I think the real estate market may have finally peaked

[Nick Danger]

Those California prices continue to amaze me. After looking at X's million dollar home, I did a search for all the million dollar homes in Albuquerque. There are only 42 of them on the market, with a maximum of $4M.

Here, $1.1M will get you 1.6 acres, 5900 sq ft, a swimming pool, and a house down the road from Al Unser Jr. http://www.realtor.com/Prop/1046210330

[Myster X]

I can't wait to see the look on people who bought $900K plus for a two bedroom home in San Franfrisko.

http://business.timesonline.co.uk/ar...752866,00.html

US heading for house price crash, Greenspan tells buyers

WALL STREET shuddered yesterday after Alan Greenspan, the United States’ central banker, warned American homebuyers that they risk a crash if they continue to drive property prices higher.
He said that the US house-price spiral had become an economic imbalance, threatening stability like the country’s trade gap or its budget deficit.

In a pre-retirement speech to fellow central bankers at Jackson Hole, Wyoming, Mr Greenspan said that people were investing in houses as if they were a one-way bet, not allowing for the risk of price falls. He said “history had not dealt kindly” with investors who kept ignoring risks.

The Federal Reserve Chairman’s warning, his strongest yet, sent share prices falling on Wall Street, at one point knocking 66 points off the Dow Jones industrial average. By the close the Dow had recovered to 10,397.30, down 53.30 points.

Traders said that Mr Greenspan’s comments were reminiscent of his 1996 inveighing against “irrational exuberance” on the stock market, for fear that a crash there would hit consumers and push the economy into recession. When the share price bubble finally burst, Mr Greenspan cut Federal interest rates to 1 per cent, triggering the flood of cheap loans for housing. He fears that rate increases set in train as the economy recovered could throw the housing market into reverse and suggested that the twin deficits would now restrict his room to manoeuvre if a house price downturn hit spending. Asset prices were, he complained, driving monetary policy more than ever before.

Share traders were also worried by an unexpectedly sharp fall in the University of Michigan consumer confidence index, a small but influential barometer, which fell for the first time in three months. The expectations index slid from 88.5 to 76.9.

Rob Carnell, of ING Bank in London, said that Mr Greenspan’s warning was an eerie reminder of a successful campaign last summer by Mervyn King, Governor of the Bank of England, to “use rhetoric rather than interest rates” to cool an overheating homes market. Britain has avoided a crash thus far.

On traditional tests, about a third of US local homes markets are now markedly overpriced. Over the past five years, the average US house price has risen by 50 per cent, half the rate of increase in UK prices in the five years to summer 2004. However, prices have risen more sharply in favoured areas, such as New York, and more than doubled in a few cities, such as San Diego.

[al_bundy]

last night there was a guy on Suze Orman who wanted to buy a $800,000 house near DC with an option loan and pay 1% interest on it and take the negative ammortization. He said values were going up so fast he could make a lot of money.

I was going to bump this with some info I gathered the last few weeks.

Housing stocks have broken through their 50 day moving averages and are going down.

I listened to the Toll Brothers conference call a few days ago and they had good numbers and their stock got hammered.

some of the highlights from the call:

EPS growth is going to drop from almost 100% last year to around 20% for the next few years

Average selling price is going to drop next year due to cheaper homes selling more

Less traffic in communities being sold due to requirements for an appointment to be made with a deposit

50% of the people this year are getting ARM's. 38% of those are getting IO loans

Overall the market has gone from red super hot to hot

they are selling more affordable homes, a trend away from their luxury roots

Interesting note about IO loans. A lot of Toll Brothers customers are higher end and financially savy. The average LTV of an IO loan is 70% and the mortgage originators use the loans to sell more homes. Since the people are higher income, they won't be financially strapped if the rates rise.

Toll Brothers makes people sign a contract that they won't flip, but they haven't gone to court yet. they said that they believe the paperwork deters most flippers. I wonder if this is true among other builders as well and how much it really deters flippers.

Guy on CNBC SquawkBox from ISI Group said nationwide housing is OK except for a few markets. He named Florida specifically.

