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Tuesday, July 29, 2014

Why home buyers aren't buying

Back in June 2009, I introduced a concept I called the Limits of Demand, which pointed out that the Austrian Business Cycle did not revolve around a shift in capital vs consumer goods, but rather the "finite limit to the maximum consumable quantity of every consumer good available". I stated: "Once the artificially enhanced demand limits are reached, or even worse, consumers cannot afford to service their debt on the goods they previously purchased, the boom will come to a hard and fast end." As Neil Cavuto's lamentation for the housing market suggests, we appear to have finally reached those demand limits, as the six-year stagnation in L1 also indicates:
You can now nab a 30-year fixed mortgage for under 4%. That’s the second week in a row, by the way, that rates have been so low. As of this writing, the numbers tick slightly, but the range remains remarkably low – 3.96% to 4.08%. In either extreme, extremely weird, and stunning when you consider we are supposedly in the latter stage of a recovery.

Usually at this point in an economic turnaround, things are rocking, and interest rates are jumping. But we all know the economy isn’t rocking. And as a result, interest rates are not jumping. What’s weird is those rates are dropping, which usually presages something bad happening.

Then again, this hasn’t been your father’s recovery, has it? Even with absurdly-low interest rates for what’s been years now, it’s hard to make the case they’ve triggered any kind of housing boom. Sales of new single-family homes fell 4.9% through the first six months of the year. They were down 8.1% in June. So let’s just say the trend is not the housing industry’s friend.

Economists and real estate experts offer a variety of reasons for this mortgage malaise. Some argue it’s still pretty tough to qualify for a loan, and bankers aren’t making it any easier, demanding more upfront money from borrowers to avoid any of the problems they encountered post-meltdown.

But it’s been more than six years now, and some very sharp numbers crunchers are getting worried. Even bankers who are lending tell me they aren’t seeing a lot of customers lining up. “Caution is the word,” said one. “They just seem very tentative, even skeptical.”
Cavuto says that history "suggests one of two things eventually happens during such periods: either the prices come down or the demand picks up." This chart I made to explain the Limits of Demand shows that prices will not only come down, but come down further than the experts are presently anticipating.

The credit-driven demand for housing has pushed up prices along the S curve, far beyond where the homebuyers' natural demand (based upon what they could afford without the credit expansion) intersected it. When the credit contraction begins, unless the supply somehow contracts, the demand for housing can be expected to fall from the point where the Dcredit curve intersects the S curve to the point on the original D curve. Where that is in practical terms, I do not know, but a rough guess would be a two-thirds collapse in home prices. And it is this collapse that will spur the economy-wide deflation that I have been predicting for the last six years.

Remember, while we haven't seen deflation, we also haven't seen the predicted inflation, let alone hyperinflation, either. That is because the Fed's desperate attempts to hold up the housing market to protect the banks has led to a six-year period of credit disinflation and the subsequent six-year "mortgage malaise".

That is the core problem with credit money. Central banks can print more paper, but they cannot print more credit-worthy borrowers. And with the median net wealth of Americans down by one-third in the last decade, few Americans can afford to borrow the money required to pay the credit-inflated housing prices even at these historically low interest rates. This should be patently obvious, especially in light of how "35.1 percent of people with credit records had been reported to collections for debt that averaged $5,178."

When even cheery, optimistic cheerleaders such as Cavuto start using phrases like "we are supposedly in the latter stage of a recovery", it should be readily apparent that there has been no recovery at all. As I have been pointing out for more than five years now, this is an economic contraction at least one order of magnitude bigger than the Great Depression. Focusing on GDP and CPI and U3 statistics is rather like trying to measure the precise size of the waves on the beach as a tsunami looms offshore.

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102 Comments:

Blogger Shimshon July 29, 2014 9:22 AM  

Vox, what does one order of magnitude greater refer to? Credit contraction?

Anonymous Stilicho July 29, 2014 9:26 AM  

The credit-driven demand for housing has pushed up prices along the S curve, far beyond where the homebuyers' natural demand (based upon what they could afford without the credit expansion) intersected it. When the credit contraction begins, unless the supply somehow contracts, the demand for housing can be expected to fall from the point where the Dcredit curve intersects the S curve to the point on the original D curve. Where that is in practical terms, I do not know, but a rough guess would be a two-thirds collapse in home prices. And it is this collapse that will spur the economy-wide deflation that I have been predicting for the last six years.

