Wednesday, May 18, 2005

Economic Myths Fan Bubble Denial

Reuters is running another bubble denial story. Frank Nothaft, chief economist with Freddie Mac, "If the local economy is doing lousy, I can assure you that the housing market is not going to do well either."

They may have attributed that quote to the wrong economist, but let's explore that last point. In Rockford Illinois. "'A year ago, in April 2004, the average sale price was $US118,000 and now it's almost $US135,000,' the broker said. 'Everybody's asking the same thing: how long can this train keep going?'"

"Employers in the Rockford metropolitan area cut 9400 jobs between March 2001 and March 2005, as the area lost a fifth of its manufacturing jobs. Rockford's unemployment rate was 6.1 per cent in March. 'In our area, we are starting to see some affordability issues,' Mr Nalewanski said. 'We've had a decline in salaries due to the exodus of manufacturing jobs and their replacement with service jobs.'"

The concept of rising wages as a driver of home price appreciation might be valid, except real wages are actually declining. And in that scenario, wouldn't prices move up in some relation to wage increases? Normal supply/demand economics don't explain this housing market because it is a speculative mania, one of the biggest ever seen.

To finish with some quotes by the courageous Dean Baker. "People are betting on the value of their homes rising, and they're not saving. This is a classic bubble. We may be seeing the bubble spreading' from the east and west coasts to inland areas. 'People are buying homes every day and paying much more than they'll be able to sell them for. A lot of people are going to find themselves a lot poorer than they expected,' he said."


At 4:53 PM, Anonymous jl said...

Dean Baker has written many articles on the housing bubbles as early as 2002. You can find the articles here

It's well argued from an economics viewpoint.

At 4:59 PM, Anonymous Rob said...

"Employers in the Rockford metropolitan area cut 9400 jobs....."

I believe that the impact of lost manufacturing in this country has not been noticed due to the credit bubble being supportive of the service sector. I have been a small manufacturer for 25 years
and for the last five years have sat and watched my entrails being wrapped around me by the unfair trade imbalance with China. My employees aren't happy because I have no way to increase pay, and all the while it gets more expensive to live here in So Cal.

The way I see it, those that have over-extended
themselves with I/O and home equity loans, and spent the money on imported crap without ever even looking at the tag to see where the products they buy are made, deserve whats coming. They should know that us dirty ole manufacturers and miners and farmers are the industries that support ALL of the service sector jobs.

There, I feel better, it had to be said.

At 5:05 PM, Anonymous Anonymous said...

News FLASH! ...

China will revalue Currency in afew month ... "Bloomberg"

Also another good reading

Bubble or not, high home prices can hurt
By Sue Kirchhoff, USA TODAY

At 5:08 PM, Anonymous Anonymous said...

Housing prices reflect income growth and local economic conditions. Unless such conditions worsen, prices will not come down.

How could prices have gone up so much without significant wage increases? It is a conundrum.

At 5:13 PM, Anonymous Anonymous said...

Didn't you see what China told Snow. They said "Go F&$* yourself" China will do it when they want. Should we push them a little too hard they can pull the plug on the whole thing by selling they Treasury or simply not buying any more.

At 5:15 PM, Anonymous Anonymous said...

At least the Californians have one great advantage over the people of Rockford -- when they all are broke, the former group can wheel their shopping carts up to a bench and enjoy great weather.

At 5:19 PM, Anonymous Anonymous said...

Trade wars are about to start. I love it. All stars are lined up for our economy to be desimated and for the next great depression to start. Sell your houses, buy firearms and canned food. Here we go.

At 5:21 PM, Anonymous Anonymous said...

5:13 -- China can ill afford to dump their Treasuries. True, they can slow down their purchase of them, but why will China want to slow its exports? That is the formula for internal revolt.

The USG will force China to make a face-saving minor change in the currency ratio with a "pledge" to move toward a float. That will silence critics for now. Japan will not bail on Treasuries. But keep a wary eye on other Asian nations who hold a lot, like S. Korea. Best thing going for us is that Europe is close to imploding and the Euro is almost a joke.

At 5:21 PM, Anonymous Rob said...

China will eventually pull the plug anyway. They have only supported the dollar as long as they needed to build infrastructure and complete the transfer of our industrial soul to their shores.

Anon 5:15, thanks for the chuckle, and yes, my shopping cart will be made in USA.

At 5:24 PM, Anonymous nostradamus said...

(Frank Nothaft, chief economist with Freddie Mac, "If the local economy is doing lousy, I can assure you that the housing market is not going to do well either.")

If you put 100 economists in a room, you get 100 opinions. Consider the source.

