The delinquency rate for prime mortgages over 60 days behind more than doubled from the first quarter of 2008 (1.1%) to the fourth (2.4%) while serious delinquencies for Alt-A mortgages jumped from 5.18% to 9.1%. For context, the serious delinquency rate for subprime mortgages was 10.75% in the first quarter of 2008 (16.4% in the fourth).
The delinquency rate for prime mortgages in the U.S. has hit an all-time high, yet mortgage rates remain near all-time lows.
Failure Rate Rises on Mortgages Revised in Late 2008, U.S. Says [Bloomberg]

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Comments from “Plugged-In” Readers

  1. Posted by tipster

    The price of homes CANNOT be propped up absent inflation. If you prop up home prices that were paid for by something other than wages (cheap loans, loans you didn’t really have to pay for, cash outs that could be used to make the payments until the next cash out, etc.), when that ends you need wages to rise up to pay for them.
    When wages can’t support normal living standards, jobs are lost because employers can’t afford to pay people what they need to live on. As a result, jobs are lost, making inflation difficult to sustain, and causing housing prices to fall when the unemployed can’t make their payments.
    Therefore, the government can try to prop up housing prices all it wants, but the bottom line is housing prices will fall to an equilibrium point or more jobs will be lost until they do.
    Some jobs might be saved by a stimulus, but what happens when the stimulus ends? When all the roads are quickly rebuilt, and then for seven years, no one needs to rebuild ANY roads, you’re back to where you started – lower jobs that causes lower prices.
    It’s the circle of life between housing prices and jobs. You need full employment to sustain high housing prices, but you can’t get there if housing prices are higher than the productivity of the country will allow, unless you basically give money away, which we did for many years.

  2. Posted by Trip

    Realtytrac (via Trulia) indicates 803 homes in SF in some stage of the foreclosure process (from notice of default — curable — through bank-owned), including 51 homes valued at $1 million-plus. The prime and Alt-A phase of the collapse is just beginning here and will get much worse. And it even looks like the subprime wave has not yet crested.
    Those considering buying now in this “buyer’s market” would be smart to wait a bit as you will do much better a year from now. You might take a look at how things developed in areas that are a year farther through the cycle — Miami, Sacramento, Las Vegas. Lots of people jumped in and got a “bargain” (even a foreclosure sale) only to find themselves underwater and their 20% down evaporated within the next year. And prices continue to fall even in those hard-hit areas.

  3. Posted by anonn

    What do you mean by “Prime” ? It seems as if you mean “sub prime” ? Sorry, but that unraveling began some time ago. It has created a market of its own too … a market that has generated a lot of discussion. Was there a map? I think it’s likely there was. Where are the 803 homes located? That bit is noticeably absent from your post. There is a poster called EBGuy who offers a much more balanced reportage about this, Trip. Your language is rarely balanced.
    Also, this: “Lots of people jumped in and got a “bargain” (even a foreclosure sale) only to find themselves underwater and their 20% down evaporated within the next year”
    I’d like to see that statment backed up with a news source. Particularly with regard to “Sacramento.”

  4. Posted by anonn

    Oh, OK. Apparently you did mean “Prime.” Prove it with regard to SF. Your logic seems to be 803 in some stage of foreclosure, 51 over 1M, therefore “prime” is collapsing along with Alt-A.
    That’s not even a remotely credible thing to say. Do you have fun being able to say unverifiable things from your gut on here because your day job as a lawyer doesn’t allow for it? Theres’ got to be some sort of rationale behind your particular brand of disinformation.

  5. Posted by Trip

    True, my day job as a lawyer doesn’t allow for it. But your day job as a realtor does.
    OK, I said I wasn’t paying any more attention to you because it is an absolute waste of my time. Now I mean it . . .

  6. Posted by Mole Man

    The price of homes CANNOT be propped up …
    This bit captures what is going on more than the rest. Arguments about the government propping up home prices are utterly deluded. All the government folks high enough up to contribute to any of these decisions believe that all they are doing, if successful, is smoothing the harshness of the transition. These are politicians, and they know that nothing challenges incumbents as much as collapsed labor markets which is the inevitable result of an unmoderated bank meltdown.
    If this bothers you then you need to be more aggressive about preventing the next bubble because the money was lost when the system was looted.
    I’m still betting that by around 2012 or so prime loans will have the largest share of defaults, but we’ll just have to wait and see.

  7. Posted by anonn

    Oh come on, Trip. You spouted off some unverifiable opinion dressed as fact or at best logical deduction, got called out on it, and you responded with a Realtorbash TM. Prove a single thing that you said. Really man. Too much. You’ve got your opinion. Everybody gets it. But that was sub-terrible.

  8. Posted by matlaw

    pot (anonn), meet kettle (Trip).

  9. Posted by anonn

    Moleman,
    First, propping up values is not the same thing as attempting to prevent widespread interest rate hikes. There can be numerous correlations between the two, sure. But we both agree that the government is not propping up values. Secondly, why widespread 2012 defaults, at least around here anyway? Those are 20 percent down loans. You forget that people who put 20 percent down are also by and large putting down roots. I’d argue that the majority of defaults on Prime is tied directly to the jobs market. If you think the jobs market is going to suck until 2012 then we are all in for a world of hurt.

  10. Posted by anonn

    “pot (anonn), meet kettle (Trip).”
    hardly. read up. read better.

  11. Posted by San FronziScheme

    All the government folks high enough up to contribute to any of these decisions believe that all they are doing, if successful, is smoothing the harshness of the transition.
    True. What matters is that the Gov’t looks compassionate to its constituents. You can’t have exploding unemployment and wealth destruction with people at the top saying “you got screwed on the way up and guess what… you’ll get screwed on the way down”. They have to look busy and throw big numbers at our face to keep everyone hopeful through the pain.
    I am no big fan of conspiracy theories but even the worst I could read say 1 year ago from the nuts on the net has proven quite accurate. Eventually Patrick.net, debtpocalypse, optionARMageddon and others will be stuck in their bearish end-of-world talk while the rest of us will move on. It’s just a transition. We’ll come out of this tunnel one day.

  12. Posted by jworm

    Delayed foreclosures via loan mods or moratoriums = propped up values.

  13. Posted by Rincon Hill Billy

    Looks like it’s not over yet…

  14. Posted by The Milkshake of Despair

    Speaking of delayed foreclosures, isn’t the California moratorium coming to an end soon ?

  15. Posted by tipster

    Goodness, annon, Trip cited his source. You countered with…nothing.
    Good point Mole Man, but the fact is that the harder they try for a soft landing on housing prices, the more jobs are lost. And some of those jobs get lost to other countries or to replacement technologies. They aren’t coming back.
    We’re using the slowdown in business to more fully automate everything. We’re doing things I should have done years ago but didn’t have the time. When things come back, and you can bet that they will SFS, we’ll be ready to contribute to the jobless recovery. We’ll do more while hiring less.
    But note that when the dot com bust happened, the only way to get back to that level of prosperity was to inflate another bubble. If the fed/government can’t or won’t do that, I’m afraid that a recovery won’t look anything like the last ten years.

  16. Posted by ex SF-er

    I’m not sure that I agree that Prime defaults will ever be higher than Alt-A and Sub Prime defaults, however going forward Alt A and Prime products are the products most of us are watching for stress. It has to do with the reset/recast dates.
    I’ve posted this before. as always, I really encourage people to read it and see what it’s saying.
    http://billcara.com/CS%20Mar%2012%202007%20Mortgage%20and%20Housing.pdf
    PAGE 47, exhibit 42.
    remember: 1 equals Jan 2007. so 28 equals April 2009.
    you can see how subprime spiked earliest. thus it was no surprise to any of us that subrpime saw stress first.
    and now you see that the spike in Alt A/Prime resets starts right about now.
    since this was published in March 2007 the pain has come just a wee bit earlier than this chart would indicate for reasons that are boring to this blog… but it shows you graphically one reason why Subprime blew up first, then Alt A, and now Prime. (due to resets/recasts).
    =====
    I agree with Anonn… we can’t just assume that Prime is getting hit in SF just because there are NOD’s in the $1M and up segment. those might have been Alt A products (in fact I’d guess most are alt a).
    the problem: SF is hugely exposed to alt A. (70% of loans were Alt A by the end).
    overall: Prime loans will do worse than they ever have in the history of Prime loans (they already are doing that). but it is less likely that the % of NOD’s on prime will actually be higher than the NOD percentages of Alt A or Subprime. of course, the NOD’s on prime loans usually are more $$$ than subprime… so a small # of NOD’s do a lot of damage. (average loan size of prime is higher than loan size of NOD)
    ======
    As for the year 2012… I’ve posted that RE will be under pressure until around that time since early 2007. again, it’s because of the reset chart.
    most of those loans were written very poorly, and are expected to do very poorly. and they won’t stop recasting/resetting until Dec 2011.
    FWIW: job growth IS NOT ENOUGH to overcome the RE pressure. the essential problem as tipster said is that incomes WERE NOT ENOUGH to pay for the housing. thus, we can’t just get job growth… we have to get job growth AND extra (since we didn’t even have enough income to service these house prices when times were good).
    a short term RE recovery is extraordinarily unlikely, unless our government really pumps money causing hyperinflation. it will need to be paired with protectionism, given global wage arbitrage. it would take a perfect benevolent storm to get significant RE recovery any time in the next 5-10 years. (we will likely see stabiliztion of prices in 1-3 years… but no true recovery for some time).
    my guess is that we won’t see inflation adjusted (real) housing price increases for a LONGGG time (perhaps decades even). nominal gains may come within 5-10 years.

  17. Posted by Trip

    ex SF-er, you and I do not disagree. You’re reacting to others’ characterization of what I said. Note that I pointed out the 51 >$1M defaults/foreclosures in SF as some indication of trouble in the “prime and Alt-A” sector (consistent with the Bloomberg article showing these areas are exploding). I have no idea how to find out which of those two categories the bulk fall into (a pure guess is Alt-A), but I’m fairly certain there were not a lot of subprime loans handed out for a million bucks even during the peak of the madness.

