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Saturday, February 13, 1982

02.13.2007 - Tuesday Open Thread

This is your open thread for Tuesday, February 13, 2007. Please post random links and off-topic discussions here.

30 comments:

Greg said...

I'm a King-county renter waiting for a short-term housing market correction, but here's my long-term concern...

A housing market collapse would easily push us into a depression because so many people's lives and jobs are riding on the housing market, and also because it could bring down the banking industry. If a Seattle home falls to $180,000 I won't be able to buy one when I lose my job.

BUT the Fed would do ANYTHING to stop a depression this time around, including massive monetary inflation even more than now.

When the housing market starts to collapse later this year, their 2 choices will be:

1. let it happen, we go into deflation. Once deflation gets hold, there is no fix, you have to wait for the market to bring us out. Banks could collapse, jobs would be lost, people would be on the street. You know our elected leaders would NEVER accept that, and would make sure the Fed took desperate measures to prevent it, which leads to -

2. prevent a depression with massive inflation - trillions of $$$s injected into the economy through war spending, monetizing treasury bonds, lending, etc. But unlike the 70's, the dollar will not crash because other nations are devaluing their currency at the same time. Listen to Bernake, he is a depression expert, and knows that you can always print $$$ to prevent deflation.

There is also still room for many tricks up the mortgage lender's sleeves to keep the housing market afloat. 50 year mortgages, 0% fixed for 8 years, no payment for the first 2 years?? Who knows! When the housing market starts falling and the Fed panics and starts lowering interest rates again, the lenders will have plenty of ways to let us make that mortgage payment.

So unfortanately, this inflation will eventually get out of control, and I assume Seattle homes will be going for $1,000,000 in 5 years as our average take-home salary is $250,000, gas is $8 a gallon, and it costs $1 to mail a letter. Hyper-inflation is our future. My plan, use this short-term correction to get a 10% savings on current prices, get a fixed rate loan, and ride it out.

Brian said...

Not to steal Greg's thunder, but now we get two mammoth posts this morning!

I wanted to kick off today's gig by mentioning that our condo market in downtown Seattle has several nuances (or intangibles) that can't necessarily be quantified just yet. Recently I kicked the tires on a few houses around the $300k line and have ended up settling for one of the very few 1br/1ba condos downtown for under $250k. I have a number of reasons for making this decision which I want to share.

Public Transit -
One thing that is striking to me when comparing Seattle to a city like Boston, where I lived for a long time, is the terrible transit. People do not like taking the bus very much. Traffic is unbearable. Tolls are coming to the bridges. Regardless of real estate market conditions I felt like relying on a commute 30 minutes or more would be too much. With all the new development parking is going to be at a premium, plus gas costs. Now I will be walking to work every day. This seems invaluable to me (maybe not to others) as a quality of life issue. Yes, the light rail may have a huge impact on this, but I really look at that project as too little too late (sorry).

Evolving Neighborhoods -
I believe the downtown area is anchored on both ends by Pioneer Sq and Pike Place Market. These are the cultural and historic jumping off points for the city. One of those two has long been neglected as a less desirable neighborhood. In most major American cities the historic neighborhoods are the true heart of urban life. The large project for the north lot of Qwest Field will really begin to energize Pioneer Sq and I believe lead to major development in SODO. It seems like a natural progression to me, and reminds me of SOMA or the "Dogpatch" in San Francisco on 3rd Street.

The Viaduct -
The most important decision this region will make is on the horizon. I am personally very heavily involved in architecture and urban design. I am from Boston, lived in SF, spent time in London, NYC and Chicago. I can tell you all unequivocally that if they do not tear the viaduct down, it will be the greatest urban planning MISS of the 21st century. Imagine being able to take those two nodes - Pike Place Market and Pioneer Sq - and triangulating them with the waterfront. Seattle needs to open itself up to this at any cost. Anyone who lived in SF knows how beneficial the Embarcadero collapse was to the city (and tragic to many during the earthquake, of course). You can't put a price on what it would mean to Seattle and to downtown living.

