No Rise in Home Prices Until 2020

[Aecetia]

Not exactly good news: “Home prices are unlikely to recover before 2020 and mortgage defaults will persist for years, says a survey of bank risk managers out Friday.”

http://www.cnbc.com/id/44735283

[an]

Why isn’t this good news? IIRC, 2007 price was crazy high. 9 years is quite short to be expecting to get back to that level.

[The-Shoveler]

Why it is not good news,

It means unemployment will likely be above 10% in SoCal until then.

It means the local and state gov will be cash short and likely in defect spending and schools will be a lot more crowded.

It means if you lose your Job you are unlikely to find employment in you current profession.

I could go on.

[an]

10% total unemployment. IIRC, unemployment for white collar (engineering specifically) jobs are around 4-5%.

More crowded public school = increasing value for private school.

Again, losing and finding job is all relative to which profession you’re in. With white collar (engineering specifically) unemployment around 4-5%, is that something to really worry about?

BTW, the article say “49 percent of respondents do not expect housing prices to rise back to 2007 levels for another nine years.” Assuming they’re right, do you think we’re going to stay at today’s level for 9 years and on 9 years + 1 day, price jumped to 2007 level?

So, why is it not good news if they’re right again?

[CA renter]

[quote=Nor-LA-SD-GUY2]Why it is not good news,

It means unemployment will likely be above 10% in SoCal until then.

It means the local and state gov will be cash short and likely in defect spending and schools will be a lot more crowded.

It means if you lose your Job you are unlikely to find employment in you current profession.

I could go on.[/quote]

The less people have to spend on housing costs, the more money they get to spend in more productive ways. Lower housing prices will lead to a STRONGER economy, not a weaker one.

Right now, people are tapped out because asset prices rose far higher and faster than wages. The sooner we wring the bubble economy from our minds, the sooner we can recover. High housing/asset prices are BAD for the economy.

[The-Shoveler]

Ohh yea, Lower home prices have been a real boon alright !!
Just ask anyone in phoenix , Florida or Vegas

Although I must admit there has been a dramatic uptick in home sales in those regions.

[CA renter]

[quote=Nor-LA-SD-GUY2]Ohh yea, Lower home prices have been a real boon alright !!
Just ask anyone in phoenix , Florida or Vegas

Although I must admit there has been a dramatic uptick in home sales in those regions.[/quote]

It’s not lower prices that have caused a problem, but too much debt that is the root of the problems. Ten+ years ago, the economy was booming in those places…and housing prices were very low. Their economies were booming precisely because of their affordable housing stock.

Their economies suck now because too many people were forced (and they didn’t help themselves, either) to pay too much of their income toward housing. They could only do that for as long as prices went up — they were using new mortgages to pay their old mortgages. When prices stopped rising, they were no longer able to cannibalize their debt. There was no way it could last indefinitely, and it didn’t. Now, we need to endure the painful correction so that we can get back to a healthy foundation from which a healthy and sustainable economy can be built.

[pencilneck]

“The survey conducted by the Professional Risk Managers’ International Association for FICO, found that 49 percent of respondents do not expect housing prices to rise back to 2007 levels for another nine years. Only 21 percent of respondents said they would.”

I wonder how the survey was written. Reading between the lines, it sounds like the question was something along the lines of “do you expect housing prices to rise back to 2007 levels within the next 8 years?”

A “no” response may not mean that housing prices will recover in 9 years as the article suggests.

I only mention this because my first thought was that the risk managers were being wildly optimistic. But, on second thought, this is probably just another example of poor journalistic analysis.

The headline that further misinterprets the article doesn’t help either.

[jpinpb]

[img_assist|nid=15409|title=CS chart|desc=|link=node|align=left|width=100|height=76]

Really. I will not underestimate the greed of people, but if we ever get to those highs ever again in however many years, it will be amazing. Nine years only?

[Rich Toscano]

[quote=jpinpb][img_assist|nid=15409|title=CS chart|desc=|link=node|align=left|width=100|height=76]

Really. I will not underestimate the greed of people, but if we ever get to those highs ever again in however many years, it will be amazing. Nine years only?[/quote]

JP, your chart shows inflation-adjusted prices. The forecast in question involves nominal prices.