  18. Posted by ex SF-er

    to clarify something:
    -there are way more prime loans than subprime.
    -I don’t think that the % of prime loans in default will be more than the % of subprime loans in default
    -however, the number of prime loans in seriuos delinquency IS ALREADY higher htan the number of subprime loans in serious delinquency.
    -and Prime loans in general are higher $$$ amounts than subprime loans. So prime loans defaulting will be a huge stress on RE.
    the resets on these crappy Prime loans don’t stop, and thus the pressure on the prime segment doesn’t really end, until Dec 2011. which is why many people (including me) have forecasted tough RE times until around 2012.

  19. Posted by Jorge

    I imagine there will be a lot more pressure on the BA prime market as long as high end jobs (IT workers in the SV averaged $97K in 2008) continue to be lost at a faster rate than they are being created.
    http://www.techcrunch.com/2009/04/03/dicecom-shows-45-drop-in-tech-jobs/
    “Dice said that of the ten reported metropolitan areas, Silicon Valley was hit worst, with available tech jobs down 57.7% year over year. Chicago (down 55.3% y/y) and Boston (down 55.3% y/y) also posted large declines. The Conference Board’s Online Help-wanted Index suggests that monthly job demand dropped 100K in March, down 31% year over year.”

  20. Posted by anonn

    Tipster,
    “Goodness, annon, Trip cited his source. You countered with…nothing.
    No, he did not. He cited a source that showed a two numbers. No map was provided. No correlation with prime. Just an assumption based upon the second number 51, corresponding to 1M+ homes in “some stage” of foreclosure. The Prime foreclosure deduction is a logical leap based upon purely upon Trip’s own bias.
    I countered with 20 percent down. Longterm plans. Unemployment being the chief factor there. You don’t what I say any more. Why should you? You’re not open to learning anything.
    The end.
    p.s. You have almost purely away from facts latel. You used to be half blarney / half data. I for one think it’s pretty cool, because I was afraid for a second that some more casual readers might begin taking you seriously. Considering the site uses the word “tipster” as well and all.

  21. Posted by ex SF-er

    @ Trip:
    sorry. you’re right.

  22. Posted by Outsider

    From personal experience, the bay area home I bought in 1988 went under water in 1990 (the last real recession) and did not reach break even till 1995-96. The combination of low interest rate and low home prices finally brought the housing market out of the slump. Its recovery, as we all know, lagged the economic recovery by over three years. The scary part is, the break even home prices then were less than half of where we are at today, even after a sizable decline…

  23. Posted by eddy

    Fact or opinion — this is a pretty bleak article with some unfavorable consequences. I love how these articles tend to gloss over key issues and relate everything to economic trends. With things like this:
    What they wrote:
    “Dugan said higher re-default rates are likely related to stressful economic conditions and new loan plans are not producing significant reductions to make mortgages sustainable.”
    Translation:
    Owners continue to be unable to keep up with loan payments that were unsustainable based on income levels on homes that were overvalued based on long term income to home value ratios. Further, owners have little incentive to make these payments when faced with market values well below the net equity and loan balance of their homes. Government policies, combined with a massively over-burdened foreclosure system are enabling families in these situations to remain in their homes much longer.
    Honestly, it’s tea leaf articles like these on subprime in 2007 that started to creep up only to ‘blind-side’ the markets in mid 2008. Except this time: “Prime mortgages, considered the least likely to fail, account for two-thirds of all mortgages.”
    Anyone that thinks home values have bottomed are likely to get the same ‘surprise’ the rest of the general population got when things started to really go south last year.

  24. Posted by San FronziScheme

    Jorge,
    I confirm this is the buzz of most my SV tech pals. One who used to be at MS is saying he’d be ready to lower his expectations if there was just one job he could apply to. Also salary offers from the ones that still hire are taking a hit. That’s reality.
    Another reality is salary freezes or even salary cuts. Wifey got a nice review late last year with a cute little raise, but all was frozen companywide therefore no raise this year. From what I hear around me this is now common practice.

  25. Posted by Jeremy R

    “Those considering buying now in this “buyer’s market” would be smart to wait a bit as you will do much better a year from now. You might take a look at how things developed in areas that are a year farther through the cycle — Miami, Sacramento, Las Vegas. Lots of people jumped in and got a “bargain” (even a foreclosure sale) only to find themselves underwater and their 20% down evaporated within the next year. And prices continue to fall even in those hard-hit areas.”
    With the entire world focused on propping up prices, and SF’s limited housing supply, I don’t see that happening. I see next year being the same as this year. If you have a great job and find a perfect property at a “reasonable” price, I would advocate buying now. If you see a marginal property, or a nice property where the seller is asking 2008 prices instead of 04 prices, I would wait. There is certainly no rush to buy, that’s for sure.

  26. Posted by Jorge

    SFS,
    Seeing much of the same myself. If wage deflation continues, and I don’t see any reason why it won’t, the effect on median prices in the mid to upper tier markets will be devastating. You also need to take into consideration that those who do gain employment often do so after burning through significant cash reserves while they look for work.

  27. Posted by eddy

    BTW — Outsider’s comment at 11:16 AM is precisely the situation. He probably makes no more or less than your standard person, but clearly could not afford to buy his house at today’s prices. The thought that today’s prices are long term stable is to assume that there are enough buyers able to afford these levels in perpetuity. The reality is that outsider can sell his home for a healthy gain even if the market drop 30-40% from today. Who cares about the Apples and the people living in them, or selling them. It’s 85% of homeowners that bought pre-2005 that are going to set the true comps for years to come. Mean reverting.

  28. Posted by Patrick

    “With the entire world focused on propping up prices, and SF’s limited housing supply…”
    From Socketsite on the 30th: Inventory of Active listed single-family homes, condos, and TICs in San Francisco rose 3.3% over the past two weeks (versus an average of 4.7% for the same two week period over the previous three years) and is now running 26.8% higher on a year-over-year basis (up 18.2% for single-family homes and 32.7% for condos/TICs) and 72.6% higher than at the same point in 2006.
    1702 properties available and Dataquick showed 272 sales in SF in February. Looks like quite a big supply to me. Just saying.

  29. Posted by Clay

    Re: Jobs / Home prices
    I enjoy reading most of the comments, particularly those that seem linked in fact / sound logic / economic theory – so thanks to all of those who contribute. I learn a lot from you.
    From the less than glam world of mgt consulting – a few facts from what we’re seeing.
    – Every retailer I’ve talked to / heard about (call it 5-10 Fortune 500 off top of head) is actively planning 1. store closures of 10-20% of network. 2. Layoffs of at least that 3. For awful 2009-2010.
    – Every tech client I’ve talked to (computer OEMs, chipmakers, etc…) are all contracting and planning similar layoffs, and have dramatically cut investments
    – 20-40% of malls in the country are near bankruptcy…
    So… latent demand, and realtor(R) vs. bear aside, I have no idea why people think prices are going to go up anytime soon. If major layoffs are still coming, and companies are actively shutting space (1,000’s-10,000s of retail doors will close this year) – how are prices anywhere close to a bottom?
    Maybe I’m missing something – but until the P/E multiple for property in SF remotely makes sense, and the economic wreckage stops (2011?) – why are prices going to do anything but go down?

  30. Posted by anonn

    Clay, I’m curious where/why you think anybody said that prices will be going up any time soon. Nowadays it’s the Vocalbears Who Totally Control All Dialog @ Socketsite TM say that prices are down 20% and I’m saying more like 5 to 10 percent. As far as predicting when prices might go back up? This whole thing has to unwind first. And the jobs market has to recover. I guess I did say that I hope the jobs market did not continue to get worse through 2012. And I mean, I hope we all feel that way.
    I don’t think most people in the market right now think that prices will be going up any time soon either. None of the ones I speak to do, certainly.

  31. Posted by Lawrence Yun

    “Maybe I’m missing something – but until the P/E multiple for property in SF remotely makes sense, and the economic wreckage stops (2011?) – why are prices going to do anything but go down?”
    Simple: prices will go up because, in spite of the fact that mortgages aren’t being handed out like candy, and jobs are being lost at the rate of 700,000 per month, when people lose their jobs, they generally move. That is excellent for SF because it is a smaller city than most other major cities.
    SF has less than 1% of the nations population, around 800,000 people. Let’s assume 10% of the people nationwide become unemployed and move. If 10% of the people move OUT of SF, that’s 80,000 people, but that means 10% of the REST of the country moves IN to SF, so the SF population will explode! That’s 30 Million people who will move IN to SF in the next two years.
    Sure. they’ll all be broke, but with that many people moving IN to SF, rents will skyrocket, and the rent vs buy will come back into line for the OTHER 90% of SF residents who did NOT move out. All of THEM will quickly buy, causing home prices to go up. So, the fact that things are getting worse actually has the effect of benefiting SF just by its natural shortage of land.
    Check out my prediction from one year ago (it’s for real – A powerpoint slide of a presentation I made) by clicking on the link below. I’m telling you, it’s gonna be BIG!! You just wait! I mean, don’t wait! NOW is a good time to buy and sell real estate TM.

  32. Posted by anonn

    Well, Clay, you have your answer.