Personally I think that sooner or later The Fed is going to increase short term rates high enough that banks won't be able to think up of any more exotic loans because they won't make money. When the liquidity dries up it'll be interesting to see what happens.

[al_bundy]

I read a housing bubble blog for fun a few days a week and they gather news from around the country about RE. Believe it or not a lot of speculators are buying up houses in Boise, Idaho of all places. The story said the speculators were from California.

[kvrdave]

I can sure believe that. While I am in E. Washington, and not Idaho, it is fairly similar, and we are seeing the market go pretty wild. Lots of retired people, and no jobs.

Interest rates are still cheap, and probably housing lending rates need to get to about 7.5% to have a significant cool off.

[al_bundy]

i don't even think long term rates will go up much

i think what happened with houses is the same thing as stocks. they race forward, then drop a little, stay flat and then go up again. Over time the prices average out. sometimes the prices go away from the historical averages for a long time.

I think the same thing happened with homes and the low rates caused them to race ahead of their true value. To keep business going lenders started using IO loans for a lot of people because short term rates are low. As the fed raises rates it's going to kill the exotic loan products. As buyers are priced out and the stupid people that overpaid get foreclosed on, there will be an inventory correction for a few years.

[X]

It's worthwhile reading the entire speech of Chairman Greenspan's instead of the sensationalist stories being written about it.

Remarks by Chairman Alan Greenspan
Reflections on central banking
At a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming
August 26, 2005

In the spirit of this conference, I asked myself what developments in the past eighteen years--both in the economy and in the economics profession--were most important in changing the way we at the Federal Reserve have approached and implemented monetary policy.

The Federal Reserve System was created in 1913 to counter the recurrent credit stringencies that had so frequently been experienced in earlier decades. As lender of last resort, we had a mandate that, at least viewed from today's perspective, was limited. We did not engage in Systemwide open market operations until the 1920s. And as recently as the 1950s, the framework within which those open market operations were formulated was still being developed. Credit was eased when the economy weakened and tightened when inflation threatened, but largely in an ad hoc manner. As a consequence, the Federal Reserve was perceived by some as often accentuating, rather than damping, cycles in prices and activity. Importantly, however, the surge in prices that followed the removal of wage and price controls after World War II and again after the Korean War kept monetary policymakers wary of the threat of inflation.

But concern that the monetary restraint of the 1950s had led to unnecessarily high unemployment persuaded the Federal Open Market Committee to adopt a more stimulative policy stance in the mid-1960s. Those actions appear to have been predicated, in part, on an acceptance of the then-prevalent view that a long-term tradeoff existed between inflation and unemployment.1

Subsequently, however, the experience of stagflation in the 1970s and intellectual advances in understanding the importance of expectations--which built on the earlier work of Friedman and Phelps--undermined the notion of a long-run tradeoff.2 Inflation again became widely viewed as being detrimental to financial stability and macroeconomic performance. And as the decade progressed, a keener appreciation for the monetary roots of inflation emerged both in the profession at large and at central banks. Indeed, the insights from the work of Friedman and Schwartz a decade earlier gained greater prominence in the realm of practical policy.3

These events, both economic and intellectual, significantly influenced the tool kits employed by macroeconomists inside and outside policymaking institutions. The large-scale macromodels that had been the focus of so much work in the 1960s came under attack on two fronts.

Most prominently, greater recognition of the importance of expectations suggested that those models, which for the most part incorporated autoregressive expectations, were excessively reduced-form and backward-looking in nature and thus insensitive to changes in economic structure and the policy process. In addition, some researchers observed that simple time-series models often produced better forecasts than the large macromodels of that period.4

One prescription was to focus on uncovering, at a more fundamental level, the structural parameters of the economy. Needless to say, this task has proven to be a very tall order that has yet to be filled. Partly in response to these difficulties, a substantial body of research focused on improvements in empirical modeling, such as vector autoregressions for forecasting, and in some cases, for policy analysis.

Each one of these approaches has proven useful, and their descendants are currently employed in various forms in central banks throughout the world. But as yet, none of these approaches is capable of addressing the full range of policymakers' needs.

