[powayseller]

The group of people you describe is termed informal employment by economists. They are measured regularly in phone surveys by the Census Bureau. The informal employment is largest in California, employing 1.5 million people, or 10% of CA’s labor force! That is more than 4 states combined.

The informal sector includes self-employed people like realtors and mortgage officers, and illegal immigrants. They do not include illegal jobs such as drug dealing and prostitution.

It is accepted that the realtors and many contractors are included in this 1.5 million informals. This number will be reduced.

You’re probably right that the large influx of illegals from Mexico coincided with our spending boom in the past 5 years. They will return to

Impact on the economy? Not sure.

[powayseller]

Forbidden

You don’t have permission to access /comment/reply/580/3550 on this server.
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Rich, if you’re out there, it’s still happening. My post was not accepted.

[powayseller]

OK, Chris, this one is for you.

By 2012, median home price will drop 32%.

I used this data and the first chart on this page, to calculate the price drop over the next 6 years.

Assuming per capita income will continue rising at 3% annually, and that the ratio of median house price/per capita income will reverse at the same rate as it rose (unlikely), in 2012, the median price will be $364,132, a 32% drop from the 2005 median of $539,823.

None of this is adjusted for inflation.

If this time is different, because the exotic loans were different, the correction could happen quicker or deeper. Perhaps 40% is possible after all.

My only point in propagating this is to help people. Anyone who owns a house, is looking to buy, ought to consider this seriously and make sure they can handle this large of a drop, both in their home’s equity, and in the economic repercussions of their jobs. Just be prepared, that’s all I want for people.

[powayseller]

What is causing the rising demand of rentals?

Are speculators selling their rentals, decreasing the supply?

Are people priced out of the market, and renting instead? Is that offset somewhat by the out migration?

My friend, a realtor,is involved in 5 transations, and he told me that in each case, the seller is planning to leave San Diego if the house sells.

OT: Today, I saw a glut of Open House signs at several intersections of Scripps Poway Parkway. There were 6-8 signs at 3 intersections. I’ve never seen anything like this. Another thing is that some of the OpenHouse signs now have flags and balloons attached. I guess you have to try to stand out…

[powayseller]

Good point, and one made by Chris J. also. Don’t let an economist manage your money. They do have interesting insights into the economy, because they spend all day tracking trends, and can put the time into forecasting. But their track record on predicting the future is really bad.

Talbott would have done better if he’d advised people to check the real estate leading indicators before selling: days on market (untampered version, if there is one), inventory, affordability index. And buyer psychology. Anyone who made a decision based on his book definitely lost money. Talbott emailed me that I should buy Ibonds with my money. He actually believes the government CPI!

After that, I learned not to let an economist manage my money. I bet their personal portfolios underperform the market by a lot!

[powayseller]

No one can time an event. Never trust a financial advisor who claims they can. You can know what will happen with a great deal of certainty, but not When. I think Talbott took that strong stand because he was either overconfident, or he wanted to sell more books. If he would have said, “Sell Sometime, I just don’t know when, but it will be sometime eventually”, his title wouldn’t be as catchy. Nonetheless, just because his timing is off, doesn’t mean I don’t buy his premise.

The important thing I look at: does this guy’s argument make sense? Can what he predicts come to pass?

I agree with you that economists should admit that they don’t know when an event will come to pass.

[powayseller]

I agree. Prices dropping 50% will bring them back to where they would be if this crazy appreciation had not happened.

Chris, I’m interested, which of Talbott’s ideas do you dispute? I dispute his assertion that inflation has been burned out of the economy.

As far as the fallout, what he says is entirely possible. The entire MBS market is at risk, because of stupidity of the managers at Fannie Mae. In my opinion, they should be in jail! The whole liquidity game was a dangerous experiment. It will end in a mess. A big global recession, unless they come up with another asset bubble to prolong having to balance the global economy.

[powayseller]

He was smart 3 years ago. As I said before, (impatience showing?), you cannot predict when irrational exuberance corrects. Excesses go on for much longer than anyone thinks possible. That doesn’t mean the person who saw the excess was wrong.

This reminds me of the alcoholic uncle. You know he’s an alcoholic, everyone does, but he is in denial. He loses his job, his wife, gets a DUI. You keep thinking he hit bottom, and he will quit drinking. But to him, it’s not bad enough. Then one day, something happens, he has a revelation, and comes to his senses. Markets are like that too. Just because he kept drinking after the wife left him doesn’t mean that you were wrong to call him an alcoholic.

