The speculative housing bubble that launched San Diego home prices so high is now in the process of deflating. Prices have been on the decline for over a year, but they remain well above the levels the would be justified by the economic fundamentals now that the bubble-era forces of rampant buyer optimism and unsustainably lax lending are disappearing before our eyes.
Using the analytical framework described above, and considering the precedents set by past boom/bust cycles in the San Diego housing market, it sure seems that the most likely outcome is for San Diego home prices to continue declining for some time to come. But nothing is ever for certain in the financial markets, so today I’d like to discuss the following question: what could prevent a serious decline in home prices?
Another excellent post by
Another excellent post by our housing saviour! (e.g. we averted buying a house in 2006 by Rich’s website.)
a nice new border fence
a nice new border fence would help. 🙂
I don’t think it has
I don’t think it has anything to do with the number of people coming here. I’m sorry but no one I know who’s coming from across the “border” can afford home prices today.
Nor_LA-Temcu-SD-Guy
What
Nor_LA-Temcu-SD-Guy
What would happen if the Builders reset the prices back to 2003/early 2004 in a few months time frame and then resume more normal price appreciation 5% to 8% a year.
This I think would be in everyone best interest,
Not likely I know but seeing what the builders have been doing in Riverside and SCV the last few weeks hmmm Maybe ???
Government intervention
Government intervention would only occur if the crisis is national. On average, national home prices are mildly overpriced when compared to San Diego so this type of intervention may not be enough to save the “most overpriced market in the U.S.” according to Forbes magazine.
Great analysis. Also a point
Great analysis. Also a point for housing bears to keep in mind: which do you trust more, Bernanke/Bush/paper USD or your own home? Granted nothing is worth breaking the bank for but a rash move to cash in the profit is not necessarily a smart thing to do for long time owners.
It is almost inevitable that USD will devalue. It is just a question of whether it will be an orderly process. Devaluation is not the end of the day either. More jobs will actually come back to the US and create more income, at least nominally. But nominal increase in wage and property value is actually important for the mass psychology and for the system to function — so they will come no matter what.
So in the long run it is not the question of whether RE will appreciate (it will). It is just other things will appreciate faster. But one thing is for sure: paper USD is not going to appreciate for a long long time to come.
Prominent on Google. When I
Prominent on Google. When I was mining this AM, your piece ranked 2nd in a search for |housing bubble| on Google News. Well earned placement, by the way 🙂
Thank god somebody said
Thank god somebody said this:
“it’s important to acknowledge that there could be some forces putting pretty serious pressure in the other direction.”
Nothing short of
Nothing short of hyperinflation will save housing prices in SoCal. Yeah, I know: helicopter Ben and dropping cash on peoples heads. That howevr is a load BS. Does anyone here really understand what would happen if Fires up the real presses (not M3)? For starters we lose reserve currency status: oil not denominted in USD. second, foreign bondholdrs will stop buying Treasuries and the rate will go back up anyway to attract them back.
Too much risk for rich and poor alike. If you think Bernanke doesn’t understand then you are a fool.
I don’t think that dropping
I don’t think that dropping rates is an option any longer. This is because the rate is intimately tied to treasury yield rates. Drop the treasury rates and who is going to pick up the treasuries to fund deficit spending? The savings rate in this country is dismal, foreign countries are looking for better places to stash the excess gains effectively from difference in balance of trade (ie: US using credit to buy Chinese goods). The treasury yield has to offset any devaluation in the currency with respect to the investing foreign country’s currency in addition to providing a risk free rate of return that may be available elsewhere. That literally leaves the more drastic mechanisms. (Increasing M0).
Forcing lending rates down is a non-starter. This is ‘at-risk’ capital vs perceived non-risk capital in the form of treasuries. At risk capital always demands higher returns to offset the risk of loss. You will be attempting to invert risk premiums. (shudder). Someone would have to negate the ‘risk’ on the mortgages… taxpayers?(more shuddering).
My gut feeling(because I can’t predict what path will be taken), is that this will look more like the 1970(s) stagflation than 1929. Inflate everything else up to the price of houses (cash and fixed yield bond holders are screwed, stock in the US will go nowhere for a long while because interest rates will actually have to be raised to stave off inflation from increasing M0, the dollar drastically deflates with respect to other currencies).