At various points in time, some analysts have held out hope that a single indicator variable--such as commodity prices, the yield curve, nominal income, and of course, the monetary aggregates--could be used to reliably guide the conduct of monetary policy. If it were the case that an indicator variable or a relatively simple equation could extract the essence of key economic relationships from an exceedingly complex and dynamic real world, then broader issues of economic causality could be set aside, and the tools of policy could be directed at fostering a path for this variable consistent with the attainment of the ultimate policy objective.

M1 was the focus of policy for a brief period in the late 1970s and early 1980s. That episode proved key to breaking the inflation spiral that had developed over the 1970s, but policymakers soon came to question the viability over the longer haul of targeting the monetary aggregates. The relationships of the monetary aggregates to income and prices were eroded significantly over the course of the 1980s and into the early 1990s by financial deregulation, innovation, and globalization. For example, the previously stable relationship of M2 to nominal gross domestic product and the opportunity cost of holding M2 deposits underwent a major structural shift in the early 1990s because of the increasing prevalence of competing forms of intermediation and financial instruments.

In the absence of a single variable, or at most a few, that can serve as a reliable guide, policymakers have been forced to fall back on an approach that entails the interpretation of the full range of economic and financial data. Policy is implemented through nominal and, implicitly, real short-term interest rates. However, reflecting the progress in economic understanding, our actions are now better informed about the pitfalls associated with relying on nominal interest rates to set policy and the important role played by inflation expectations in gauging the stance of monetary policy.

Our appreciation of the importance of expectations has also shaped our increasing transparency about policy actions and their rationale. We have moved toward greater transparency at a "measured pace" in part because we were concerned about potential feedback on the policy process and about being misinterpreted--as indeed we were from time to time. I do not intend this brief and necessarily incomplete review of events to illustrate how far we have come or to despair of how far we have to go. Rather, I believe it demonstrates the inevitable and ongoing uncertainty faced by policymakers.

Despite extensive efforts to capture and quantify what we perceive as the key macroeconomic relationships, our knowledge about many critical linkages is far from complete and, in all likelihood, will remain so. Every model, no matter how detailed or how well conceived, designed, and implemented, is a vastly simplified representation of the world, with all of the intricacies we experience on a day-to-day basis.

Formal models are a necessary, but not sufficient, system of analysis. To be sure, models discipline forecasts by requiring, among many restraints, that identities are indeed equal, inventories non-negative, and marginal propensities to consume positive. But we all temper the outputs of our models and test their results against the ongoing evaluations of a whole array of observations that we do not capture in either the data input or the structure of our models. We are particularly sensitive to observations that appear inconsistent with the causal relationships of our formal models. Tentative revisions of that structure are reflected in our add factors.

Given our inevitably incomplete knowledge about key structural aspects of an ever-changing economy and the sometimes asymmetric costs or benefits of particular outcomes, the paradigm on which we have settled has come to involve, at its core, crucial elements of risk management. In this approach, a central bank needs to consider not only the most likely future path for the economy but also the distribution of possible outcomes about that path. The decisionmakers then need to reach a judgment about the probabilities, costs, and benefits of various possible outcomes under alternative choices for policy.

The risk-management approach has gained greater traction as a consequence of the step-up in globalization and the technological changes of the 1990s, which found us adjusting to events without the comfort of relevant history to guide us. Forecasts of change in the global economic structure--for that is what we are now required to construct--can usefully be described only in probabalistic terms. In other words, point forecasts need to be supplemented by a clear understanding of the nature and magnitude of the risks that surround them.

In effect, we strive to construct a spectrum of forecasts from which, at least conceptually, specific policy action is determined through the tradeoffs implied by a loss-function. In the summer of 2003, for example, the Federal Open Market Committee viewed as very small the probability that the then-gradual decline in inflation would accelerate into a more consequential deflation. But because the implications for the economy were so dire should that scenario play out, we chose to counter it with unusually low interest rates.

