San Diego Housing Market News and Analysis

"Clearly, that adjustment is not being allowed to take place. And when it finally does, will it come in the form of lower nominal home prices or higher nominal incomes and rents?"

Higher nominal incomes and rent??? Really!?! I think I know where I'd place my bets.

"One is forced to practice a sort of real estate Kremlinology in an attempt to figure out how fiscal and monetary policy will affect, or cease to affect, the market."

LOL. Love the use of the word Kremlinology. Pretty much says a mouthful there.

"The government will move heaven and earth to prop up housing prices, at least for as long as our creditors are willing to foot the bill."

The way I see it, the taxpayers are footing the bill and that can go on in perpetuity as long as people just go along w/it. And since a majority of the population wants to save housing, they will sell the future of their children for it. (continue to be happy about not having any)

JP, if the taxpayers were footing the bill via taxes, then we wouldn't have to be borrowing so much money from overseas, or creating so much new money out of nothing.

US taxpayers are certainly paying some of it, but not all, and those other parties could pull the plug even if the Americans wanted to keep it all going.

Rich

Yes, Rich. I sometimes don't consider the money from overseas. Are you referring to China? They would have to find another country w/a voracious appetite for their crap. Who could replace us? Without us, they would have warehouses full of junk they couldn't get rid of. It's all so precariously balanced.

I don't really agree with that viewpoint... my opinion is that their productive capacity can, and eventually will (emphasis eventually), be repurposed to serve the needs of their own consumers or to make products for importers that actually stand a chance of paying them back in real terms.

As far as the topic at hand goes, though, it doesn't matter... this uncertainty actually feeds into my point that the govt will be able to distort the housing market for an unpredictable length of time.

Rich

The Govt. WILL step in and "save" the real estate market. The next wave is commercial prop which is crippling cities. Commercial properties are down 40% nationwide. In SD, some areas (Carlsbad, Eastlake, etc.) have double digit vacancy rates. I, without ANY proof, suspect the Govt. will take over mtgs. with a guarantee/buy/take of mtgs. with an "agreement" that when things are great again the Govt. will own a certain % of the home. Yes, it was initially floated when this thing started to unravel. However, I'm with Rich. I have been screaming from the mountain that this current meltdown was upon us. In the rear view mirror we were all prophets. However, my crystal ball is cloudy at this point. Hopefully, Mr. Battiata or Mr. Chamberlin can voice an option to steer us clear of upcoming obstacles. . .

Emperor Bernanke has no clothes and the crowds are starting to catch on. Congress is getting anxious already about next year's elections and there are rumblings about whether Bernanke should be re-confirmed. The level of cronyism with the likes of Goldman Sachs is making more and more headlines every month. The battle over the next major stimulus component is probably going to be more drawn out. "The" government is not a monolithic entity (with the midterm elections fast approaching) - and there is already a great deal of positioning starting with a year to go.

Yes, the government will TRY to prop up the markets, but we should continue to stress that we are in uncharted territory and have no idea what to expect. Unintended consequences may overwhelm legislative foolishness. IF the 1930's and Japan since 1990 are our best models, should we really expect something significantly better? China's over-capacity may prove to be more than they can easily utilize before it's too late. No more customers here ... so where? I think their bubble is going to implode with even bigger consequences than ours did. Then what?

So riddle me this:
If there is no real play between RMB and the greenback, then aren't they effectively just buying their own securities?

I mean there is a different government but there appears to be no downside risk to buying US debt at a nominal cash level. The nominal yield on US securities won't change even if denominated Yuan.

Hey - if you aren't making any forecasts, I'm not making any comments, so there !

Dan - Sorry, I don't understand the question...

Rich

Okay.
It is a given that much of US funding comes from Chinese purchases of US securities.

It is also a given that renminbi does not have a market-based relationship to the greenback.

To me this suggests that the yuan is (or at least could be seen as) effectively a 14-cent unit and not a discrete currency.

This further suggests to me that it is in the interests of the holders of the afore-mentioned securities to maintain this relationship (lest their huge quantities of dollar-denominated wealth suffer catastrophic drops in (in local nominal) value).

