Who cares about and the state of the economy and the livelihood of our citizens when I have gay people to hate?

Signed,

Bobby Sue

You're pretty funny Thomas. *Snicker*

Kevin - I just finished reading John Brady Kiesling's new book, "Diplomacy Lessons...for an unloved superpower" and think it's right up your alley. If you don't recall, he's the foreign service officer whose resignation letter protesting the Iraq war was reprinted across the world. Check out his book:

http://www.bradykiesling.com/thebook.htm#Advance Praise

Why is the crash in the housing market a bad thing? A lot of us don't own homes and were wondering if we were ever going to be able to.

Joyner's observation that this is a softening rather than a bubble bursting stems from the fact that he is, correctly, focused on the fact that he sold his house for 140% of what they bought it for three years ago. From a seller's perspective, this is a great turnaround, even if they could have gotten 13% more a year earlier. Similarly, the people who sold him his new house made a terrific profit.

We will know if the housing bubble (if that is what it is) has burst if people are forced to sell at a loss. Right now, the only people hurt by the drop would be someone who bought a year ago and hope to flip the property now. Someone who bought say three years ago on an interest only ARM may get hurt because of higher rates but even if that forces them to sell, the market would have to drop 40% (to use Joyce's data) before they were actually taking a real financial hit. If an when that happens, then we can start talking about bubbles.

10-15% drop over last year matches what I've heard about just about EVERY formerly "hot" market (from SoCal houses to Chicago condos to DC townhomes).

That said, I'm not sure that this is the end of the world. It is not uncommon in a bubble situation to claw back 12-18 months of gains immediately upon it becoming common knowledge that a bubble was out there. This doesn't mean that this pace of depreciation will continue for any extended period of time. Just that everyone realizes that the price increases of AT LEAST the last year or two were unreasonable, and the new market starts back at the previous prices.

Now, THIS doesn't mean that housing values AREN'T going to drop significantly. Especially in a few markets (see the above examples), I wouldn't be surprised to see a return to 2000 or 2001 prices--so, indeed, a 40-60% drop. On the other hand, I also wouldn't be surprised to see a bona fide "soft landing" scenario where prices stabilize after this initial 10-15% drop or perhaps tumble 5-10% more, but it takes a LONG time to sell your house.

In any event, buyers that bought in the past 2 years or so are screwed if they need to sell. Seriously, seriously screwed. To the point that if I was advising someone that bought a condo in 2005 and (1) could no longer afford the payments and (2) couldn't get anywhere close to their outstanding balance back on the open market, I would tell them to pack up their stuff, rent a cheap apartment, and then call the bank and tell them that they are just giving up on the place. At the very least, it will save them four months of foreclosure hell.

I'm with Hacksaw, and to tell the truth, don't feel a lot of sympathy for flippers that get caught out. That's capitalism and the free market for you. I also think the impacts on other people will be somewhat muted as most people will simply decide not to sell or move if that move or sale was an optional one. There will be some people who are forced to walk away, but that's life.

I agree with Hacksaw and Joe: anybody who bought in the last two years is screwed if they're trying to flip, but I hope that isn't too many people and, given that there's no secret there's a bubble on, I don't feel terribly sorry for them.

I only know one person who's bought in Manahttan since 2003 and we all told him he was buying at the top of a bubble. His attitude was, I know, I don't intend to sell, I'm locking in a low interest rate for 30 years and I need the tax benefits.

Actually, James is right about a 5-7 year ARM; most people will move before they feel the bite.

Unfortunately, from what I understand, most ARMs are 3-year ARMS, and the low teaser rates are starting to expire, putting marginal buyers in big trouble.

If 30% of home purchases were by speculators, that means that same amount of demand has completely disappeared. If the speculators should all decide to sell at the same time, then house prices should fall that far, too.

One thing that never seems to get mentioned in discussions of the housing bubble is the effect it's having on the rental market. As a new arrival in DC, I'm looking for an apartment, and I've been told that rental rates have gone up in a huge way over the last year or so because no one wants to buy right now. The demand for rentals has gone way up, and so have the prices, meaning the lower-middle and working class folks who couldn't afford a house in the first place are taking it on the chin too. Never hear that talked about though. Just kind of annoying.

Why aren't we talking about the crisis in Baluchistan which is more than a little likely to lead to the downfall of the Pakistani gvmt?

Zac,

It could be a bad thing because thousands of construction workers, suppliers, realtors, financial folks and others could be out of work. And then they don't buy cars or truck or what you make. And you get laid off along with thousands of auto workers. But housing prices would come down, and you could buy one, if you only had a job.

Why is the crash in the housing market a bad thing?

Because escalating home values against which people can borrow ((and have been, quite freely) have been providing much of the spending power that's kept the economy afloat despite falling real incomes of all but the top segments of the economy during the Bush Administration.

If home values fall broadly, it could trigger drastic cuts in consumer spending and, through that, a general economic slowdown.

It seems like the main bubble you are talking about is the market for flippers. If you are going to hold on to a house for more than a year, the trend is still up and will likey always go that way, especially in coastal areas. Of course, when the oil runs out, those McMansions in the 'burbs will tank, but that's not such a bad thing. Anybody want a 1982 Lincoln Continental?

Oh, and we also need to outlaw stem-cell research and abortion. Thank you.

"Why is the crash in the housing market a bad thing? A lot of us don't own homes and were wondering if we were ever going to be able to."

This is lots bigger than that. The US economy over the last few years has been propped up by the housing/construction bubble.

When that pops, (we are now the early stages thereof) I really don't know what's gonna hold the economic ship afloat.

Watch for the economic ripples to spread as banks and S&L's feel the pinch and go under... (just like last time).

I have the sense that this is going to be a 'Perfect Storm'. Housing collapse, massive budget deficits (Iraq + tax cuts), skyrocketing energy costs and an overwhelming trade deficit are all coming home to roost at once.

Fasten your seat belts.

Of all the annoying verbal shorthand, *Snicker* is by far the gayest.

You know if they continue to run things, the Republicans you blindly support won't let you marry your boyfriend, don't you Al?

Kevin,
Can I borrow your crystal ball if you're done with it? Mine's broken and yours always seems to spot everything with such amazing accuracy that I just know I'll be a kazillionaire if I use your crystal ball.