[powayseller]

Bugs, are you saying that since homes prices are so out of whack with rental rates, that home prices must fall a lot, and get back down to rental rates, before rents can be affected? In that case, it will be many years before rents decline.

The rental market is dependent on wages, not on fancy loans. Even the housing market is dependent on the mortgage payment someone can make. Let’s say the median family can make a $2K rent. That would get them a $300K home with a traditional mortgage, but a $800K home with an exotic loan. But the family still only pays that $2K.

Now assume there are layoffs, out migration, and we are left with a reduced median income. Now people can only afford $1800/month in rent. Wouldn’t that reduce rents, regardless of the housing market? Whether there is a housing glut or shortage, the renter can only pay $1800. If he can’t find a unit for that price, he’ll move in with his parents or leave SD. The layoffs and out migration will put downward pressure on rents. The bad news is: there is no new industry in sight to save the SD job market. You may see a few jobs in port construction and Homeland Security, perhaps a few in biotech. But the massive 10K/year new jobs, which went into buying, remodeling, and furnishing our homes, will reverse.

[powayseller]

As Thornberg said, you can recognize a bubble, but you cannot accurately predict how long it will go on. His analogy is, “Don’t ask me what that crazy man is going to do. If I knew, he wouldn’t be crazy”.

Other economists have said you can recognize an asset bubble, but you cannot predict its collapse.

What Talbott did is make the points for why there is an asset bubble, and how it will deflate. Those points are still valid today, and he made them at a time when everyone thought RE would only go up. He was the visionary.

His timing was off a bit, as was Thornberg. The UCLA group predicted the bubble would end in 2003. I will write more about the UCLA group in the next day.

[powayseller]

Argument for rental drops:
The glut of vacant homes will be exacerbated by the exodus of people. Remember that in the year ending June 2005, 44K people left San Diego. I assume that was the beginning of a trend, and trends like this have a way of picking up speed.

Perhaps by June 2006, another 65K people will have left. Add to that the contractors who are out of work, the people who are foreclosed on who don’t have money now to live in San Diego, and we may hit 85K people/year leaving over the next few years until prices drop and jobs pick up again.

Here’s an intersting factoid: In LA and Orange County, 20% of rented untits have more than 1 person per bedroom (11% in SD, 6% in US). So a 2 br apartment has 5 or more people. Despite crowded housing, rents have not gone up because the demand just isn’t there. Why will this change? Only an increase in wages can cause rents to go up in high-priced rental markets like southern CA.

Argument for rents going up:

In the past, when housing prices dropped, rents went up. People who are not buying homes are instead renting. This is why the CPI went up more than expected last month, and economists are expecting it to continue going up, since rents are about 30% of the CPI component.

Will rents go up or down? Since I really don’t know, and I don’t want my landlord to sell this house from under me, I am signing a 2 year lease this weekend. Am I foolish?

[powayseller]

I can’t reconcile these numbers. If 40% of homes were purchased by investors, why are sales down only 30%? Shouldn’t they be down 40% for the investors, plus another 20% for the entry level buyer who is squeezed out?

The builders have filled this market with excess capacity. In the US, the ratio of new units/new households, which vacillated between 1.0 and 2.0 between 1980 and 2000, stands at 2.6! That means they are building 2.6 housing units for every new household. Clearly a glut of inventory. Meanwhile, we still have a shortage of housing for low-income workers.

[powayseller]

After I clicked “Post Comment”, I got this error message below. I hit return on my browser, and saw in a green box “Your forum topic was created.” Indeed, it was.

Internal Server Error

The server encountered an internal error or misconfiguration and was unable to complete your request.

Please contact the server administrator, [email protected] and inform them of the time the error occurred, and anything you might have done that may have caused the error.

More information about this error may be available in the server error log.

[powayseller]

Try again. The server has been down, and I e-mailed Rich to tell him, and the e-mail kept coming back. I also got a Server Administrator screen whenever I went to the piggington site, and yesterday was the 2nd day this happened.

[powayseller]

John Talbott. Among economists, he’s the biggest housing bear. More than Shiller? That’s why I upped my 30% drop forecast to 50%, after reading his book Sell Now.

[Author]

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