“Obvious Guy” sez a price correction by “Soft Landing” will still suck.

[Bugs]

Just for the sake of discussion, let’s set aside the established “return to the trend” precedents that have already been established and repeated in our history. Instead, let’s consider the ramifications of the vaunted “Soft Landing” that the permabulls are trying so diligently to sell us.

How would the Soft Landing be any better for everyone than the return-to-trendline pattern that has prevailed so far?

Instead of prices becoming affordable by adjusting back DOWN to the wage and population trends, we would be waiting for the prices to become affordable as a result of wages adjusting UP to the prices. Thus, while the prices for all other goods and services increase, which is what’s going to happen when wages increase, the prices for real estate would remain stable.

I don’t know how anyone else sees this, but the way I see it is thusly: a loss of value by inflation is just as much of a loss as is an outright price correction. Ask the South Americans what it’s like to be a millionaire when it costs 10,000 (pesos, reals, cubits, whatever) to buy a pair of shoes.

The big question here is whether it’s somehow easier or better to lose in the form of a more abrupt price correction now or in a long, slow bleedout that eventually stops at some point in the distant future.

The only way I see a Soft Landing being better than an outright price correction is if the overall loss is minimal and of limited duration. I don’t think it’s an accident that both of those qualifiers have been implied by the permabulls rather than openly expressed. If the losses from a soft landing were both minimal and short term it would enable more people to hang on while awaiting the next upcycle. Needless to say, that has never happened before. This brings me to my next “obvious guy” moment:

If we were to put a definition to this combination of elements (Soft Landing, minimal loss, short duration) we would invariably come up with something similar to the phrase “New Paradigm”; wherein the new baseline will replace the old one and the old rules will no longer apply.

Most people have already given up – twice – on the New Paradigm as a bust. That being the case, I wonder what measure of self-delusion allows them to indulge in it’s synonym, the short-duration Soft Landing?

[Bugs]

Oh yeah, I should have modified the title. It’s not “price correction”, but “value correction”.

Obviously.

[powayseller]

The Soft Landing crowd isn’t as smart as you make them out to be. They think prices will go down 5%, and then plateau. After a few months or a year, they will rise again, at the historic level of 3-5%.

Remember that most Americans prefer watching Survivor (is that still on?) and going to the movies and standing in long lines for overpriced coffee drinks, over reading economics and figuring out the definition of baseline, upcycle, paradigm, permabull, and the other words you mentioned.

My sister is a surgeon, and she didn’t have a single class in med school about billing codes, marketing, setting up an office. Likewise, high school and college graduates can get out of school without ever understanding inflation, interest rates, central bank policies, and the fact that the prominent world economy shifts every several hundred years (Spain, France, England, US, China,…).

I know half the people are smarter than average, but they choose not to think about money/economy because it doesn’t occur to them that they should!

So they sit back at night, watch TV, and let their company HR department decide which mutual funds they should select for their retirement plan.

[North County Jim]

I don’t think anyone could underestimate the need for economic education in this country. So much bad s*** could be avoided.

Since this a real estate related blog, I must correct Powayseller. Half the people are smarter than the median, not average.

[privatebanker]

I can’t imagine in any way, shape or form there would be a so called “soft landing” for real estate prices. I’m hearing the same arguements that I heard in 2000 regarding the stock market. When there is an asset class that has been driven to extreme levels (up or down) on major speculation and greed, there’s a major correction that follows. Reason being is that there are no fundamentals in place to support the prices. There were new paradigm proclamations by analysts and investors every day during ’99 & ’00. What happened shortly there after? I realize real estate is not a transparent, liquid investment which has allowed the NARs to manipulate public sentiment, but at some point, panic will set in and create a very bad scenario. Once emotion gets involved, most people are destined to make the wrong decisions. Behavioral finance at it’s best.

[powayseller]

Look at China. Their downturn was “softened” by government policy intervention, yet thousands of brokerages closed, realtor income is down 2/3, and many are upside down on their mortgages. And yes, the banks are suffering. Their upside: a high savings rate, so the pop didn’t wipe out their economy. The US won’t be able to handle it as well.

The only thing soft will be the sound of shoppers driving to the mall.

You won’t hear them, and you won’t see them.

And that will be the beginning of the end of the strong economy.

[North County Jim]

While I won’t disagree with your conclusion regarding hard or soft landings, I think your premise about the resiliency of the American economy vs. the Chinese economy is quite a stretch.