  33. Posted by Clay

    Totally agree that the vocalbears dominate the forums… but I also think its mostly b/c they’re right. That said – its good to get both side of story, so appreciate the reply.
    From the sources I’ve seen, both anecdotal and publicly avail – I’m not sure how the argument that SF is only down 5-10% holds up. C-S for the area (not perfect obviously) shows down 30%, property after property listed for 2004 prices… and sitting there unsold, landlords unable to rent property at 2006 rents (2 units avail in my building)… but anyway – thats not my main question.
    I’m just a bit mystified by the logic of buying a house in market where the P/E ratio is really out of whack, given all of the macro and micro economy headwinds that SF real estate seems to face. I was in a townhall discussion with Martin Baily the other day about the broader and two things that he said that hung with me:
    1.) The US economy has to deleverage – the current stimulus package is not focused on changing this fact, but rather smoothing the transition as opposed to having us fall off a cliff.
    2.) For consumers, deleveraging has to happen in the top 10% earners of US households (who own 60%+ of the debt).
    If overall leverage is reducing, and the top 10% of HHI earners are being most dramatically affected – it seems like a city like SF who’s run up was created off of the leverage of top earners has many points to go before it hits bottom (back to traditional P/E, or Case-Shiller type levels)
    And just FYI – all of this is blatantly self-interested as I decide whether to buy now (seems silly), but in a year (also seems sorta silly), or just bank the rent / buy spread, and then buy after economy gets rolling a bit (3-4 yrs)

  34. Posted by LMRiM

    C-S for the area (not perfect obviously) shows down 30%
    Actually, C-S for the SF MSA shows down just over 43% from peak (index 5/06 = 218.37 vs. index 01/09 = 124.33) and SF certainly holds its own versus other bubble markets in the “sand” states:
    http://2.bp.blogspot.com/_pMscxxELHEg/SdIWXOstoII/AAAAAAAAE7Y/HItfDP9mThc/s1600-h/CSJan2009cities.jpg
    (Chart is from http://www.calculatedriskblog.com/2009/03/case-shilller-prices-fall-sharply-in.html)
    [Editor’s Note: A bit more detail: According to the Index, single-family home values for the bottom third of the market in the San Francisco MSA have retreated to August 2000 levels having fallen 58% from a peak in August 2006, the middle third has returned to May 2002 levels having fallen 39% from a peak in May 2006, and the top third has fallen to February 2004 levels having fallen 25% from a peak in August 2007.
    And with respect to condos, values in the San Francisco MSA accelerated their decline falling 5.4% from December ’08 to January ’09, down 19.8% on a year-over-year basis and down 27.2% from an October 2005 high.]
    I’m not sure how the argument that SF is only down 5-10% holds up.
    It’s easy. First, you exclude D3, D9, and D10 entirely. Second, eliminate any neighborhood in any other district that has obviously shown large declines. Third, eliminate all foreclosures, short sales, or corporate relocations (these are all “motivated sellers” and therefore pollute the data).
    Fourth, eliminate from consideration any property that is languishing unsold at a price that would show more than 10% down – these haven’t sold so “we don’t have enough data”.
    Fifth, and this is critically important, eliminate all properties that have any flaws. It could be a gas station on the corner that has always been there, a house with an “unusable cliff” for a backyard, or it could simply be “ugly”. One was even dismissed because it was a very “HGTV circa 2002” remodel (although that one failed to sell anyway and so would have been eliminated regardless).
    Sixth, any sale above a prior sale (even if the last sale was in the year 2000) counts to disprove the idea that prices are down from peak; therefore, if a NV property is listed at 8% below its 2004 sale price (such as 3730 26th Street) it doesn’t count. (Besides, that one has the fatal flaw of not being in the “real Noe” anyway, and so would have been eliminated under any number of considerations anyway.)
    Finally, of course, if all those steps fail to eliminate the data point, scream at the vocalbears, hurl insults, and gradually work your way to the holy grail of dishonest data analysis: the current seller simply “overpaid”. Hey, it happens. Perhaps they should have had a better realtor, lol.
    I hope that helps clear things up, Clay. I’m sure some of the other vocalbears (TM) can come up with some other exclusionary criteria. I trust that the motivation for this sort of “ostrich head in the sand” behavior is pretty obvious, whether it is practiced by realtors on commission or by recent purchasers of bubble-priced assets.

  35. Posted by Jorge

    Clay,
    I think the current administration hopes to keep home prices from dropping too much by offering cheap credit to slow downward price movements while they wait for inflation to meet it half way in a few years. Unfortunately, most citizens will miss the hidden inflation tax and hail the price stabilization as good economic policy.
    What the government plans to do at that point will pretty much determine whether we see hyper-inflation or not, as they control the market on lending rates at that point. If they raise rates to match inflation, housing prices will drop significantly again. If not, hyper-inflation is back in play. We’ve set ourselves up for a lose-lose proposition in my opinion, but unfortunately this has been baking for the last 20 years.

  36. Posted by anonn

    LMRim said, It’s easy. First, you exclude D3, D9, and D10 entirely.
    and then continued on. I didn’t read. I’m sure it was the same old antagonistic arch detached armchair crap. I’m tired of this. Look at Jorge. At least he showed that he’s capable of being civil. Take a note or two, Satchel. Sheesh.
    Parts of D3 and D10 are behaving quite differently than the rest of the market, and have been for some time. That development has been pretty in your face, and visceral, for quite a while now, actually. Parts of D9 had a lot of condos built. Not unquantifiable at all there, either. But draw the line for the most part at that point. In fact, the other day I parsed what a rather bullish poster called SFRob had to say regarding “all of D9.”
    Look, I have people looking for good deals in any central neighborhood, OK? It’s about five to 10 percent off, tops. And I’ll tell you what, the new loan programs aren’t going to make the middle of the road type properties too much cheaper for the average working San Franciscan any time soon. This is right now that I discuss. I don’t care what the likes of LMRiM has to say. He hasn’t made a correct call yet on an individual property, has he?
    What I don’t understand is the hostility. You lot don’t see fit to question why someone who bailed on the city is so up in arms on a blog with naked hostility all the time, and looking up tax records and stuff. OK, fine.

  37. Posted by tipster

    What’s hilarious is that the people saying that the declines are constrained to subprime areas haven’t identified that the cause of those declines was artificially cheap mortgages resetting that could not be supported by the incomes of the borrowers.
    Yet this is exactly the situation that has been set up in the other areas, with one major difference: the resets on those loans happen much later. When the loans reset, many, though not all, of the borrowers incomes won’t be able to support the payments and the exact same thing will happen. Some will, just like some o fthe subprimes did. But enough will not be able to.
    It’s like saying “sure your kid has strep throat, but my kid, who spent all the time playing with your kid, just got a slight fever. I’m sure he’ll be fine.
    No he won’t, he’s going to be just as sick. He’s not a super kid, he’s a later kid.
    The future of D7 is staring you in the face in D10. And those problems in D10 started *before* any layoffs, when the economy was healthy. The economy is far from healthy.
    So your calls of “it’s only down 5-10%” may be true in some areas, but it’s just getting started in the others. They all have the same source of problems, just different timing.

  38. Posted by shza

    The “Lawrence Yun” post is snark, right?
    The obviously unfounded premise in that post is the notion that as an effect of unemployment, there will be a mass net influx of no-income people into one of the most expensive cities in America.
    But it’s snark, right?
    (I’m a recent SS-follower and have posted a few times anonymously — given how much I’ve been visiting, figured I’d start an ID. Background – 2 kids, me and wife are both big firm lawyers — and renters.)

  39. Posted by ex SF-er

    I guess I did say that I hope the jobs market did not continue to get worse through 2012. And I mean, I hope we all feel that way
    Interesting point.
    My rationale for 2012 is as posted above, that’s when the current crapola loans finally finish resetting. It only indicates one aspect of this issue- that RE is under pressure due to previous unsustainable pricing.
    the jobs picture is less clear. It is unlikely that the jobs picture will get worse through 2012, although it will likley get worse the rest of this year and maybe into next.
    I haven’t heard any bear speak about progressive worsening job market through 2012. If that were to happen it would make the last depression look like a cakewalk. and then most cities would look like Detroit.
    the real issue with jobs is that we may have a jobless recovery… in other words, we may lose 5-10 million jobs that don’t come back.
    typically, new job growth makes up the employment lost during a recession in under 4-6 quarters. it took 3 years (and a RE bubble) to do it after the 2001 recession.
    People keep thinking that getting back to “normal” means going back to life in 2005-2007. that was the BUBBLE, in fact it was life under the biggest credit bubble in modern history. normal was more like 1995-2000 (and some would argue normal was more like the 1970s before we started our unprecedented credit expansion).
    The govt is trying to blow a big bubble. they have no choice. it is the only way our economy “works” these days.

  40. Posted by Trip

    Hee hee. LMRiM did a nice job recapping all the qualifications that go into any claim of “only down about 10%.” Of course, this is just a variant of the old saw that Real SF is only down 10%. But Real SF has shrunk to about 5 properties in the city. (And the decline is picking uo steam there)

  41. Posted by tipster

    Shza,
    yes, it’s snark. The premise was that unemployed people move, and so 10% of the SF population would move out of SF.
    However, if the premise was true, the unemployed 10% of the rest of the country would move to a different area in the rest of the country, i.e. dispersed across the country.
    The fact that the rest of the unemployed would all move was a plausible argument. However, the faulty part of the argument was that instead of dispersing across the country, they would all move to the same exact city: SF, driving up rental rates, which is, of course, ridiculous.
    Sorry I didn’t do a better job of making that clear when I posted as Lawrence Yun.
    You should realize that all of the other arguments used to predict why prices will never fall as much are based on just as faulty arguments. And by the way, different seemingly plausible arguments like that are made by Realtors in EVERY city, to justify why THEIR cities won’t decline as much as the average in the future. Obviously, they cannot all be right.

  42. Posted by Trip

    Shza, welcome! Our backgrounds are nearly identical even down to the number of kids (only we bought our place here about 10 years ago, and my wife is a govt not biglaw attorney). I hope you and your wife are hanging in there during the layoff bloodbath going on in this industry. I throw out legal thoughts every now and then — please correct me if I have it all wrong!

  43. Posted by tipster

    “My rationale for 2012 is as posted above, that’s when the current crapola loans finally finish resetting.”
    They never finish resetting. They reset over and over again. If they reset in 2011 at a low interest rate, they can reset again in 2013 at a higher one.
    The people who have them might be able to keep the loans through one or two reset periods, only to lose them as the loans reset higher when they can’t qualify for a fixed loan because they are underwater on the existing one.
    This isn’t going to stop in 2012, I’m afraid.