In San Diego, prices are down a bit less than 40% from the peak (in aggregate per CS) so this implies an average price growth rate of about 5.5% per year over the following 9 years. This does seem a bit optimistic but it’s not completely out of whack (especially considering that homes in aggregate are slightly undervalued at this point).

Personally I think it’s silly to predict the nominal price of anything 9 years down the road, since I do not believe that historical assumptions about inflation will apply over this time period.

[jpinpb]

Thanks for the clarification, Rich.

[Jazzman]

I don’t understand why this should be news, or why 2007 prices should be any kind of benchmark to aim for. Is the assumption that a return to prices that were artificially highly inflated is somehow symptomatic of a recovery? If it is, then is it any wonder we got into this fine mess. I am seriously starting to be believe I must be from a different planet.

[jpinpb]

[quote=Jazzman]I don’t understand why this should be news, or why 2007 prices should be any kind of benchmark to aim for. Is the assumption that a return to prices that were artificially highly inflated is somehow symptomatic of a recovery? If it is, then is it any wonder we got into this fine mess. I am seriously starting to be believe I must be from a different planet.[/quote]

Yes, thanks for that. Agreed.

[quote=Nor-LA-SD-GUY2]Ohh yea, Lower home prices have been a real boon alright !!
Just ask anyone in phoenix , Florida or Vegas
[/quote]

If one is allowed to use monopoly money, then the economy is good.

[scaredyclassic]

I predict in 2020 there will be ad campaigns referencing about seeing clearly 20/20 and they will play the song I can see clearly now.

Pretty sure about this.

[svelte]

Have to say I am skeptical prices will get back to 2007 levels by 2020. They were so artificially high that it seems like it should take longer.

Not that I want them to get higher – I’ve got a couple of kids who will be house hunting soon.

[The-Shoveler]

While I do agree the real issue is too much debt,
Yet lower home prices will not solve the above.
We are currently choosing the path that leads straight to the Japan Trap,
High debt, lower and stagnant wages leading to lower household formation and an aging declining population combined with ever higher defect spending (in 1988 Japan had a surplus big time).

And that very same aging population SCREAMING for a flat currency,
We need wage inflation and we need it fast or we join Japan,

[patientrenter]

[quote=Nor-LA-SD-GUY2]While I do agree the real issue is too much debt,
Yet lower home prices will not solve the above….[/quote]

We have already tried creating ‘wealth’ by inflating asset prices, turbocharged with leverage. This is what we specialized in until 2008. This creates nothing of any real value. It merely transfers real wealth from one group to another. Real wealth is created when we actually manufacture things, or provide services, that other people want enough to make trades for.

Inflation is just a way to subsidize those who bet on paper-shuffling as a way to make their living. Since it is a zero-sum game, others who are actually creating wealth are made to pay for these inflation subsidies.

What is the real solution to our macro-economic problems? Is it re-starting the game of becoming rich through leveraged asset speculation, as Bernanke has been attempting? That certainly suits Wall Street, and many others who want to live off financial gambling. Or is the solution to be found in reducing our trade deficit and increasing domestic demand?

It probably isn’t possible to increase domestic demand enough until we lower the trade deficit and re-distribute domestic income. Wealthy people save a high fraction of their incomes, so when we allow high concentrations of national income accrue to the wealthiest few %, there’s not enough spending to keep everyone employed. A trade deficit does the same thing, allowing too much domestic demand leak into employment for foreign workers, not Americans. Applying a 50% tax on capital gains, and to the highest income bracket, and reducing social security taxes by the total dollar amount of the resulting increase in taxes, would stimulate demand. So would applying a tax on imports from countries that hold their currency value well below its natural purchasing power, thereby encouraging US businesses to supplant the imports.

We keep reaching for false easy solutions, when the real solution is waiting. Yes, it doesn’t involve getting paid (through ultimate capital appreciation) to buy homes, or other obviously unsustainable dreams. But just dealing with reality isn’t that hard an alternative. We’ve just become hopelessly lazy as a nation.

[CA renter]

[quote=patientrenter][quote=Nor-LA-SD-GUY2]While I do agree the real issue is too much debt,
Yet lower home prices will not solve the above….[/quote]

We have already tried creating ‘wealth’ by inflating asset prices, turbocharged with leverage. This is what we specialized in until 2008. This creates nothing of any real value. It merely transfers real wealth from one group to another. Real wealth is created when we actually manufacture things, or provide services, that other people want enough to make trades for.