Please?

Kevin,

Sure, the prices are down from their peak. But they're way up compared to two, three, or four--let alone ten--years ago.

The longest I've stayed in the same house as an adult is four years. I've either relocated entirely or had different needs after that.

Lets see if I understand James. If James climbs to the top of a cliff and jump off he can say that he is higher than he was when he started climbing all the way to the bottom. Morevoer it is the end of the drop that is painful. The rest of the way down, everything is fine.

Growth depends on the frame of reference doesn't it? Compare today's price with the price in 1970 for bigger gains.

And growth since 1870? Blistering!

cmdicely,

falling real incomes of all but the top segments of the economy during the Bush Administration.

Real incomes have not been falling for all but the top segments of the economy during the Bush Administration.

"If home values fall broadly, it could trigger drastic cuts in consumer spending and, through that, a general economic slowdown."

So we'll be more like Europe. Isn't that what you liberals want?

Joyner's observation that this is a softening rather than a bubble bursting stems from the fact that he is, correctly, focused on the fact that he sold his house for 140% of what they bought it for three years ago. From a seller's perspective, this is a great turnaround, even if they could have gotten 13% more a year earlier.

What about people who bought houses a year ago ?
They just lost 13%... What about people who build\sell\finance houses for a living ? How much are they losing with the 13 % drop ?

People who just bought houses have lost nothing. They will only lose upon sale.

It would be accurate to say they'll lose if they sell but those who maintain their homes have lost nothing.

Lets see if I understand James. If James climbs to the top of a cliff and jump off he can say that he is higher than he was when he started climbing all the way to the bottom. Morevoer it is the end of the drop that is painful. The rest of the way down, everything is fine.

What an absurd misrepresentation of what James said. Most homeowners did not buy their first home within the last year or two. Most homeowners have reaped the benefit of a long period of rising home values. Therefore, even if there is a significant drop in values, most homes will still be worth more than their owners paid for them. That is the point.

"Real incomes have not been falling for all but the top segments of the economy during the Bush Administration."
Posted by: GOP on August 28, 2006 at 1:40 PM

I guess it depends on how you define "top segments." I don't have it in front of me and I read the article early this morning (and have read several related articles sence), but as I recall today's New York Times article indicates real incomes have been falling for the top 90% of wage earners.

If you think the New York Times is too liberal you might want to read http://money.cnn.com/2006/08/28/news/economy/real_wages/

Excuse me, the bottom 90% of wage earners (not the top) have seen real wage declines under Bush. The top 10% have been doing OK, what with their tax cuts and all.

I welcome the crash. I'm a renter in the DC area who wants to own. I cannot wait for the crash. It means I'll finally be able to afford my own place.

Leading indicators (my wife and all her architect / contractor friends) tell me that the DC crash has already begun. People just don't know it yet. Contracting jobs are vanishing, "orders" for new developments and new homes are being cancelled, and banks are turning away from funding new projects.

And don't give me an interest rate argument: real intrest rates are awful. Great, I can get a 6.2% rate, but my month-to-month payments are beyond my reach because I have to take out a loan on half a million to get anything I can stay in for a while.

All that said, this is an issue that is affecting a very small part of the country. Pittsburgh won't feel a thing.

GOP

I don't know what planet you live on, but here in Red State America lots and lots of people have refinanced their homes over the last few years. They have taken money out for all the normal reasons, to pay for college, to pay medical bills, to pay off credit cards, to take advantage of low interest rates. There are very, very few Ozzy and Harriett types who have just sat on their mortgages. A bursting housing bubble means that many of them are or will soon be upside down in their mortgages. Try to refinance that ARM if you are upside down. Forclosures, and lots of them, are on the horizon.

"Real incomes have not been falling for all but the top segments of the economy during the Bush Administration."
Posted by: GOP on August 28, 2006 at 1:40 PM

Funny thing... Census data (http://www.census.gov/hhes/www/income/histinc/h06ar.html) shows both real median and real mean household income have fallen every single year since 2000. This means at least half the US population is making less money every year.

I think the common sense thinking is that it will be bad for marginal borrowers, people who cashed out equity on variable rates to buy a ski boat, speculators and some builders. Otherwise the rest of us have to have a roof over our heads and so what if my place that went up X% in the last two years is now worth X% less, it's where I live. It will be nice not to have the conversation a every dinner party turn to real estate gains.

Now the macro impact might not be so good and I think we're certainly looking at a down turn next winter. Although the middle class never really saw the last upturn, so it will just feel like more of the same. So much for trickle down right.

140% in 3 years is a 11.9% annual rate, while 238% in 10 years is a 9% annual rate. While the total is impressive, neither of the annualized rates are that amazing. This means that a drop of 13% or 21% wipes out more than a year of growth.

"Real incomes have not been falling for all but the top segments of the economy during the Bush Administration."
Posted by: GOP on August 28, 2006 at 1:40 PM

GOP is actually right... its not the top segments that are doing well, its the top segment. Measured in real dollars, the 1st, 2nd, 3rd, and 4th quintiles has seen declines in their income since the year 2000. That is also true of the bottom of the top 5% of all households. (http://www.census.gov/hhes/www/income/histinc/h01ar.html)

Boffo economy there, GOP.

It's all the Republicans moving out in anticipation of the next 2 elections.

The peak price in this boom throughout the country was 90% above the inflation- and quality-adjusted average price of houses over the past century, or, roughly 75% higher than the inflation- and quality-adjusted average price since World War II. Since bubbles usually overcompensate, we could see a number of markets that have 40-60% drops in house values in the center of the country and 50-70% drops in the superbubble cities.

Freedom Fighter -

I know you fight freedom and all, but do you ever pay attention to actual economic indicators or is that too much like having freedom for you.

There's a reason that the Euro has appreciated 30% against the dollar.

"I think the common sense thinking is that it will be bad for marginal borrowers"

If by "marginal borrowers" you mean 60%+, then maybe. The thing that would make this downturn a lot worse than previous ones is the fact that so many people got ARM loans with $0, and they (1) can't afford the payments when the teaser rate expires and (2) owe a good bit more than their house is currently worth after a "healthy" 10-15% market correction. Number 1 means that they can't sit on their current mortgage, and #2 means that they can't refinance or sell. This conundrum (can't sell, can't not sell, can't afford payments, and can't refinance) of the current slump has never really happened before.

