The problem of poison

Janzen writes for iTulip.com. He is a very well spoken man who called out the housing bubble years ago. Early enough that he was laughed at by many. Guess who is laughing now.

The problem with housing is that the cost is heavily dependent upon borrowing rates. A 20,000 Toyota would not cost 40,000 next week if car loan interest rates were shaved in half. But, the cutting of home loan interest rates did just that, to homes despite no real significant change to the size of the population and no change to the size of the country.

To those of you who think 2005 prices were new norm, and are waiting for home prices to reach those levels, expect to be disappointed. Those days are over. Also, to those who expect 50% home price decreases, you also are going to be disappointed. Homes have been falling in value, and will fall some more, but reports of a "crash" are overstated. Expect something in the Middle.

Its amazing that in just 2 years someone could afford to buy a home that was double the price of their previous home... I believe prices have a ways to go. Their is pent up demand as well.. I have a lot of friends who like me are 26-30 and have been waiting... We all are unwilling to spend $2,500 or more to own a home. Once we are able to buy a home for 275k you will see a lot of buyers out there... because we all have a ton of student loans and have been putting money in our IRA's and 401k's so we dont have 50k in cash for a DP. we may have 20 or 30k. Housing will come down because of people like me and my friends wo are un willing to spend 375 or 400k for a 3 bed 1.5 bath Cape in a suburb with $5k worth of taxes.

He is right, and the media got it badly wrong. Subprime is not, and never was, an isolated problem.

It’s not just that Alt-A is performing badly, too, or that prime is now under stress. It’s that subprime, very often, represented not a separate, alien species of bad borrower, but the last stage in the lifecycle of borrowers who started out as prime, or close to it. Meaning, prime borrowers got into trouble, refinanced for cash or lower monthly payments, got into trouble again, and ended up in the subprime sewer. It was the “release valve” for an entire unsustainable system of mortgages. And when that release valve got stuck—when borrowers reached the end of the mortgage rope, and couldn’t get one more refinance—that’s when the foreclosure crisis blew up.

In fact, it’s even bigger than that. Making all of those sausages of fancy structured products had to start with an income stream that came from somewhere. Same with all that mortgage equity extraction that drove the consumer economy for the last five years; somebody had to bid up housing prices in the first place, so we could borrow against them. Well, if you look, the sharpest appreciation happened not at the top of the market, but the bottom—the cheapest houses went up in price the most. Subprime borrowers floated up everybody’s “equity,” and everybody got nice shiny gold cards to spend it with. The bottom line is, it was the subprime market that drove Wall Street and Main Street over the past five years.

As Tanta likes to say, “We are all subprime now.”

OK, so therefore, what? Why did this happen? Here, I think Janszen’s answer is right again.

An economy is like a food chain. No matter how complex and evolved things look at the top, everything depends on simple plankton down at the bottom. In an economy, the plankton is some guy who applies his labor to raw material to make a product, then goes home and spends his paycheck on some other guy’s product. Problem is, we don’t manufacture anymore, and people’s paychecks have been shrinking. So—how do we get that plankton to spend a paycheck he doesn’t have? Without it, we’ll all starve. I know: We let him borrow it! Except we forgot: Borrowing is a claim against a future paycheck. Which the plankton isn’t earning, remember.

So, yeah, subprime is like toxic waste. But it’s our waste.

Matt hit the nail right on the head. We in the 26-30 age group who have been waiting and paying rent realize that the market was way over valued and refused to get sucked in. Honestly- who on earth can justify home prices DOUBLING in recent years? Is it because of MA's great "quality of life" or a massively increased demand?

No... its because realtors, mortgage brokers, and the media created the perfect storm of spin, PR, and easy money for unqualified applicants. What happened- those of us who are qualified got the shaft...

I am either waiting until prices continue to go down and I can buy my first home for a reasonable "first home" price. Or relocating to another area of the country that doesn't suffer from the "over valuation" plague...

U.S. bubble mortgages are poison, but you missed a crucial element of Jantzen's argument: the problem remains the securitization of loans for which the issuer has no risk of the homeowner going belly up and sending jingle mail to the CDO bag holders -- who are now largely the U.S. taxpayers thanks to questionably legal recent Fed actions after Jantzen's article appeared.

And the best Harper's article on this was Michael Hudson's excellent "The New Road to Serfdom" (May 2006), that predicted quite accurately how this debt poison will kill:

"The problem [is] that prices are falling even as the buyers' total mortgage remains the same or even increases. ... Rising debt-service payments will further divert income from new consumer spending. Taken together, these factors will further shrink the “real” economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagnation or worse."

Oh, Dave, really? "Realtors gave it spin and PR?"

Well, let me lay out the facts for you, right now, so that there's no misunderstanding.

There is absolutely no chance, no chance in 100 or 1000 years that the average home price in Massachusetts is going to hit $275,000. Matt is not right, he's wrong.