Any thoughts as to what the inflection point will be where credit actually starts contracting? Or what the trigger will be? Alternatively, what warning signs do you expect to see in the Z1 (or elsewhere) that the collapse is fairly imminent? The more I look at what the Fed has done since 2008, the more I view it less as a matter of "pumping" credit into the system and more as a matter of "sucking" the last few trillion of potential credit onto its balance sheet. Sure, there's some velocity associated with this monetary "Hoovering" but sucking on a drying tank only results in diminishing returns, no matter how hard they suck.

Blogger David July 29, 2014 9:34 AM  

Astonishing, is it not, to see people clamor for tulip bulbs again?

Charles Mackay, where are you? Your book needs a new chapter.

Blogger rondolf July 29, 2014 9:37 AM  

If we had a total federal and state governmental policy change to free market(not crony capitalist) monetary, and nationalistic economic sanity, how long do you think it would take to recover, and how long and painful would the correction be.

Not asking if possible because we both know the answer to that.

Anonymous Will Best July 29, 2014 9:41 AM  

There won't be a 2/3rds drop in home prices. You are forgetting the other buyers. Landlords. If I am generating 10% ROI on the income stream, I could give a rats fart what the value of the house. I am depreciating it to zero anyway.

In order to get prices to fall that much you would need to reduce the number of bodies that need shelter.

Anonymous the agnostic lurker July 29, 2014 9:43 AM  

" this is an economic contraction at least one order of magnitude bigger than the Great Depression."

This seems contradictory to the evidence one can gather using eyesight... For example, where are the bread lines? Where is the Dust Bowl and okies? where is Hooverville? Why do you still see lower middle class people with iPhones and buying large screen TVs? Why is obesity and fatsos our main health problem?

1. It's possible that technological advancement and increased government social welfare programs are masking these analogs in 2014?
2. Am I just blinded by the media-created imagery of "the Great Depression" of the 1930s vs. reality?

Anonymous Brother Thomas July 29, 2014 9:44 AM  

I guess it may be a little hard to buy a house when you're unemployed and living in your parent's basement. I know, let's open the borders and implement a national minimum wage of $15 per hour, that ought to help.

Anonymous Mob-Rules July 29, 2014 9:45 AM  

Last year I tried to buy a home. Everything sounded awesome and amazing, but then reality struck. I was being sold snake oil. Supposedly I would be paying less than my rent a month. Somehow, for a home with the equivalent size of what I'm renting, I had to pay about 30% more a month in mortgage. Thankfully I didn't let the emotion of being a "homeowner" get the best of me. Not saying it's bad to be a homeowner, just that in South Florida, things are way too high for what you get. And first time buyers are getting creamed by the rigged system and, if they do find a good deal, all cash buyers knock them out of the running.

Anonymous Roundtine July 29, 2014 9:48 AM  

what does one order of magnitude greater refer to

The Great Depression saw bank failures. This one will see central bank failures.

Blogger Miguel D'Anconia July 29, 2014 9:49 AM  

The big looming problem is and will be retiring boomers trying to downsize and the introduction of family sized houses in the supply side of the equation. With the younger generation saddled with college debt and poor job prospects this is a recipe for a major price correction.

Anonymous fred July 29, 2014 9:49 AM  

"For example, where are the bread lines?"

A part of the record number of people getting food stamps. Some are citing that at 20% of the population now.

Pacifying people with cheap Chinese junk is no surprise - particularly when assistance helps them get it. When the state pays for your needs whatever else you manage to get can go to goodies.

Are you really unable to figure this out?

Anonymous John Regan July 29, 2014 9:51 AM  

VD, I'd be so interested to know what you think about the jubilee + return to gold redeemability idea:

Debt jubilee + gold standard

My more recent thoughts are that it is politically impossible, however necessary it might be. A jubilee is possible via a constitutional amendment in theory, but there are too many conflicting interests for it to actually happen that way.

I believe that historically the only way jubilees have happened is through a monarch. Or maybe a dictator.