Compounding all of this is the fact that the places that saw the biggest bubble--and face the biggest correction--were the ones where you saw a huge number of young families borrowing way more than they could afford (thanks, ARMs!) with the thought that "nobody lives in the same house for more than a few years anyways." Well, they do when housing values drop, and guess what? They're now dropping.

Why is the crash in the housing market a bad thing?

Falling home prices are good if you did not purchase a home before the dramatic rise in the slope of increasing prices of two years ago. If you bought at the peak last year, however, it means your mortgage is more expensive than the new selling price, which means you cannot refinance or sell without selling for less than you purchased. The new home owners from last year are now upside down. I think the people purchasing now will be upside down next year.

Ron Byers,

I guess it depends on how you define "top segments.

Do you think those making the median wage qualify as the "top segments of the economy?"

but as I recall today's New York Times article indicates real incomes have been falling for the top 90% of wage earners.

What article would that be?

One thing I haven't seen mentioned in these discussions is property taxes.

My property taxes have almost doubled in the last 5 or 6 years. If you "own" your home (the bank really owns your home) and you live in an area where selling prices for homes are accelerating rapidly, your property taxes will go up. Sure, if you sold your home you would make a profit on it, but as long as you stay in that home you are essentially taking a loss.

Also, if you sell the home and buy another more expensive home, you will be paying more in monthly payments and property taxes than you were for the previous home. The only way you actually really make a profit is if you buy a less expensive home.

I do realize that there are people who buy on spec and hope to sell higher a year or two later. Those people are hurt by a drop in prices for homes.

OTOH, for people like me who don't plan to sell, a drop in evaluations for homes will mean my property taxes decline and this is an advantage to me.

If prices drop dramatically and far fewer new homes get built, this does have a cascading effect on the economy, and I feel sorry for those in the home-building business, contractors, carpenters, electricians, etc. If I worked in one of those businesses, I would specialize in remodeling rather than building new homes.

My ideal would be a long and gradual decrease in housing prices, eventually to the point where police, firefighters, teachers, nurses, etc., could actually live in the communities where they work. I mean where housing prices have gone so high. I realize that there are communities where these types of workers can also live, but this is not true of many places on either coast, or in some of the other larger metropolitan markets.

Over the last decade the housing bubble has driven up home assessments here in Jesusland, the cradle of the Confederacy and home to Pat Robertson and Jerry Falwell.

Will a 10-15% drop in home resale values lead to lower home assessments? Not likely. Once Governor Jim "Happy" Gilmore cut our car taxes eight years ago the state and localities became addicted to taxes generated from higher assessments to balance school budgets & maintain essential services. Assessments have been driven up 20% from FY05-06.

So who benefits? Hummer and Ford truck drivers from the outer suburbs, who clog our roads, erode our roadbeds and pollute our air while the rest of us pay disproportionately for their kids' education.

GOP read my cite. It will take you to the New York Times article.

In fact read the posts following mine. They are filled with citations blowing giant holes in your position.

Of course, facts do have a definite liberal bias.

can't sell, can't not sell, can't afford payments, and can't refinance

Let's hope your mortgage is nonrecourse, that'll save you a little time in bankruptcy court.

Measured in real dollars, the 1st, 2nd, 3rd, and 4th quintiles has seen declines in their income since the year 2000.

The table you link to does not support this claim.

1. The most recent year for which data is provided is 2004. It's now 2006.

2. The data provided is the upper limit by quintile, not the median or average of each quintile.

3. The data represents income by household, not by person. Household size has been decreasing, meaning that income per person (member of household) may rise even if household income falls.

4. The constant-dollar numbers were calculated using the defective CPI deflator, which has been found to overstate inflation, and thus understate growth in real income, on the order of 1 percentage point per year.

GOP,

"I guess it depends on how you define "top segments."

Yeah, well, apparently actual data would indicate that those whose real income has dropped has included the 1st, 2nd, 3rd, and 4th quintile of households, plus the bottom end of the top 5% of households. That leaves... well, it leaves the top, doesn't it?

Don't be lazy - look at the data (second table): http://www.census.gov/hhes/www/income/histinc/h01ar.html

Then tell us all how things have been so great for almost everyone since GW took office.

In my market, July sales were down 30% from last year's July.

But prices are up 5.1%.

WTF?

"The most recent year for which data is provided is 2004. It's now 2006."

Sure... why the administration is holding back data from 2005 is anyone's guess.

"The data provided is the upper limit by quintile, not the median or average of each quintile." Ah yes... if the upper limit of the 2nd quintile is down, and the upper limit of the 3rd quintile is down, we can assume that everyone else in the third quintile is making off like a bandit.

"The data represents income by household, not by person. Household size has been decreasing, meaning that income per person (member of household) may rise even if household income falls."

Real income per person has also fallen every year since 2000. (http://www.census.gov/hhes/www/income/histinc/p01ar.html)

"The constant-dollar numbers were calculated using the defective CPI deflator, which has been found to overstate inflation, and thus understate growth in real income, on the order of 1 percentage point per year."

Two comments to that:
1. cite?
2. how come that doesn't seem to have had the same effect at other points in time? Even with this defective deflator, real income per capita (you wanted per person, right) rose every single year during the Clinton administration. And dropped every single year per person during GW's.

"In my market, July sales were down 30% from last year's July.

But prices are up 5.1%."

Classic stalemate. Sellers aren't willing to come down, and buyers know that paying asking prices is silly. There are still a few buyers who *have* to buy (not really, but who wants to rent after owning?), which explains the noise and the slight gains. But in general, the two sides are waiting each other out.

This has happened before. For what it's worth, buyers always win. A huge drop in volume with stagnant prices almost always is followed by drastic price reductions.

We might be facing the paradox that the bubble bursting might hit a lot harder in the red states than in the blue, notwithstanding the fact that the blue states got far more overpriced. Here in Manhattan, despite the absurd prices, the bubble may well have been limited by co-ops not accepting ARMS and the amount of land available for condos. Add in the fact we're less affected by increases in gasoline and all the foreigners happy to arbitrage the strength of their Euros by scooping up those marked-down condos, we might be O.K.

