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Diego Mamani
ParticipantHad the Bank of England done nothing, there would have been a recession. A recession means job loss. Had that happened, conspiracy theorists would have accused the BoE of keeping interest rates too high so that rich old fogies could profit at the expense of the jobless working class.
So, BoE lowers interest rates: conspiracy. Or, BoE does not lower rates: conspiracy too!
See, if you believe in conspiracies, invisible helicopters, or horoscopes, there’s nothing that can’t be interpreted in your favor, no matter the outcome.
ParticipantI simpatize with you. My guess is that since 9/11 there are new regulations and guidance for the banking industry. There was a time when your banker was your friend. Now they are required to vet depositors to prevent money laundering, and inform Uncle Sam if they notice anything remotely suspicious.
March 17, 2007 at 6:26 PM in reply to: In California, Perris is at the epicenter of mortgage problems. #47920ParticipantWell, 18 in 1000 houses means less than 2%. And as we know, only a fraction of NODs result in foreclosures. The average for all of California is probably less than a quarter of the NOD rate in Perris. In other words, this relatively high number of NODs is still not high enough to make prices collapse.
Prices are moving down, no doubt, but they are sticky as we know, and I expect houses to remain overvalued for several years while inflation slowly erodes real values until they become more “normal” relative to rents and incomes.
Two things are true: (1) This NOD rate will increase as more ARMs reset and more subprime borrowers default over the next months, and (2) the fraction of NODs resulting in foreclosures will probably be higher than in recent housing busts (early 80s, early 90s).
ParticipantLots of liquidity.
Have you seen the latest (or very recent) Businessweek cover story on the low low (interest) rate world we live in? The point is that liquidity abounds and investors don’t know what to do with it. I sold my house in mid 2005, as part of an in-state relocation, and didn’t buy another house expecting that prices would drop about 25%-35% in real (inflation-adjusted) terms by the end of the decade.But now I’m not so sure. There really is a lot of liquidity due to several of the reasons mentioned in the Businessweek article (mostly tech iinovations in finance and globalization). At the same time, due to the billions of willing workers in Chindia, prices of consumer goods don’t increase in response to the increased liquidity (as they would have in the past). As a result, only what is really limited (real estate, gold, oil, etc.) increases in price, but not consumer goods because there’s a nearly infinite supply of low-wage labor.
As I wrote elsewhere, ‘supply and demand’ applies to dollars too: if greenbacks are more plentiful, then their value falls. Hmmm, and back in 2005 I thought that my house had doubled in value in the few years that I owned it. Perhaps it was the dollar that lost half its value and not that my house doubled…! Only we don’t see that inflation reflected in consumer goods because of Chindia.
What matters in microeconomics is not so much whether an item’s price is $3 or $200. What matters is its relative price. I can see that the relative price of gold, land, etc., has gone up enormously given the entry of emerging markets in the world economy. Perhaps Greenspan wasn’t as far off as I initially thought when we blamed the recent bubbles on the fall of the Berlin Wall.
Quite a conundrum. I can’t wait to see how this will resolve. But we won’t know for several years. In the meantime, it looks like interest rates will remain unusually low for years.
But, OTOH, Jim Jubak (msn finance guru) cautions that current difficulties in the finance sector (where the mortgage bust is only another component) will result in a credit crunch where the highly liquid investor (like me who sold a house) will be king.
ParticipantPerry, thank you so much for the summary. I’m sure there always were people at the Fed who concurred with Bies, but we seldom heard from them.
As we’ve been saying for the last six months or so: the party has only started, the worst is still ahead of us. RE bubbles take several years to ‘correct’.
ParticipantThere is a very simple explanation for this. A few mortgages are of the “callable” type, which means that the lender can ask you to repay the full amount at virtually any time, or under certain conditions, whatever the contract stipulates.
Such callable mortgages are rare, that’s why most of us haven’t heard of them. However, in recent years, some of these products may have been pushed to less sophisticated borrowers. Like prepayment penalties, balloon payments, etc., callable mortgages may yield fatter commissions to the loan agents.
ParticipantAs an obessive-compulsive saver and investor who is on track to retire in his early 40s, I’d say that I like articles like this. Let me explain, by consuming more, non-savers make my investments (shares, etc.) more profitable. Stop reading this! Get yourself to the mall and buy and charge until you drop! Don’t just stand there, buy something!