Whether he said it or not, it's not true in any case. The housing boom has gathered momentum throughout the past five years. From 2000-2002, the stock market lost b/w 50-80% (depending on index). Not exactly robust economic years, yet housing did great.

During the late '70s, housing doubled (or more) in California even though the broader economy was in recession. And after the stock market crashed in '87, real estate went straight up in California until '89.

The only period when both the economy and real estate tanked together was during the Great Depression.

The current housing mania has little connection with fundamental economics, such as job growth, income growth, population growth. It has everything to do with negative real interest rates, a flood of EZ credit and optimistic sentiment towards real estate and negative sentiment towards other asset class options like the stock market.

You'd think an economist would know these things.

At 5:29 PM, Anonymous freudianslip said...


If China revalues, it would hurt the US, not help us. They wouldn't need to hold so many of our dollar-denominated assets so watch for interest rates to rise and mortgage credit to get tighter as China unwinds its positions. And it won't benefit our manufacturing industries one iota. China could quadruple its prices and they would still be a fraction of what it would cost to manufacture in the USA.

Maybe all this talk out of Washington is just a smokescreen. We know that a reval of the remninbi would hurt us. And we know China won't reval if we demand that they do. So we demand that they reval in order for them to be able to stand up to us and refuse. Reverse psychology?

At 5:30 PM, Anonymous Anonymous said...

5:21 - Rob - with respect, China is far, far from completing their infrastructure. There are a zillion Chinese in the provinces who have heard of the relative riches to be made in the cities. The rulers walk a tightrope trying to manage those expectations while growing their economy, all the while burdened by lying mandarins who feed them dubious reports of progress in the hinterlands. We are the only nation large enough, import-wise, to prop them up. So we will make noises like a bull and they will grudgingly give a little ground. Anything else is what I would like to coin as "MAED" - Mutually Assured Economic Destruction.

At 6:07 PM, Anonymous Anonymous said...

I live in a market that has lost jobs and population over the last 10 years, New Orleans.

In the acceptable in-town neighborhoods, housing has tripled in cost in 10 years. Appreciation is not as great in the far suburbs but still more than double inflation and starts are up 70% since 2001

At 6:29 PM, Blogger Melody said...

Some interesting charts.

At 6:51 PM, Anonymous Rob said...


Doesn't the WTO require China, and haven't they agreed to unpeg by 2007 anyway? (I may be mistaken, but think I read it somewhere)

You are right, by now, it would hurt to unpeg. But it has also hurt manufacturering to let this thing get to this point. It will comeback to bite us when we have a disagreement with China and have to ask them for the parts to fix our fighter jets.

In my opinion, the main reason that we have not already felt the effect in the service sector is the credit bubble. Our easy credit has taken the place, although temporarily, of wealth creation. If our industries are gone, and the generation that built it is retired or dead, we will need to flip a lot of hamburgers to pay for an aircraft carrier.

At 6:58 PM, Anonymous so. cal serf said...

Q. What do you get when you combine a single mom, a mayor, a realtor, and a rabbi (yes, a rabbi) on a panel on affordable housing in the Bay Area?

Sound like a bad joke? It is:

At 7:14 PM, Anonymous Anonymous said...

Don't know exactly what to make of this article, but on its face it appears that the Japanese central bank has done its fair share in keeping down our interest rates by snapping up treasuries, looks like a one hit wonder though:

At 7:15 PM, Blogger Melody said...

Real Estate Roulette

At 8:14 PM, Anonymous Anonymous said...

6:51 Rob -- I agree with all your points, though I think the "unpegging" will be far, far less than a complete float. It will be some sort of managed compromise.

As you say, our problem right now, relative to real estate, is too-loose-credit. Interesting that the Prez has asked AG to stay on a while. Perhaps just long enough to be on seat when his house of cards crumbles.

At 9:12 PM, Anonymous Anonymous said...

North Central Illinois has been hard hit.
Havard lost the Motorola Plant, Job losses at Chrylser and Rockford has been struggling
for years. I think the only thing keeping the Rockford housing market going is folks who have moved out there who work in Schaumburg or Hoffman Estates. A hour plus commute one way.

Just wait until gas hits 4.50 a gallon as predicted. That means oil at 80 bucks a barrel equal to its adjusted 1981 price.

At 9:42 PM, Anonymous Dimitris said...