Which means, of course, another clusterfuck for the Bush supporters who moved an hours' drive out to the McMansions they could afford only with interst-only mortgages in the first place.

BTW, the fact that everyone who's waiting to buy is renting is BIG news here in Manhattan, just not nationally. Right now it has led to a resurgance of a scam in which a rental broker signs an "exclusive right" to rent an apartment, doesn't do anything to show the apartment, waits for the owner to rent it on craig's list (which can happen in day, the NYC rental market's so tight)and then demands his fee from the owner, pointing to the fine print of the broker's agreement which required the owner to refer all offers to the broker. Easy money, indeed. Some of these "real estate professionals" deserve not just to be out of work but in jail, in my opinion.

Ron Byers,

GOP read my cite. It will take you to the New York Times article.

Your cite takes me to an article on CNNmoney.com, not to a New York Times article. There is nothing in that article substantiating the claim that real incomes have fallen for "all but the top segments of the economy during the Bush Administration." First, the article discusses wages, not incomes. Do you understand the difference? Second, the time period discussed is "the last three years," not "during the Bush Administration." Third, the real wage claims are based on calculations made using the defective CPI deflator, which overstates inflation and understates real wage growth.

Try again.

wolfdaughter,

If you "own" your home (the bank really owns your home) and you live in an area where selling prices for homes are accelerating rapidly, your property taxes will go up.

Not in California, which is one of the prime examples of the hot hot hot real estate market.

GOP at the bottom of this message is link to a New York Times Article you might want to read.

According to one very telling passage in the article:

"Average family income, adjusted for inflation, has continued to advance at a good clip, a fact Mr. Bush has cited when speaking about the economy. But these gains are a result mainly of increases at the top of the income spectrum that pull up the overall numbers. Even for workers at the 90th percentile of earners — making about $80,000 a year — inflation has outpaced their pay increases over the last three years, according to the Labor Department.

“There are two economies out there,” Mr. Cook, the political analyst, said. “One has been just white hot, going great guns. Those are the people who have benefited from globalization, technology, greater productivity and higher corporate earnings.

“And then there’s the working stiffs,’’ he added, “who just don’t feel like they’re getting ahead despite the fact that they’re working very hard. And there are a lot more people in that group than the other group.”"

Emphasis added.

In short, the really rich are doing really well. The rest of us are really taking it in the shorts. Of course, the Republicans don't notice the pain of the bottom 90% of the population. They aren't part of the riff raff.

http://www.nytimes.com/2006/08/28/business/28wages.html?ei=5090&en=ea4fce3d527e44a0&ex=1314417600&adxnnl=1&partner=rssuserland&emc=rss&adxnnlx=1156790137-gIiTxDLX+V3qu1HxU6wAXg

The CPI deflator does not overstate inflation. If anything, it understates inflation. It's defective because the OER (Owner's Equivalent Rent) component, which is approx. 30% of the CPI calculation attempts to make housing prices into a rental factor. It totally failed to pick up the increase in home prices that occurred in the 90's and early part of this decade. Thus, while housing prices were going up at double digit rates in many prices, CPI was showing increases in the 1-2% range, which was totally ridiculous.

See comment above, in the last sentence "many prices" should have read "many places."

Note to self, use preview button in the future.

Another observation from the DC area.

A friend of mine tried to sell a condo in Adams Morgan she bought in summer of 2004. She's not a flipper, her fiance just got a job offer across the country. After 5 months on the market she pulled it off, because the only offer she got was $20,000 less than the price she paid in 2004. They are going to live apart until they figure out what they can do about the shortfall.

Another friend who bought a downtown condo 10 years ago made a killing. However, he took all the equity out (he retains it as a rental property) and bought a $700,000 fixer-upper after bidding out all other bidders in 2004. He's done at least one cash out refinancing since then to pay off credit cards.

I don't know anyone who bought in the last three years who didn't use an adjustable rate mortgage, a piggyback loan, and an interest only option mortgage, usually all three.

Since there's usually an age bias in the anecdotal evidence (i.e. people tend to buy homes at a certain age, most of our social circles tend to sample heavily from the distribution right around our own age) let me state that I'm a DC professional in my early thirties, so I do know a great many first time homebuyers.

cactus,

1. cite

The 1996 Boskin Commission concluded that the CPI overstates the rate of inflation, and thus understates real growth, by more than 1 percentage point per year. Subsequent research has confirmed the Boskin finding, and indicates that the CPI still overstates inflation despite adjustments to the CPI made by the government in response to Boskin.

See, for example, the paper from this year, The Boskin Commission Report: A Retrospective One Decade Later.

Quote:

"This retrospective evaluation suggests that the Boskin bias estimate for 1995-96 should have been 1.2 to 1.3 percent, not 1.1 percent. Current upward bias in the CPI is estimated to have declined from the revised 1.2-1.3 percent in the Boskin era to about 0.8 percent today. Yet the Boskin report, like most contemporary studies of quality change, failed to place sufficient value on the value of new products and on increased longevity. Allowing for these, today's bias is at least 1.0 percent per year or perhaps even higher."

And also, the 2003 paper Measurement Error in the Consumer Price Index: Where Do We Stand?

Quote:

"We survey the evidence on CPI bias and provide our best estimate of its magnitude. We also identify a 'weighting' bias that has not been quantified previously. We estimate that the CPI currently overstates the rate of change in the cost of living by about 0.9 percentage point per year."

2. how come that doesn't seem to have had the same effect at other points in time? Even with this defective deflator, real income per capita (you wanted per person, right) rose every single year during the Clinton administration. And dropped every single year per person during GW's.

Huh? It did have the same effect at other points in time. Income growth during the Clinton Administration was also probably higher than the official numbers indicate, because of the effect of the defective CPI deflator used to calculate those numbers.

"I don't know anyone who bought in the last three years who didn't use an adjustable rate mortgage, a piggyback loan, and an interest only option mortgage, usually all three."

[Raise my hand.]