The product of a low-probability event and a potentially severe outcome was judged a more serious threat to economic performance than the higher inflation that might ensue in the more probable scenario. Moreover, the risk of a sizable jump in inflation seemed limited at the time, largely because increased productivity growth was resulting in only modest advances in unit labor costs and because heightened competition, driven by globalization, was limiting employers' ability to pass through those cost increases into prices. Given the potentially severe consequences of deflation, the expected benefits of the unusual policy action were judged to outweigh its expected costs.

* * *

The structure of our economy will doubtless change in the years ahead. In particular, our analysis of economic developments almost surely will need to deal in greater detail with balance sheet considerations than was the case in the earlier decades of the postwar period. The determination of global economic activity in recent years has been influenced importantly by capital gains on various types of assets, and the liabilities that finance them. Our forecasts and hence policy are becoming increasingly driven by asset price changes.

The steep rise in the ratio of household net worth to disposable income in the mid-1990s, after a half-century of stability, is a case in point. Although the ratio fell with the collapse of equity prices in 2000, it has rebounded noticeably over the past couple of years, reflecting the rise in the prices of equities and houses.

Whether the currently elevated level of the wealth-to-income ratio will be sustained in the longer run remains to be seen. But arguably, the growing stability of the world economy over the past decade may have encouraged investors to accept increasingly lower levels of compensation for risk. They are exhibiting a seeming willingness to project stability and commit over an ever more extended time horizon.

The lowered risk premiums--the apparent consequence of a long period of economic stability--coupled with greater productivity growth have propelled asset prices higher.5 The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions.6 The conversions have been markedly facilitated by the financial innovation that has greatly reduced the cost of such transactions.

Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.

* * *

Broad economic forces are continuously at work, shaping the environment in which the Federal Reserve makes monetary policy. In recent years, the U.S. economy has prospered notably from the increase in productivity growth that began in the mid-1990s and the enhanced competition engendered by globalization. Innovation, spurred by competition, has nurtured the continual scrapping of old technologies to make way for the new. Standards of living have risen because depreciation and other cash flows generated by industries employing older, increasingly obsolescent technologies have been reinvested to finance newly produced capital assets that embody cutting-edge technologies.

But there is also no doubt that this transition to the new high-tech economy, of which expanding global trade is a part, is proving difficult for a segment of our workforce that interfaces day by day with our rapidly changing capital stock. This difficulty is most evident in the increased fear of job-skill obsolescence that has induced significant numbers of our population to resist the competitive pressures inherent in globalization from workers in the major newly emerging market economies. It is important that these understandable fears be addressed through education and training and not by restraining the competitive forces that are so essential to overall rising standards of living of the great majority of our population. A fear of the changes necessary for economic progress is all too evident in the current stymieing of international trade negotiations. Fear of change is also reflected in a hesitancy to face up to the difficult choices that will be required to resolve our looming fiscal problems.

The developing protectionism regarding trade and our reluctance to place fiscal policy on a more sustainable path are threatening what may well be our most valued policy asset: the increased flexibility of our economy, which has fostered our extraordinary resilience to shocks. If we can maintain an adequate degree of flexibility, some of America's economic imbalances, most notably the large current account deficit and the housing boom, can be rectified by adjustments in prices, interest rates, and exchange rates rather than through more-wrenching changes in output, incomes, and employment.

The more flexible an economy, the greater its ability to self-correct in response to inevitable, often unanticipated, disturbances. That process of correction limits the size and the consequences of cyclical imbalances. Enhanced flexibility provides the advantage of allowing the economy to adjust automatically, reducing the reliance on the actions of monetary and other policymakers, which have often come too late or been misguided.

In fact, the performance of the U.S. economy in recent years, despite shocks that in the past would have surely produced marked economic contraction, offers the clearest evidence that we have benefited from an enhanced resilience and flexibility.

We weathered a decline on October 19, 1987 of a fifth of the market value of U.S. equities with little evidence of subsequent macroeconomic stress--an episode that provided an early hint that adjustment dynamics might be changing. The credit crunch of the early 1990s and the bursting of the stock market bubble in 2000 were absorbed with the shallowest recessions in the post-World War II period. And the economic fallout from the tragic events of September 11, 2001, was limited by market forces, with severe economic weakness evident for only a few weeks. Most recently, the flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for crude oil and natural gas that we have experienced over the past two years.