  44. Posted by ex SF-er

    This isn’t going to stop in 2012, I’m afraid.
    tipster, I both agree and disagree here.
    remember, I’m ONLY talking about RE pressure secondary to resetting loans. not talking about RE pressure due to recession (possible depression), changing demographics (boomers downsizing) and so on.
    as you know, most of the crapola loans were originated through 2007 and they are truly horrific. most of them will reset by 2012. The defaults on those will continue to be record breaking but will then slow after 2012.
    why? because if the homeowner can make it through 5 years of payments AND a reset then it is my feeling that they are a lower default risk than what we’re currently seeing (people who are defaulting within 1-2 years… people who NINJA’d themselves to death, the strawberry picker in a McMansion). the 5 years of payments will weed out much of the crap.
    this is not to say that the problem is solved (it isn’t), just the the loan characteristics of a portfolio of 5 year old loans are different than those of a portfolio of 1-2 year loans
    we could see prolonged agony of course depending on govt actions. IF the govt REALLY enacts this 3-4% mortgage stuff and continues foreclosure moratoriums and all that, then you are keeping people in homes that they can’t afford, and then you’ll see tons of re-defaults beyond the 2012 date. (whenever the govt program expires)
    Also, if future/current loan origination goes back to (crappy) 2005 underwriting standards then you’ll see prolonged problems as well.
    BUT, if the govt continues lip service of helping homeowners while letting them default and if the banks use even minimal lending standards again then I think the bulk of reset-related mortgage pain will wane by 2012.
    unfortunately, it all depends on govt actions. (which has not been reassuring to date)

  45. Posted by tipster

    “the 5 years of payments will weed out much of the crap.”
    There are two sets of people we are talking about. The first set can’t afford any mortgage: they can’t manage their finances and will default sooner or later no matter what. Most of these people have bad credit to start with, and so they were classified as subprime loans. Those loans go bad before they reset.
    The second set of people are people who can afford their loans, but can only afford subsidized loans. They took out the Alt-A or option arm loans that had initial rates that were very low. They knew full well they couldn’t afford a resetting loan, but figured that they could just refinance into another subsidized loan.
    The initial subsidy was courtesy of the Chinese government and other investors. Now the subsidy is the Fed. For many of the Alt-A crowd, the initial reset is going to be lower or the same.
    Now, you are right, in this second set, there are a subset of people who not only require a subsidy, but also require high home values, to keep paying their loans. They are the ones who stretched to get into the loan and are barely making it. When the home value drops significantly under the loan value, they walk. And you are right, that many of these people will do so early.
    But as home values continue to fall, and interest rates start to rise, the number of people in the subset increases. So as interest rates tick up, the people who needed subsidized loans and subsidized housing values to keep paying will no longer have either of those things and will stop paying. The fact that they didn’t stop in the first 5 years will have no bearing: they are the same people with the same value judgments. They will find it harder and harder to pay (especially with wage deflation, and the baked-in everything else inflation that will shrink even a constant paycheck) and easier and easier to walk away as housing values decrease when loans are more expensive.
    So I don’t see how the same person you freely admit will walk if these things happen in the first 5 years won’t do the same in the second five years if conditions warrant. And people normally move after 7 years anyway: the same forces that would have caused them to move will cause them to want to walk.
    The people who just need subsidized loans to make their payments are going to bail when loan rates go up. People who need subsidized loans and high home values will bail too. And if inflation occurs without wage inflation because the government printed too many dollars, even people who aren’t on the edge will get there, and there could be an entire set of people who take off just because they can’t afford the mortgage payment with the price of everything else rising while their wages are flat to down.

  46. Posted by Trip

    Y’all are right, but there are other important factors at play. Even if it were true that SF is “different” and will have few recasts/foreclosures (because of trustafarians, the internets, or whatever), broader factors are going to have a huge negative impact here. [Of course, it is nonsense to claim that SF is “different”].
    Prices skyrocketed here through two bubbles. Home price increases far exceeded comparable rents and incomes. This was fueled by cheap easy money. but now we are in a major recession (depression?), and people are losing jobs and seeing incomes tumble. More people will have to sell for the traditional reasons — they can no longer afford what they once could, and even prime borrowers stretched to begin with, hence the fast-rising prime defaults. There are simply far more sellers than buyers.
    Also, the govt is now reinstating the cheap money, but not the easy aspect of it as lending requirements are back to almost normal. So the buyer pool is not increased that much. And the low rates won’t (can’t) last forever. When interest rates climb again that will put additional downward pressure on prices.
    The recast tsunami is coming (it’s already begun) and will accelerate the process, just like the subprime tsunami did earlier in certain market segments. But it will just accelerate what would happen anyway.

  47. Posted by anonn

    It’s like saying “sure your kid has strep throat, but my kid, who spent all the time playing with your kid, just got a slight fever. I’m sure he’ll be fine.
    No he won’t, he’s going to be just as sick. He’s not a super kid, he’s a later kid.

    That analogy is to crud as gala is to granny smith. But I’ll tell you one thing. It paints a vivid picture of where you fancy yourself in all of this. You imagine yourself rather paternal and condescending.
    Yeah. Not really. Get a better hobby.

  48. Posted by NoeValleyJim

    I am sure that either interest rates will stay low or that inflation will pick up. The Trip/tipster disaster scenario where we have wage deflation combined with high interest rates is exceedingly unlikely.
    Of course, it is nonsense to claim that SF is “different”
    You have been saying this for years now and you are already wrong. Now your claim is that San Francisco is not really “different” it is just “late”. But late is different, isn’t it?

  49. Posted by diemos

    “The Trip/tipster disaster scenario where we have wage deflation combined with high interest rates is exceedingly unlikely.”
    All it takes is foreigners getting sick of loaning us money they’re never going to see again. I would say its inevitable but I’m not going to hazard a guess as to when it will hit.

  50. Posted by ex SF-er

    tipster:
    it appears we don’t really disagree.
    as I wrote myself above:
    we could see prolonged agony of course depending on govt actions. IF the govt REALLY enacts this 3-4% mortgage stuff and continues foreclosure moratoriums and all that, then you are keeping people in homes that they can’t afford, and then you’ll see tons of re-defaults beyond the 2012 date.
    it looks like our ownly disagreement is timing. You seem to think that the govt can continue these mortgage subsidies for several more years. I’m not so sure about that. it is my opinion that govt subsidy of mortgage interest rates will stop long before 2012, which will causes the increases in payments that you discuss in your last post.
    it has taken massive governmental intervention to reduce mortgage rates to their current status, and it has come at a great cost. although technically possible, I find it improbable that the govt will be able to hold rates down for 3 more years. the bond market is already starting to squawk as it is.
    it’s only been a few months, and already the foreign central banks are hesitating to buy our debt. And it’s only been a few months.
    our govt has shown that they are fools. I pray that they aren’t that foolish to try to hold mortgage rates low for 2-3 more years. we would likely face currency crisis.
    as you well say: current ARM holders are being subsidized. My question to you: by who? Follow up question: how long do you think they’ll do so?
    again, it isn’t out of the realm of possibility that the artificial lowering of mortgage rates continues… but I just don’t see the bond market accepting that. I could very well be wrong though.

  51. Posted by Trip

    NVJ, we already had this discussion. SF is not “different” or “later” than anywhere else, particularly within our own MSA. Parts of SF were hit earlier with the subprime wave and parts are coming now and later with the Alt-A wave. Same goes for Vallejo, Walnut Creek, and anywhere else you have a heterogeneous borrower profile and housing stock. Others (not you) have tried to define “SF” by excluding huge geographic areas and housing classes (see debate on “Real SF”), and I guess if you do that then I accept that “SF” is “different.”

  52. Posted by NoeValleyJim

    I don’t think current ARM holders are being particularly subsidized. I just think that The Fed is doing what it is always doing, which is trying to hit its 2% inflation target. It is just in this current environment, it needs to do that by injecting more money into the economy, rather than by removing it.
    How else would you have them increase the money supply?
    If people are willing to lend money to the US Government at 3% and they turn around and lend it out at 4.25% how is that a subsidy?
    Current real interest rates on home mortgages aren’t particularly low. If you think that we are in for an extended period of 0% inflation, borrowing money for 30 years at 5% is not really that great a deal. Usually home mortgages are 3-4% above inflation. If inflation picks back up, this will have turned out to be a smart move.

  53. Posted by diemos

    “If people are willing to lend money to the US Government at 3% and they turn around and lend it out at 4.25% how is that a subsidy?”
    Since people are not willing to cut out the middle man and lend for housing directly at 4.25% we can conclude that the government’s implicit backing of the loan is worth more than the 1.25% difference. That is the subsidy.

  54. Posted by ex SF-er

    I don’t think current ARM holders are being particularly subsidized
    Yes, they are
    Subsidies:
    1) holding interest rates below the level of inflation (this is general subsidy to ALL adjustable rate debtholders, not just home related)
    2) Allowing Fannie and Freddie to go into the “jumbo conforming” space, as well as expanding FHA loans and as well as Ginnie Mae. this is clearly subsidy. the entire goal was to reduce interest rates for homedebtors using the Federal backstop. federal guarantee=lower risk premium=lower interest rate for homeowners.
    3) Fed monetizing debt. Fed is going and purchasing longer dated Treasuries DIRECTLY. (the fed is creating money and then buying Treasuries with it, which raises the Treasury price which lowers the Treasury yield, or interest rate. This is clearly focused on homeowners, as most ARMs are tied to longer dated Treasuries (or LIBOR).
    4) Creating new “lending facilities” and other programs such as loan guarantees that have the express function of “increasing liquidity” in the mortgage space. this is another subsidy, as the taxpayer is spending money trying to lower rates again.
    the list goes on and on. there is HUGE mortgage subsidy right now. it is unsustainable.