So perhaps we're screwed. That may be understating things a bit.

Blogger Miguel D'Anconia July 29, 2014 9:52 AM  

@agnostic lurker wrote This seems contradictory to the evidence one can gather using eyesight... For example, where are the bread lines? Where is the Dust Bowl and okies? where is Hooverville? Why do you still see lower middle class people with iPhones and buying large screen TVs? Why is obesity and fatsos our main health problem?

EBT & welfare/social security benefits has eliminated breadlines. Check the numbers on participants in those programs.

As far as purchasing iPhones, big screen TVs, etc., look at household credit.

With respect to fatsos, go to Wal-Mart and check out the sh*t that the average EBTer puts in their cart and their pie hole. They aren't buying fruits and vegetables.

Anonymous Salt July 29, 2014 9:56 AM  

In order to get prices to fall that much you would need to reduce the number of bodies that need shelter.

Immigrants v Ebola

Anonymous the agnostic lurker July 29, 2014 9:58 AM  

The same fatsos getting EBT are the ones buying big screen TVs and iPhones. They have air conditioning, Fios cable, and WiFi. Most have autos. They are living high on the hog - and paying cash (not credit) for these things (HINT: most poor blacks have TERRIBLE credit Are you really unable to figure this out?).

Meanwhile you look at the photographs and you see the poor homeless fucks in the 1930s were standing in line to get their daily bowl of soup.

You fanbois can shit on me hoping for Vox to give you a handjob. You can try to handwave away these contradictions away, but you are just being "Tads" and disqualifying what appears to be a major contradiction.

Blogger Viktor Elefant July 29, 2014 9:58 AM  

I concur on the landlords + depreciation comment, if for no other reason than it's one of the ways I plan on profiting from the decline.

Anonymous Porky July 29, 2014 9:59 AM  

Landlords. If I am generating 10% ROI on the income stream, I could give a rats fart what the value of the house. I am depreciating it to zero anyway.

Bingo. And guess who wants to be the Lords....

In order to get prices to fall that much you would need to reduce the number of bodies that need shelter.

I imagine we'll see more and more instances of 18 people crammed into a 2 bedroom house. The Lords of the Manor don't care. As long as the serfs don't trash the place it's a good guarantee that rent will be made every month.

Anonymous Porky July 29, 2014 10:06 AM  

Also, Cavuto focuses only on new home sales. Existing home sales are up 2.6% for June.

Anonymous DrTorch July 29, 2014 10:09 AM  

Immigration will keep up the demand...and yes investors are keep prices high in some markets.

I've been priced out of the NoVA market due to my hesitation to by at the overpriced values of two years ago, and not appreciating some existing traffic patterns.

Oh, technically I can still get in, but I'm not keen to get a 30 year mortgage at my age, and frankly, wouldn't mind moving from this area.

Anonymous Roundtine July 29, 2014 10:10 AM  

Meanwhile you look at the photographs and you see the poor homeless fucks in the 1930s were standing in line to get their daily bowl of soup.

There was no welfare state in the 1930s to speak of. There is a massive welfare state today. People are buying iPhones and big screen TVs with welfare money. They don't pay rent, they don't pay for food. Any cash that comes their way is disposable. Ultimately, that cash is coming from Wall Street. The financial economy is pumping out a lot of tax dollars and it is all backed by the Federal Reserve pumping debt into the banking system. The whole world printed money too; China printed 40% of GDP and pumped it straight into roads, bridges and buildings among other things, which caused big demand for raw materials and boosted economies as diverse as Brazil's and Australia's. Chinese money is even propping up the U.S., Canadian and Australian housing markets.

Anonymous Leonidas July 29, 2014 10:17 AM  

And this hits today:

1 in 3 American Adults have debt in collections

Anonymous Roundtine July 29, 2014 10:17 AM  

You can try to handwave away these contradictions away, but you are just being "Tads" and disqualifying what appears to be a major contradiction.

Are you familiar with the business cycle and bull and bear markets in the stock market? A boom can last for several years, as can a bull market in stocks. A bust usually takes far less time, maybe only a few months. The 2003-2007 stock market rally was completely erased in 1 year. The economic contraction in 2008 was aborted by central banks actions, but all they did was repeat U.S. policy from 2003-2007 on a grander, global scale.