* * *

This morning I have tried to outline my perceptions of the key developments that have influenced the conduct of monetary policy over the past eighteen years. I acknowledge that monetary policy itself has been an important contributor to the decline in inflation and inflation expectations over the past quarter-century. Indeed, the Federal Reserve under Paul Volcker's leadership starting in 1979 did the very heavy lifting against inflation. The major contribution of the Federal Reserve to fashioning the events of the past decade or so, I believe, was to recognize that the U.S. and global economies were evolving in profound ways and to calibrate inflation-containing policies to gain most effectively from those changes.

For reasons that may not be too obscure, I will pay close attention to, and hope to learn from, the deliberations of the next couple of days. I have been asked to make a few closing remarks tomorrow about some of the unresolved challenges facing policymakers in the years ahead and about my experiences living inside the Federal Reserve for nearly two decades, after so many years of observing our institution from afar.

Footnotes

1. See Romer, Christina D. and David H. Romer, "The Evolution of Economic Understanding and Postwar Stabilization Policy," NBER Working Paper No. 9274 (October 2002), p. 39.

2. Friedman, Milton. "The Role of Monetary Policy", American Economic Review, vol. 58, No. 1 (March 1968) pp. 1-17. Phelps, Edmund S. "The New Microeconomics in Inflation and Unemployment Theory", American Economic Review (May 1969) pp. 147-160.

3. Friedman, Milton and Anna Jacobsen Schwartz. A Monetary History of the United States, 1867-1960. Princeton University Press, Princeton, NJ, 1963.

4. Sims, Christopher A. "Macroeconomics and Reality". Econometrics, vol. 48, No. 1 (January 1980). pp. 1-48.

5. Despite the two-year bear market following the stock market collapse of 2000, equity prices have risen at an annual rate of 10 percent since 1995.

6. Capital gains do not add to GDP. The higher prices of plant and equipment and homes are reflected in an economy's cost structure, which directly or indirectly increases prices of goods and services, leaving real output largely unaffected. Capital gains, of course, cannot supply any of the saving required to finance gross domestic investment.

Remarks by Chairman Alan Greenspan
Closing remarks
At a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming
August 27, 2005

The Federal Reserve will almost surely face as many uncertainties over the next eighteen years as it has over the past eighteen. Technology continues to bring rapid change and, hence, considerable uncertainty, to the global marketplace. Monetary policy, supervision and regulation activities, and payments system operation will need to be calibrated to respond to the influences of that technological change.

Other forces will be at work on the economic environment as well. The inexorable aging of our population will markedly influence the policy milieu in the years ahead. Monetary policy, for example, cannot ignore the potential inflationary pressures inherent in our current fiscal outlook, especially those that could arise in meeting commitments to future retirees. However, I assume that these imbalances will be resolved before stark choices again confront us and that, if they are not, the Fed would resist any temptation to monetize future fiscal deficits. We had too much experience with the dangers of inflation in the 1970s to tolerate going through another bout of dispiriting stagflation. The consequences for both future workers and retirees could be daunting.

Nearer term, the housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease. As a consequence, home equity extraction will ease and with it some of the strength in personal consumption expenditures. The estimates of how much differ widely.

The surprisingly high correlation between increases in home equity extraction and the current account deficit suggests that an end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports, and a corresponding improvement in the current account deficit. Whether those adjustments are wrenching will depend, as I suggested yesterday, on the degree of economic flexibility that we and our trading partners maintain, and I hope enhance, in the years ahead.

On monetary policy, I envision a continuous refinement of our risk-management paradigm. I presume maximum sustainable economic growth will continue to be our goal, with price stability pursued as a necessary condition to promote that goal. To date, we have chosen not to formulate explicit inflation targets, in part, out of concern that they could inhibit the effective pursuit of our goal.

I remain unpersuaded that explicit numerical inflation targets are a key characteristic that distinguishes behavior among the world's central banks. Despite the various public characterizations of the form of monetary policy regime, the Federal Reserve and most other central banks generally pursue price stability and, consistent with that goal, ease when economic conditions soften and tighten when they firm. That said, I am certain this will remain a topic of lively discussion here and at other monetary forums in years to come. Participants on all sides of that debate will be well served by keeping open minds and remaining attentive to the evidence as events unfold and practices evolve.