I need some help. I'm a first time buyer. I DON'T WANT TO BUY NOW. However, I may not have a choice. My wife is losing her patience. We both have good credit and good salaries, but I feel that we'd lose our savings if we bought now. We are currently living with my parents (rent free). We live South of Boston and would like to buy in Easton or Norton. I was thinking the safest bet would be to buy a condo (priced around 350k) and lock in a fixed rate. If the prices drop say even 40 percent in the near future, my logic would be to rent it out and then buy the single family dream home? I was thinking to do it with no downpayment and hold on to our savings for the future. Should I give this a shot or convince her to wait it out for a couple of more years and save more money?

At 9:55 PM, Anonymous jl said...


Why not rent a condo in Easton or Norton? It's not as good as living rent free, but if you can convince your wife that condos are over priced, you should be able to convince her to rent rather than buy.

And if you believe there is a bubble, renting is the safest bet.

At 11:42 PM, Anonymous Don said...


Have you wife read this blog. Then go rent.

At 4:22 AM, Anonymous Anonymous said...

9:52 - I've read that Boston has one of the very highest bubbles and, therefore, the farthest to fall when the bubble bursts. If you don't want to do as JL recommends, then why not start giving $500-$1,000 per month (depending on how much space, amenities and free utilities you receive) to your parents and stay on with them? That might make them REALLY happy to have you there, and you can be sitting pretty while the market there crashes. If you can have the patience to wait for the near-bottom of the market, you can pick up a terrific deal. Otherwise, as JL say, rent something until all that happens.

At 5:48 AM, Anonymous Dimitris said...

Thanks for the quick responses. I was afraid of these answers. I've done the math to her and she still doesn't get it. She has that female "nesting" instinct in her and thinks that we must own. The situation here is fine at home, my parents are cool and wouldn't accept rent money from us. My wife just wants to have her independence, I completely understand her. I've done worst case best case scenarios and still I can't get her to understand, she thinks I over analyze things and acts as if the housing bubble is my fault because I didn't want to commit a year ago when I believed we were in a bubble. Damn thing hasn't bursted yet! I'm going to put up a fight with her and then try to make her happy (vacations to forget about houses). Who knows maybe it will work. I should have waited a couple of years longer before asking her to marry me, or better yet when home prices reached rock bottom. (like in 5 years probably). It really stinks being a first time home buyer in todays market.

At 6:31 AM, Anonymous Anonymous said... your wife today's Wall St Journal. On page one is an article titled "The Fed Starts to Show Concern
At Signs of a Bubble in Housing"


It isn't only that the clever mortgage industry keeps coming up with new ways to lend people money to buy houses that involve ever-more leverage and little -- or sometimes no -- down payment.

It's that more people are buying second and even third homes, expecting that prices will continue to rise so they can sell the houses quickly at a profit -- and that is drawing the Fed's attention. The National Association of Realtors says its surveys find that 23% of all homes purchased in 2004 were for investment, and a further 13% were vacation homes. It's as if Americans got tired of the stock market, and decided to look elsewhere to try to lose money.

..end excerpt..
Something to think about: If the $350k condo you are considering falls 10% in one year in value, that would be a $35,000 loss, or about $3000 a month...add that on to the monthly mortgage, taxes, insurance and HOA fee for the true cost of buying now.


At 6:38 AM, Blogger The Original Anon said...

"If the $350k condo you are considering falls 10% in one year in value, that would be a $35,000 loss, or about $3000 a month."

This really is one of the best arguments for waiting, but in reverse it is also the sole good argument for buying in this bubble. So be careful when you use that to convince the wife.

At 8:13 AM, Anonymous Anonymous said...

Commentator "Nostradamus" said

"The only period when both the economy and real estate tanked together was during the Great Depression"

He obviously means that the only way for the BUBBLE to bust is by a "Great Dpression" scale event

I hope his prescience is not validated by his NIC

At 8:45 AM, Anonymous Anonymous said...

To Dimitris:

Buying a house takes courage no matter when in the cycle. Those who thought there was a bubble 2 years ago may be still fence sitting.

You have to manage the risk. You can do this by having a deposit to start off with. This gives you some margin.

If you choose to rent then pretend you are buying an entry level property and save the difference between the cost of Ownership and Rental. You may find this difficult. Some people would first buy an apartment then after creating some equity move on to a detached house. It is called the Real Estate Ladder.

Anyway - Patricks site :-
has costs of Ownership vs rental.
If you can build up a deposit this way over a year then you would have the means and the discipline to Buy. You may also be the beneficiary of lower prices ?

At 2:14 PM, Anonymous Anonymous said...

Dimitris, I too live in Mass, metrowest to be exact, and currently renting. There are some great rental units available, and I would encourage you to either stay where you are and sock as much money away, or move out and rent. Paying $350k for a condo in Norton, is LUDICROUS. Good luck to you.


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