The Coming Deflation In Home Prices
The folks at Elliott Wave International have a feature up about deflation. "Dow-Jones newswires reports that a Fannie Mae executive told a mortgage-banking conference last week that Fannie Mae would be making the 40-year mortgage a standard product."
"Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt)."
"Non-self-liquidating credit is a loan that is not tied to production and tends to stay in the system. When financial institutions lend for consumer purchases such as cars, boats or homes, or for speculations such as the purchase of stock certificates, no production effort is tied to the loan."
"Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation, because almost no one expects deflation before it starts."
20 Comments:
The sky is falling, the sky is falling!
Face it, the reason real estate has never declined on a national basis in this country is because it never WILL.
Period. There's no use debating this with you chicken littles because you people are always looking on the negative side of things. Always looking for the "catch"
Well wake up, morons. The only catch is that people who don't get involved with real estate are going to be crying in their beer 5 years from now after they've been priced out of the market for the rest of their lives.
Didn't Willie Lowman make his last payment on a 40 year mortgage in Death Of a Salesman? I seem to remember his wife saying that it was quite an accomplishment to weather a 40 year mortgage...
(Just trying to help set the mood around here)
Okay, let's say I wind up being "priced out of the market for the rest of my life." Since I make more money than most people, that means everybody else will be, too. Which means that when you go to sell your "investment" properties, they will be bought by ... whom?
Why do you need to "sell" your home when prices rise?
You can just take a cash-out refi, and spend the profits without actually selling the house.
Considering real estate has NEVer, not even ONCE, dropped nationally, this is about as close to a perpetual wealth generating machine as you can get.
Keep thinking negative. See how far in life that gets you.
"Keep thinking negative. See how far in life that gets you."
Keep up with your wishful thinking and you'll find out real soon.
Face it, the reason real estate has never declined on a national basis in this country is because it never WILL.
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The real problem with the above perception (other than being just a wee bit shortsighted) is that the writer has not gone back to the 1973-74 Bear market nor the Great Depression. With GeeM, Ford, Freddie Mack the Knife, Fannie May I Please, we really are in unchartered territory.
All I can say is "let 'er rip." I'm in one of South Florida's most expensive enclaves. How 'bout a nice modest 2/2 in Naples for $5+ million. If you think that's normal then end of discussion.
Has there ever been a national real estate boom? Seems to me that the backwater burgs appreciate on a smooth trend line, and the flashy coastal and resort towns are cyclical.
You're saying that because there hasn't been a "national" price bust -- i.e. the backwaters haven't declined even as LA, Boston NY etc. declined by 30% to 50% in past declines ('87 in NY, '90 onwards in CA), therefore every day is a good day to buy real estate.
I detect a breakdown in logic between the last two steps.
I make 200k a year.
I've owned two homes and condo in NY.
I've got more than enough cash for a nice down payment.
I've worked in commercial real estate.
I'm renting.
The sky will fall.
Real estate goes down. The whole condo complex I'm now renting in went under in the late 80's. You can see the pre-crash sale prices 150k. The post crash sale's from the bank 45k 1 year later. 200% decline. These condo flippers are going to get burned bad.
The big private investors are selling out to REITS because they think the valuations are ridiculas on the commercial side, across just about all asset classes.
But I guess on the single family residential market, the new paradigm investors have it figured out. All the new immigrants are going to buy the 300k starter homes w/IO, no statement loans.
Yep, nowhere to go but up.
A big mistake in this childish argument is that you are looking at nominal and not real terms. Nominal price appreciation in the 70s was huge but not so in real terms.
As Shiller points out, housing prices on average have followed inflation from the 1800s until 1995. It's just in the past 10 year period that we have had a major dislocation. So yes, it has always increased on average in NOMINAL terms but we will also revert to this average soon, and it's going to be one hell of a bear market.
If you buy the US stock index then you will have an average return of 9% since 18XX but if you bought QQQs in say March 2000 then you are going to have to wait a generation or more before you get back on track. QQQs in 2000 might be like buying a house today in LA, Boston or DC. If you buy an S&P 500 index (house in St. Louis?) then, yes, your downside risk is not going to be as large, but it will go down.
Another possible outcome is that the Fed will bail us out by letting the US economy slide into 70s style inflation. I hope that this is politically untenable. In this scenario and the associated sever recession you will have stagnating nominal prices that will bring the real value back to par.
I am in Saville camp regarding inflation vs. deflation. Helicopter money will "save us".
I assure you we are very positive.
Why do people always assume that money can only be made in optimism?
