But when I’m in the other 99% of America, I’ll rent, thank you very much.
Don’t want to OWN a McMansion and buy into the whole renting from the bank but it’s mine treadmill illusion…
What you say about ownership is true only if you buy a piece of property that is not subject to restrictive covenants promulgated by your homeowners’ association. Buy a house that was built in an urban area in the last 25 years and see how far you get raising chickens, stacking cord wood, or planting a garden before the HOA fascists come down on you like a ton of bricks.
Dude, I feel lucky now. My landlord put in solar panels. I’m growing food in the front yard, and have introduced native plants. I also have this ditch where I’m trying to develop leaf mold and compost, and will be burying wood to help retain water in the dirt patch. He’s a cheapskate in other ways, but he’s good about the “green” thing.
gregggp is right. You will have to buy in an upper-working-class or lower-middle-class area to get your permaculture on. Try unincorporated areas or older streets where you see a few houses with peeling paint or weeds – signs of no inspector or uptight neighbors. Immigrants are also a plus (as long as they’re not rich people from Taiwan or Germany). Then, growing things in the front will be OK, even appreciated. The garage might even be detached, allowing for improvements to set up a better workshop. The backyard will be hidden, so the chickens will not be seen. Sqftage will be smaller in the house, too, saving on heating and cooling.
Part of the problem you’re having is not enough tenants rights in your area. Too many people think that’s “unamerican”, so you suffer.
“This is like running into an AA meeting and announcing you have free liquor for anyone outside. Many will resist but some won’t. ” LMAO, love this analogy.
Devalued dollar means exports are cheaper (more competitive) and imports are more expensive (less competitive). How is this all bad?
Go to your local Walmart and try to find something (other than food) not made in China. Good luck. Now take that price in USD and multiply it by the 1.2 to get the new price (soon, based on QE2). And the price will possibly go higher.
Now tell me what the US exports other than arms and bad television. Perhaps we will all end up working for Raytheon or General Dynamics. Or even better, we will be send abroad not as travelling salesmen for these companies, but as travelling product demonstrators, showing Iraqis, Afghanis, and Iranians how an air to surface missile works and the effects it has on their livestock and children (whoops! Is that your kid’s left lung dangling from that shattered olive tree? My bad)
We still make some housewares. WM caters to the Made in USA crowd so they probably have one item or two. We still make plastic goods, chemicals, lumber, tools, etc. What I see around my home imported are computers, cheap furniture, cheaper appliances, utensils, chairs, electronics.
We’ve lost our assembly lines.
Group moves homeless people into foreclosed homes:
“We’re matching homeless people with peopleless homes,†he said with a grin. [Max] Rameau and a group of like-minded advocates formed Take Back the Land, which also helps the new “tenants†with secondhand furniture, cleaning supplies and yard upkeep. So far, he has moved six families into foreclosed homes and has nine on a waiting list.
http://boingboing.net/2008/12/30/group-moves-homeless.html#previouspost
The burn-off all this over priced inventory will take years. If they really did it all at once, the banking system would fail. So housing will have this sword hanging over its head for some time to come. I still remember it took a solid 4 years of depressed prices to get everyone hating real estate back in 1990-1994. So, sometime in late 2012 or 2013, real estate in CA will despised once again.
Ahh memories. Prices actually plateaued in 1988. It was more like a 5 year drop. 94 was awesome but I lacked cash. Perhaps this time around it’ll be my opportunity.
Late 1980’s to late 1990’s RE was flat-to-down. Enjoyed my ocean view but was glad to see the upturn after 10 YEARS. On the upswing I sold/bot-up — big beach city OC home at 3x’s my gross income of $125k/yr. Sold a tad soon but hoping to buy again at 3 to 3.5xgross income — I think RE remains flat-to-down till 2016 that’s 10 years again :
Though we now have greater population and fewer homes per capita, we are not creating jobs. Who can qualify for the loans-plus-prop tax — we lack “qualified demand” to keep prices up where they are; based on econimic principles of supply and demand.
