Inflection Point

Nothing like disaster staring you personally in the face to sharpen the mind and narrow focus to the important facts. These things are “brainers.” The problem is so many people sleepwalking or in denial.

It is important to remember that housing is priced at the margins. That’s also why the bubble won’t be as injurious to the general economy as some here believe. Imagine getting a letter in the mail saying you won a million dollars. Next day you get another letter saying a mistake was made, you only won $400,000. Did you just lose $600,000? Only if you went out the night before spent it all (MEW). [Calculations below.]

I’m not too worried about the coming and needed recession even if it is late and thereby harder than necessary. The jobs that will be lost are largely parasitical and not ultimately productive nor are they the jobs we wish to have created in a modern economy. Obsolete jobs are best cleared out. A recession will ease our crushing immigration pressures here in California as well. Schools are already talking about closing buildinngs, saving billions. Lower taxes, less crowded schools; what’s not to like? Maybe the national psyche can find enough breathing space to heal as well.

How deep will be the declines? Anyone will be able to justify anything from 0% to 80% with careful work. Small Midwestern stable communities that missed the bubble will drop in real terms with inflation but prices will stay flat. Certain problem properties in wildly speculative areas, a mudslide in Califorina for instance will see 80% declines. A brutal winter or two in New England with home heating oil prices or a brutal summer or two in Phoenix with home cooling prices could literally leave empty unsaleable houses. That’s 100%+ declines where governments may be forced to pay for dispensation. But all these are extremes. I’m guessing 25% on the national median which is actually about 35% on any one house same sale and 40% in the bubble zones with some truly spectacular outliers. Why the small difference twixt BZ and normal America? The problem is/was a nationawide credit/lending issue not local real estate issues.

Just like any herd behavior at infection points and changes in direction individual chaos overwhelms underlying trends. There are still large numbers of sheeple in the Euphoria category. Witness the continuing negative savings rate and massive MEW amongst some while at the same time people like me have recently sold off every non personal piece of real estate.

At the top of a cyclical process this noise in wave terms is called froth. Hmmm, who in the highest levels of economics do we remember using that term? "Although a 'bubble' in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels." - Alan Greenspan 06/08/05.

Likewise at the trough the disorderly behavior of individuals will in wave terms be likened to churn. This is indeed the point of maximum oportunity. Those of us with forward thinking perspectives will be able to take advantage of those still panicing.

I commented back in April on the closer resemblance to physical waves ratrher than mathematical waves: http://exurbannation.blogspot.com/2006/04/why-are-home-prices-still-going-higher.html

By my estimate $2.5T in MEW is unsupported by reasonable asset valuation. In total somewhere between $7T and $9T in phantom equity is exposed in any retracement to the mean. An orderly retreat will allow inflation to eat away much of this. A decline in the dollar may result in a disproportionate amount of pain to be taken by foreign investors. No matter how the pain is spread, there will be consumer pain. Likewise because of govt spending policies that resemble the proverbial cricket in summer we can expect massive deficits and even larger tax inceases. I hope everyone likes their neighbors because nobody is moving for a very long time. The new immobility class has moved in to stay.