Blogger JDC July 29, 2014 10:20 AM  

This seems contradictory to the evidence one can gather using eyesight

Then perhaps you need to change your vista. You may be seeing impoverished people enjoying certain luxuries (cell phone, flat screen), but one must ask where is this coming from? They aren't working and many have no desire to do so. In cities near my panaroma - Detroit, Flint and Saginaw - you see the tax base fleeing while the cities respond by raising taxes.

Detroit continually raises property taxes while the properties themselves are sliding into the 5th layer of hell. Detroit has an income tax which is continually increasing. Demand for services increases while people are becoming more and more dependent on the government to fill this gap.

You can try to handwave away these contradictions away, but you are just being "Tads" and disqualifying what appears to be a major contradiction.

I agree that at first glance this appears to be a contradiction, but how long can this be sustained? What happens when the system simply cannot supply the needy with the services, cell phones, EBT cards and flat screens they so desire?

Meanwhile you look at the photographs and you see the poor homeless fucks in the 1930s were standing in line to get their daily bowl of soup.

This picture FLINT Food line-2011, is a common sight in Flint, Saginaw and Detroit today. My guess is the reason you don't see it often is that it doesn't play into the left-leaning agenda of the media. Churches have and continually are filling the gap to provide food and assistance, but that well is running dry as well.

I personally have contact with a number of food banks / assistance groups in the area. We meet a couple of times a year to discuss how things are going, and how we can best provide services. Without exception the message is the same, "Demand is increasing and funds are dwindling." Maybe it looks OK today, but I assure you that the sickness is there.

Anonymous Marty July 29, 2014 10:23 AM  

Agnostic Lurker - interesting observation. My wife is a teacher in poorer school district. Something like 85-90 percent of the kids qualify for free and reduced lunch. She told me that she is always amazed at the number of parents of these students that drop off their kids in Escalades and other expensive vehicles. The kids have nicer and newer clothes than we can afford for own children (and we both work). If you don't have to pay for rent and food, what money you do get can go for the finer things. What a great time in American history to be poor!

Anonymous Salt July 29, 2014 10:26 AM  

A new estimate by the Russell Sage Foundation found that the median American household experienced a loss of more than one-third of its wealth over the last decade, plummeting from $87,992 in 2003 to $56,335 in 2013.

Blogger swiftfoxmark2 July 29, 2014 10:35 AM  

Really hoping you're right about this VD because I have decided to not buy a house until I can put down 100% on it. If this is true, then I'll be a homeowner sooner than expected.

Blogger brian July 29, 2014 10:48 AM  

@agnostic lurker

Nobody here is being a "Tad". You're missing something, however.

The black market. Because the EBT cards can be used to buy pretty much anything food related, there are people who are simply converting EBT to cash by using things like soda as a transfer mechanism. This gives them the free cash to buy the phones and the bling.

There's also the illegal economy to consider. And furthermore, the under-the-table odd jobs.

You're looking at the economy, not seeing the immediate evidence of bread lines, and presuming that everything's fine. It isn't. But people will do what they must to survive.

Anonymous VD July 29, 2014 10:48 AM  

1. It's possible that technological advancement and increased government social welfare programs are masking these analogs in 2014?

That's exactly the situation. Imagine the situation if all that EBT money was not being handed out.

2. Am I just blinded by the media-created imagery of "the Great Depression"

I'll bet you could find images every bit as awful today. If not worse.

Blogger Owen July 29, 2014 10:50 AM  

There won't be a 2/3rds drop in home prices. You are forgetting the other buyers. Landlords.

Will, I think landlords of the future will see more headaches. As more become renters, I can see laws changing to accomodate renters at the expense of property rights.

Anonymous Alexander July 29, 2014 10:59 AM  

I don't know about that - isn't the net effect of all this crap the transfer of real property to the banksters while the average joe gets stuck with debt and scrip?

Seems to me that if step one is to acquire the property, step two may be many things but is certainly NOT 'reduce rights of ownership over newly acquired property'.

Anonymous patrick kelly July 29, 2014 10:59 AM  

" increased government social welfare programs are masking these analogs in 2014?"