Do any of these notions or ideas point towards or away from the Bubble regionally or in the city? I don't know, but I feel lucky to have an opportunity to watch Seattle truly become an international city.

EconE said...

Tricks up mortgage lenders sleeves? Not ones that are any more financially prudent for either the lender or the borrower.

I feel that the government will let people hang out to dry...it won't be easy but we now have good practice with such measures after what we have seen in New Orleans. Not to mention...each persons situation would be different...and it would be inefficient to help out individuals on a case by case basis not knowing when the end is in sight.

So...my guess...call...whatever...is that the Gov. will bail out the banks/financial institutions etc...not so that they can make even more stupid loans to stupid consumers...but rather so that they can pump money into the economy in the business sector...in a proper manner...in order to keep people at work. I also see large government work projects.

Housing will end up being very inexpensive...however...the taxes for owning those homes could potentially very high in order to help fund the bail out...after all...the people left standing (able to afford/keep their homes) will be the only ones with the money left and will shoulder a larger burden.

There will be lots and lots of regulation...things will also happen that will be things that are not only more serious than we thought...but repercussions that come about completely unexpectedly.

that's just my guess...but in reality...I think that it is being overly optimistic.

plymster said...

...the dollar will not crash because other nations are devaluing their currency at the same time.

What other nations are devaluing their currency? The European Central Bank has been raising interest rates lately. The Bank of England has been raising interest rates. The Bank of Japan had a 6-3 vote to keep interest rates level. The global industrial community is raising interest rates. This is the most pivotal point in the deflation/inflation argument.

If the Fed lowers interest rates in these international conditions, the dollar will freefall. It won't help foreclosure rates or bank failures because it will be too little, too late. It will also cause a mass exodus of foreign investment in US funds. Gas prices will soar in the US, and voters who guage inflation based on gas prices, will revolt. Treasury interest rates (rates on the national debt) will advance, since Asia and other nations will be moving towards a more stable currency for reserve purposes. Congress will be forced to pressure the Fed to do raise rates.

I expect a slight lowering of interest rates, a big scare, and then a quick rise in rates to try to stay internationally competitive. I think this is the more likely scenario, given the history of those in charge.

Eleua said...

I think econe is onto something.

When the wipeout comes, government will do what government does, which is to bail out all the morons at the expense of those that can still pay.

If your assets are in dollars, you can put green slips of paper in your mattress. If your wealth is in property, you can't hide it, and the government is in on the transaction.

It's not like you can just put your house on your sailboat and sail off to some tax haven like the Caymans, Nevis, or Vanuatu.

Just another reason to be a renter - portability and asset protection. Whodda thunk?

Brian said...

Wouldn't rents then spike because of the tax burden placed on property owners? It's not like you can stop the dominoes from falling all the way down the line in these scenarios.

matthew said...

Greg -

The problem with #2 is that currently we are financing our "Team America" actions with debt purchased by our friends in China. Should the Chinese realize that we are going to start cutting rates again and that massive inflation is imminent, they would sell dollars and buy EUROs.

Its a double edged sword, the FED is damned either way. My guess is that Bernake will continue the tough talk, but in reality the only solution is to keep rates where they are, watch the fallout, and pray for the best.

WTF said...

How does one go about "buying EUROS" as an individual? It seems like it would be a "safer investment" especially if the dollar is poised to fall so precipitously.

That nest egg I've been saving for a sane down payment on a house (assuming pricing gets in line) could get devalued rather quickly even at the 5% interest I'm getting on it.

matthew said...

WTF,

You can trade currency by going through most commercial banks. If you are a licensed ForEX trader, than you can obtain currency at the market rate. If not, you can obtain currency at your bank rate.

EconE said...

yes...Eleua...the burden will fall on tax payers I feel.

The morons that get bailed out...hmmm.

Just speaking in easy numbers.

If the Gov is gonna spend $100 on the "bailout"...$90 (my conservative estimate) will go to the Banks...

and the other $10...will be for the "morons".