  55. Posted by ex SF-er

    I am sure that either interest rates will stay low or that inflation will pick up. The Trip/tipster disaster scenario where we have wage deflation combined with high interest rates is exceedingly unlikely.
    out of curiosity, why do you say this? I would say that it is actually NECESSARY so long as we have globalization(at some point, could be near or long term).
    I’ll start with the idea that lower wages is distinct from interest rates. I’ll take them one at a time.
    1) interest rates. Our govt has lowered and HELD interest rates too low twice now this decade. From 2002-2005 they did it. And now they are doing it again.
    The problem: it causes massive dislocations to an economy (for example: caused the RE bubble)
    right now there is NOBODY who doesn’t recognize that interest rates are being purposefully held lower than where “the market” would set them. this is done by the Central Bank (the fed). this is a tool of the Fed. However, it cannot be done forever. (this is fact. a more detailed explanation about fed operations would be boring, so I’ll assume that everybody recognizes that the Fed cannot hold interest rates at artificially low rates forever without consequences).
    Foreigners help hold our interest rates down as well as they buy our debt (Treasury Debt, Agency Debt, etc). if we hold interest rates too low too long, they won’t buy our debt (in general). so at some point FCB’s and foreign investors will demand higher interest rates. even if foreigners don’t buy our debt the Fed can hold interest rates low but then the mechanism severly damages the dollar (we risk inflation/hyperinflation)
    Japan is able to keep low interest rates because
    1) its populace is savers… so they use National buyers (not foreign)
    2) they ran up tremendous debt
    the US will have a harder time (not impossible) doing this as we don’t have good national savings. (we’re a debtor nation).
    —-
    second aspect:
    REAL wages in the US MUST come down, so long as we have globalization. one of THE problems is that Americans make “too much” given their global contribution to the economy. Thus, we are uncompetitive globally. the only way to address this is to eventually have wages come down so that we are more competitive with our trading partners.
    the real wage can drop either by devaluing the dollar (creating money supply or monetary inflation) or by reducing nominal wages, or by a combination.
    but as the auto industry found, you can’t pay an American Worker $X per year with $Y benefits per year, when a Japanese worker will make the same product for 3/4 of that. other manufacturing employees have found that out over time. more and more employees will figure it out over time.
    this process has been brutal for over 10 years, but was hidden by the fact that Americans could BORROW money making them look (and spend) more than they made. But the charade is up. we are not competitive on a global stage (overall. proven by our current account deficit). thus we must make less. (in real terms)
    =====
    thus overall:
    The American wages MUST come down (if we have globalization)
    Interest rates going forward have a high likelihood of rising from current manipulated levels (but I agree this is far from insured). if they do not then we face inflation/hyperinflation and a currency crisis. probably much like the Argentina crisis. less likely Weimar Germany
    inflation vs deflation is a slightly different topic, which weaves in to my above argument, and depends in part on what our central bank does.
    and lastly: if we have huge protectionist measures then perhaps wages can stay the same or go higher (as we won’t have global wage arbitrage). but then prices will be higher (no cheap goods from china).
    lastly lastly: clearly our Fed is using many tools to keep rates low. such as all th

  56. Posted by Clay

    So – seems like bears are all aligned…. real estate is going to struggle, inflation is highly likely… so what are you guys investing in?
    I’m moving from cash into commodities (natural gas), gold, and US equities. You guys have any real estate specific longs or shorts that jive with your views of the market?

  57. Posted by NoeValleyJim

    out of curiosity, why do you say this? I would say that it is actually NECESSARY so long as we have globalization(at some point, could be near or long term).
    Well, for one thing it has never happened before. You can bet that something that has never happened has a pretty low probability of happening. 🙂
    Perhaps you can find some historical example outside the US, but I am not aware of one.
    I don’t disagree that US real wages are going to go down, but if the inflation rate is 7% and wages are going up at 6%, then this does not qualify as “wage deflation” to me. I hope we are using the same terms here.
    For all the sabre rattling the Chinese have made about their concern with the US dollar, you notice that they have continued buying treasuries. And the rate that the USG has to pay to borrow long term is still at what historically is a very low rate. Sure it is up from the panic lows of a year ago, but still much lower than any time since the Great Depression. This is hardly the sign of a currency on the brink of collapse.
    The Chinese have reduced their currency inflows, but if you notice, we have reduced the rate at which we import from them as well. Since we are sending them fewer dollars, they are sending fewer back to buy bonds. How this can be a surprise to anyone is beyond me.
    I think “hyperinflation” is a remote possibility, even less now that the G20 has made it clear that there is going to be a coordinated to preserve the status quo, with the dollar as world reserve currency. Hyperinflation in the US Dollar would mean a total reordering of the current world order and the collapse of US demand for Chinese exports would probably lead to domestic instability in China. I know we are in agreement on this. So China will continue to grumble, but continue on their present course.
    I expect inflation to pick up but stay below 10%. The Fed is claiming to target 2% and I am sure they will continue with the QE until they hit that rate, but it is hard to imagine how the US (Government but also businesses and consumers) can repay all the debt we racked up the last two decades without using inflation to devalue the amount, so I expect The Fed to keep the overnight rate “too low” and therefore fuel inflation.
    The real test will be when we do get to 2% inflation. At that point I will be watching The Fed very carefully to see if they decide to nip inflation — and the first signs of a recovering US economy — in the bud by raising rates.

  58. Posted by ex SF-er

    At that point I will be watching The Fed very carefully to see if they decide to nip inflation — and the first signs of a recovering US economy — in the bud by raising rates.
    me too. others (LMRiM and polip) feel the Fed will be able to reverse course. I do not.
    I am not looking for hyperinflation (a la Weimar) in the moderate future. I am looking for prolonged significant inflation.
    otherwise I agree for the most part with your post. The US owes to much to ever repay it. Thus the goal is to inflate our way out of it.
    however: you may not consider 7% inflation and 6% wage gains as wage deflation, but I do. it would be very painful to Americans if that continued for any period of time.
    regardless, I don’t think it will be that close anyway. I think we’ll have something like 5-10% inflation with 0-1% nominal wage growth (numbers completely made up).
    In other words, it will be something like last year, when oil was booming, commodities soaring, and the American worker crying in pain. have no doubt the American middle class will take the brunt of the economic changes going forward. At least as long as we continue the current path of bailing out the banks/connected interests with taxpayer money. it really is the worst theft in the history of Earth.
    people get so worked up over $160M of bonuses, and don’t think anything of the hundreds of billions (even Trillions) that they’re getting bilked out of every month

  59. Posted by NoeValleyJim

    The numbers you threw out there — which I know were completely made up — would indicate a total and utter collapse of the US economy, worse even than the Great Depression. I just don’t things can possibly be that bad. For one thing, this would cause domestic unrest in the United States.
    I don’t see how we can have real wage declines of 4-10% without a corresponding drop in GDP, can you?
    Last year we did see inflation peak at 5.6% mid-year while average wages grew much more slowly at 2.5%, for a real wage decline of 3.1%.
    I can just barely imagine that condition continuing for an extended period of time.
    And you have stated (and I agree) that housing costs are unlikely to go up anytime soon. This is about 1/3 of the component of inflation. Are you expecting gasoline prices to go up 25%/yr for an extended period of time? It really doesn’t take long for gasoline to cost $20/gallon under that scenario.
    I do agree in the general direction that you think we are headed though: being forced to consume less resources because of the growth of the rest of the world, mostly India and China, leading to smaller cars and houses. But I think we can have a growing economy even in that situation, with more and more of the economy devoted to things like entertainment and services.
    Less bread and more circuses, basically.

  60. Posted by diemos

    “I just don’t things can possibly be that bad. For one thing, this would cause domestic unrest in the United States.
    I don’t see how we can have real wage declines of 4-10% without a corresponding drop in GDP, can you?”
    You’ve bought into the idea that “prosperity always goes up”. History is replete with societies that have prospered mightily and then failed.
    “But I think we can have a growing economy even in that situation”
    Nope. Standard of living goes down.

  61. Posted by ex SF-er

    NVJ;
    Unfortunately, I do think things are that bad. I used to be more optimistic, but my optimism has failed me watching the policy response from Washington.
    thus far we have done little to nothing to heal our economy. instead we are throwing good money into insolvent institutions. we thus won’t have the money when we need it most. For goodness sakes, we just proposed a program that puts the FDIC first in line for MAJOR losses through the PPIP. they don’t have that kind of money (they’re almost out of money as it is). where is the money coming from? taxpayers of course.
    our leaders still refuse to recognize the problem, that we have INSOLVENT (bankrupt) banking institutions. they still either pretend or lie to us that these banks are illiquid.
    I try not to speculate too much about our future, because our trajectory to some extent really does depend on the actions of a very few number of people.
    However, American standard of living MUST come significantly down going forward. We simply can’t afford to live the way we did in the late 1990’s/2000’s. this is obvious by our trade and govt deficits, as well as the surging per capita debt situation. we lived too high. thus, we must retrench.
    the only alternative is another bubble, which IS possible. that’s what our govt is trying furiously to produce. they seem to want to get back to “normal” with “normal” being the largest bubble we’ve seen in modern history. and they have this pipe dream that next time will be different some how… that people will play by the rules and be smarter. Of course that’s not true.
    It reminds me of bumper stickers from the 1980s in Texas that said: “Lord, please let me have another oil boom, and I promise not to blow it this time”
    I don’t use the word depression vs recession much, because the words are unclear. But it is clear that this is by far the worst situation we’ve been in economically since the 1930’s, and it is also possible that this is the worst since 1873 (the so called ‘long depression’). regardless of severity however, we appear to be in for a LONG downturn, as we are zombifying our banks right now (most recently/famously done by the Japanese). we are also increasing opacity of the sickness in the financial system. the duration of this recession looks to be breathtaking (all in my opinion of course… but backed by historical precedence I BELIEVE)
    there are other things that could have been done. but both bush and obama’s administrations are clearly captured by the financial industry (Goldman Sachs, all the big banks, etc).
    if you are interested, here are ideas that I thought would have come from Obama’s camp under Volcker. I weep that it is Summers and Rubin instead. (also, note how Hussman uses Ivy Zellman’s chart that I often discuss)
    this is an excellent synopsis of part of what I thought “should” have been done. the only thing is he doesn’t address the Credit Default Swaps problem that I often harp upon. I also quibble here and there. but the following plan is 100,000x better than the crap we’ve been force fed.
    the biggest theft in modern history is happening, and the victims (taxpayers) don’t even understand it. they understand a few hundred million dollars of bonuses, but miss the $10+ TRILLION that was just stolen. Makes me want to puke.
    highly recommended reading:
    http://www.hussmanfunds.com/wmc/wmc090330.htm

  62. Posted by ex SF-er

    I don’t see how we can have real wage declines of 4-10% without a corresponding drop in GDP, can you?
    it is clearly possible in a monetary inflationary environment. GDP is not inflation adjusted, real wages by definition are inflation adjusted. thus if inflation goes up 5%/year GDP would be expected to go up. But if wages go up 1%/year then REAL wage growth is negative 4% per year. (I am NOT predicting this exact scenario, again just made up numbers… I’m only predicting real wage declines)
    I also just made up the original numbers off the cuff though…
    my real point wasn’t to say we will/won’t get inflation vs deflation… that depends too much on the Fed/Govt/Foreign Central Banks. I still think Ka-POOM is most likely (time period of deflation or disinflation for a few years followed by massive but not hyper inflation).
    if that’s the case we’ll see deflation/disinflation first for a while before we see the inflation.
    gas prices being $25/gallon depends on if we have monetary inflation again… so not willing to say that. (doubt it would get that high anyway… I think $5-6/gallon would be enough to get our attention)
    instead, my point was only to say that we’ll need pretty hefty real wage losses in order to balance world trade distortions. I think 2-5%/year would be sufficient. 10% is hyperbole.
    A good model would really be like life last year when people felt like they were falling behind… or life from 2001-present, where more and more people feel like they’re falling behind. They feel that way because they are falling behind. up until now a lot was papered over with debt.
    Lastly: there is no reason why GDP can’t fall (real or nominal).