Considering that the entire focus of the last 20 years of Chinese policy has been an accumulation of capital (or at least had that as the common thread), I consider it unlikely that dumping that much capital would really be in the offing.

Now if the jobs picture improves, we might see spending such that there is actual inflation (other than that targeted in housing). If that happens, we might see diminished demand for US securities and then perhaps a funding problem.

So all we need is a full recovery to have a catastrophe.
Wait.
My head hurts.

The only flaw is that the US debt is not static but approaching a parabolic trajectory with no foreseeable effort to curb it.

Dr. Boom's First Law of Economics Charts:

If your chart looks like a hockey stick, you will soon be pucked.

btw: Thanks for the great commentary, Rich.

It is for as long as they hold the peg, but I don't assume that that will go on forever. I don't buy the argument that they will throw good money after bad forever just to prop up the value of their existing dollars. Though they certainly could for a while. But it's certainly not a long-term sustainable situation.

My guess is that it all comes down to confidence in that the US will be able to pay back its debt in real terms. Right now this confidence is still broadly held, though (imho) ill-deserved. We've seen many examples of misplaced confidence in recent years, eg MBS. When the confidence does go away, it can do so in an abrupt way; but since it involves a change in mass psychology it's impossible to predict the timing in any reliable way.

So I feel pretty comfortable saying that our foreign creditors will cut us loose from the gravy train at some point; but i don't know when.

Rich

It is for as long as they hold the peg, but I don't assume that that will go on forever. I don't buy the argument that they will throw good money after bad forever just to prop up the value of their existing dollars. Though they certainly could for a while. But it's certainly not a long-term sustainable situation.

My guess is that it all comes down to confidence in that the US will be able to pay back its debt in real terms. Right now this confidence is still broadly held, though (imho) ill-deserved. We've seen many examples of misplaced confidence in recent years, eg MBS. When the confidence does go away, it can do so in an abrupt way; but since it involves a change in mass psychology it's impossible to predict the timing in any reliable way.

So I feel pretty comfortable saying that our foreign creditors will cut us loose from the gravy train at some point; but i don't know when.

Rich

The PRC has connected itself to the US because it's their biggest market for their production and has big US investors. The US has also allowed the massive outsourcing of US production to China. The Eurozone has not really allowed this to happen. Unless world markets are drastically realligned, this relationship will probably persist for at least a few more years, if not longer. The internal consumption of the PRC is a bit of a wild card, but doesnt change the fact that they also need to continue their export business if they want to maintain their growth pattern and avoid civil unrest. I think this can will be kicked down the road for a while yet.
But the PRC and Indian central banks buying gold is a clear sign that the producing nations want something more tangible for their production besides debt paper and fiat currency. It's a vote of no confidence and a hedge against default. And will probably add significant continued upward pressure on the price of gold as the US govt does more and more unsustainable borrowing.
The Fed raising the interest rate would change all this in a heart beat. But what are the odds of this given our economic position?

I very much enjoyed this essay. Rich, you perfectly express my exasperation as well as yours.

Just one quibble: "... inflation could cause rents and incomes to rise up and meet home prices."

Most people's incomes, including mine, have not gone up at all over the past decade. In fact in real terms, thanks to inflation, my income has lost 25% of its purchasing power. I really do believe that tons of people all over America, and here in San Diego, are in the same boat. Many people's budgets are already stretched to the breaking point and beyond.

With global wage arbitrage, China, etc, I see no indications that give me any strong hope of good income increases for me or most people. So, if the prices of staples, rent, gasoline, and other essentials start to jump up, many more people will get pushed over the financial edge. The much-ballyhooed-in-some-circles "coming hyperinflation" could lead in short order to civil unrest or even outright revolution.

I lay no odds whatsoever that a revolution will lead to any good end in America. Hyperinflation, followed by effectively a coup as a backlash, is what happened to Germany in the 1930s.

Re what China will do:

A columnist over at Minyanville argued in a series of points that China is not in a bubble. One of his notable arguments to this discussion is that:

China is not nearly as export-driven as the world thinks.

* One of the most common misperceptions about China is that it lives and dies by exports. In fact, Gross expressed concern that China is gearing up for an export market that may not find buyers.