Everyone needs to file BK!
Excellent article..! I am cheerleading for the day when conventional 30 year home mortgages return to 9% annual interest. It will ONLY be a matter of time when this happens. Mortgage Interest can not be sustained at LOSS rates. As well all know, when interest rates increase, house prices decrease. This is because the work “affordability” has lost its true meaning ie AFFORDABLE and has been redefined by Realtors and banks as a monthly PITI payment by a stable employed mortgage debtor on a treadmill to nowhere.
When 30 year mortgages return to 9% you will see house prices drop even more down the roller coaster hill. Why should a wood stick built house that has a real build cost of $65/sq ft be sold for MORE money…when we all know that termites get hungry, wood rots, shingles fail, plumbing leaks and electrical paint and upkeep are required to keep the house from getting in worse shape. A used house should be CHEAPER than a new house…it is manmade and can rot just just like an old rusty car. We need to change this attitude that old rotted wood with termites munching away is “better’ than a new house built to the latest code. At least the new house will have fewer termites.
Japan has super low morgage rates for like 15 + years
Agreed that Japan has had their rates at super low levels for almost 2 decades, along with property values that are still anywhere from 10% of peak (as in, lost 90% of peak value) to 25-40% of peak (60-75% off from peak) for prime Tokyo and other cities. They also have inter-generational loans up to 100 years!
Starting to see those 0 & 1% intro APR credit card offers again….lmao
The Fed prints money to buy back Treasuries owned by banks, wall street firms, insurance companies, and so forth.
Those institutions then use this new money to drive up the stock market.
Additional Treasuries are being repurchased with $250 Billion of TARP money that was still unspent.
Our money becomes worth less, the banks and Wall Street magically acquire more money, more than offsetting the drop in value of the dollar.
The transfer of wealth from the people to Wall Street marches on.
The Dollar has lost 15 percent of it’s value since QE 1.
A massive liquidation of the wealth of all Americans.
QE 2 will result in more of the same.
The dollar has gone up in the past two years. Not down.
Tell it to Gold.
Video: 10-year Dollar Chart
Where the Dollar is headed.
Quantifying Quantitative Easing
Quantitative easing, or more simply known as money printing, is a dilution transaction similar to issuing more shares for a stock. The dilution has two primary affects: a decrease in the value of the initial shares and a redistribution of wealth from the original owners to the new owners.
The most significant difference between stock dilution and currency dilution is of course that publicly traded companies tend to use the funds raised through dilution to add value by investing those funds – whereas governments don’t add value by diluting a currency.
In this case, $900 billion will be diluted to purchase US treasuries so the primary benefactor of the quantitative easing will be the US federal government and the financial institutions selling that debt.
Well, the government spending will go toward stimulus spending, HCR, and the war(s). So that’s all going into the economy.
I thought the goal was to create some inflationary pressure, to avoid deflation, and prevent unemployment from increasing.
The excess liquidity given to the banks is being horded domestically, but it also being invested overseas in assets and commodities. This liquidity is diluting the US dollar, and causing inflation to soar in commodities worldwide, including gold and silver. The stock market is going up not because someone is buying stocks with that liquidity. It is going up because everything relative to US dollars is being repriced according to the devaluation of the US dollar. It is the ILLUSION of upward movement because prices are going UP for everything. This will ultimately lead to a US dollar crash.
People have to live somewhere. No new homes are being built. In areas with population and job growth, demand will exceed supply thus prices and rents will rise. What creates job growth? Low taxes, reasonable regulations, fiscal responsibility – things California lacks.
Areas experiencing population and job declines will see empty homes and price declines. Look at Detroit, where the city is buying whole blocks of vacant homes just to tear them down. California’s taxes, regulation and eventual bankruptcy will trigger a mass exodus of money and jobs to other areas increasing demand there.