  63. Posted by HillsPlazaRenter

    ex SF-er, the hussman funds link is fantastic. A bit technical, as I am not a finance/econ guy, but figure 1.7 (2/3 way through) regarding mortgage reset schedules is frightening.
    From the explanation below the graph, it seems that the mortgages that are most dangerous (or likely to default) are the option adjustable rate variety (option ARM). When the “option” of intereset only payments expires at the recast, people will suddenly be forced to pay interest AND principal AND any negative amoritization that has accrued. As per the article, this could cause monthly payments to “go up significantly.” How many people can afford such “payment shock”? People will be forced to sell, shortsell, or foreclose.
    The option adustable rate mortgages will start to reset en masse in early 2010, then peak at mid 2010 and early 2011. Thus it appears that we have not yet begun to feel the financial pinch of these toxic loans, (or the likely resulting negative pressure on real estate values).
    Thank you for the educational link and the macro-economic overview. For me, the germane question is: How does this effect my housing choices? After looking at this data, at least on the macro level, it would seem that I should continue to rent through the expiration of my lease in October 2009, then perhaps rent month to month for another year. Then, when the typical seasonal real estate price doldrums arrive in winter of 2010/2011, consider purchasing a SFH.
    Cheers for the insights and providing a framework for personal real estate/financial decision making.
    -HPR
    PS: It’s links like these that make me think I am not completely wasting my time reading socketsite and obsessing on real estate, though my fiancee might disagree… 😉

  64. Posted by anon

    The option adjustable rate mortgages will start to reset en masse in early 2010, then peak at mid 2010 and early 2011. Thus it appears that we have not yet begun to feel the financial pinch of these toxic loans, (or the likely resulting negative pressure on real estate values).
    But this is not a concern or even an issue for San Francisco. The “proof” is that a few realtors have said so on this site. Everyone here put 20% or more down and took out a conventional loan.

  65. Posted by anonn

    But this is not a concern or even an issue for San Francisco. The “proof” is that a few realtors have said so on this site. Everyone here put 20% or more down and took out a conventional loan.
    Where will you be when this does or does not happen, “anon” ? Nowhere accountable, that’s for sure.
    I have an adjustable rate mortgage. Do you?

  66. Posted by diemos

    LMRiM, here’s the post I promised you entitled “The productive side of the economy”
    A human being performing manual labor generates ~200W of energy, which for 2000 hours gives 400kWhrs per year. In the 18th century before fossil fuels this energy was supplemented in various ways by using animals or wind or burning wood but the 18th century lifestyle was what could be supported by human manual labor powering some simple machines.
    During the industrial revolution we learned how to make machines do our work for us and how to power them by burning fossil fuels. That combination of capital equipment with a primary energy source created an army of energy slaves to work for us (400kWhrs of work/year = 1 e-slave). And thus began an era of growth as we created capital equipment to extract fossil energy from the ground and convert it into useful work. The population of e-slaves grew and grew until today the US primary energy consumption is 100 quadrillion BTUs (quads) / year or 97000 kwhrs/year/person which is the equivalent of the average citizen having 240 e-slaves working for them. That’s the reason the average american has a life of ease and comfort barely imaginable to the nobility of the 18th century.
    No human being can compete with an e-slave, E-slaves don’t complain, get sick, need to be fed or revolt. The service of an e-slave requires the consumption of 400kWhr/year which is about $40 worth of electricity or $33 bucks worth of gas. (And that’s the real reason human slavery disappeared right around the start of the industrial revolution. Real slaves just weren’t economic.)
    So you can look at that history and see a triumph of capital investment and ever increasing human productivity and wealth that has brought us to where we are today. But I think that view is self-serving and delusional. If the fossil fuels hadn’t been there to dig up, then we would, today, have an 18th century lifestyle no matter how innovative or educated we were or how pure a version of free market capitalism we practiced. No primary energy source = no e-slaves = 18th century lifestyle.
    I think a more accurate view is that our modern economy doesn’t “create” wealth at all, and never has. What the economy does is take inherited wealth in the form of stored energy from the Mesozoic and transforms it into other forms of wealth that we wish to consume. In a very real sense there is no “productive side of the economy”, we are all trust fund babies living off an inheritance that we did nothing to create, nothing to deserve and the primary reason we’re rich and others are not is that we figured out how to tap the trust fund first.
    Instead of seeing the past as a tale of ever increasing productivity “creating” wealth the we “deserve” to have I see a bunch of partying trust fund babies busy blowing through their inheritance as fast as humanly possible.
    Fossil fuels are finite so the trust fund is going to run out one day. Also, for reasons of geology, the rate at which we can extract wealth will peak and begin to decline far sooner than that. “Economic growth” just means more and more people around the world learning how to tap the trust fund which reduces the flow of wealth available to us. Exactly the opposite conclusion from what you would reach if you believed that economic activity “creates” wealth.
    Luckily there are other ways of generating 100 quads/year of energy to power our e-slaves. Here’s a back of the envelope calculation. Solar cells: 1msq is 120W peak power (12% efficiency), collects 220kWhr/year in a good sunny location. Need 133k sq km of cells to generate 100 quads/year. If you believe a cost of $1/W peak that’s $16T of solar cells covering roughly half of Nevada. Nukes: 1GW plant is $5B. You need 3300 of them, $16T. My only point being that there are solutions and an investment of 10% of GDP for 20 years would get us off fossil fuels and onto a sustainable source of wealth (let’s not degenerate into all the sundry issues around these technologies that people get spun up about, wind I didn‘t do because I didn‘t have a good handle on the intermittency issue even though it‘s currently cost competitive). (And let’s not get into a big discussion about the assumptions that went into those estimates, the one thing I can say without any doubt is if we don’t create a non-fossil fuel energy infrastructure our descendents will wind up living in the 18th century again.)
    I’m not sure if the free market, left to itself, will do the right thing. When the flow of wealth out of the trust fund starts to decrease the people will be quite unhappy. They will have essentially two options for solving the problem: decrease their standard of living even further to free up the resources to invest in a non-fossil fuel energy infrastructure or vote enough people off the island (island = the western middle class) to provide the desired lifestyle for those that remain. Given what we’ve just seen I’m not optimistic. The economy expanded beyond the number of e-slaves that were available so the price of e-slaves went up. Everyone started talking about efficiency and investing in alternative energy, then enough people were thrown out of work to get demand below supply and the price of energy fell back to it’s marginal cost of production. Problem solved. Now not only is there no impetus for investing in alternative energy there’s not even an impetus to keep up with new drilling for fossil fuels.
    What I fear is that we’ll see wave after wave of price spike and collapse throwing wave after wave of people out of the middle class and we’ll wait until it’s very late to start the transition to the new energy economy.
    Cheers, diemos.

  67. Posted by anon

    “anonn,” you clearly do not understand the relevant concepts. The adjustable rate component of these toxic mortgages is all but irrelevant. It is the IO and neg-am aspects that is the catastrophe waiting to happen, and already beginning to happen.

  68. Posted by diemos

    “you clearly do not understand the relevant concepts”

    It is difficult to get a man to understand something when his salary depends on his not understanding it.
    Upton Sinclair

  69. Posted by NoeValleyJim

    Yeah, I meant real GDP, I guess I did not make myself clear. We are in agreement then that real incomes cannot drop severely over a period of time without a corresponding real GDP change. The component of GDP that is income has been dropping, but it is still something like 50%.
    GDP is falling right now, but I don’t think it will do so for an extended period of time. We might see slow growth, but I doubt it will be negative much longer than six to twelve more months.
    Wage loses of even 2% a year would be very painful to people and 5% catastrophic. The entire trade deficit is $700B, compared to an overall economy of $10T, so it would only take a couple of years at that rate to wipe out the entire trade deficit and turn us into a creditor nation.
    Why would you expect it to take longer than that?

  70. Posted by tipster

    Dang, Diemos, that was good.