Debates on the relative merits of asset price targeting also will continue and possibly intensify in the years ahead. The configuration of asset prices is already an integral part of our evaluation of the large array of forces that influence financial stability and economic growth. But given our current state of knowledge, I find it difficult to envision central banks successfully targeting asset prices any time soon. However, I certainly do not rule out that future work could improve our understanding of asset price behavior, and with it, the conduct of monetary policy.

* * *

I will miss debates on such topics with members of the Federal Open Market Committee and with the staffs of the Board and the banks. The Federal Reserve is a remarkable institution. Aside from its technical expertise in supervision and regulation and in overseeing an increasingly complex payments system, it combines for monetary policy an academic sophistication and a market-sensitive understanding that is brought to bear in formulating the tie between instruments and the goals of monetary policy.

Surely difficult challenges lie ahead for the Fed, some undoubtedly of our own making, and others that will be thrust on us by market or other forces. Having been exposed to the inner workings of this extraordinary institution for nearly two decades, I have little doubt that my successors, and theirs, will continue to sustain the leadership of the American financial system in an ever-widening global economy.

[twikoff]

i sure hope the real estate market isnt on its way down!
hmmmmm
although, i guess that is a bad thing on one side, and good on the other
probably wont effect me much either way though

[al_bundy]

Originally Posted by X

It's worthwhile reading the entire speech of Chairman Greenspan's instead of the sensationalist stories being written about it.

when has the media ever not changed his words into something else?

[Xndman]

I believe the market will slow dramatically very soon (6-9 months), the cause?? Rising gas prices. Soon the increase in gas will affect manufactorers and distributors significantly. They'll in turn raise their prices to offset their higher cost. Since gas affects every industry, this will ultimately increase the CPI, and interest rates will be raised to offset this new inflation. The rising interest rates will cool off the housing market (as well as negatively affecting many new interest-only, etc. purchasers).

That's how I see it.

[X]

I wouldn't be so sure about inflation going up that much. Gas prices are doing what high interest rates are supposed to do, they they suck up so much money it makes it hard for manufacturers and retailers to pass on their cost increases.

The high oil costs that can't be passed on will hurt the performance of companies (luckily all companies, not just the domestic ones) and economic growth will be moderated. Rates won't need to be raised to counteract a runaway economy.

Interest rates are bound to go up a bit, they're at such historically low levels. But even with all the Fed funds rate hikes we've had and the short-term interest rate rising, the long-term rates have stayed very low. They keep trying to go up and come right back down again, even in this environment of expensive oil. This reflects a lack of concern by economists that interest rates are going to go up that much over the relatively long term. Greenspan does prefer to use monetary policy rather than interest rates to moderate the economy so that could be an indication of interest rates remaining low.

When people want to buy houses that are greatly increasing in value the interest rate doesn't stop them that much. I watched that happen in the early '80s when interest rates were over 15% and people were frantically buying houses with extremely creative financing. High interest rates signify high inflation and it's better to own appreciating hard goods in times of inflation.

Even when prices aren't increasing that much, people still need to buy homes. But a slowing of the increase of their value will wring out the speculators who have been making the prices crazy. How quickly that happens will determine the severity of the "burst".

Higher interest rates do stop refinancing and taking equity out of the home and that's what Greenspan was warning about because a lot of that equity being turned into the purchase of goods is driving this economy. That's not necessarily so bad either with respect to where that money is going.

At least that's how I see it.

[Xndman]

X, I appreciate your logic (are you an Economist?).

However, I think that companies will pass on virtually all of the gas increase. Today we see surcharges added for pizza and flower delivery. Tomorrow industries not directly related to transportation but heavily reliant on it (particularly grocery stores) will have no choice but to pass on the increased cost. These companies have stockholders to which to answer.