Inflation is just a way to subsidize those who bet on paper-shuffling as a way to make their living. Since it is a zero-sum game, others who are actually creating wealth are made to pay for these inflation subsidies.

What is the real solution to our macro-economic problems? Is it re-starting the game of becoming rich through leveraged asset speculation, as Bernanke has been attempting? That certainly suits Wall Street, and many others who want to live off financial gambling. Or is the solution to be found in reducing our trade deficit and increasing domestic demand?

It probably isn’t possible to increase domestic demand enough until we lower the trade deficit and re-distribute domestic income. Wealthy people save a high fraction of their incomes, so when we allow high concentrations of national income accrue to the wealthiest few %, there’s not enough spending to keep everyone employed. A trade deficit does the same thing, allowing too much domestic demand leak into employment for foreign workers, not Americans. Applying a 50% tax on capital gains, and to the highest income bracket, and reducing social security taxes by the total dollar amount of the resulting increase in taxes, would stimulate demand. So would applying a tax on imports from countries that hold their currency value well below its natural purchasing power, thereby encouraging US businesses to supplant the imports.

We keep reaching for false easy solutions, when the real solution is waiting. Yes, it doesn’t involve getting paid (through ultimate capital appreciation) to buy homes, or other obviously unsustainable dreams. But just dealing with reality isn’t that hard an alternative. We’ve just become hopelessly lazy as a nation.[/quote]

That was very well said, patientrenter!

[The-Shoveler]

I did say wage inflation I think.

Anyway, with out inflation at this point we are Doomed !!! (as in we are Japan).

[DomoArigato]

[quote=Nor-LA-SD-GUY2]I did say wage inflation I think.

Anyway, with out inflation at this point we are Doomed !!! (as in we are Japan).[/quote]

How is Japan doomed? How is the U.S. doomed?

Japan’s debt-to-GDP ratio is ~2:1 while the U.S is only ~1:1:

http://en.wikipedia.org/wiki/List_of_sovereign_states_by_public_debt

However, Japan’s unemployment rate is only 4.3%:

http://www.tradingeconomics.com/japan/unemployment-rate

The official U.S. unemployment rate is 9.1% but underemployment is probably between 25 and 30%.

Interest rates have been low in Japan since at least 1995.

So I ask again, how is Japan doomed? How is the U.S. doomed?

Many people seem to think that high levels of debt-to-GDP will lead to doom, but there is no evidence of that in Japan.

What does lead to doom? Either not having your own currency or not having control over your own currency appears to lead to doom.

We’ve all heard about the PIIGS (Portugal, Italy, Ireland, Greece, Spain) and their economic troubles. However, none of those countries have their own currency and so can’t be compared to either the U.S. or Japan.

Germany in 1914 may at first glance appear similar to the U.S. today. As you can see from the article linked below, it had just abandoned the gold standard and had a relatively strong currency (German Mark) which traded at around 5 German Marks to one dollar.

http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhyperinflation.html

So it was Germany’s massive deficit spending which led to hyperinflation, right? It doesn’t look like it. Instead, it looks like Germany effectively lost control of their currency because they were forced to pay war reparations in gold.

No one is militarily strong enough to force the U.S. to repay our debts with some real, physical asset, so the U.S.’s creditors will have to take our paper money as repayment. Germany of course had many other issues that the U.S. doesn’t currently face due to the fact that it just lost World War I and also due to its geographical location.

I don’t see any evidence that a high debt-to-GDP ratio leads to doom. As long as a country has its own currency and can repay its debts with that currency, high debt-to-GDP ratios do not appear to lead to doom.

The U.S. and Japan might continue to do just fine with much higher debt-to-GDP ratios. 10:1 debt-to-GDP anyone?

[The-Shoveler]

Hmm well in 1988 Japan had a huge surplus, but when they had their real-estate bust in 1991 they had to revert to very large defect spending to keep the unemployment below 5% (building highways bridges etc…) (BECAUSE THEY (the Japanese population) ABSOLUTLY WOULD NOT TOLERATE INFLATION)

Well I am fine with the defect spending I just think they will need to get the unemployment down or they (we) are looking at revolt fairly soon.