Young 30s professional in Chicago. I bought an old but livable SFH in an "up and coming" (read: lawyers and doctors are buying out all of the old blue collar Irish people) about 4 miles from downtown. It's a 9 minute commute with no traffic; 35 minutes door-to-door if I walk up and take the El. I paid about $350k. It is my first home.

I paid 20% down and took out a 30 year fixed mortgage for the rest. With my credit, my mortgage is less than 20% of my net (i.e., takehome) pay. I kept a $25k cash cushion for repairs or unexpected costs (it's since grown to about $45k, but I need a new roof and I'm going to gut the basement in the spring, so that is going to be dwindling soon). I was able to afford that by living like a pauper on a very nice salary for five years. Heck, I would have just as soon waited another year or two until prices come down in the city, but family circumstances (baby and wife's job) required a house in the city for the next several years.

Which means, of course, another clusterfuck for the Bush supporters

Allah akbar!

The Boskin Commission==ALL_ECONOMISTS_EVERYWHERE_FOR_ALL_TIME!!

Because it uses an implicit rental component. the CPI deflator is likely to overstate inflation during this downturn in the housing market. More demand for rental housing will increase rent, but not help homeowners one bit.

"The 1996 Boskin Commission concluded that the CPI overstates the rate of inflation, and thus understates real growth, by more than 1 percentage point per year. Subsequent research has confirmed the Boskin finding, and indicates that the CPI still overstates inflation despite adjustments to the CPI made by the government in response to Boskin."

Subsequent research has shown nothing of the kind. The so-called hedonic adjustments, i.e. the adjustments made for quality of goods, have been well incorporated into the CPI data. Some experts (Bill Gross of PIMCO fame) have opined that the hedonic adjustments have been over-implemented. And the OER component has not even come close to estimating the impact housing has had on inflation in the US.

All real estate is local, so national trends are somewhat irrelevant. As with everything else in economics, it all comes down to supply and demand. A place like DC, where demand is always fairly strong because it is the nation's capital and the center of much political and business acitivty should have a relatively soft landing.

Places like Phoenix and Las Vegas, on the other hand, where there are few physical constraints on the creation of new supply, will likely get crushed.

We live in Seattle, and bought our house in July 2000. Since then we have seen approximately 9% annual growth and after six years, our house is now worth about 70% more than what we paid for it. Places like Seattle and San Francisco, where demand is strong due to job growth, and supply is limited by physical constraints (mountains, water) should do fine, since supply will always be very limited and these are highly desireable places to live. Up here, we never really had much of a bubble (9% annual growth is fairly moderate, although above historical norms), so when things do slow down, it will likely be in the form of a few years of flat to minimal growth, as opposed to price decreases.

The key thing is real estate as in everything else is to be smart financially...don't buy more house than you can afford, build up equity, and don't use your house as a cash cow.

People who have managed their money wisely will be fine no matter what real estate prices do; people who have not will get killed. We bought our house with the standard 20% down, have refinanced twice and are now on a 7/1 ARM at 5% that does not adjust until 2011, have not tapped our equity, have no other debt, and will be just fine no matter what.

However, we have friends in the Bay Area who took out an interest only loan two years ago and are now in a negative equity situation and are really hurting.

Everything comes down to each person's individual situation.

Since both houses appreciated handsomely (nearly 50% and 24% per year, respectively) the small decreases look to be just seller overestimation of the current values of their houses.

Am I the only one here old enough to remember the last housing market downturn?

In 1992 I sold an apartment in NYC for 25% less than I paid for it in 1988. Today that same apartment is worth two to three times what I sold it for.

What's the point? Real estate markets are cyclical, even though the long term trend is up. There's nothing particularly surprising or noteworthy about this.

DBL

I am old enough to remember the last real estate downturn and the one before that. You are right, nothing about this downturn couldn't have been anticipated by anyone with a brain. The differences this time are (1)the dracoian bankruptcy code and (2) the bizarre financing tools that have become popular during the last few years. Interest only ARM, give me a break. An invitation to disaster.

GOP,

Do you mind identifying your source or did you just make it up. There is no identifier on the chart.

The word (in DC, anyway) is that the condo market is doing really well. In part because there are an awful lot of (a) people who can't afford the housing market, and (b) a TON of retirees that are looking to downsize and stay in the DC area.

It's tempting to buy in DC (although, I don't have enough money saved and I am paying nearly 50% of the going rate for a rental. so there's no hurry.) but I think I'll wait.

Careful economists understand that the CPI understates inflation if anything.

Therefore, real wages have been falling, of course.

I've never had sex with a woman.

GOP - your Boskin Commission's findings were based on the FLAWED PREMISE that;
Since features and quality of goods were increasing, that they goods were being undervalued (example: A $500 TV today has better picture quality, etc. than a $500 TV 5 years ago).

The FLAW in that premise is the idea that people can eat a TV.

The DC housing market crash is fairly evident out my way in Montgomery County. I bought a year ago and similar townhouses in my neighborhood now go for 10-15% less.

The spambots are out, so this thread should close. Too bad. It was a good conversation.

I'm late to comment but, I live about 30 miles outside of DC. Houses for sale in my neighborhood have been sitting here for months, and it's a nice neighborhood with 1-5 acre lots...

If only the Democrats had stayed constant to the moderately socialistic economic views of FDR and LBJ during the last 26 years, they would be in a fine position to make major corrections to the increasingly unfair economic model that has by default monopolized the arena of debatable thought in this country for so long. As things stand, when the iceberg is sited it will be far too late to turn the ship around. If you cant hold to your principles during the tough times, what good are they?

Ha ha ha ha ha. Your link doesn't cite any "economists" at all, let alone "careful" ones.

Wow, you're pretty pathetic. The guys who make money watching other people's money believe the CPI understates inflation - based on economic observations, not politically convenient boilerplate, but since I said "economists" and not "money managers" you're going to stick your fingers in your ears and ignore their argument?

Well, I can't help you there. Seems like a problem with your early childhood development.

There are plenty of good economists out there who've see through the mistakes in the Boskin report, although you don't have to be an economist to see them, just honest. Start with Mason Gaffney and John Williams.