I don't think anyone, from economist to fortune teller to real estate agent will tell you otherwise.

By no means am I suggesting that Matt or Dave should buy, just that waiting for something that has no chance of arriving is not wise.

"There is absolutely no chance, no chance in 100 or 1000 years that the average home price in Massachusetts is going to hit $275,000. ... I don't think anyone, from economist to fortune teller to real estate agent will tell you otherwise."

Checking the S&P/Case-Shiller futures market, it takes about ten seconds to show that this claim is dead wrong.

The futures market are now pricing in a price index of 80 for MA SFH by 2012, down from an index of 120 at the bubble's peak in summer of 2005 [see tinyurl.com/47qb4c]. The median price at the peak was about $405K [see tinyurl.com/4km828], so $405K*80/120 = $270K by 2012.

That's the futures market pricing in $5K less 4 years than something you claim that "anyone, from economist to fortune teller to real estate agent will tell you otherwise" that "there is absolutely no chance, no chance in 100 or 1000 years."

Avg home price in Mass is now $310,000 Statewide....10% down from here makes Avg house price in Mass $279,000.....

I think what we might be forgetting is that home prices are just part of the whole.

During the tech bubble, and even now to a certain extent, inflation was non-existent. There was all kinds of talk about how inflation had disappeared because of technology. Well, now that's not the case.

Will the average home price drop to $250,000 or $230,000 where it really belongs? Probably not. $275,000 might happen. What is likely to happen, is that corporate America, which until now has been tallying record profits, are going to have to invest some of that in their workers. If for no other reason then they have to buy the goods that corporations are producing.

Inflation is going to increase. And real wages are going to increase along with it. The market will equalize and ten years from now real estate will be where it should be historically.

As inflation increases, makine up for its disappearance over the last 10 years, home prices will stagnate -- first falling some more. But, relative to the rest of the economy -- inflation, wages -- housing prices will tumble. We just won't see it because the correction will happen elsewhere.

This is just part of the ebb and flow of the economy. Just wish I'd bought a house in 2000 instead of waiting until now.

I don't think Matt is waiting for the average home price in MA to hit $275K. He, like many other potential first time buyers, just want to find a starter home in that range. I don't think he'll have to wait long for that to happen. Your price predictions appear to be based more on fear than economic reality.

Per the census, in 2005 the median home price in Massachusetts was $300,800. I have no problem seeing that fall to 275k from that peak. That's only a 10% drop.

How do you justify thinking that impossible?

Now granted, the Boston area prices will be higher. IN 2005 the Boston area median was 431,900 per CNN. A third off that, which is my back of the envelope number for the correction we are going to see in total, is roughly 288k.

So I would say Matt is not far off. Obviously my 33% off the peak number is arguable, but it is by no means absurd or unusual - its pretty close to the wall street consensus numbers

I was using Matt's #'s. He uses an example of a $375,000 - $400,000 home and says he'll buy when he can get it for $275,000, or at least that's how I read it.

That seems terribly unlikely to me, based on market trends, inventory levels, employment figures, and population totals.

Brian, I agree... I am just looking for a starter house with 3 bed 2 bath 1400-1600sq ft in a nice decent town with decent schools. Right now they are going for $375k. I need them to get down to 275-310k to make the numbers work and my fiance and I make $110k/yr... I am not willing to pay 3.5 or 4 times my salary for a house... 2.5 to 3 is what we can take on comfortably.
I am 27 and I need to save for retirement now or it wont happen. Housing has taken up too large of a slice of a families income. I am not going to have that happen to mine. I rent for $1,100/mo in Waltham including Heat... I am not going to jump to a $2,700 mortgage/taxes/ins payment on a 375k house...
Like I have said before there is a lot of pent up demand amongst my peers, but we wont buy untill the prices come down to a level where we can afford it. Also What happens if our spouse has children and wants to be out of the workforce for a while instead of paying a few thousand a month in childcare.... The whole equation is out of whack.
You almost have to make enough on one salary to buy a house and the other salary will go to retirement and the kids.... Its totally out of whack.

I think you all prove my point.

Matt says Realtors were partially responsible for the run-up, because people believed their PR.

Yet, I tell you something, and you don't believe me.

People believe what they want to believe, I guess.

Join me at church on Sunday if you want to meet 150 people who actually believe the world was created in 7 days.

I never said Realtors were partially responsible for the run-up, because people believed their PR. That was Dave who said that.

I said that there is pent up demand out there but not at these prices. Prices need to come down a bit more to get me to buy. The industry needs sales volume to live... Prices need to be lowered to where buyers are willing to buy. I was pre-approved for over $400k... I would never buy that much because of the monthly payments. I would buy in the $275-315 range. Thats my point. But I am not going to buy a house in a not so good area.

@ John K, "[$275,000 MA home prices] seems terribly unlikely to me, based on market trends, inventory levels, employment figures, and population totals."