What could these "morons" expect to get with their $10 bail out?

A Fema trailer. If they are good enough for the citizens of Florida and Louisiana...then they are good enough for everybody.

In fact...I think that former Seattle condo dwellers might actually prefer the spaciousness of the fema trailer their "former" 400sf condos.

There may also be some intangible benefits such as...

No longer will said former condo owner have to complain about the pretentious arrogant whoever that lives next door as I feel that there will be much more humility in society after the ego party is over...well...at least until the first guy gets granite, stainless, and hardwood floors installed in their trailer.


There may also be lucrative television deals to be made within future Fema Cities.

'Cops...Fema City'

...everybody likes those Cop shows don't they?

'Hobo Joe's Trailer Makeover Show'

...decorating tips for the newly common man.

and my personal favorite...

'Pimp My Trailer'

...you just *know there has to be a market for that.

Just out of curiosity...does anybody how long has Fema City been in Florida now...are they still there? Hasn't it been somewhere in the vicinity of four years now?

plymster said...

You can buy Euros by investing in Exchange Traded Funds (like FXE), or buy investing in European investment funds (like Vanguard's European Stock Index, VEURX). I think this is a good short-term (maybe 2-4 year) strategy if you believe that the housing bubble will take down the US economy.

What's more distressing, though is that if the US economy (25% of global demand) takes a dive, the global economy is in trouble, and then even European investments will be in trouble once the US consumer collapse trickles down.

matthew said...

And yet another great reason to be working for big brother.... They are going to need someone standing in front of the banks with machine guns...

Terry said...

greg mentioned something in his post I have yet to see anyone else mention - ..."trillions of $$$s injected into the economy through war spending...."

I'm old enough to remember the Vietnam War. Does anyone else remember the big inflationary spike the U.S. experienced right after the end of the war? I remember reading that the inflation we experienced at that time was due to the billions spent on the war, that it all came home after marauding around the world for awhile. Maybe significant inflation in the near future is inevitable, given the similar circumtances with our current fun activities in the Middle East.

matthew said...

Terry,

Good point. There is almost always a direct correlation to the end of a war and the increase of inflation. An increase in inflation happened after every war in the 20th century.

Anytime you increase spending without an increase in taxes, inflation is inevitable. We all know that G.W. is a big spender and has been cutting taxes, we'll see how this plays out.

I believe the FED realizes this and why the tough talk on inflation, but yet these realize the economy is slowing so therefore aren't raising rates. Therein lies the dilemma.

EconE said...

Terry...Matt...I remember the early 70's also...not well enough though...although I was very young. I asked my Father about the inflation and he mentioned to me that the Government used was capping prices of many goods...not to mention that government approval was needed in order to raise prices...much as the Insurance Industry today has to work with the Insurance Commissioner for rate increases.

dan said...

A very easy way to buy lots of other currencies is to open an account here:

http://www.everbank.com/main.asp?affid=eb

I haven't done this, but I've seen it recommended elsewhere

Ben said...
This comment has been removed by the author.
Ben said...

As a massive debtor nation, one would think the U.S. (and hence the Fed) would be more scared of a deflationary spiral (perhaps caused by a massive correction in housing prices, or contraction in credit) and would actually prefer inflation/hyper-inflation. I tend to agree with several of the points made by Greg and Brian.

WTF said...

Looks like precious metals have seen quite an uptick recently, though gold has dipped in the last few months Gold and Silver 5-Year Performance.

Are investors pulling away from real estate and getting into metals?

Greg said...

ver

Greg said...

The Euro, the Yen, the Pound, they ARE all devaluing along with the dollar.

Like America in these last few years, you can raise interest rates to "show" you are against inflation, yet you open the money printing even more.

The Euro is just becoming the "trash of the month". You may preserve some capital, but it's only temporary. The only currency that cannot be devalued is gold...check out GLD. It's a fund that buys actual gold bars for every share you purchase. Gold mutual funds are also a good idea.