Until then, here's some more guys who invest for a living who see the obvious:

Once again, inflationary pressures failed to show up in the CPI data. This is in sharp contrast with market measures (gold and commodity prices) and anecdotal evidence (ISM Index) which indicate that inflationary pressures remain elevated. While gains in productivity and cheap goods from overseas are helping to hold prices down, we continue to believe that the CPI understates actual inflation. For example, the CPI's measure owner's equivalency rent is up just 2.5% in the past year and has averaged only 2.9% annualized gains over the past five years. If this measure was accurate, talk of a housing "bubble" would be hard to sustain. Most anecdotal evidence points to much more rapid growth in home prices. The median price of an existing home is up 11.6% in the past year, while the median price of a new home is up 6.7%. Other measures of healthcare and education costs are rising faster than official CPI estimate. As a result, it could be that inflation is being understated by as much as 1% on an annual basis. Even with this underestimation services prices, excluding energy services have climbed 3% at an annual rate in the past three months and we believe this is much more indicative of true inflation. As a result, a neutral federal funds rate is likely near 5.5%.

http://www.ftportfolios.com/Retail/research/viewresearcharticle.aspx?id=33

GOP

This thread is about the bursting housing bubble, so great job of creating a red herring, but let us assume the current economy is performing for the average Joe or Jane just as you have said (even though nobody believes it is doing that well.) The "increases" you suggest are pretty thin beer by just about any measure. They are certainly nothing for the President to point to with pride, at least not by historic standards. In any event as near as I can tell you are just about alone in claiming the average person is doing better now than when George Bush came into office. Most Republicans just make excuses like 9/11 changed everything, we are fighting a war, Bill Clinton got a blow job, or its all the fault of social security. Assuming for the sake of argument that the average American is just about where he was when George Bush became president, experience teaches me that treading water means your closer to drowning than to reaching the shore.

Explain to me just why hasn't your party done anything to improve the lot of the Americn worker? Why are so many countries gaining on us? On what economic basis should anybody outside the upper 5% even consider voting for your candidates? Do the average Joe and Jane really need more of what you would argue is a stagnant standard of living, and more likely a declining standard of living? What are you going to do to improve the economic lots of the bulk of Americans?

So you're claiming that measures of inflation are only meaningful if they're based on price changes in things you can "eat," are you?
Posted by: GOP on August 28, 2006 at 4:29 PM | PERMALINK

An "Inflation Metric" intended to be used as an indicator of "How Economically Well Off We Are" better damn well be heavily weighted with necessities. You know, like housing, food, energy - the things that are generally omitted from CPI.

Luxuries like DVD players and SUVs with stock spinners should figure in only peripherally.

Americans are less able to cover expenses, less able to make ends meet, less able to buy housing, less able to pay for the gasoline to get them to work, less likely to get raises, more likely to work unpaid overtime, more likely to get laid off, more likely to get their pensions yanked, less well off - by any measure except your Boskins-computed CPI. If the measure doesn't match the reality - guess what that says about your measure?: it's been defined and twisted into uselessness - except that it's very useful for administration flaks trying to paint a rosy picture of the shithole they've dug us into, just so they have an excuse to keep digging.

anonymous,

There are plenty of good economists out there who've see through the mistakes in the Boskin report,

What "mistakes?" What "economists?" You haven't named even a single one. You haven't cited any research rebutting the conclusions of the Boskin Report. Or the study by Robert Gordon I cited. Or the study by Lebow and Rudd I cited. Gordon, Lebow, Rudd, and the members of the Boskin Commission are distinguished economists with special expertise in prices and inflation. If you think you think have expert opinion and research that refutes their conclusions then produce it.

Start with Mason Gaffney and John Williams....

Ha ha ha ha ha! Who the hell are they? What claims do they make? What research is those claims based on? What is their area of professional expertise, if they even have one? Do you have anything or don't you?

Kevin: Go read Nouriel Roubini's latest take on the fate of the housing bubble. It's a hair-raiser!

Here in Denver, there were some neighborhoods that lost 80% of their value when the oil bust collided with the S&L crisis in the early to mid 1980s. If you bought just before the peak, you'd have to sit on your house for almost 15 years before you could recover your "investment." All those foreclosed properties that were sitting on the banks' books and then the bank ended up at auction dumped more properties onto the market than the market could bear.

As a country, we're heading for something similar. I'm renting and I'm saving (only able to sock away $300/week) up for when there is blood in the streets. And a 10-20% "correction" isn't enough. I'm waiting for 50-80% off. Several of the houses on my block have been on and off the market several times (they're "REO" which means the bank owns them).

osama,

An "Inflation Metric" intended to be used as an indicator of "How Economically Well Off We Are" better damn well be heavily weighted with necessities. You know, like housing, food, energy - the things that are generally omitted from CPI.

You don't know what you're talking about. Food and energy are not included in the "Core CPI" because of their price volatility, but they are included in the CPI-U and CPI-U-RS deflators used by the BLS to calculate real wages.

The perennial topic is back. So, 1) housing is inflation-neutral over the long run. Some markets are way ahead of themselves and have a way to go before they fall back in line with historical valuations. 2) A large chunk of US housing is poorly situated (commutes, water supply, etc.) and energy inefficient.

Ron Byers,

let us assume the current economy is performing for the average Joe or Jane just as you have said (even though nobody believes it is doing that well.)

I don't know what "performing for the average Joe or Jane" is supposed to mean. I have been rebutting cmdicely's false claim that "incomes of all but the top segments of the economy during the Bush Administration" have been falling, and other false claims I have seen here about wages and incomes.

In any event as near as I can tell you are just about alone in claiming the average person is doing better now than when George Bush came into office.

If you think you have evidence demonstrating that the average person is not doing better now than when George Bush came into office, then produce it. You haven't provided any such evidence so far. The median earnings data I gave you shows an increase every year from 2001 to 2004, even using the defective CPI deflator that understates real wage growth. And wages and salaries are just one type of income. And income is just one type of economic benefit.

Explain to me just why hasn't your party done anything to improve the lot of the Americn worker?

My party has improved the lot of the American worker.

Why are so many countries gaining on us?

They're not.

On what economic basis should anybody outside the upper 5% even consider voting for your candidates?

Because my candidates are better for their economic status than your candidates.

