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Daniel
Participant“Yeah, thanks for that Rich. 2 quarters seems survive-able. Why did the one in the early 90s seem so painful?”
Lindismith, a clarification: when Rich is saying that a recession is formally defined as 2 quarters of decreasing GDP, what he actually meant to say is AT LEAST 2 quarters. In other words, a single bad quarter doesn’t count as a recession. But recessions often last longer than just 2 quarters (I think the historical average is about a year, although the recent ones have been shorter).
Anyways, these are just formal definitions. Periods of less than 1% growth feel almost like recessions, too. A decade of stop-and-go growth (like Japan’s) feels pretty miserable.
ParticipantDocteur,
My apologies for teaching you about land values. Where I’m from, we call that “selling cucumbers to a farmer”. I’m sure there’s a similar saying around here.
Powayseller: you may be done with this subject, but I hope you won’t mind the rest of us discussing it. Docteur here brings very interesting insights to the issue of SD house prices. It’s not always about you, you know.
ParticipantDocteur,
That’s an interesting comment. Although my personal bet is that prices won’t drop that much (35%-50%), I don’t think that there is “replacement value” support 10%-15% under current prices either. Let me explain.
The cost of the housing structures in SD (materials, labor) is not much higher than elsewhere in the country. It is the implicit cost of land that makes housing very expensive. But the implicit cost of land is extremely volatile, and it includes a very high speculative “lot premium”. In a downturn the cost of land and the lot premium will likely go down.
Let me give an example of lot premiums: say you have a 10,000 sq ft lot with one house on it (large back yard). You can compute the “implicit cost of land” by substracting the construction costs from the market value of the house. Then let’s say you divide the 10,000 sqt ft lot into two 5,000 sq ft lots, and put two houses on them (identical houses, but with small yards now). You repeat the calculation: the implicit cost of the land equals the market value of the houses minus construction costs for the two houses.
If you do this calculation (and I read a report that did just that, I’ll try to see if I can post a link later), you will be surprised to find out that the single 10,000 sq ft lot is worth much less than the two 5,000 sq ft lots. Actually, a 10,000 sq ft lot is worth just a bit more than a SINGLE 5,000 sq ft lot.
This is the very definition of land speculation and speculative lot premium. Land is not valuable per se, in $/sq ft. It is valuable as long as a house can be built on the parcel. As I said, I would be surprised if the lot premium held up during a downturn.
August 1, 2006 at 10:50 AM in reply to: You thought doctors were free of outsourcing worries? #30332ParticipantPowayseller,
Being bearish on the US economy has been in fashion for as long as I can remember. “The Downsizing of America”, and all those other books. They sell well, don’t they?
As I said, in the past quarter century millions of jobs have evaporated, and millions more have taken their place. Microsoft, Qualcomm, Cisco, and so on weren’t even around years ago, and now they employ hundreds of thousands each.
Now, we do consume more than we produce, by the tune of $330 billion, as you correctly point out. That is 3% of the economy. Were that to go away, we would have what is usually known as a recession. We will probably have that, as we can’t over-consume forever. But try to keep things in perspective: US economy is 3.5% bigger this year than last year, which is bigger than the year before, and so on, going back a long, long time. We may take a 3% haircut, and it will hurt, I’m not saying it won’t, but it’s just a drop in the bucket in the long run. Economy is twice the size that it was when the other Bush was around.
Regarding the job market, it is tough for some, as it should be. Competition is healthy, even with China and India. Decades ago, we thought all jobs would go to Japan, then to Korea. There always will be a lower-cost locale.
Truth is, if you’re a qualified individual, it is very hard not to find work in the US. People decry the loss of software jobs to India. Yet hundreds of thousands of new college graduates find software jobs in the US every year. And US still imports a large number of highly skilled immigrants to fill vacancies. Five or six years ago, I remember that the US swept the science Nobels. Every single one of the US laureates was a foreign-born US scientist (except one with dual US-German citizenship).
If there is something weak in the US, it is public school education. We do have jobs, we just can’t produce enough qualified people to fill them. The strongest assets are our entrepreneurship culture and very deep capital markets (including venture capital). No other country in the world has managed to produce so many world-class companies (think EBay, Google, Genentech) so fast.
ParticipantThat’s the ONLY reason he does it. It shows as a fresh/updated listing in automatic searches. I’ve seen this trick many times.
ParticipantNo margin calls on real estate. If the borrower pays the mortgage each month, the lender can’t force anything. The only exception: option ARM, where the lender can ask that the borrower pay the full amount each month, rather than the minimum.
ParticipantI also am somewhat skeptical of the claim that price increases were constant in dollar terms (and therefore decreases would follow the same pattern). But I admit that I don’t have any hard data to back this up; it’s mostly anecdotal.
ParticipantAnd one more thing: still keeping a very open mind, I suspect that whoever wrote that piece isn’t the brightest bulb, so to speak…
ParticipantI’m keeping a very open mind. However, I wouldn’t touch gold with a ten foot pole 🙂 But that’s just me.
ParticipantThat’s also a bit of exaggeration, PS. Generally speaking, the American economy does pretty well, believe it or not. Even manufacturing is not as weak as the headlines would suggest. GM and Delphi are the exceptions, not the rule.
Now, there have been and there will be recessions, bear markets, and such, but overall we’re in pretty good shape. Millions of jobs are gone, but we also have millions of jobs that didnd’t even exist years ago. If you look at only one side of the coin you’re bound to get depressed and angry. The American and world economies have had a great run in the last 25 years, with hiccups here and there. And no, it was not just smoke and mirrors. Living standars here and accross the world have increased tremendously.
ParticipantThe surest way to make something unaffordable is to have the government subsidize it on the demand side (a.k.a. tax breaks for buyers). What are the sectors that pinch our pocketbooks the most? Housing, health care, education. What are the sectors with the highest demand-side subsidies? Housing, health care, education. Coincidence? I think not. If the government gave us tax breaks to buy cars and sofas, you can bet the price of those would get out of reach, too.
PS: OK, I’m exagerating a bit. But it’s allowed on this forum, right? 🙂
ParticipantThe ironic thing is that she focuses on the concept of leverage. In a declining market, that’s like whistling past the graveyard. She could have come up with “we have a buyer’s market now”, or “a house is a place to live, not an investment”, or “interest rates are still low”, or any other line that’s popular nowadays. Instead, she picks the worst possible concept to atract buyers.
ParticipantI have no qualms with the chart. As I said, I’ve seen it before. I also think we’re headed for a recession next year. I was just pointing out that some folks on the board seemed to have grossly misinterpreted what the chart actually shows.
It goes without saying that current investment in residential RE is excessive. Residential RE is going to be a drag on GDP for quite some time, I think.
ParticipantThat’s too funny…Maybe she hasn’t updated that page in the last couple of years 🙂
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