Yes. Add up all the people signed up for unemployment payments, SNAP (food stamp ebts), section 8 housing, whatever AFDC is called these days, and those living primarily on social security. None of these existed during the 30's depression.

Now take that number of people and put them in bread/soup lines living in BamaVilles outside the cities. Sure looks as bad if not worse now.

Anonymous Stilicho July 29, 2014 11:07 AM  

Another interesting issue is that, although the Fed currently forgives the interest owed to it on the Treasury debt it holds, it only does so to the extent it is a net profit to the Fed. All of that junk mortgage debt the Fed owns (I forget how many trillions exactly) is carried on the books at nominal face value because the Fed plans to hold to maturity. If/when that junk debt starts defaulting, the interest forgiveness will decrease by a commensurate amount resulting in increased debt service expense to the federal gov't.

Blogger Joshua_D July 29, 2014 11:09 AM  

JDC July 29, 2014 10:20 AM

Churches have and continually are filling the gap to provide food and assistance, but that well is running dry as well.

I personally have contact with a number of food banks / assistance groups in the area. We meet a couple of times a year to discuss how things are going, and how we can best provide services. Without exception the message is the same, "Demand is increasing and funds are dwindling." Maybe it looks OK today, but I assure you that the sickness is there.


Yep. There are plenty of signs. Follow the local paper of almost any small town America, and I'm sure you'll eventually see the stories about food banks needing donations, funding drying up, etc.Like has been said, there are plenty of food lines, they're just electronic.

And more and more people, like me, simply do not want to pay the asking priced for many homes. I'm just not on board with paying a $130,000 30-year mortgage, nor can I really afford that on my single income.

Anonymous RedJack July 29, 2014 11:09 AM  

As the boomers age and die off, more and more housing will be on the market. We see that here in eastern Iowa.
The real boom is nursing homes.

I don't expect housing prices to drop by 2/3. The banks will demand nationalization of their debt (and assets) before that happens. A drop of that magnitude would destroy the financial system. The elite will not allow that to happen.

Anonymous joe doakes July 29, 2014 11:10 AM  

Agnostic Lurker: people who couldn't find work walked to stand in bread lines. They have been replaced by people who don't want work but ride light rail to buy Honey Bunches of Oats with EBT cards. Exercise, diet, technology and work attitude changed, the consequence of bad public policy did not. The Great Depression 2.0 is invisible, not non-existent.

Anonymous Porky July 29, 2014 11:18 AM  

With the younger generation saddled with college debt and poor job prospects...

I hear the border patrol is currently hiring greeters.

Anonymous Jack Amok July 29, 2014 11:19 AM  

Vox, I'm curious what factors went into your two-thirds guess. Can you elaborate a bit?

Anonymous Don July 29, 2014 11:19 AM  

One of the big reasons that TPTB have encouraged illegals in our community is to keep rentals artificially high. Prices would be half what they are without it and local government and real estate go hand in hand.

Blogger James Dixon July 29, 2014 11:24 AM  

> The banks will demand nationalization of their debt (and assets) before that happens.

You could argue they already have, what with TARP and all. However, even if the government assumes the debt unless they raze those homes the prices will still drop.

Anonymous VD July 29, 2014 11:29 AM  

Vox, I'm curious what factors went into your two-thirds guess. Can you elaborate a bit?

If I wanted to go through the trouble of working it out, it wouldn't be a guess.

Blogger James Dixon July 29, 2014 11:35 AM  

> I'm curious what factors went into your two-thirds guess.

If you want a quick estimate, Jack: Take the pre-1990's housing boom prices and add on about half the rate of inflation since. That should give you a pretty good metric for fair market value in the current depressed economy.

Now try to figure out how far it's going to fall when people finally accept that there has been no recovery and that there's not going to be one. That's the difficult part.

Anonymous Harsh July 29, 2014 11:37 AM  

For example, where are the bread lines?

EBT cards.

Where is the Dust Bowl and okies?

The 6% unemployed, 15% underemployed, and thousands who have "left the work force."

where is Hooverville?

Detroit and other places like it.

Why do you still see lower middle class people with iPhones and buying large screen TVs?

Rent to own, bad credit loans, etc.

Why is obesity and fatsos our main health problem?