To be frank, I think the
To be frank, I think the rest of the country will put up with quite a bit of pain if that means California gets a lot of pain.
Uhhh, yeah but what about
Uhhh, yeah but what about incomes. I don’t see a 100% raise coming any time soon. Unless Ben can get the money into the hands of joe six pack, then inflating everything else leads to hyperinflation. Your post started out well, but deterioated at the end.
Ever hear the term pushing on a string????
So, which one would be more
So, which one would be more desirable: Hyperinflation or housing crash? Either way, fundamental always win in any market. Personally, I don’t care if it’s one or another or a combination of both. As long as fundamental is reach and families can finally live in San Diego on single income again, that’s all I’m asking for. The only unknown is how long before fundamental is reached.
Oh you will care if it’s
Oh you will care if it’s hyperinflation. If we do down that path, then this country is done. Hyperinflation is serious people. Haven’t any of you heard of Weimer????
How can you not care about
How can you not care about inflation? I just don’t get it. I honestly feel nervous about the decisions the feds are going to make. I would rather us have a downturn in housing, but keep the value of the dollar. I think we would be able to pull ourselves out of the housing hole. People will lose homes, but when the market comes down people will buy again. The coasts are the most problematic areas, other areas won’t feel the same pain.
My problem is that people these days do not want “pain” to be any part of their vocabulary. It’s the new four letter word. You screw up, you should get a second chance, instead of paying the price. That way of thinking is wrong. Hard work, education and responsibility is what earns you the right to own, not the government making lax loan standards and you see that you could buy a home for a few years and somehow make it work. Then when they pull the rug from under your feet (still not paid for on their visa) they cry foul, as if they are a victim.
Who knows what the future will bring, but with politicians only caring about votes, I wouldn’t put hyperinflation out of their book of tricks. I really don’t think they care about the future of the United States.
With a correction, the
With a correction, the people who pay are those who have overextended themselves. With inflation everyone pays regardless of whether they made any foolish or imprudent choices. Inflating our way out of it is a wholly unfair solution, which is probably wherein the appeal lies.
Besides, I don’t think dropping interest rates will do anything locally other than possibly prolong the slide. The RE markets are not struggling because of the increase in interest rates which has been minimal. They’re struggling because the investors have left and, to a lesser extent, the AVAILABILITY of no-look credit has tightened.
US Hyperinflation ala
US Hyperinflation ala Argentina is a Y2K fantasy cans-in-the-basement scenario, not gonna happen. Slow, bleeding, painful, YOY inflation for the next 10 years, reducing the real value of your savings? Very likely. Think 1970s stagflation, that’s where we’re headed. Simultaneous inflation and declining values and sales. High unemployment, high interest rates. Your purchasing power will go down 13% a year but you’ll get 8.5% on your CDs.
Y2K was all too real,
Y2K was all too real, CONCHO. We saw that one coming 15 years ahead of time and worked like hell (and spent tens of billions of dollars) chasing down all those YY fields on 80 byte records — Herman Hollerith’s revenge. This time around, like imbeciles, we’ve set up Adam Smith in our elephant niches as some patron god of greed and nobody is looking out for systemic threats. I fear it’s too late now, but perhaps it was too late in 1978 when Freddie’s charter made half of America’s national debt disappear (or so Congress thought). Long live the implicit guarantee!
Do you really think a hard
Do you really think a hard crash will only affect people who chose bad loans? A hard crash can very well cause a recession. To what magnitude, we have no idea. So tell me, which is worse, hyperinflation or recession in the magnitude of 1929? On one hand you have jobs and great pay, but that pay doesn’t buy you much. On the other hand, many people won’t have jobs and won’t have any money to buy anything. Seems like a lose-lose situation to me. A more probable scenario is to have inflation go up faster than it has been but under hyperinflation range and housing price go down faster than it has been but slower than a hard crash. I see the probability of the outcome as a gradient. One extreme is hyperinflation and the other extreme is recession. I vote for somewhere in the middle. Only time will tell how things will play out.
No, you’ve got it wrong.
No, you’ve got it wrong. Hyperinflation is end game. WE ARE ALL DONE if that goes that way…which is why it won’t. Hyperinflation only works if the money gets into the hands of J6Pack via wages and the government and the Fed cannot control that. Outsourcing will make sure of that. House prices will not survive that either because interest rates will have to be raised sky high to get foreign investors to continue to buy US treasuries. That’s why the idiots who like to site the “helicopter ben” moniker don’t know what the hell they are talking about. The FED has one primary goal: Dollar Hegemony. They will protect that at all costs in the end.
