San Diego Housing Bubble News and Analysis

I agree in principle but do not think it will reach hyper-inflation levels. That said, 5% to 6% per year inflation compounded for 5 years would take a huge chunk out of the mortgage!!

Also, the strategy only holds if you want to buy and hold for ten years or more. The high rates we both expect will depress valuations in the intermediate term.

Yes, and also my theory has an implied assumption that may not hold up: wages will keep pace with inflation.

I'm not sure that future typical raises will keep pace with inflation

I think salary inflation will be the only thing that can cause price to turn around, not commodity inflation. If we don't have salary inflation, house price might drop even further in monthly payment term if rates sky rocket, because, at today's payment, it still does not make sense when compare to rent. Rent won't sky rocket if salary does not. If salary does not drastically inflate but everything else does, then we might see people having much less $ for houses, which might cause price to compensate.

"salary inflation will be the only thing that can cause price to turn around,"

I think they were going to be raising minimum wage soon (don't remember when it was to occur).

Maybe we can all go on strike for higher wages like they did in Egypt (I think that was the place).

Or have Wage riots .

Just kidding sort of, But if it keeps going in this direction, who knows ???

Oh come on this is short lived. I'll call up my buddies that are laid off at my job and ask them when they are going to demand and picket higher wages from EDD. The pull back in jobs and the economy is way faster than $4 gas or 15% food gains. Before every recession in history (except 60's) we had tons of inflation. Be more wary about the recession and not inflation.

I agree with AN.
Hyperinflation is not going to prop up the RE values until after the recession, when economy (and salaries) start to grow again. Until then it's rather downward pressure, since people have to pay for commodities and don't have to buy housing.

Dow looks like V-Fib today if it were an EKG-(not good!). That's what I thought when looking at the ol' ticker this morning. Felt like I was back working in the ICU. I don't know if I will buy yet, this patient is too unstable!

Well, I won't post today about how much money I'm making in the stock market recently. These days I'm getting my butt kicked in the stock market.

I re-established my 2X leveraged short positions in a BIG way when the S&P 500 was about 5% LOWER than it is today. I cannot believe this stock market is heading over 1400 on the S&P 500. ON paper I've lost 10% in last 30 days across my portfolio. (It also hasn't helped I didn't sell my gold at $1,000/ounce, and I kept those short oil positions.)

However, I'm keeping the faith on a deepening recession taking the markets down at least 10% from here. I'm taking on more short positions, and looking at again buying put options on the indexes.

I look for markets or specific stocks which are at irrational extremes relative to underlying economic and financial conditions. I think the stock market rising (10% in 45 days on the S&P500) in this economy is irrational and it will correct downwards over 10%, probably over 20%.

BobS
Stockstrader: Everything you say sounds on target, at least in theory. You may have been around in the 1970s and 1980s when those homeowners who had old fixed rate 30 year loans way below prevailing rates of inflation were "the smartest guys in the room". If it was a VA rate at say, 5%, when everyone was getting a new loan at 12%, and said loan could be passed on to any buyer of the property, this actually boosted the value of the property considerably.
The inflationary scenario you portray looks entirely plausable; the only question I have is why aren't long term rates higher now. Investors aren't irrational (usually). Who would be crazy enough to buy a 30 year government bond today @ 5%, or lend on a 30 year mortgage @ 6%. Yet those are today's rates.
I agree with your thesis, I just don't yet see the market supporting it.

BobS,

You were looking for lower down investor loans. I think VA properties allow 6% down with "vendee" financing. The contact I found was OCWEN. I didn't investigate yet. HUD probably has some deals too. Unfortunately not many of these two foreclosures types in the county yet. Might be something to pursue in Riverside or San Bernardino?

A couple of your assumptions that I find unreasonable, first of all hyper inflation. This is a deflationary credit collapse, the inflation has already occurred.

Second the collapse of credit is making it harder to get loans, if you think that is going to change anytime soon, then we need to have a much more involved talk about, "who's holding the sausage."