Do the average Joe and Jane really need more of what you would argue is a stagnant standard of living,

No, they need more of what I would argue is an improving standard of living, which is what they're getting.

What are you going to do to improve the economic lots of the bulk of Americans?

Pursue policies that are conducive to growth and prosperity.

I'm just sort of amazed at how Kevin, who lives in California of all places, can (i) keep posting on this topic as if housing prices are, as a matter of fact, dependent upon some political act, and (ii) at the same time ignore the radical difference between the various markets in the country.

Its especially ironic considering how much abuse is heaped (and IMO rightly so) on those who ignore, for example, the collective experience of Western Europe w/r/t provision of health care. I mean, gee whiz, its not as if its only poor Mexicans who do anything to get into this country. How about the rich Iranians in Beverly Hills? Or the rich from the entire world in Manhattan? For the wealthy, the desirable neighborhoods in this country is still perhaps the least expensive of the entire first world.

What's even more entertaining is the "on-cue" ramblings of GOP who attempts to convince someone, anyone, that real wages or Klingon wages or Martian wages have actually increased, as if the question of what you can buy with those wages is somehow only of academic interest.

There never seems to be a serious discussion (which you would expect from this crowd) of the long term implications of what I believe is the inexorable transition from a country with more land than it needs to a country with a shortage of desirable land, like, for example, pretty much all of Europe. You would think that the recent rise of gasoline prices, and their obvious effect on simply building more affordable large homes out in the middle of bumfuck Egypt as some sort of answer would be the first thing discussed.

Instead, this topic is always treated as of short term interst in only a general political sense, rather than the long term city planning issue it really is.

>If you think you have evidence demonstrating that the average person is not doing better now than when George Bush came into office, then produce it.

The poster "cactus" (who happens to be an economist and was smart enough to give up on GOP) has twice given you links to tables that show you are flat out wrong on the facts.

In fact, you indicated that you don't even have an understanding of math when you say "The data provided is the upper limit by quintile". Duh. The upper limit of the quintile goes down when... oh hell, what's the point. Everybody else gets it.

So you got basically your whining about the CPI Deflator, like there is no argument about the Boskin report. You get pointed to an argument against it and again you troll away.

Finally, the other thing you don't seem to realize is those may well be, as in many cases, compensation tables.

Because once you go to take-home pay it's worse. Medical cost inflation has, in the perverse world of economic thought, made us all "better paid" since our employers are struggling to keep up their benefit programs. Or at least can't find a way to cut them fast enough without having a cube farm riot.

Your party's economic so-called ideas go beyond sucky, sorry. And your misunderstandings show us how lost you people are.

Pursue policies that are conducive to growth and prosperity.
Posted by: GOP on August 28, 2006 at 5:43 PM |

What policies? I am sick to death of GOP slogans. You all have had 12 years to pursue policies that are conducive of growth and prosperty. Near as I can tell your policies are conducive of the growth of the Chinese, and Indian economies. They have only improved the prosperity of the very rich. The rest of us are just your suckers paying for your personal prosperity.

GOP If you think you have evidence demonstrating that the average person is not doing better now than when George Bush came into office, then produce it. You haven't provided any such evidence so far. The median earnings data I gave you shows an increase every year from 2001 to 2004, even using the defective CPI deflator that understates real wage growth. And wages and salaries are just one type of income. And income is just one type of economic benefit.

You have spent your entire day trying to knock down the proof. I can't help it if you keep ignoring the evidence presented by lots and lots of folks on this board and elsewhere. The best you have accomplished is demonstrating that the average guy is running harder just to stay in place.

Anyway, you guys claim to be the family values party. You have had 12 years. Where the hell is the economy where one bread winner would be able to support a family. Create that economy and you have created a world beater. Given the almost straight line improvement in worker productivity, it should be possible for Americans to have families where one parent stays home to take care of and help raise the kids. A policy goal of sharing that wonderful productivity improvement would win you elections into the far, far future. It is a fundamental family value you seem to overlook.

hank,

What's even more entertaining is the "on-cue" ramblings of GOP who attempts to convince someone, anyone, that real wages or Klingon wages or Martian wages have actually increased,

I don't care whether you're "convinced" or not. I'm simply showing you the data and other evidence, including earnings data cited by a left-leaning policy institute, indicating that real wages have not declined. You can choose to ignore this data if you like, but it's not in your interests to do so.

People with something to lose, i.e. reassurance that putting all their money into housing was a can't lose "investment," just can't see the size of the trouble coming down the pike. It's a built-in biological safety feature.

There will come a day when people will kill to get back half of what they paid. My wife and I owned a home on Maryland's Eastern Shore for over a dozen years, and it appreciated less than one percent per year (we sold in 2000). That was normal, and everything that's happened since is utter bullshit. The dollar won't be worth a damn anyway after Bush attacks Iran, and that's an even BIGGER wave o' trouble...

Ron Byers,

You have spent your entire day trying to knock down the proof. I can't help it if you keep ignoring the evidence presented by lots and lots of folks on this board and elsewhere.

Ha ha ha ha ha! What "proof?" Proof of what claim? You haven't even attempted to rebut this yet:

Median usual weekly earnings of full-time wage and salary workers (25 years and older), annual averages (2004 dollars)

2001: $672
2002: $678
2003: $680
2004: $683

Nor have I seen any serious attempt by you or anyone else to rebut the finding of the Boskin Commission and the two academic studies I cited that the CPI overstates inflation.

If you "own" your home (the bank really owns your home) and you live in an area where selling prices for homes are accelerating rapidly, your property taxes will go up.

Not in California, which is one of the prime examples of the hot hot hot real estate market.

Yes, in California, your property taxes will increase if your home value increases. The rate of increase of tax basis value is capped, though (which has an ironic effect in a bursting bubble that, if the actual value of your house falls but not past its current basis value, your taxes can keep going up while your value goes down.)

Plus, while some areas of California have "hot hot hot" markets, lots of places in California are already seeing the bubble burst with rapidly declining values, most notably (though not exclusively) the Sacramento region.

doesn't matter,

The poster "cactus" (who happens to be an economist and was smart enough to give up on GOP) has twice given you links to tables that show you are flat out wrong on the facts.