The quality of borrowers out there is very poor, I wouldn’t lend to anyone either unless they put down at least 20% on a house! There is a large pool of borrowers in other developing countries, my guess is that the banks and investors would rather lend to them! God help us, we are in a real mess, and the Fed is only making it worst for the savers, by depleting our savings with the QE1, QE2, QE3,4,5,6,7,8,9,etc…. That’s what they did with interest rates, from 20% in 1980 and lower, and lower all the way to near 0. Now it’s QEing to the end!!!!! Shut the Fed down, live within our means as a country, as a family, as a person. God Bless the USA, we are going to need it!!!!
Inflation in the near future is almost a certain reality. Dollar based assets (such as oil and U.S. real estate) will inflate. We do not buy houses in the United States with Euros, Yen or gold. Buyers out there hope home prices in U.S. dollars will decline further, but I just don’t see it. Hoping for something with charts and graphs can only go so far.
Home prices can’t go up if supply is increasing (which it is), people cannot afford to pay for them (also true) and credit is contracting (check). The weaker dollar will raise prices on certain everyday expenses, but it doesn’t equate to greater profits and a stimulating economy. It will cause more households to struggle to pay for everyday expenses.
Unemployment held steady at 9.6% this much, and it might hold for the next couple months as retailers hire more holiday sales associates. However, that will hide the more stable jobs that are lost as well as the 1+ million unemployed whose benefits are about to run out this month.
Home prices (in general) will correct at least another 10~20% before they begin to stabilize. This is not so much a hope as it is a calculated prediction based on the current economic conditions.
Supply increasing?? Population increase is far outpacing home construction. And about inflation for ” certain everyday expenses”…well, a house is the definition of a everyday expense. What’s more essential than a roof over our head.
I’ve posted many times about how inflation and home prices run in tandem step with each other, and I’ve grown tired of repeating the same post. Yes, I might be wrong, but what I do know is the house that I’m living in now was sold for $17,000 when it was built in 1959 and is currently (and conservatively) appraised at $600,000. Just got a loan at 3% with this appraisal. Knowing how to use other peoples money while being prudent and patient will reward. Just my 2 cents.
yep, supply is increasing. if you’ve been following this blog, you’ll know that inventory is increasing. this includes not just new home, but also existing homes. if a car lot has 10 new cars, and 10 used cars, it’s supply is 20 cars, not 10.
Everyone, what will cause real estate inflation [too much money chasing too few goods isn’t that the definition of inflation]. Who has the money/qualifications? Foreigners coming here? In inflationary times interest rates go up which causes home prices to go down [1%=about $100+/mo per $100k loan] so 1% point increase in home loan rates = drop in home price of:
$500k loan at 5% loan =5.0×500=2500/mo.
At 6% = approx 600/mo=$3000/mo payment
2500/3000 = .83
this home would drop to approx $500kx.83 = 417k and to check: 4.17×600/mo=2500/mo back to affordable monthly payments. People buy payment plans on cars and homes. Remember in the 1970’s/early 80’s inflation was high and home loan rates were say 10% sometimes as high as 15-18%. Anyway 10% is payments of 5143/mo on a 500k loan. At 10% this house would drop about 2500/5143=.486 or 243k or more because it would knock the air out of demand, knock a lot of people out of the market.
Chart #4 displaying negative investor equity /pre-foreclosure NOD shows the underlying problem with Calif Real Estate and that is single family housing (urban buildout) has been based on 30 years of speculative investor buying using asset inflation and tax write offs. What remains is millions of stranded investors and millions of expensive houses relative to average family incomes creating a one for the ages over supply of American Dream homes. These rental properties that become foreclosures offer the bank and future buyers several financial hurdles and I will use a foreclosure property 1651 Juliet Dr Petaluma, CA 94954 as an example. This home is listed for 369K,1658 sq. ft. built in 75. It as listed as move in ready and when you drive up the front looks pretty good, fresh coat of paint (one coat) but the sides and back of the house have pealing paint, the roof in the back shows significant problems, windows need to be replaced, original bathrooms (2) and kitchen all need complete updating now or within couple years. This house has been a long term rental and needs a complete make over but most likely it will be sold to an unsuspecting couple using FHA low down payment and no money for needed repairs and upkeep. In reality one needs to buy this property for around 125K and put in 75K to make it work but it won’t happen and this is what the future of much of middle class urban area’s will become, white slums.