Which is better? Recession, deflation and credit contraction. Let it burn out on it’s own. The people who get hurt the most are debtors and commission generators. The system needs desperately to be reset. One way or another.
I highly doubt that it’ll be
I highly doubt that it’ll be contained to only hurt the debtors and commission generators. It will spread throughout the whole economy. No industry is independent. We are all interconnected, so when they go down, so will other industries, such as retail as well as tech. What do you think people who are strap for cash will cut first?
Why do you think I got it wrong? I never say hyperinflation is a desirable solution. Hyperinflation is END GAME scenario, but recession in the magnitude of 1929 are END GAME scenario as well. Pick your poison. Imagine when no one can get a job. At least hyperinflation, J6pack still make some money. Total melt down will mean J6pack have no income. Even Mr. WhiteCollar will have no income either. That’s why I don’t believe either extreme will happen. My point is, we scream till we’re blue in the face about how things will play out, only time will tell. I have faith in the global economy and the market. I trust they’ll fix themselves just like they fixed many other economic bubbles and busts. I’ll just sit back and watch the show.
“At least hyperinflation,
“At least hyperinflation, J6pack still make some money.”
You didn’t read carefully enough. Once again, the Fed can inject liquidity but it cannot control where it goes. That is how we got malinvestment in real estate for the past several years. M3 went through the roof (which is why it is not published anymore) and the Real Estate values went sky high because of the easy credit. J6Pack is not going to get a 100 or 200% raise in a year or two. His job will go somewhere else if does.
Once again, you didn’t get
Once again, you didn’t get my point. I never said J6pack will get 100-200% raise. Even if J6pack didn’t get any raise, he’ll still make more money than if he is unemployed in a depression scenario. If income doesn’t go up at all and dollar devalued, then more jobs would come back since it won’t be as cheap as it used to be to out source. I’d take hyperinflation over depression any day. A job, even a poorly paid one is still better than no job at all.
Even if there is a 100-200% raise in 1-2 years in relative to the salary of the previous year or 2, that doesn’t always mean that J6pack salary will now be 100-200% higher compare to other countries (i.e. China/India). If the dollar devalued at the same pace, then it’ll be a wash in the eyes out countries outside and corporations looking to outsource in term of labor cost. Either extreme will be END GAME for J6pack.
And once again,
And once again, Hyperinflation will lead to loss of reserve currency status and high interest rates regardless. Businesses will also lose profit in that scenario. YOUR MONEY as a saver (most who post here are savers) will be worthless in that scenario. It also means that prices expand rapidly…faster than people can spend the money until the cycle ends causing a huge shock to those who are using it. The only things that end the cycle are changes in Political Structure and new currency. Bye Bye dollar hello ???? It won’t matter that J6Pack has a job with money that loses value every day…literally. Again, look up what happened in Weimer era Germany and what that lead to: Nazis.
Depression/severe recession is survivable as a nation. Hyperinflation is not. It really is end game. The US is not a freaking banana republic. If we go, it will be ugly.
Hello Amero. JWM, there’s
Hello Amero. JWM, there’s your answer to “Bye bye dollar, hello ????” that and the SPP. As reported today in Reuters, positive foreign central bank purchases of US debt was pretty well just Fannie and Freddie senior debt, and it’s been that way for five straight weeks. The prime sector of the housing bubble is the only thing holding up the dollar’s reserve currency status at this point.
I can’t even believe you
I can’t even believe you would advocate Hyperinflation…come on, you are smarter than that.
I never advocate anything.
I never advocate anything. The only thing I advocate is sit back, relax, and watch the market play itself out. The chance of hyperinflation/depression is probably very unlikely. I don’t know which is worse and I doubt you know for a fact either. I didn’t live in Germany at the hyperinflation time and I didn’t live in 1929, so I can’t tell you. It’s only logical to me that some money is better than no money. At least with some money, you can buy food, w/ no money, well, you can’t buy anything.
You need to read some basic
You need to read some basic economics. As do a lot of the poster here on piggington. The whole world doesn’t revolve around San Diego.
