San Diego Housing Market News and Analysis

I just heard it on KPBS. 9 years of inventory. YIKES!

The percentage of vacant houses is an old fallacy (most vacant houses are second homes / vacation homes). The role of the Fed is exaggerated too. Money is "free" because interest rates are low. Interest rates are low because there's not enough demand for borrowed funds: the household sector is deleveraging (outstanding household debt has been going down every month since early 2008)< and businesses aren't investing. Commodity speculators are the only ones left to borrow.

That's a good point, Eugene. I DO think there is a high percentage of vacancies in very distressed parts of the country, such as Detroit, MI. However, many, many people have vacation homes which are never rented and always left furnished with supplies for family and friends to visit. I believe the bulk of vacation homes nationwide are owned free and clear. Whenever I visit certain lakes in the southwest part of the country in the summer, I see many vacant homes, some with private boathouses and quite a few are over 2500 sf with multiple garages. The lawn is mowed and all is well.

The same is true of homes here in SD county which are owned by persons living in other countries (such as Mexico). Many are "vacant" with an alarm system, pool servicer and gardener and the owners come and enjoy them whenever they are able to :=]

I think this vacancy figure (that needs to be absorbed thru sales) is high but I can't say by how much.

In general, I agree with most of those points. Just a few items to quibble with.

4. "Free" money from the Fed is causing speculation.

It's probably more appropriate to say that cheap money from the fed is facilitating the speculation. Low interest rates do not make anyone speculate.

5. It's a way for the Fed to help the banks to make up housing losses.

I'm not sure even what this is referring to. I don't now what "It's" is. Low fed rates? If so, probably close enough for government work.

On a related topic that seems to be all over CNBC these days is the gold and silver prices. Item 4 probably contributes to that too. My peeve about the discussion is that many so called experts attempt to differentiate between investors and speculators. There is no difference. Unless you're a jeweler (or some other industrial user of gold or silver, where it's a logical hedge), gold and silver are ALWAYS speculative investments. They have no intrinsic value (exceptions noted). They do not pay dividends, no earnings multiples, no earnings growth. They do not "produce" profits. It is a pure speculative play on future prices. Arguing any differently is either disengenuous or idiotic.

No intrinsic value? What does have "intrinsic" value, if not gold. It's a nice thing.

Oil - other natural resources - but energy is the king

Anything that can perform labor, or increase the efficiency of labor, has intrinsic value. Coal has intrinsic value, because it can be burned in a power plant and the resulting energy can be used to do work. A truck has intrinsic value, because it can greatly decrease the amount of labor needed to transport a load from point A to point B (if you need to transport 5000 lbs the distance of 20 miles, you could hire fifty laborers for one day, or you get the same job done in 20 minutes with one pickup truck, one driver, and a quantity of gasoline).

In this sense, gold has no intrinsic value that I can think of.

No, peak oil is pretty much here, but it has nothing to do with price. Yes, the constant battle of explaining prices as due to geological forces or monetary will be with us for a while. Lots of moving parts in the issue and people wanting assign blame. But the fact of the matter is we have been on a production plateau since early 2005 with massively fluctuating prices. In a normal market increased prices should increase production. But it did not happen.

The 2008 price spike there was a definite tight market. It's not quite the same as today.

Being that the majors have access to 96% or so of the deposits this is a red hearing. Coupled with the fact of how big the global oil market is and the negligible effect it would have makes the argument that it is a problem even more silly.

I agree. Nobody nor low interest rates can make anyone do anything.

It's a matter of incentives and policies that encourage and enable certain behaviors.

Playing devil's advocate here...

I'd say that artificially low rates do indeed cause people to "speculate" and move further out on the risk curve. Many institutions (pension funds, hedge funds, private equity, etc.) have certain performance goals, and some NEED to reach certain yields. If the Fed keeps rates artificially low (as I'd argue they've been doing this entire decade, if not longer), it forces these large, institutional buyers/traders to get into markets or types of investments they'd normally not be in, or at least not without requiring a much higher yield.

IMHO, the whole "growth" story (really, asset price increases) that's occurred after the credit bubble began imploding, is almost entirely due to central bank and govt interference. I believe asset prices are bound to correct again if the Fed/govt ever reduce their presence in the market. As a matter of fact, if the Euro takes a hit, I think we're going to see some major dislocations because everyone and their mothers are short the dollar/long assets and other currencies.