Ron – you are right. There is sooo much overpriced garbage out there. $369,000 sounds way too much for that piece of junk house. It sounds like it would need $100,000 to get it nice and liveable. These insane housing prices are an ABSOLUTE RIP-OFF. We all need to say “Hell no, we won’t pay” (insane prices).
From what you describe, the house does sound like it’s worth $125K. Wow, I just checked the house out via the internet – horrendously priced!
These insanely high prices ($375K for a fixer upper) were caused by a massive orgy of bankers – this orgy being called the Housing Bubble.
In the middle of all this mass insanity, reading DHB is like having one’s temples massaged with warm melted chocolate. These charts say it all, and so clearly.
Doc notes the trend has been “Save less and spend more.” This is exactly correct, and has been on two fronts: not just consumerism (buying crap that is soon discarded) but also debt (buying chains that may never go away).
In fact our entire GDP is measured by how fast we can turn “natural” “resources” into consumer crap, then get it into a landfill and replace it with more crap. Preferably with a hefty underpinning of debt. (Both financial and environmental.)
The phony numbers that measure this are all cooked up in the meth lab of the speculating class and their designated quants. It’s a lot like a schizophrenic’s inner world: it all hangs together until somebody references it to the real world, then it starts to crumble, and the schizo person doesn’t generally react well….
Instead of the “practical Yankee” way of going at things or defining ourselves–saving, pinching pennies, not needing consumerism, not wanting debt, building skills and knowledge–the global plutocracy has brainwashed a huge mass of people into living for bigger better faster louder more more more. I.e., a culture that is more like Third World warlordism.
Dostoevsky again: “In the end, they will lay their freedom at our feet and say, ‘Make us your slaves, but feed us.'” (The Grand Inquisitor)
How can you predict that the price will go down only 15%? Your own chart #2 says that a normal price should be around 2001 level that is it has to go down at least 30% at least. Look at the day dreaming sellers in Redfin.com . They are looking for 100 to 200% gain even in this market. Bought at 90K in 2008 and listing at 400K. house. Highest price sold in 2000 was 200K. http://www.redfin.com/MD/Ellicott-City/3533-Lower-Mill-Ct-21043/home/10043095
Another example sold at 245K in 2000 and asking for 390K now at: http://www.redfin.com/MD/Ellicott-City/10235-Raleigh-Tavern-Ln-21042/home/10043946
This example is very common in the MLS listing.
“In fact, some argued we should rid ourselves of the minimum wage! That sure sounds like a wage growth strategy.” Wow. Sometimes there are sentence weeds in the forest of good sense at this site that are truly startling. We could go into a long seminar why minimum wages produce unemployment. But suffice it to say that the facts are in. Most recently, since the dimDems increased the minimum wage in 2007, youth and young adult unemployment has skyrocketed (even before late 2008). The minimum wage overwhelmingly affects an employer’s decision on whether or not new, young hires can be productive enough to justify their collective expense. Since they are just out of school and inexperienced, higher enforced wage rates, raising labor costs, mean fewer hires, thus more unemployment. This is just one of the ever expanding number of reasons – e.g. growing student debt levels – which are forcing the postponement of family formation and of transition to more stable career employment. Hopefully, the next Congress will realize the folly of the labor market equivalent of the Fed policy of printing money out of thin air and lower, or even better eliminate, the minimum wage, at the very least for persons under 25 years of age. Think about it a bit. If residential housing prices should and will decline to clear the market, how can the same not be true wage rates in the labor market? Hate to be the bearer of bad news.
Delusion isn’t bad news.