I suspect the poster "cactus" is also the poster "doesn't matter" (i.e., you) and the poster "_", and the poster "gab."

It's all you, isn't it? You're desperately trying to lend credibility to your evidence-free assertions by repeating them under various different handles. I suspect you're also the same individual who has been showing up in numerous other threads in recent weeks and entering posts under many other names that have never been seen before and that disappear shortly after they first appear. Lame, lame, lame.

GOP

NANA NANA NANA is just not a very good rejoinder. You are going to have to try harder.

You are getting tired. If you want we will be glad to tell your friends at the Heritage Foundation a note that you tried hard.

What about my idea that a true "family values" party would value families enough to insure that jobs paid enough to let one parent stay home with the kids?

Ron Byers,

NANA NANA NANA is just not a very good rejoinder.

Then why do you keep saying it?

Do you have a rebuttal to the earnings data I provided showing an increase in median real earnings from 2001 to 2004, or don't you?

Do you have a rebuttal to the Boskin Commission finding that the CPI significantly overstates inflation, and therefore significantly understates real wage and income growth, or don't you?

Do you have a rebuttal to the studies by Robert Gordon and David Lebow that I quoted and linked to, studies that confirm the Boskin Commission finding that the CPI overstates inflation, or don't you?

Do you have evidence demonstrating that "the average person" is not "doing better now than when George Bush came into office," or don't you?

I keep asking and you keep ignoring the requests.

The economy is great, lalala, there is no housing bubble, lalala, I'm not a bedwetting virgin, lalala, everything I say is true because I say it's true, lalala, to hell with the real world, lalala, I'm a complete moron, lalala...

The world is going to hell, lalalalala, we're all gonna die, lalalalala, I hate America, lalalalala, I'm an ignorant bufoon, lalalalala

I suspect the poster "cactus" is also the poster "doesn't matter" (i.e., you) and the poster "_", and the poster "gab."

Um, no. I can't speak for the other handles you mentioned but I've only posted under this handle, although your paranoia is duly noted.

I decided to let this discussion go not because my assertions were "evidence free," but because I realized that no amount of persuasive evidence was going to change your mind.

I came by this conclusion after realizing that if you were not aware of the growing cadre of economists who believe that the CPI understates inflation (and I referenced two) or their reasons for arguing that (a few were cited in the article I referenced but you should know what they are if you're at all familiar with this issue) -- then you're not somebody who's looking at this matter seriously.

Obviously you've glommed onto an opinion about this for political reasons, and aren't open-minded enough to examine it critically. I've learned from experience that arguing with reactionaries isn't usually a fruitful use of one's time.

Using misleading rental inputs in lieu of actual housing costs, not properly accounting for the effect of rising energy and food costs, overweighting of both the use and influence of big box retailers on prices, buying into the ridiculously fatuous quality changes bias -- these are just some of the the faulty assumptions that render the two studies you mentioned seriously defective.

Here's a link that contradicts myself, and I'm still an unlaid moron---

http://www.epi.org/content.cfm/webfeatures_econindicators_income20050831

Does anyone here actually respect my opinion? I guess I'll have to change my name again, like I did when I was Don P.(aka Pissypants), once I'm completely discredited and humiliated again.
We need to torture more people!

One final thing though, since you seem to be a little lacking in recent economic data.

Why are so many countries gaining on us?

They're not.

They are:

The euro zone grew almost 1 percent last quarter, outperforming the United States, Britain and Japan. The upshot is that the euro zone will likely grow about 2.5 percent this year—up from 1.3 percent in 2005. What's more, Slow Europe is now creating jobs faster than the United States: France and Germany in particular saw strong jumps this spring and summer.

One thing that never seems to get mentioned in discussions of the housing bubble is the effect it's having on the rental market. As a new arrival in DC, I'm looking for an apartment, and I've been told that rental rates have gone up in a huge way over the last year or so because no one wants to buy right now.

The rental runnup, too, will subside.

As more an more unsold (or foreclosed) property gets dumped on the rental market, rents should eventually weaken just like sales prices. Every empty bit of new construction that's "for sale" and awaiting a buyer is essentially new supply being temporarily held in a housing "bank". When this new supply is eventually released, much of it will go directly to the rental market, exerting downward pressure on rents.

I've learned from experience that arguing with reactionaries isn't usually a fruitful use of one's time.

Unfortunately, most people here have already figured that out about me, so I'm mostly just an object of mockery. I think it's someone named Stefan(probably some sort of Soviet spy) leading the plot against me.
Why doesn't anyone recognize my obvious intellectual superiority?

Faulty link, here's one that works:

http://www.msnbc.msn.com/id/14533734/site/newsweek/

anonymous,

I came by this conclusion after realizing that if you were not aware of the growing cadre of economists who believe that the CPI understates inflation (and I referenced two)

No, you haven't. You haven't identified even one single solitary economist claiming that the CPI overstates inflation. None. Nada. Zilch. Zero.

Can you cite any economists who make this claim, or can't you? Can you cite any studies refuting the conclusion of the Boskin Commission, or can't you?

Here are the members of the Boskin Commission:

Michael J. Boskin, Ph.D., Chairman
Tully M. Friedman Professor of Economics
& Senior Fellow, Hoover Institution
Stanford University
Stanford, California

Ellen R. Dulberger, Ph.D.
Director of Marketing Strategy
IBM Personal Computer Company
Somers, New York

Robert J. Gordon, Ph.D.
Chairman, Department of Economics
& Stanley G. Harris Professor in the Social Sciences
Northwestern University
Evanston, Illinois

Zvi Griliches, Ph.D.
Paul M. Warburg Professor of Economics
Harvard University
Cambridge, Massachusetts

Dale Jorgenson, Ph.D.
Chairman, Department of Economics
& Frederic Eaton Abbe Professor of Economics
Harvard University
Cambridge, Massachusetts

And here is the author of the 2003 study I cited confirming the Boskin Commission's finding:

David E. Lebow
Chief
Macroeconomic Analysis Section
Division of Research and Statistics
Federal Reserve Board.

And "liberal" economists such as Brad DeLong and Paul Krugman also agree with the Boskin Commission's finding that the CPI overstates inflation.

I'm still waiting for you to identify even a single professional economist who dissents from this view.