China can keep the game going on for a long time...they won't dare pull the plug (sell their dollars) unless they think their economy can get by without America, otherwise they fall with us. That could be 10 years away. The other central banks of the world will play along and print money, because they too can't let America fall down.

Thanks to a global economy, we can all inflate together.

B said...

Back to real estate, rather than speculative doomsday economics.

Has anyone been looking at the new construction townhouse market within Seattle proper? It seems to me that builders are budging a little bit on pricing now - what I'd like to know is how many of these transactions go for less than "MSRP", in recent years vs now, and what sort of kickbacks and incentives the builders are offering right now?

I'm not shopping, the construction quality on most of these shoeboxes that I've walked through is appalling. But I think as a signal of builder desperation, incentives have been pretty reliable indicator in other markets.

I don't think we're quite at "free car!" yet, but I'm seeing a lot of rolling appliances and large televisions into the sales price to move the house (does this really work?)

Any personal anecdotes?

synthetik said...

I was looking up ratings about my new apartment over on apartmentratings.com and noticed an interesting graph.

Shows that with 277 responses for a 1bd/1bth unit, prices only rose by 2.94% in 2006 and actually dropped 9.25% for 2bd/2bth.

Where'd they get the data?

Data used to calculate average prices by floorplan are gathered from renters' disclosure of monthly rental rates on ApartmentRatings.com, the Internet's most popular website where renters can exchange information about apartments.

But you better buy now because it's obvious we're about to become another NYC or London.

robert said...

Anyone see this over at Rain City Guide? Ardell takes on Freakonomics!

When does this woman have time to sell Real Estate?

My favorite comment is #8

EconE said...

Speak little of gold...for now.

Buy Gold...physical...not stock.

Research China and their history with gold for the last 3 years.

People used to think that gold investors were crazy...just a bunch of cooks...Everybody would tell their goldbug friends that Real Estate or the Stock Market were the places to make the real money.

My prediction for 2-3 years from now...these 2 statements will be normal.

"do you remember when people *actually thought a mil for a 2 br condo was a good investment."

"do you remember when gold was *only $1000/oz"

Lake Hills Renter said...

You guys know I'm a bear, but I'm getting a sneaking feeling that 2007 won't be the year we start seeing a decline in local prices. I hear too many people talking about RE as a good investment and hear too little about tightening lending standards. Psychology alone may keep this going a while longer. I fear we may be in for another year of continued insanity.

rubyfan said...

Lake Hills Renter: The psychology is beginning to change. It's hard to say which comes first: psychology or market forces. Remember back to about March/April of 2000, a mere 7 years ago: plenty of people still thougt tech stocks were a good investment and as the NASDAQ fell they continued to "buy on the dips", but after a few months they were just overwhelmed. It only took about six months for the NASDAQ to lose 1/2 it's value and it's still about 1/2 of what it was at the 2000 peak (it's even worse when you adjust for inflation).

People don't have to be talking about tightening lending standards: they'll find out when they go to get an 80/20 mortgage that they need to come up with that 20% in cash now, not by some shady 2nd mortgage on the house they're buying. Then when the deal falls through because it was predicated on 80/20, that's when they'll be talking about it. In other words, most people will be finding out when their mortgage application falls through and yet they thought they had such good credit...

EconE said...

Brian Stated...

"Wouldn't rents then spike because of the tax burden placed on property owners? It's not like you can stop the dominoes from falling all the way down the line in these scenarios."

If housing prices fall the way I think they will...they will be so inexpensive that rents will decrease even with the tax burden...I don't have any mathematical equation to back that up (I didn't care much for econometrics anyways)...but I guess I just have a hunch.

macaca said...

Econe -

"Research China and their history with gold for the last 3 years."

how do you go about researching this topic?

EconE said...

Macaca...

I could write quite an economic dissertation here with regards to gold.

I must correct my post...I meant to say 5 years.

I'd rather not take too much away from the focus of the blog here as it is not my blog.

My sources...Chinese Newspaper articles both new and old and all sorts of random stuff...Even a Chinese Blog that was written in English.

China has money...We have debt.

Follow the money.