I would need to get the data together but I would think, you could attribute most of the difference between the current 11~13% to the more normal 5-6% unemployment in ca directly to the real-estate industries.

[briansd1]

[quote=Nor-LA-SD-GUY2]Hmm well in 1988 Japan had a huge surplus, but when they had their real-estate bust in 1991 they had to revert to very large defect spending to keep the unemployment below 5% (building highways bridges etc…) (BECAUSE THEY (the Japanese population) ABSOLUTLY WOULD NOT TOLERATE INFLATION)
[/Quote]

Nor-LA, I don’t follow your logic here. Did you mean to say deflation?

While big deficit spending in Japan did not create rampant inflation it did hold back deflation.

[quote=Nor-LA-SD-GUY2]
Well I am fine with the defect spending I just think they will need to get the unemployment down or they (we) are looking at revolt fairly soon.

I would need to get the data together but I would think, you could attribute most of the difference between the current 11~13% to the more normal 5-6% unemployment in ca directly to the real-estate industries.[/quote]

I agree that real estate hugely affects wealth and consumer confidence.

[The-Shoveler]

In other words, it’s fine for the Gov to print money, but those dang citizens better pay off their debt in GOLD dang it !!!

[The-Shoveler]

The logic, is that without inflation, we have 30% of mortgage holders (and no most will not be walking away) with approx. 90K in debt over what they could sell for ,meaning they are stuck and they are not going to be in a spending mood for a very long time.

Also the Gov debt will need to be paid off in basically “GOLD” if there is no inflation.
We would need about 5 years of 7-8% inflation to get anywhere close to being out of this debt trap.
Until then welcome to Japan (without the culture of course).

[briansd1]

I agree that it’s fine for the Federal government to be spending money to stimulate the economy.

Economists have been talking of the lessons of Japan but unfortunately, our government is paralyzed by obstructionists.

Yes, welcome to Japan.

PS: did you mean to say that the Japanese traded deflation for more government debt? If the government had not gone on a building spree, deflation would have been much worse in Japan.

[The-Shoveler]

[quote=briansd1]I agree that it’s fine for the Federal government to be spending money to stimulate the economy.

Economists have been talking of the lessons of Japan but unfortunately, our government is paralyzed by obstructionists.

Yes, welcome to Japan.

PS: did you mean to say that the Japanese traded deflation for more government debt? If the government had not gone on a building spree, deflation would have been much worse in Japan.[/quote]

I agree with that, but it was the aged population (soon to be fixed income) that the politicians were playing to and that is the reason they had no inflation, which was the end of growth, as the young and current as well as future were left with only lower wages and expectations.
So they had to create Jobs as there was no other growth.

The Debt trap. The German example was actually a good one.

[patientrenter]

[quote=briansd1]…….If the government had not gone on a building spree, deflation would have been much worse in Japan.[/quote]

Deflation in Japan?

Let’s look at the actual numbers. Here is the consumer price index for Japan, from the official Japanese government website http://www.e-stat.go.jp/SG1/estat/ListE.do?bid=000001015975&cycode=0 :

1980 76.9
1981 80.6
1982 82.9
1983 84.4
1984 86.3
1985 88.1
1986 88.6
1987 88.7
1988 89.3
1989 91.3
1990 94.1
1991 97.3
1992 98.9
1993 100.2
1994 100.8
1995 100.7
1996 100.8
1997 102.7
1998 103.3
1999 103
2000 102.2
2001 101.5
2002 100.6
2003 100.3
2004 100.3
2005 100
2006 100.3
2007 100.3
2008 101.7
2009 100.3
2010 99.6

When I look at these values, I see price stability in Japan from 1993 on. The cumulative deflation from 1993 to 2010, a period of 17 years, adds up to a grand total of 0.6%. That’s 0.036% per year, which is barely discernible.

I love the (Rich-inspired) motto at piggington: Bring facts.

[briansd1]

patientrenter, your facts make my point. Despite all the money printing and government spending, inflation did not take off in Japan. That’s the Japan lesson.

[quote=Nor-LA-SD-GUY2]
I agree with that, but it was the aged population (soon to be fixed income) that the politicians were playing to and that is the reason they had no inflation, which was the end of growth, as the young and current as well as future were left with only lower wages and expectations.
So they had to create Jobs as there was no other growth.
[/quote]

I don’t believe the politicians were playing to the seniors.