@ boqueronman –
Chances are a good portion of posters here are Democrats. So, why the name-calling? Can’t you just present your argument without the dis? Does that make you feel smarter? I imagine you’re one who’d call yourself a Patriot who loves your country (forgive me if I’m wrong), so do you think demeaning people who represent tens of millions of Americans makes you a more authentic American?
Makena, you are probably right. Also, any neighborhoods that have an international appeal will gradually climb higher in price with cash buyers from countries that now possess our lost productivity. I dare you to find a great deal on a well-kept house in San Marino or Arcadia. Although there will always be the Santa Clarita, Palmdale and Corona neighborhoods that will drop precipitously for sometime. Unfortunately, it will be the new international middle class that will be buying the goodies from now on, not Americans.
Yes I think you have the global picture. We can’t keep letting non-citizens come here and take our jobs, and our shelter.
Has anyone projected the long term effect of the high property tax on a buyer due to the higher cost of homes. If you buy a 1M home in SoCal (which is common) it comes with a $12,500 year tax bill that will only increase over time.
An $1041/month payment is a lot of money when you retire and have a fixed income. Think about how much you would need in that bank at a 1.5% fixed CD just to pay for your property tax! (Math: 12,500 / .015= $833,333!) Do you have an extra 800K CD to help cover your property tax in retirement? Maybe just rely on social security.
Yes. I project that I will end up selling my One Million Dollar home north of the M or loose it to tax foreclosure. Then move to an Airstream Trailer in the high desert around Joshua Tree and raise some chickens and grow pesticide free melons !
If you’re buying a million dollar home, 12k per year in taxes should be affordable because your income has to be pretty damned high.
High property taxes would increase the PITI and make borrowers eligible for less money, and that would depress house prices. Think about it – if your tax was 2% instead of 1%, doubling the taxes, and the house was worth 500k – your monthly expense goes up $400.
A $400 payment gets you around $80k in loans. So you can expect the 500k houses to drop down to the 420k range, or even lower.
This would actually be good to raise property taxes at least a little. The tax money, instead of going to the bank, goes to the state general fund to pay for services. That tax money isn’t hoarded – it’s spent in the economy, helping to reduce unemployment.
I can’t believe that the FED just announced QE2. I mean why not just abolish both parties and let the corporations and big banks rule us directly. Why this elaborate ruse ?
Dr. Housing, you give the impression that you think that California Housing Prices are in for a 10-15% decline in 2011. How does this compare with your 2009 forecast?
I think that even 10% is a little high for 2011. May be 5-8% would be more in line. A 10-15% decline is for a further major economic downturn. But we will see. Too many of these bank foreclosed homes are junk, hence the lower price. If a person’s house is not junk, they should be able to get significantly more than the bank foreclosed home down the street. The Realtor, in their comps, are aware of the condition of the homes in the neighborhood and how much a non foreclosed home could go for.
Hi in the early 90’s appraisers (RE agents can’t do appraisals but do provide comps) were dragging the good homes down in value, calling the junk the norm, and knocking 50% off of upgrades calling them “cosmetics”. That is what I recall from home shopping in the 90’s.
The appraisers work for the banks. So they have a different view point. During the days of the “liar loans” they changed their appraisals to suit their employers, the banks, who wanted to make loans. Now days, a substantial portion of purchasers are mostly cash, so the appraisers are not that important. Today, banks look at credit scores and W-2 income. The big downside for most people buying is the lack of mobility. 2012 should be a better year for a number of reasons.
John, I don’t understand your point at all.
Appraisers set the sales price, which in turn affects future comps. We just sold our home to upgrade, and despite putting $100k into the house vs the neighbors, we got a $10k higher price due to the ultra-conservative appraisal environment.
This will likely not change for a good while, based on bank comments that they forsee very tight lending conditions for the forseeable future (see Calculated Risk).
As a buyer, a great time to lowball and purchase a heavily-upgraded house.
As a seller, a great time to rent out your nicely remodeled home until prices recover in 2015.
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