Because of the nature of their political system, I think it’s fair to say there is a certain lack of transparency concerning their economy. I don’t think it’s implausible that the damage to their economy from a real estate crash is greater than they may have led people to believe.

I also don’t believe that a high savings rate is the panacea you seem to think it is. A high savings rate did not prevent Japan from experiencing a 15-year deflationary spiral.

Like you, I’m certainly bearish on SD real estate but unlike you, I don’t see this bubble as the precursor to a repeat of the 1930’s.

[powayseller]

The economy is strong because of housing. Most jobs in the last years are housing-related, either directly via construction and sales, or indirectly, via purchases made through refis and HELOCs. Economists state that 2/3 of our economic growth is from consumer spending. Thus, if you take away half of consumer spending, the economy will take a hit.

In addition, the Fed has to inject money into the system to pay the promised entitlement benefits, and service the national debt.

The trade deficit is large and unsustainable. The GSEs pose systemic financial risk (both facts are per Greenspan). The dollar is on shaky ground, and our deficit is sustainable ONLY as long as foreigners keep buying our dollars. China has hinted that they want to diversify, and judging by the rising yield curve, it appears they have started.

America was once the world’s largest producer of goods. We are now the world’s largest debtor nation, the largest consumer of goods. We get away with this because we have the reserve currency. But, as in housing, all excesses correct.

Where do you see a bright future in that, North County Jim? What did I miss?

[North County Jim]

I’m not saying the future is all bright and rosy. I just don’t buy into the type of doom and gloom that you have continually espoused here. Are there many economic problems to solve here? Of course. Are they unsolvable? No. Will the solutions be painful? Sure.

Another point I’d like to make.

The unwinding of the housing bubble in selected markets will cause residual damage to the economy. So did the unwinding of the tech/telecom bubble earlier this decade. Just as many software engineers lost their jobs then, many real estate related jobs will also be lost. Please explain why a housing bubble confined to selected markets on the east and west coasts will cause significantly more economic damage than a major stock index losing 75% of its value.

No doubt there will be severe economic distress for those that bit off more than they could chew during this mania. We’ll read about a lot of these people just as we read about daytraders who lost it all as well as the Enron and WorldCom employees who lost all of their retirement savings.

Nationally, I think the damage will be commensurate with the pop of the telecom bubble or the S&L crisis of the early 1990’s. To be sure, these were painful events but fell well short of inducing a critical loss of confidence in the US economy.

Yes, all excesses correct. That doesn’t necessarily translate into economic armaggedon.

[powayseller]

I’m starting a new forum topic for the reply, and will post it after server access is restored.

[RightSide]

Poway,

I heartily support your decision to start a single forum to confine your posts too…please don’t take this the wrong way, but you spend way, way too much time posting on this website and its detioriating the overall quality of the forums at large.

I’m sure other’s would appreciate it if you could reign it in or keep it in your own forum. I also respectfully ask that you no longer respond to any of my posts. I will do the same for you.

Thanks.

[powayseller]

RightSide, I thought Rich asked us to play nice. I also wonder which of my views seem to offend. The nice thing about the forums is that folks can read those responses they like, and can skip over mine if they wish.

I actually have a lot of valuable insights and information to add. Fortunately, I have time to read, and instead of keeping this all to myself, like to share it with the community that comes here.

[lostkitty]

I enjoy reading the posts from all perspectives. Please do not ask anyone to leave RightSide. That is not going to benefit this forum at all.

[powayseller]

Thanks lostkitty.

I couldn’t remember offending anyone at all, so I did a Search on RightSide, and looked at all his posts, and whether I had given responses. We had exchanged ideas a few times, and it was very friendly each time. I am really surprised that he is so upset with me. I know he is moving from Seattle to San Diego, and hopes to purchase a house this summer/fall. Perhaps my forum topics on Sell Now have offended him, as he feels I judge people who are buying right now.

While I and most on this forum believe that buying now will result in lost money, I would not wish him away from this forum just because he disagrees with that. I had hoped to show him that renting is a viable alternative.

This forum would be boring if everone felt the same way. I am open to learning from all who come here. I’m always so happy when I see a new name in the forums, and a new idea is presented, even if it goes against what I thought was true. Case in point: I was so against gold, and then 4plexowner got me thinking, and I ended up buying GLD this week. Probably I’ll regret it, buying at the top 🙂

Anyway, diverse opinions and outlooks enrich us all. We’re learning from each other.

[Author]

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