[X]

Thanks for the logic compliment. I'm not sure about the economist remark though

I just don't see the factors that fueled the high inflation environment of the past occurring this time. I really do believe the Fed has figured out ways to temper inflation short of using the heavy stick of interest rates. And the factors and psychology required to severely raise long-term rates just don't seem to be there anymore. Globalization has probably contributed a lot to this. If you haven't lived through it, I can't tell you how bad it is to live in an environment of high inflation.

I don't think companies are in a position to substantially pass on their higher costs. Take a look at the pricing models the domestic car companies have had to take just to stay in business. If all companies are hit with higher costs due to oil prices they all will have the same problems with profitability and will remain relatively the same to shareholders. I suppose we'll ultimately find out which of us is correct.

[al_bundy]

greenspan said as much in his speech and in previous writings. People say globalization and outsourcing is bad, but the alternative is a lot worse. Globalization has effectively killed inflation and even lowered prices for a lot of goods. And we have extremely low unemployment as well.

[Jack Straw]

[al_bundy]

Jim Cramer actually called the housing boom over today and said that the peak was back in January

[jiggawhat]

I just wanted to chime in again. I am a RE agent and have seen what's been happening. One thing I'm finding is that people are getting too greedy. People are reluctant to list their homes because they feel the prices are still going up and they feel they can time the market so that they can sell at the top. Although the rules of economics actually state that generally people will start selling when it's close to the bottom. This has happened throughout history and happened with the dot-com bust as well.

As long as demand is outstripping supply, home prices will continue to rise. The main reason of course for this supply shortage is what I pointed out earlier which is people trying to time the market.

I think once more reports come out from NAR (National Association of Realtors) and other agencies showing that price appreciation is less than 10%, you'll see a flood of listings go on the market and that my friends is when the correction occurs. California of course and states where astronomical price increases have occurred will be hit hardest.

I don't think there will be an all-out crash because housing cannot be sold instaneously like stocks and bonds can but there will be a steady decline. That decline will last approximately 3 years before it starts to level out. Then we might see a flattening for another couple of years and then maybe we'll see and upturn again albeit with price appreciation more in line with historical rates.

Any thoughts?

[al_bundy]

most likely

around 2 months ago i was in the bookstore and saw a book called TrimTabs in the investing section. They had some charts that showed that housing and stocks move inversely over the long term

[X]

Originally Posted by al_bundy

around 2 months ago i was in the bookstore and saw a book called TrimTabs in the investing section. They had some charts that showed that housing and stocks move inversely over the long term

I did some research and found no significant correlation between the two.

Sometimes they both go up, sometimes they both go down, and sometimes one performs better than the other. They don't really appear to be alternative investments. Probably due to people needing to live in houses.

[al_bundy]

in the 1990's it was generally an inverse movement

the stock market started it's big move up around 1994 and the housing market bottomed our around 1995. Housing started it's current bull run around 1998 and the market topped out around 2000. Not an exact inverse movement, but pretty close.

[jiggawhat]

Well housing is generally used by investors as a hedge against inflation. Never heard of stocks and housing being inversely related. Interest rates and homes prices are inverse related though.

I feel bad for the people who got into really bad loans like interest only or
neg-am loans because they will be hit hardest.

Since I am an agent hopefully I can swoop up on those deals.

[X]

There's more to significant correlations than what happened in 5 or 10 years so I would consider a longer timeframe that includes more factors, such as inflation, interest rates, and GDP growth.

[ChiTownAbs, Inc]

Originally Posted by al_bundy

most likely

around 2 months ago i was in the bookstore and saw a book called TrimTabs in the investing section. They had some charts that showed that housing and stocks move inversely over the long term

if that is true, then either the stock market has tanked over the last 20 years or the housing market has tanked.

the only purely negative correlation is stocks and gold. the correlation is near -1.

[ChiTownAbs, Inc]

i read in the journal a few weeks ago (maybe it was businessweek, can't remember) that robert schiller and a company (perhaps his?) is working on some futures contracts on real estate.

basically you are making bets about the median housing prices in certain markets. i think they will start with san fran, new york, and boston. expanding into other cities and then baskets of real estate.

[ChiTownAbs, Inc]

here is the story