* In reality, net exports contribute only about 20% to China’s GDP growth. Infrastructure and capital investment make up the rest.
In other words, this is hardly a nation that will live and die if the West stops buying, despite the widespread contention that has somehow become gospel over the past few years.

Thanks Cricket... but nominal per capita and median household incomes have risen over the last decade by quite a bit. There are multiple data sources from the Census Bureau, SANDAG, etc showing this.

Even if it hadn't, though, I don't think the quibble would be valid. Your argument is that there is downward wage pressure from China etc. Perhaps, but if so, that can be offset by more US money printing. In other words, there may be REAL wage pressure from abroad, but whether that translates into NOMINAL wage declines is simply a policy decision (and one that I think there is no chance will be made).

Rich

It's not getting into peoples hands.

I'm talking about the future, not the past.

Rich

Well, what is the mechanism to get money into John Q Public's hands. Because the printing they have done, has not done it.

They have failed to reignite lending(except in the housing sector) and it is contracting steadily and will do so for the foreseeable future.

I agree, that they stopped a monstrous deflationary collapse, and want to inflate, but they aren't inflating much besides Wall Street and debt. Unless that is their policy, to forget the real economy, then they have failed thus far.

Now eventually the deflation of the real economy, which really shows in tax receipts, jobs and wages, will meet with debt obligations with disastrous consequences unless they find a way to get money into average joes hands. Which they have not done to any degree that matters.

I agree with you that it hasn't really gotten out into John Q Public's hand yet. But historically it has typically taken 18-24 months for the lagged effects of money printing to raise the general price level, so this isn't really unexpected. If bank lending doesn't re-ignite, there are endless mechanisms to get money into the public's hands -- they can monetize whatever they want to.

Rich

What do you suppose they want to monetize?

Are you suggesting a specific agenda?

If it were just a matter of propping up their existing stores, then I would agree with you more. I think that the issue is that de-pegging would have broader effect than just diminishing one part of the Chinese portfolio. I think it would damage tremendously their entire business model. Putting that differently, it would eliminate a lot of capital and make it much more difficult to accumulate more.

I think a good way to predict changes to the yuan-dollar relationship is when you see China make a much more substantive shift away from dependence on US consumption.

Confidence suggests a prediction in outcomes that are dictated by non-controlled but predictable forces. I am confident that the sun will rise without having my own control over the forces involved.

China actually has control over the exchange rate and (to a lesser extent) the very underlying wealth for which that money proxies.

They don't need a good bet. They actually own most of the horses in the race.

Well, we all know how their last inflationary policy ended. I'm not sure when or how this new one will end, but it will no doubt end in tears.

Rich, I agree with everything you've said. Thank you for being so patient - more patient that I could ever be - when explaining the basics to your readers.

Historically, as in when? When have we printed like this? I think this is unprecedented. What do we have to empirically review the situation?

They could, if they wanted to, air drop freshly printed hundred dollar bills into chula vista. However, I don't see it happening.

Thus far, MBS purchases being the vast majority of printing, which has not left wall street and it won't. The banks are hoarding because of the tidal wave of losses coming back.

Credit will be contracting through 2011, so money will be becoming scarce that way. This is certain.

To date, they do not have a mechanism to get money into peoples hands and it is in fact, becoming more scare. With no engine for job growth. Tax receipts tell the tale.

Also, if printing were such a cure all, why are the banks still sitting on trillions in bad assets. Citi bank alone has 800 billion in level three. They are all as insolvent as ever.

Tons of printing and no more money in the hands of people and banks are in worse shape than they were a year ago.

So far the real economy is deflating with no recognizable plan to reconcile that problem.

Arraya, check the most common index of consumer prices, the CPI-U, here at ftp://ftp.bls.gov/pub/special.requests/c....

Tell me whether the numbers for 2009 are increasing or decreasing.

Ok, look at wages, employment and tax receipts. It's not that complicated. There is less money in the general populace. Prices are irrelevant and influenced by more than supply and value of money.

Less money will eventually lead to lower prices unless other their are other factors such as scarcity and such.

So far, it is very obvious there is less money around.