  71. Posted by ex SF-er

    Wage loses of even 2% a year would be very painful to people and 5% catastrophic
    Yes. But it is necessary at some point. (real wage losses). Remember, some of it will be tempered by the fact that there will be real wage losses, but inflation will “hide” that. Inflation is insidious and most people don’t really understand it deep down inside. Most will see their nominal checks rise, but then have a harder and harder time with their bills. they won’t make the link… it is doable, but will be very painful, especially for the poor and working classes.
    GDP is falling right now, but I don’t think it will do so for an extended period of time.
    I agree that nominal GDP won’t fall long. Again, however, it is likely that real GDP may fall. We recently went through a massive worldwide credit bubble. Some (much?) of the recent economic activity only makes sense during bubble times, and it must now go away, unless we can blow another bubble.
    I hate using Mish as an example, but he often uses the point: “How many more Home Depots do we need? How many more Starbucks? How many more Walmarts?” it even goes further “how many more iPhones and Laptops, how many more flat panel TV’s?” in the end, we overbuilt a lot of commercial enterprises using bubble financial analysis and projections… those inputs will not come to pass. thus, we will need to contract.
    but I’ve never really sat down and pondered a duration of needed GDP contraction. I’ll leave that to others. I just know we need some contraction.
    so it would only take a couple of years at that rate to wipe out the entire trade deficit and turn us into a creditor nation. Why would you expect it to take longer than that?
    a few things
    1) it’s not enough to wipe out the trade deficit. We must do that AND we must start paying off our debt (in theory… it is more likely that we will default on our debt at some point)
    2) we also have our federal debt to worry about
    3) the asian tigers peg to our currency. it doesn’t help us to lower our wages if the Chinese/peggers drop along side of us. Thus, at some point (1-100 years from now) the Chinese will need to depeg (or revalue their currency higher), or we will need protectionist measures.
    however, it is not in Chinese interests to depeg, nor current American goals to enact protection. The Chinese at this point “need” the American consumer to help pull their 700 billion impoverished people out of destitute poverty, and the Americans need the Chinese to help fund their Federal deficit and to help keep goods prices down.
    everybody wants to be an exporter. thus everybody will start doing things trying to export. (given recent Japanese exporting numbers, my guess is that you can count the days until we see Yen Intervention to drop its value). averting a trade war will be difficult.
    ===
    I’m actually tired now so will go to bed and stop posting, or I’ll post incomplete/inaccurate ideas.
    but we are in a conundrum, with competing interests. and what “needs” to be done is both politically and practically difficult (not impossible). politically, it looks like we will need more pain before the obvious needs to be done (weak banks dealt with one manner or another).
    and the debt is just too large, world wide, to be dealt with. I see no solution to that except to reduce the debt through inflationary measures over long periods of time. thus, I foresee coordinated currency devaluation (all fiat currencies devalue vs commodities/assets/gold, etc)… it’s already begun. but will accelerate IMO.
    but it’s the only way I can think of to get us out of this, by making the nominal debts we have cheaper in real terms.

  72. Posted by Robert

    Just for some perspective, it’s not uncommon for real incomes to decline. Since 1967, median income has declined 5 times:
    1973-1974, decline of 2.4%
    1979-1982, decline of 2.9%
    1989-1992, decline of 5.3%
    2000-2004, decline of 2.7%
    2006-2007 (latest data), on-going decline of 1.1%
    In all cases, it took 2 years for incomes to recover.
    If we expand our time horizon, we’ll find that earnings throughout most of history were only mildly linear, with substantial oscillations. Only in the mid-19th century did earnings in England begin to take off, and only in the early 20th century did they sustain the growth rates that we take for granted. I.e. the peak real earnings in England in 1495 weren’t surpassed until 1875. Earnings in 1552 were about the same as in 1289.
    The period of time from 1800-2000 was really unique in that industrialization (first of farming, and then manufactures) allowed for exponential population and productivity growth, respectively. At some point, both must stop. Population growth rates have already halved since their 1963 peak, and will level off, or will at least asymptotically slow to zero.
    With manufacturing, the labor pool shrinks in proportion to productivity gains and declining population growth (adjusted for purchasing power). We are already at 70% services, and of course it’s difficult for an accountant or waiter to be exponentially more productive from year to year, which is exactly why more of the labor pool is engaged in the “non-scaling” activities than was the case 30 years ago.
    I believe the next 200 years will not be like the last — we will go back to slowing linear growth, and enter a possible stagnant range of per-capita productivity growth, as the proportion of the population engaged in non-scaling services continues to dominate GDP.
    Technological progress may of course provide an improved “quality” of life, but purchasing power will not be able to continue to grow exponentially.
    I think there is a good chance to see this in our lifetimes — much depends on income distribution, particularly in asia. If they can achieve a healthy middle class, then those activities which can undergo exponential productivity growth will be eclipsed more slowly.
    Regardless, as we approach the “non-scaling” saturation point, the consequences for financial claims that require constant exponential returns will be significant.
    This ties in to the notion of “over-production”. There is no such thing — everyone who bought a flat-screen TV wanted to buy it. Only, they over-estimated their future income streams. In the same way, the sellers of TVs over-estimated the income streams available to buy their products. They didn’t over-estimate the attractiveness of the products. China suffers from “under-consumption” precisely because of a volatile economic history and poor safety net, so that households discount their earning power much more than in the industrialized world.
    When talking about whether we “need” so many TVs, I am more on the side of individual choice and freedom. We need only to have an accurate picture of the future. I.e. purchasers need an accurate value of the financial claims that form their purchasing power, and sellers need an accurate valuation of claims used as payment. Of course, this is impossible, so like “feer and greed” in the stock market, there is under and over-consumption, as households re-assess the value of financial claims, including their claims on their own labor.
    The uncertainty becomes more pronounced as we move away from near-constant exponential returns in the overall economy, and enter a time period in which we oscillate around a growth rate that is declining to zero. Due to the nature of fixed-payment debt service and return on capital requirements, as productivity growth declines, the financial system becomes more unstable and/or must de-lever.
    I think one useful step is to move towards a more flexible debt model, similar to the one used in Islamic banking. I.e. instead of fixed payments, payments will be denominated in terms of fractions of profits. For example, loans in which payments are determined as a percentage of income net some deduction for living expense — Robert Schiller made this point not too long ago.

  73. Posted by diemos

    “I think one useful step is to move towards a more flexible debt model, similar to the one used in Islamic banking. I.e. instead of fixed payments, payments will be denominated in terms of fractions of profits.”
    I’ve always thought that a good idea for student loans would be if the student was required to pay back two dollars for every one borrowed without any compounding interest and payments fixed at 10% of gross income. Make the loan more of an equity investment in the students future career.

  74. Posted by anonn

    anonn,” you clearly do not understand the relevant concepts. The adjustable rate component of these toxic mortgages is all but irrelevant. It is the IO and neg-am aspects that is the catastrophe waiting to happen, and already beginning to happen.
    But I do, tho. Meanwhile you fail to concede that the government has observed same, has made changes to banks, some (many?) of these banks do not exist any more and have been replaced by larger government-funded banks, the toxic assets that were chopped up and passed on are subsidized already, and individual borrowers are able to negotiate in worst case scenarios.
    Also, I’m sorry, that you folks do not want to hear it. But a lot of the properties you would want to live in were purchased with 20% down and more. When the 20% market shift occurs, then these poeple will be underwater.
    Last … buying something and then selling it within two, three, four years without enterprising to make fundamental improvement is really only an investment worth of minute dissection on Scoketsite. In the real world people by and large know they’re likely to take a loss.

  75. Posted by LMRiM

    There are a lot of fun ideas in the posts above, and I don’t have too much to add. The idea that “progress” is not necessary linear (to say nothing of the practically exponential growth we’ve seen since early 19th century) is of course one that I’m very fond of.
    Diemos, I think your positing that fossil fuels is the primary driver (almost sole, from your post) is probably a stretch. We obviously can’t back test history to isolate exogenous factors in growth rates, and there’s no question that extracted fuels have been an enormous part of the growth since the late 1700s. First, coal and steam engines, followed by derived electricity generation, and then the internal combustion engine (and variants) is probably a reasonable broad brush history of some of the progress “tailwinds” that we’ve enjoyed. I’m not sure where we’re going; clearly, you don’t believe the Russian abiogenesis theories of oil 😉 (neither do I really)!
    Robert, about your idea of moving towards a different debt financing model, we have it, and it’s called “equity”! (I know you know that, but I couldn’t resist ;)) Aside from the issue of cost of financing (investors would likely demand a higher prospective return in the absence of fixed payments), which should be no big deal as for much of US corporate history equity financing carried dividend rates higher than interest rates on corporate debt, corporates trying this today face the huge tax distortion: very basically, interest payments on debt are deductible while dividends are not. This distortion has only grown since the mid-80s revisions to the Code. We’d have to start with reforming the tax code if we really wanted to move towards this sort of model. I’d support such a change, and removing corporate taxation would be a good start. (If taxation of income received by individuals from corporates were to be retained, I’d want to see no differential between interest and dividend taxation rates.)

  76. Posted by EBGuy

    I don’t have much more to add to diemos’ post, but will comment that man’s forward progress thus far has been accompanied by our ability to exploit increasingly concentrated energy resources. This is another way of saying that the Energy Returned Over Energy Invested (EROEI) has increased as we moved from wood->coal->oil to meet our energy needs. There is no successor to oil on the horizon, and the EROEI of oil is declining as we move towards areas were oil extraction is more difficult (deep sea platforms, artic regions, etc…) In another words, the free lunch is over. BTW, did anybody see that the oil majors are picking up ethanol plants for 30 cents on the dollar.

  77. Posted by diemos

    “the primary driver”
    That phrase doesn’t quite catch what I was trying to get across, think instead “limiting factor”. It takes a combination of both primary energy and capital equipment to create wealth. One cannot substitute for the other.
    During the first half of the industrial revolution there was as much energy as people cared to dig out of the ground and the limiting factor was capital equipment. This made investments in capital equipment highly profitable.
    The second half of the industrial revolution will begin when energy availability becomes the limiting factor. At that point the profitability of investments in capital equipment will fall to zero as there will be no spare energy to run them. Instead we’ll enter a period where it will require enormous investments in new energy infrastructure just to keep the capital equipment we’ve already got running. “Growth” as we know it will be over until we’ve completed the transition to a new energy infrastructure.
    From what I’ve seen recently I think that transition period begins now, +/- 5 years.

  78. Posted by dub dub

    Wow. Not a single person has mentioned nuclear, which will immediately come (back?) into vogue if any of these apocalyptic scenarios even comes close to happening.

  79. Posted by diemos

    “Wow. Not a single person has mentioned nuclear”
    I did in my original post and said it was a solution but it requires a large investment.