Yes, I need to read about
Yes, I need to read about basic economics to tell me END GAME is bad. Wow, I didn’t know that. Please tell me you’ve experience both depression and hyperinflation first hand as J6pack. You can argue all you want about which is theoretically worse than the other. But at the end of the day, all I know is having $0.50 is better than having $0. That’s my basic economic. Sorry, but I’m no economist and I’d never want to be one. Economic theory bore me to death, which is why I’m an engineer and not an economist. Speaking as a J6pack, I don’t care which one is worse because if either one ever happen again, I’ll be broke, hungry, and homeless. Also, things are much different now than it was in 1923. Chinese Yuan are tied to the US $, if $ goes hyper inflated, so will the Yuan. What do you think will happen to the rest of the world economy when the #1 consumer and #1 producer goes into hyperinflation? We’re all interconnected now. Much more than we were before. We all agree END GAME is HORRIBLE, period. We don’t want either to happen. That’s what I’ve been saying from the beginning. All I want is for things to return back to fundamental. I don’t care how we get there. I trust the global economy and I believe the market will sort itself out w/out the need to resort to END GAME scenario. So can we just drop this whole debate on which is worse and get back on topic?
You do not have to have had
You do not have to have had lived through something to understand it. Hyperinflation has happened in the past. We can study it.
If you are earning $10 an hour and a loaf of bread costs $1000, are you really earning anything at all?
You can understand the logic
You can understand the logic of it but unless you live through something, you’ll never know how it feel. Depression has happened in the past as well. With what I’ve read about the 1929 depression, it doesn’t sound any better either. Same question can be asked, if you make $0 because you have no job and a loaf o bread is $1, are you better off?
You are in about the same
You are in about the same situation (except for the fact that you worked your tail off in a hyperinflationary situation and looked for a job in a depression). Either way, you can’t afford a loaf of bread. However, you are only thinking about the situation in a micro sense. From a macro standpoint, our global position will be more severely impacted by hyperinflation than a depression, IMO.
Thank you for agreeing with
Thank you for agreeing with me. I’ve been trying to say both situation affect J6pack in the same way all along. Yes, I’m only looking at the situation in a micro sense. That’s what J6pack cares about. Either case is horrible and most likely won’t happen. To me, at least in hyperinflation situation, you can work 100 hrs to buy a loaf of bread. While in a great depression, even if you want to work 100 hrs to buy a loaf of bread, you can’t because you won’t have a job. That’s just IMHO. What what do I know, I’m just a lowly engineer who don’t know basic economic. Maybe having $0 is better than having $1.
We’re in a very different time now I think. Since we’re so interconnected and the Yuan directly tied to the US $, I think either situation will affect the world economy in a great way. There has never been a depression or a hyperinflation situation that affect both major power at one time. If we go hyper inflated, so will China. If we go into recession, so will China. As I’ve ask before, what do you think will happen to the world economy when the #1 consuming country and #1 producing country goes into depression or hyperinflation at the same time? This has never happened before.
The war is unaffordable.
The war is unaffordable. That’s the basic problem. The other side of the coin of millions of households unable to pay their mortgages is trillions of dollars of bonds whose payments depend on those mortgage cheques.
Inflating the bubble created the fiscal dark matter to finance the invasions in the first place, but deflating the bubble will require replacing the dark matter with real money from somewhere. The present Bean-Neugebauer amendment will likely prove to be about the last effort by Congress to ignore systemic risk arising from the securitization of the subprime / Alt-A loans.
To now the internal damage to the health of the banking system has been hidden by Enron-on-steroids off-balance-sheet accounting by everyone, but I can’t see this lasting much longer. Like in any pyramid scheme, once things stop accelerating (three multi-billion dollar private equity takeovers in the last two days, jeesh!) one major player too many (WaMu’s my guess if there’s an office pool) will just run out of cash.
When the next Amaranth-style bailout becomes impossible, everyone seizes up all at once (because everyone has FIN 140 vehicle joint ventures with everyone else). So we wake up like Argentinians one day and the financial services industry has evaporated. I expect the day after that we Canadians find out you guys weren’t kidding about the Amero and SPP.com . Hope the evil day can be put off until autumn. It will be good for our egos up here to have a post-par Loonie for a few weeks before we have to give up our beloved currency.
Inflation, deflation, whatever. Every night I’m just hoping for the continued health of Fannie’s QSPEs.