I believe that the forces of globalization held prices down in Japan.

The same is true for America now. We are exporting inflation.

The people here who are against a large jobs stimulus are essentially heartless ideologues telling the unemployed to just eat cake.

[patientrenter]

[quote=briansd1]patientrenter, your facts make my point. Despite all the money printing and government spending, inflation did not take off in Japan. That’s the Japan lesson…… [/quote]

I am sorry, I missed your reference to an absence of inflation in Japan. I only saw your comment referring to Japanese “deflation”. I was pointing out that Japan is not experiencing deflation. It’s not experiencing inflation either. What Japan has experienced since 1993 is simply price stability.

[Rich Toscano]

[quote=briansd1]Despite all the money printing and government spending, inflation did not take off in Japan. That’s the Japan lesson.
[/quote]

What money printing? Japanese money supply growth averaged about 2% a year all through the 90s (and beyond). The Japan lesson, as I keep trying to point out, is not that a central bank is unable to create inflation during a credit bust — it’s that the Japanese central bank didn’t try.

[briansd1]

[quote=Rich Toscano][quote=briansd1]Despite all the money printing and government spending, inflation did not take off in Japan. That’s the Japan lesson.
[/quote]

What money printing? Japanese money supply growth averaged about 2% a year all through the 90s (and beyond). The Japan lesson, as I keep trying to point out, is not that a central bank is unable to create inflation during a credit bust — it’s that the Japanese central bank didn’t try.[/quote]

yes, Rich. you are correct. I had meant to edit my post to take out the money printing part. The Japanese central bank was timid. That was the lesson Bernanke learned from studying Japan.

In America, we had the monetary part right thanks to Bernanke, but we are lacking the fiscal part. While the Federal government had a stimulus, the cuts at the state and local levels canceled out the Federal spending.

[UCGal]

[quote=Nor-LA-SD-GUY2]The logic, is that without inflation, we have 30% of mortgage holders (and no most will not be walking away) with approx. 90K in debt over what they could sell for ,meaning they are stuck and they are not going to be in a spending mood for a very long time.
[/quote]

I’m curious where you got this statistic. I’m not disputing it – just wondering if it’s accurate.

[The-Shoveler]

OK Fine whatever they had no control what so ever over minimum wage hmmm,

But regardless we won’t get out of this debt trap without inflation (nor will they).

[The-Shoveler]

July 2011
California ranks in the top five of both categories. Nearly a third of California homeowners with mortgages — 2.1 million families — owe more than their homes are worth, according to CoreLogic. And each of those borrowers is underwater by an average of about $93,000

http://articles.latimes.com/2011/jul/31/opinion/la-oe-gelinas-foreclosure-california-20110731

http://articles.ocregister.com/2011-09-16/news/30166535_1_negative-equity-corelogic-chief-economist-mark-fleming

[UCGal]

[quote=Nor-LA-SD-GUY2]July 2011
California ranks in the top five of both categories. Nearly a third of California homeowners with mortgages — 2.1 million families — owe more than their homes are worth, according to CoreLogic. And each of those borrowers is underwater by an average of about $93,000

http://articles.latimes.com/2011/jul/31/opinion/la-oe-gelinas-foreclosure-california-20110731

http://articles.ocregister.com/2011-09-16/news/30166535_1_negative-equity-corelogic-chief-economist-mark-fleming%5B/quote%5D

Thanks.
I hadn’t realized you were just talking California. It didn’t fit what I see elsewhere. (midwest, east coast) But it does fit here.

Interesting to see that these stats are an improvement over a year ago. Not that it matters if you’re underwater.

[briansd1]

Nor-LA-SD-GUY2, any data on the total value of homes vs. the total value mortgages for different regions on California?

For example, Orlando and Las Vegas are underwater as a whole (according to NYT article).

[The-Shoveler]

I don’t have time today need to get stuff out,
Will try to look up this weekend,
I will throw this out, esp when people talk about vacant homes in the media, in really most of the vacant homes are only in a few cities like Detroit and when talking about percent’s they use towns like Tuscan AZ.
The way they talk you would think about 20-30% of the homes in SD are Vacant, but I guess the truth does not sell books or make good headlines.

[Author]

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