You've got to be kidding. Are you not following the market? Or the credit crisis? Or the housing bubble?! It takes about ten seconds to find many credible arguments that housing can and will fall to these levels—or less—in Massachusetts and elsewhere. Go read about the background of this crisis, then please come back and provide real reasons why you hold the beliefs that you do. Here are some places to start:

Goldman Sachs: "According to Goldman if there is no recession, the housing market will fall by 15%. On the other hand, if there is a recession, then housing prices could fall by 30%." [tinyurl.com/3oxqwb]

BTW, we're in a recession.

NYU Professor Nouriel Roubini: "Two years ago, I predicted home prices would fall cumulatively 20%, but now I believe it will be at least 30%." [tinyurl.com/5xmluz]

And that's for the country as a whole, not bubble markets like Boston and the northeast.

Yale Professor Robert Shiller: "The examples we have of past cycles indicate that major declines in real home prices—even 50 percent declines in some places—are entirely possible going forward from today or from the not too distant future." [tinyurl.com/34c8a9]

And on and on. Could it be that it's not that you believe that home prices won't fall this much, but that you fear it or otherwise have an interest in them not doing so? In that case, there's the Upton Sinclair explanation for such beliefs:

"It is difficult to get a man to understand something when his salary depends upon his not understanding it."

here is the problem: our society adapted to a standard of living based on the historical anomaly of post WWII growth. People in America expect to have a higher standard of living with every generation, or at least maintain their parents' status, but this ignores the reality of the global competition with which we are now faced.

The way in which many people have bridged this gap between expectation and reality is through debt. Mortgage debt is the most high profile recent example, but over the past 30 years there has been an explosion of all forms of consumer debt: credit cards, auto loans, student loans, etc.

We have now reached the limit of a debt-based economy. We have actually not achieved anything in the past few years other than to hide this fact temporarily.

Wait, Sunny Jim - when you mention that quote, about understanding something when his salary depends upon it, do you mean me or Robert Shiller.

Because, god knows, his salary depends on the market doing poorly, as much as anyone else's depends on it doing better. I mean, he's made a career out of being the way he is.

I think I understand the market as well as, or better, than anyone. Of course, I see things from a Bostonian's point of view, which, obviously, is quite different than someone in the suburbs. All I'm saying is, there's nothing I see that gives me any reason to believe we'll see a 33-50% drop in prices. It just doesn't make sense.

Hmm.

The suburbs and Boston are very different markets. While "all real estate markets are local" is usually a statement made by people who are trying to sell you or snow you, its also true. (Its just not the whole truth, as people usually fail to point out)

Though I'd expect all areas around Boston to go down in this crunch, I wouldn't expect them all to go down equally. Center city boston and equivalent should go down far less than say Canton real estate, all other things being equal.

Which is to say, I think that it's fair for John K to look at things a certain way if he's looking from a Boston perspective. Which obviously he is.

On Shiller though, I'm unaware that Yale is paying him based on his prognostications. I don't think its quite clear his salary depends on a down market.

Because, god knows, his salary depends on the market doing poorly, as much as anyone else's depends on it doing better.

This kind of slander incinerates your own credibility. How does his salary "depend on" bearish predictions? He's a Yale professor, and he doesn't get a bonus when prices decline.

And even if he did, how do his opinions determine the prices on a futures market?

Of course, we know you're just repeating NAR talking points, whose chief economists, Liareah and Yun, have made careers out of lying for pay. They recently launched a hilarious attack on Shiller's index, much the way Baghdad Bob attacked the video footage of tanks on the streets of Iraq.

@ John K

You keep changing your story.

First you say "there is absolutely no chance, no chance in 100 or 1000 years that the average home price in Massachusetts is going to hit $275,000" and that absolutely no one is saying this.

A ten second search shows that this is dead wrong, with the futures market already pricing in these reductions for Massachusetts, and many investment banks and economists predicting just such an outcome.

So then you impute that you're really talking about the Boston market not the suburbs, and that Yale economist Bob Shiller profits from the misery of others.

What a load. Boston prices went higher in the bubble than the suburbs based on the same bogus debt mechanisms, so what law of economics will protect them as the bubble collapses? And how exactly does someone who publishes a market index profit from negative price movements? Or rather does a NAR-independent price index threaten realtor sunshine fantasies, leaving realtors with the only option of slandering the people who established that index? I suggest that we all already know the answer to these questions -- the only thing that "makes sense" to realtors is that prices never fall, and those who say otherwise must be calumniated. Realtors appear to be sticking to this NAR script. Good luck with that.

My opinions are my own, thank you very much.

They are based on my knowledge of the market, and my analysis of the data.

The people who comment here who constantly harp on "real estate agent motives" and engage in name-calling bring down the entire board. Making it unpleasant for everyone involved (except, themselves).

Having differences of opinion is what makes it fun to comment. Letting your anger get the best of you and spouting off about someone's ethics, is not really what I think this is all about, no?