Third if prices for basic staples, food, fuel, clothing keep increasing people will keep heading towards the cheapest option, especially but not limited to if they are unemployed. That means the ONLY way home prices will go up is if the option to own is cheaper than the option to rent. There may be a few exclusions but the mass of humanity will take an extremely narrow view of whats in its own best interest if times get tough.

Wage inflation is possible only if labor has the upper hand on capital, as it stands that just isn't so. At least not in most fields. Maybe some highly skilled professions such as doctors, dare I even hope software engineers, will gain such traction. The majority of the population will not anytime soon.

As far as locking in a low interest rate, who wants that? High interest rates and low prices benefit non contingent buyers. If you can't keep your job in those times you probably shouldn't have bought the house.

Josh

I have to agree with barnaby on this one. When you've got $trillions$ of dollars in bad paper about to disappear when they finally get marked to market (someday in the not so distant future) your inflation thesis goes out the window. Buying a house at low interest rates under that assumption will likely lose you a lot more than the 10% you've seen fly out of your stock portfolio. On the brighter side only losing 10% so far in stocks you're doing a lot better than those with 401Ks and mutual funds.

I'll second that, without wage inflation, there can be no RE inflation!

The idea that inflation of everything non-housing means home prices aren't as high as they appear doesn't make any sense.

Regardless of the cost of gas, food, and water people have to buy these things. They will adjust their spending in other areas, assuming getting a raise on demand is not an option. Housing is different.

People renting do not suddenly rush out to buy a house because home prices adjusted for inflation appear low. If anything, higher CPI/core inflation will reduce demand for housing as income, which is stagnate at best right now, goes more towards food and energy.

People renting do not suddenly rush out to buy a house because home prices adjusted for inflation appear low. If anything, higher CPI/core inflation will reduce demand for housing as income, which is stagnate at best right now, goes more towards food and energy.

As well as concentrate their living situation. Taking roommates, moving back home etc...

Cooprider & Arraya..................You are soooooooooooo right! This is reality.
Good posts!

Generally higher level of inflation (i.e. increasing prices of goods and services in the 4+% range) is not sustainable without some increase in the incomes used to purchase such goods and services.

Well if this keeps up, Don't think I will quit my day Job, but I will definitely start a farm business on the side.

Corn they say hmmm., maybe wheat ..

funny don’t see anything in the news about avocados ...

Rip up those Lawns, cut down those shade trees...

Tell the HOA to stick it!!

It's time to get serious here ....

Start planting food .....

Just kidding sort of, but you guy's with the big lots...

maybe ...

Olive trees:
Firewood,
Live stock goat fodder(for the prerequisite goats),
Oil, for making candles and such
Food.
Native Rainfall.

Swimming pool.
Tilapia pond.

Rustico,

Don't forget to add Ducks in the "Tilapia pond" .

Should be able to get maybe 50 pounds of Duck Meat a year out of a good size swimming pool .

Should be able to get maybe 50 pounds of Duck Meat a year out of a good size swimming pool .

This is all starting to sound too appealing.
Better start a small vineyard on the side for proper companion wines.

Cooprider14: Your idea of inflation is that every price goes up except salaries. That may be true in the short term, but once inflation gets much higher than the 3%-6% range, nominal salary increases are the norm.

Were you around in the 70s? Once the expectation of future price increases gets generalized, nominal wages go up.

High nominal incomes/salaries are not a cause for celebration in an inflationary environment: sure, an engineer who used to make $80K in 2005 may make $120K in 2011, but that's of little or no help if food, clothing, rents, insurance premiums, etc., are also 50% higher.

A $400K house in the year 2001 got inflated to $800K in 2005 b/c of the bubble. By 2008 that house is still ridiculously overpriced at $620K. However, if inflation shoots up, by the year 2011 $620K may not be overpriced any more if gasoline is $5.00 a gallon, milk is $6.50/gallon, fish tacos are $10 and a cheap shirt is $35 (and not $20 as in 2005).