CA renter, what do you think will happen to the public employees pension funds if there's an asset price collapse (beyond the collapse we've seen so far).

As you said before, the majority of the valuation is return on investment (not contributions).

Who will make up the shortfalls so that the guaranteed contractual pension payments can be made? Taxpayers?

I have no problem cuttting pay/benefits of public workers as long as their purchasing power is maintained. You can cut compensation, yet still have greater purchasing power if asset prices deflate more quickly than wages/benefits.

As stated before, I would also reduce some of the retirement benefits. On that, I've never wavered.

CA renter. You should write a paper. Maybe you would win the Nobel Prize in economics.

Your way has never happened before.

When there's an economic crisis, you create inflation (currency devaluation) to make your output more competitive around the world.

Or if you don't have currency flexibility (like Portugal, Ireland, or Greece) you have internal deflation to lower you labor input costs to make your products and services more competitive around the world.

For example, the workers of Greece used to be poor prior to them joining the Euro. Suddenly they ended up with puchashing (and borrowing) power parity with France and Germany. But they didn't reform or do anything different. Now they have to pay the price.

In order to attract investments, a country has to be cost competitive, relative to other countries where similar products and services are produced. If we want to sell our products overseas (to pay our external debts) we need to give up some purchasing power so that foreigners can buy our products.

In USA, state and local government budgets grew too fast in relation to a sustainable economy (population growth + inflation). Now it's time to "deflate". Sounds about right to me.

Here is what I'm talking about WRT rising purchasing power for wage earners (at the expense of asset holders, which I think is healthy):

There are at least two other reasons to worry about the onset of a deflation with devastating economic consequences. Labor markets exhibit considerably less flexibility than several decades ago. Consequently, it is considerably more difficult for the necessary fall in nominal wages to match a drop in prices. Otherwise, real wages would actually rise in a deflation and this would produce even more slack in the labor market with the resulting increases in the unemployment rate contributing to further reduce aggregate demand, the exact opposite of what is needed.

http://eh.net/encyclopedia/article/siklo...

As opposed to Dr. Siklos, I believe that rising purchasing power for wage earners is GOOD thing. There are many variables in the economy that determine if inflation or deflation are beneficial or harmful, but the period leading up to the Great Depression and the period leading up to our current economic climate have many similarities, which I think make deflation a favorable thing.

Income tax rates leading up to the deflationary periods/recessions/depressions were at extremely low levels. IMO, this accelerates the wealth/income gap between producers (the poor) and capitalists (the rich). As the gap grows, the wealthy "invest" by lending out money. Much of that credit goes to the poorer people so they can pull their purchases forward (and pay more for things than they otherwise would). The debt grows bigger for the working people, and the "assets" of the wealthy grows alongside it on the other side of the balance sheet.

As this debt/credit expansion is happening, it looks like "growth" and GDP will rise, but what's really happening is that they wealth divide is growing. The workers net worth shrinks with the debt, while the "rich" folks' net worth grows. At some point, the debt grows so large that the ability of the poor/working people to pay off that debt diminishes. During the credit expansion, production capacity grows to match the "fake," debt-driven demand. All of that capacity needs to shrink during a deflation, in order to match *true* demand. The "wealth" of the rich shrinks, because the debt they own cannot be paid by the poor/working people who are over-extended. All of this is painful, but it is entirely necessary in order to reverse the credit expansion that should not have existed in the first place -- it was a Ponzi scheme that was bound to fail at some point. That being said, when the deflation is complete, and supply matches demand, IF things are handled correctly (which is not the case, all too often), a very healthy and sustainable economy -- tied to real demand that is driven by wages and savings -- can rise from the wreckage.

IMHO, debt should not generally be available for consumption unless the credit market is being closely regulated, with debt (for consumption) being extrememly difficult to get, AND expensive.

On the other hand, debt that is used to finance business creation and expansion should be easier to get and cheaper, even if it takes some subsidies.

Not all debt is equal. Some debt, like the kind that finances growth in production capacity, is good (as long as demand for the goods/services is there). Debt for consumption (including "investing," or speculating on the demand side) is bad, in general. The only possible exceptions would be debt for housing and other large (and "necessary") purchases, and debt for medical expenses. In these cases, a closely regulated debt market could provide less expensive loans with shorter durations.