Being negative is not that bad. My hero, George Soros, made a lot of money in many busts. My other hero, Warren Buffett found lots of opportunities after busts.
How can you buy real estate on a national basis? You buy local homes and many local markets have crashed before.
We may have a troll from NAR.
I am optimistic!
I'm optimistic prices will tumble.
I'm optimistic RE speculators will lose their shirts further reducing prices.
I'm optimistic I will be buying their condos on the courthouse steps.
who cares what people like 10:18 Am Anon think... he's a realtor... who else would claim that now is a great time to buy? You have to be a true moron to buy in a seller's market...
we make 140k and we are renting, because only idiots buy into this mania happening right now in Boston and so many other maniac towns, which will soon burn all their money and then put them into a severe and very painful financial distress. Tell me I will be priced out for life, I have 300k in liquid investments and I'm RENTING. I can walk into a bank and get a 400k loan no problem, but I'm not dumb, I've seen how "real" assets crash and it is far riskier to buy than rent in Boston and so many other places at this moment. I'm in top 15% and I'm renting, if I'm priced out that would mean the crash is simply imminent and I don't mind waiting it will really pay this time.
I'll see you 50% down from here.
did you notice that there are so many conversions from rentals going on for sale everywhere?
did you notice how cheap the rent is comparing to buying? did you notice prices detached in 2003 and ran up like mad? if it looks like a bubble, smells like a bubble, behaves like a bubble, lady and gentelmen that is a bubble and a huge one, one we never seen before. It may take 20 years for prices to come back to these levels after they crash; I say after, because I have no doubts that it will. Look at OIL only a month ago everybody thought that after 59 we are going to 100, yet what realy happened is a reversal back to 48, this is A LOT. Banks are starting to worry about the load crysis, that spells restrictions to borrowers, finally, that means higher, much higher rates.
Dollar also has been ralling for the past month, which means housing prices are now way detached for their real value.
the last ASSET BUBBLE IS PICKING I can hear a cracking noise it's in the air!
agree with 12:56 - markets tend to overshoot, so it might crash hard. RE is of course not a NT, which rose to a insane valuation like many other stocks. Do you remember what "smart" analysts said then? New Economy P/E of 200 is OK, etc, etc. I still rememeber how I worked like an idiot for those stock options that crashed in tree month. The heard learns nothing indeed. RE agents push it like mad, they make so much money now it is not even funny when so many people with no education are making way more than a PhD and that is exactly how it was back 2000. The good thing is that the market finds ways to crash excess and punish those involved, so thankfully having a PhD is still better long term.
my RE agent tells me that it is such a good investement right now;
that even if it "goes down a bit" I would still own a piece of property that will be worth another such piece of property. What a bullshit that is! If I buy now and it drops 10% this would be the only property I could have, bacause I had sold it in a down market I would have lost my downpaiment and also left owing some 100k to the bank, how is that for a real picture of what a 10% down on a 600k house means?
I'm not even talking about 20% or more that will be such a pain that you would be glad if you never was born. Those poor people who listen to those RE agents, one advice go read some books about the CYCLICAL nature of RE, how the FED watches and controls inflation, before you buy now you simply must read Shiller's new book Exhuberance second edition. Those who jump into the RE now are going to regret it very deeply.
The only thing that bothers me is that the next crash in RE will cause so much more damage than one in 2000 that everybody will get affected, thanks to a few greedy ones that propelled this bubble to the insane hights. An of course Mr. Greenspan who gave so much cheap money to those who should have never gotten it. Greenspan is the RE bubble maker man and that's how the history will remember him.
Denver Investor,
Thanks for commenting on your market. I think it is a little ahead of most, price and inventory wise. Please keep us updated.
I like to say this to all of those people who encourage buyers in a seller's market to buy, buy, buy or you'll be homeless for the rest of your life. I have 600,000 cash and I am not going to buy and waist half of that for your pleasure. I'll see you when real estate is busted at least 50%.
I am in the mortgage business and i cannot believe the loans that fannie and freddie are willing to approve as long as it has mortgage insurance. 60 to 70% debt to income ratios. these people do not have $5.00 bucks left at the end of the month for a cup of coffee. interest only is a 3, 5, or 7 year time bomb. then there is subprime, 520 credit scores with 10% down. at 520, your history suggests that you don't pay anyone.
greenspan raising the feds fund rate does not address the real problem...loose lending practices. Did i mention $500.00 total move in with fannie mae. You can buy a $350,000 house with $500.00 out of pocket...it costs much more to get into a rental. no wonder rents are going down. Don't think that for a second the market can't crator. It took my sister 18 years to get her money out of her condo in Houston.
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