Rip up those Lawns, cut down those shade trees...

Tell the HOA to stick it!!

It's time to get serious here ....

Start planting food .....

Just kidding sort of, but you guy's with the big lots...

maybe ...

I prefer grazing cow and converting their by-product to Hydrogen gas to power a BMW Hydrogen 7.

Warning: don't look while eating. http://www.autobloggreen.com/2006/12/02/...

http://driving.timesonline.co.uk/tol/lif...

selfportrait

----- Sour grapes for everyone!

Stockstradr (the OP): How do you define hyperinflation? I'm convinced that inflation will shoot up in the near/medium term, but I'm also absolutely convinced that we won't have hyperinflation in the USA.

Hyperinflation is not just "high inflation" (of say, in the 8%-15% range). Hyperinflation is what happened in Germany in the inter-war period, when prices went up within the same day! It happened again in some South American countries in the late 1980s, when governments thought that they could inflate their problems away (sounds familiar?).

With hyperinflation, prices can double in a few days. You go to a bar and your second beer will cost more than the first. (You could order all your beers at once, to save money, but they'll go flat. An economists' joke is that you must find the optimum equilibrium between the beer's foam decreasing rate relative to the inflation rate).

The implication for the housing bubble is that nominal house prices will not drop as much as we anticipated back in 2005 because of high inflation in 2008-2012. This won't matter for real (inflation-adjusted) prices: they'll drop the same as they would have without a high inflation scenario.

After all, what matters is the purchasing value of the dollar we use to buy a house: as the dollar's value falls (due to the current inflationary Fed policies), we need more dollars to pay for the same value as before.

Good comments, made me think; now here's my response.

I agree I should use the term "high inflation" instead of "hyperinflation" because I'm talking about the former.

Think about what happens if our government just starts printing more and more dollars, increasing the amount in circulation. (that can be done in many ways, from physically printing lots more dollars, to more traditional stimulus methods such as Fed lending to banks which then lend multiples of that, pumping money into the system). At the same time, global use of dollars, holding of dollars, declines dramatically as the non-USA world switches to Euros, or whatever.

As a first stage analysis, let's hold nominal wages constant, assume economic growth unchanged, and assume balance of trade unchanged…etc..etc.

What happens?

EVERYTHING goes UP in nominal dollar prices, from food to houses to the stock market. If you double the dollars in circulation (holding all else constant), they are worth half as much and prices then double in nominal dollars.

Next, let's start thinking about wages no longer being constant. Nominal-dollar wages must go up in a highly inflationary environment, because labor is a commodity just like anything.

In real dollars, average wages are falling now, and will keep falling in the USA (no matter if inflation remains as it is or if it dramatically increases). This is a natural outcome of global economics and our failure as a nation to manage the transition of our economy away from a manufacturing growth driven economy (into something else providing similar wage growth)

In a highly inflationary environment, would housing prices rise in real dollars? That's a complicated question depending on multiple variables, particularly in the short-term; however, long-term I've stated above that I don't see USA real wages keeping pace with inflation, which certainly doesn’t imply significant real dollar appreciation in housing prices. Look at Japan's 10+ years of deflation in real housing prices. Long-term I don't see how USA housing prices will show significant real dollar appreciation, unless we also have significant population growth.

Of course, if nominal wages are CONSTANT in an inflationary environment there is zero benefit to buying a house with a fixed-rate mortgage, because while future fixed rate mortgage payments will involve your paying the bank less real money, you'll have less real salary to make those payments.

However, nominal dollar wages won't be constant. I believe that in the high inflationary period ahead of us, wages will increase at rate which is a significant proporton of inflation, similar to what's happening now.

Short-term, YES we are experiencing a massive credit contraction, which is deflationary, yet it is being fought with massive stimulus measures. So short-term, anything goes, as far as inflation or deflation.