  80. Posted by dub dub

    aaah. “Nukes”, apologies 🙂

  81. Posted by LMRiM

    That’s exactly what I thought, dub dub.
    I’m far from an expert on energy, but a few things seem pretty clear to me.
    1) Energy (in real terms) is probably as cheap as it has ever been in the history of the world (at least on average).
    2) While peak oil is no doubt a likelihood at some point in the future (maybe now?), after which increasing extraction costs will collide with increased demand and cause skyrocketing oil prices, I wouldn’t trust any data coming out of mideast or Russian oil fields to get any handle on when this might be. Whether by design or just incompetence, I doubt there’s any reliability in the data.
    3) If oil were truly limited on anear term basis by cost or by reserves in places like the Continental Shelf (or other offshore locations) there would not be the highly political moves to limit exploration and development. Companies simply would not do it, and there would be no need to expend political capital to prevent it. (I’m assuming that the whole “offshore ban” is not just political theatre for consumption by the sheeple, but I guess it could be.)
    4) Although I’m no expert on nuclear fission, given that uranium is so abundant, I have to believe that the cost-benefit analysis in nuclear power is compelling. Perhaps not for the US, in which because of political concerns/ideology the environmental/liability costs are prohibitive, but I bet there won’t be any issues there in China, India, Middle East, etc. Without pax americana anyway, there would be no way to enforce any sort of global order with regard to these costs, and so there won’t be any global order. I wonder how high the investment is if the liability/environmental issues are ignored by governmental command? (I really don’t know the answer to that, and I’d defer to people on the board who have a better handle on it.)
    So, I hear you diemos, but I’m not so sure how to position for it. As I mentioned in another thread, just in case you’re right on oil and we’re just about at the tipping point (+/- 5 years) I’m going to take some of my ill gotten trading gains made (largely) from betting against the US private credit/equity markets and exchange them for a 450HP+ supercar. There might not be too much time to have fun left, and as diemos is fond of saying, “it’s only fiat” anyway 😉

  82. Posted by diemos

    “There might not be too much time to have fun left,”
    As I always say, “Enjoy the good times while they’re here. The bad times will be here soon enough whether you enjoy the good times or not. Go ahead and burn all the oil you can afford. If you don’t, the market will just lower it’s price until someone else does.”

  83. Posted by Trip

    LMRiM, if Fiat makes a 450 HP supercar, I suggest you pass on it in favor of a Porsche or Ferrari 😉

  84. Posted by dub dub

    All the environmental “concerns” would melt away under any truly stressful energy scenario, as I’m sure you agree. Crickey, look what has happened to contract law over the last 6.5 months 🙂
    Let’s not forget THE FRENCH are net electricity exporters due to their nuclear infrastructure, and (“according to wikipedia”) they have among the lowest electricity costs in Europe, and they do not stigmatize nuclear energy like we do.
    Nobody expects electricity to be “too cheap to meter”, but of all the things I worry about, running out of energy isn’t up there. I’ve been wrong before, but it certainly feels true in my gut 🙂

  85. Posted by LMRiM

    LOL, Trip.
    I was actually talking about fiat currency (I suspect you knew that), but the funny thing is, Fiat owns Ferrari! (It’s actually a shared ownership structure – back in my hedge fund days, the Agnelli family was one of our largest investors, and we even part sponsored a F1 driver for a time.)

  86. Posted by tony

    Nuclear fission may be a necessary stop gap, but only until we get fusion down.
    Once we’re at 100.000001% return from fusion, we’re home free.
    http://en.wikipedia.org/wiki/ITER

  87. Posted by anonn

    For sure Tony. And then after that once we get the even more efficient magnetic propulsion devices down that Gene Rodenberry conjured, we’ll be in even better shape.

  88. Posted by tipster

    If oil production peaks, oil just gets more expensive, but the economy’s growth won’t stop. People will simply value efficiency more.
    For example, UPS trucks no longer make most left turns. They found that routing their trucks in a manner that only required right turns was far more efficient. (That isn’t to say that you should always make 3 right turns – they had packages to deliver along the three right, so it works for them). They just figured that out last year when gas prices went up. Same work – less gas. That left gas for other uses.
    Printers and monitors now shut down between uses. Compact fluorescent lamps look as good as incandescents, which are being phased out. Same work – less electricity.
    More and more people turned their stereos off and listen to ipods. More and more people use laptop computers. Cars and jet engines are lighter, and therefore more fuel efficient.
    And a lot of things really don’t cost much. When is the last time you checked the air in your tires. The average person would get 5% better gas mileage if they checked them regularly. That would be equivalent to getting a huge extra boost in supply. California now requires auto shops to check and fill the air in your tires before they give the car back to you. What does that take: 1 minute for a car someone worked on for 4 hours?
    Energy is being freed up every day. Furthermore, more and more of it is being produced from alternative sources. It’s a tiny fraction now, but as technologies mature, it becomes an added supply.
    The world uses more and more of it as nations modernize, but even if it peaks out, the economy won’t stall. I agree with everything else, but not that. Maybe after all the easy projects are finished, that will occur, but just replacing light bulbs is still huge.

  89. Posted by Robert

    Since we are ruminating:
    Last … buying something and then selling it within two, three, four years without enterprising to make fundamental improvement is really only an investment worth of minute dissection on Scoketsite. In the real world people by and large know they’re likely to take a loss.
    Wise words, but then again
    Robert, about your idea of moving towards a different debt financing model, we have it, and it’s called “equity”!
    Yes, and I rent! But, to make the flexible lease-to-own model work, I would be happy for tax reform: the tax code should be agnostic as to sources of income and independent of uses of income. I’ve never understood why money received from a dead uncle, from a capital gain, or from payroll should be taxed at different rates. For households, add it all up into a big pile, called “money received” and tax it at a (mildly) progressive rate (say with the highest federal rate = 1/3 or so) with a cutoff for low income households.
    No deductions of any sort — nothing is exempt, including muni debt, “savings” accounts, charities, medical expenses, etc. The only subtraction from the “money received” pool that would be the cost basis for asset sales.
    The “money received” tax would be the only tax — no property, sales, payroll, Pigou, excise taxes, or anything else. No special “assessments”.
    As different cities/states have different tax/service preferences, people could vote to add local rates to the federal rate, and the income would be diverted to them by the treasury.
    I would also favor abolishing any taxes on business or corporations with two caveats.
    For certain structures such as sole proprietorships or captives, You can deal with the tax haven issues by imputing unappropriated profits as revenue/income to the equity holders.
    For cross-border money flows/repatriation, I would tax any net outflows at the “money received” rate for individuals, and would not tax any inflows. The principle is to leave money untaxed until it is paid to households or leaves the country, at which point it is all taxed at the same rate.
    The second half of the industrial revolution will begin when energy availability becomes the limiting factor. At that point the profitability of investments in capital equipment will fall to zero as there will be no spare energy to run them.
    I agree that clean energy and medicine may play a role similar to highway construction and aerospace in the 50s, but I don’t see them as “game changers”. Then again, I’m a global warming skeptic, and think household recycling is, for the most part, an expensive form of self-righteousness (I would instead recommend purchase of indulgences, as printing the certificates consumes fewer resources :). There is plenty of energy out there, the main risk is not running out of energy, but price-shocks and discoordination, which tend to be temporary.

  90. Posted by Robert

    I should have said “The only subtraction from the ‘money received’ pool would be the cost basis for asset sales.”
    Btw, I would prefer a classic fiat 500 or Autobianchi Bianchina over anything coming out of Ferrari nowadays. Classic example of decreasing productivity, or at least decreasing fun/$.

  91. Posted by tony

    Mostly for Diemos, and perhaps Fluj, JIC you didn’t see the US’ latest solo thinking on fusion, here’s what’s new at LLL:
    http://news.yahoo.com/s/space/20090408/sc_space/friendlydeathstarlasertorecreatesunspower
    Basically (in case this link rots), LLL will be testing a fusion reaction initiated by lasers, using a containment model based on the reaction produced vs magnetic containment.

  92. Posted by anonn

    That was an interesting article. I knew they were working on fusion out there. Seems like we’re still a long way away from home free tho! But to go back to my Star Trek thing — and if anybody has seen the previews for the new one it looks awesome — unlimited energy is what unites the world in that whole fictional future.

  93. Posted by diemos

    Thanks, but I was aware of the US fusion program. They’re still trying to create a gizmo that will produce as much fusion energy as it takes to run the gizmo, “breakeven”, as they say. Even if they get that they still have to convert it to electricity with some efficiency, scale it up to power plant scale, etc. I picked solar, wind and nuclear because they exist and are known to work here and now.

  94. Posted by Gman

    NEW STUDY SHOWS MORE THAN 2.1 MILLION CALIFORNIA SMALL BUSINESS JOBS WILL BE LOST OVER THE NEXT 3 TO 4 YEARS
    1.5 Million Face Immediate Risk of Job Loss as a Result of Small Business Owners Who Took out
    Toxic Home Mortgages according to Bornstein & Song, CPAs & Consultants Study with MerchantCircle
    Toxic Mortgage Study will Continue Nationally, Including Florida, Arizona, Michigan, and Nevada
    Los Altos, CA April 23, 2009— New study results show more than one-third of all California small business owners took out risky or toxic mortgages such as Alt-A, Alt-A ARMs, Option ARMs, Interest-Only, and Subprime, etc. to get cash for business expenses during the peak of their home values from 2004 to 2007. As the first wave of mortgage resets hit, small business owners will be at-risk of “payment shock” and default as their monthly mortgage payments skyrocket. The toxic mortgage resets began in the 4th Quarter 2008 and will continue through 2012. “The resulting defaults will be the cause of the 2nd “Tsunami” Wave of Foreclosures that will dwarf the subprime crisis and will take many homeowners and small business owners by surprise. In California, these inflated mortgage payments will threaten more than 2.1 million small business jobs,” said Prof. Samuel D. Bornstein.
    The California Small Business Toxic Mortgage Survey is the first to provide compelling evidence of California’s small business involvement in the toxic mortgage crisis, foreclosures, and job loss. The survey was created and analyzed by Prof. Samuel D. Bornstein and Jung I. Song of Bornstein & Song, CPAs & Consultants, as part of their small business research which they have been conducting since 2000.
    “I purchased my home in 1999 for 235K,” says Keith Capsuto, owner KC Photography & Music in Oxnard, CA. “Within the first 3 yrs. it had a value of $650K. I did the foolish thing of buying the home with an ARM loan to save money for business expenses. Up to the turnaround in the real estate market, I had been doing a fair amount of business, but it dwindled off sharply and by 2008, I was almost bankrupt. Now in 2009, business is about gone! I am 8 months behind on my mortgage with credit cards up to the hilt from business expenses. I am attempting to work with my mortgage company and on the brink of filing for bankruptcy.

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