[/sarcarsm off]
ParticipantMy in-laws used to live around Greenville, SC. I felt so out of place there… I like to travel and see new places, for example, once I walked around in Kyoto (Japan) far from the tourist area, and I couldn’t read any street signs, etc., but everybody was so friendly. I could see myself living there if I had to. But not so in SC.
On a Sunday afternoon we drove to downtown Greenville. It was pretty, but everything was closed. Only a cafe (or something that looked like one) was open, and a bunch of youngsters were inside. When it started to rain, we walked into the cafe. As we were walking in, a young guy at the door asked me something like “how may I help you?” or “what are you looking for?” (I can’t remember exactly). I just said we wanted a cup of coffee. We then sat at a table, and only then, to my horror, I realized there was some sort of protestant religious event going on.
So, that place wasn’t open for business. Nothing is on a Sunday. We got up and left. BTW, my wife is Asian and I look southern Mediterranean.
I was there twice in summertime (it was too humid and I got bit by mosquitoes both times) and once in winter (all the vegetation turns brown/yellow and it’s awfully cold). Main avenues look like highways, not pleasant to walk around… I hated the place. Unless you are (and look like) a religious WASP, you’ll probably hate it too.
Then there was an incident at a snookers/billiards place, but this post is too long already…
Participant“A lot of people are sitting on the sidelines,” Barnard says, “but in the middle of summer they’ll come back.”
I wholeheartedly agree. Buyers will come back in the middle of the summer… of 2010!!!
ParticipantWelcome to the forum Ken! No need to duck for cover…
ParticipantYes, the non-market exchange rate has a lot to do with the manufacturing situation. But, the enormous availability of labor probably has more of an effect than the Chinese currency overvaluation. In other words, even if the Chinese were to allow their currency to float, we would still see rapid manufacturing growth in China. The trade deficit, measured in dollars, would noticeably improve, however.
ParticipantKev, thank you for the link. Ken Fisher is not an economist, he’s a money manager who probably makes a living from commissions paid every time his customers’ buy stock or mutual funds. In fact, Fisher is not cheering the housing market per se, but house builder shares (I know, I know, they are related).
My point is that, just as the NAR benefits when houses are bought and sold, Fisher benefits when people invest in shares as part of their portfolio. An economist, he’s not.
ParticipantThis is a very timely topic, and something that will have economists busy for some time. One of the reasons for the lack of consumer price inflation is international trade, and the entry (re-entry?) of China and India to international markets.
In the past, when consumers had more cash, and demanded more shirts, pans, cars, etc., prices of such items went up. Supply and demand, as we say. What is new nowadays, is that there’s an almost infinite supply of labor in those emerging countries. If Americans want X millions of shirt, that’s no problem, they can be produced without pushing wages in those countries. If consumers want twice as many shirts, then more workers are recruited at the same (low) wages, and therefore, shirts don’t become more expensive.
We have enourmous liquidity in the system, but it has only resulted in asset inflation (think real estate, gold), but the prices of everyday consumer items have not gone up; if anything, they have dropped!
This has serious implications for the collapse in real estate prices many of us anticipate. If there is really an oversized amount of liquidity floating around, and if consumer prices won’t go up because there’s unlimited labor (an almost perfectly elastic supply curve), then house prices may remain overpriced when measured in dollars.
Perhaps it’s not really that house prices have doubled entirely because of an speculative bubble. House prices may have spiraled in recent years mostly because dollars are more plentiful. Supply and demand applies to dollars too: if there are too many of them around, their value will drop. How do we know dollars are less valuable now than five years ago? Answer: Half a million dollars buy about half less house today than back then.
I’m not saying that there wasn’t speculation in RE. There was plenty of it. But other mechanisms, such as asset inflation in a context of easy money and cheap overseas labor, may have had a larger role than previously thought.
JG: Care to clarify your assertion that “cheap loose money kills manufacturing competitiveness”? I would think, that if anything, cheap loose dollars would boost US manufacturing competitiveness by making US products relatively cheap to foreigners.
ParticipantWell said, Masayako. Why pay half a million, when you can rent for $2K a month? Even if rent is as high as $3K (which is not), you come out ahead by renting.
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