However, my basic theory is that we are now entering a new epic where the primary dynamic will be INFLATIONARY pressures driven by multiple factors, just one of which is our government conspiring to devalue the national debt (and also stimulate the economy)

Based on this scenario, one can brainstorm financial moves to hedge against that and take advantage of it.

This is why we personally own property in China, but none in America. This is why we have lots of our money in bank accounts in China also. This is why I seek jobs where I act as a consultant making money off helping 3rd world nations evolve into the world’s manufacturing base, and eventually regions of technology innovation (because acting as global facilitator to emerging nations can be our value-adding product to the world)

What about purchasing homes in America?

It seems to me that it would be smart to let housing prices continue to fall in the very near term until just before rising inflation will dramatically affect mortgage rates; then at that point buy property in America, particularly when you can rent with positive cash flow, always financing with minimum money down using a fixed rate loan.

That's how you can screw the bank, because each year the bank will be getting less and less real dollars in those fixed mortgage payments.

Timing will be important, particularly if inflation dramatically forces up mortgage rates BEFORE this housing market bottoms out. If you don't buy before then it becomes a moot point because higher mortgage payments erase the positive (rental) cash flow from renting, and also the house payments become unaffordable. It becomes the old conundrum of lower housing prices, but still unaffordable because of much higher mortgage interest rates.

In brief I'm saying the Big Picture is our country trying desperately to maintain a standard-of-living (and status as World's Policeman), when our evolving global role and aging economy cannot support it. This denial has lead to our unsustainable debt burden held primarily in hands of foreign nations, but the Spoiled Child (USA) has the ability to devalue that debt, which will be the only, inevitable way forward.

I believe this also explains why Bush is our current president. He is the personification of and projection of our National Denial of our diminishing world role, and decline in our standard of living. He is the cowboy standing tall with guns raised, screaming at the world, "The USA is still GREAT!" He also keeps the national credit card raised high, welding it in uncontrolled spending to maintain the myth we are still rich.

So all those inflationary forces will soon produce dramatic inflation which will drive mortgage rates up, eventually to double digit interest rates.

A buy point for housing will come soon where the risk of ever-increasing mortgage interest rates will overshadow the downside risk associated with continued falling housing prices.

Actually, high interest rates dampen inflation. It dries up cheap capital. The last time we had inflation with high interest rates, house prices were held low.

If interest rates are high, it is hard for someone to buy in, which knocks the support out of house prices. The best time to buy is actually when interest rates are at their highest and about to go back down. Your down payment goes the furthest and house prices are held down by the cost of financing.

I'm not sure that future typical raises will keep pace with inflation

I am anticipating that they won't for a while. Comparative wage rates out of country are lower. With a global economy, things such as wage rates tend to eventually balance out. I think that some high demand jobs will keep pace, but other low skill will not.

However, I'm keeping the faith on a deepening recession taking the markets down at least 10% from here.

Be careful. You have two forces at play, not one. Inflation drives markets up, recession drives them down.. The market is still trying to decide who is going to win - buy/short for only short periods of time.

I wasn't around in the 70's but I would agree wages may go up eventually as a result of the higher prices across the board. However, the time frame is the issue. Going into a recession we're going to lose jobs so any increases anywhere could be more than offset by job losses. When wages finally do rise it will be nowhere near the level of actual inflation we are currently experiencing, and nowehere near enough to stop home prices from plummeting.

It will be interesting to see what Helicopter Boy says about inflation tomorrow.

Sounds like most expect a small, but maybe a final cut. I don't think we will see the end of thee recession until rates go back up. The dollar and therefore inflation certainly have no hope of turning for the better until that happens either.

stockstradr, you're going to have to get some evidence on the money printing theory before making an argument like this. There is no evidence of money printing and in fact the Fed is currently removing money from the system.

Also it is not the government that prints money but rather the Fed which is a bank. Banks don't like to be paid back with inflated dollars so I'm not seeing their motivation in promoting/allowing a long term inflationary scenario.