They won't be when the EBT cards run out.

Anonymous Harsh July 29, 2014 11:38 AM  

I hear the border patrol is currently hiring greeters.

"Welcome to America. I love you."

Blogger Ashley July 29, 2014 11:39 AM  

To those who believe housing prices can't fall because "bodies need shelter", here are some stats that may open your eyes:

===================
http://inexpensivehomebuilding.blogspot.com/2009/05/house-square-feet-per-person.html

Average Square Feet of US New Single Family Home (NPR, Census Dept., medians slightly lower)

2007 = 2,521
2000 = 2,266
1990 = 2,080
1980 = 1,740
1970 = 1,500
1960 =
1950 = 983

1947 = 750*
===================
http://inexpensivehomebuilding.blogspot.com/2009/05/house-square-feet-per-person.html

Square Feet Per Person
(various examples, not all US average)

2007 = 970 (2,521sqft/2.6 people)
1954 = 125 (1,000sqft/8 people, Levittown ad)
1950 = 289 (983sqft/3.4 people)
1947 = 208 (750sqft/3.6 people)
1845 = 150 (150sqft/1 person, Thoreau)
===================
http://notbuyinganything.blogspot.com/2012/03/average-house-size-by-country.html

Average House Size By Country
Australia - 214.6 sq m (2310 sq ft), 2.56 people per household (pph)
USA - 201.5 (2170), 2.6 pph
New Zealand - 196.2 (2112), 2.6 pph
Canada - 181 (1950), 2.5 pph
Japan - 132 (1420), this year the pph in Tokyo dropped below 2 for the first time (1.99)
UK - 76 (818), 2.1 pph
The largest households are found in Iraq with 7.7 people. India has 5.4 people per household, and the world average was 3.8 in 2002.
===================

There is plenty of room to fall as households collapse back into each other. We moved into a new house in 2013 and specifically configured it with the assumption that our 4 children will likely (at some point) be replaced by another "family" comprised of parents or a child and spouse. (i.e. having a higher number of bedrooms per overall square foot, and forgoing the huge family room, wet bar, game room, and media room common in the basements of large houses today.)

Anonymous Dr. Kenneth Noisewater July 29, 2014 11:46 AM  

Welp, I bought in Central TX since the PITI was lower than a comparable rent (and about 18% of my current net take-home, before taking deductions into account), and rents are only going up (my previous rental from when I first moved here has already gone up $200/mo). Significant nonportable improvements to a rental (such as solar power, batteries, water wells, a usefully-sized and secured gun vault, etc) are a fool's game.

Blogger Ashley July 29, 2014 11:50 AM  

Here's another good article on house size:

http://www.aei-ideas.org/2014/02/todays-new-homes-are-1000-square-feet-larger-than-in-1973-and-the-living-space-per-person-has-doubled-over-last-40-years/

Today’s new homes are 1,000 square feet larger than in 1973, and the living space per person has doubled over last 40 years

The Census Bureau recently released data on average and median home sizes for 2013 and those data are displayed in the top chart above. Here are some details:

1. In 2013, the average size of new houses built increased to an all-time high of 2,679 square feet (see blue line in top chart), and the median size new home set a new record of 2,491 square feet (see red line in chart). Over the last 40 years, the average home has increased in size by more than 1,000 square feet, from an average size of 1,660 square feet in 1973 (earliest year available from Census) to 2,679 square feet last year. Likewise, the median-size home has increased in size by almost 1,000 square feet, from 1,525 square feet in 1973 to 2,491 last year. In percentage terms, the average home size has increased by 61.4% since 1973, while the median home size increased by 63.3%.

2. Meanwhile, the average household size has been declining, from 3.01 persons per household on average in 1973 to a new record low of 2.54 persons per household last year, a reduction of almost one-half person per household over the last 40 years (see brown line in top chart).

With the average new house in the US getter larger in size at the same time that American households are getting smaller, the square footage of living space per person in a new home has increased from 506.6 to 980.7 square feet using the median size home, and from 551.5 to 1,054.7 square feet using the average size home. In percentage terms, that’s a 93.6% increase using the median home size and a 91.2% increase using the average home size. In either case, the average amount of living space per person in a new home has almost doubled in just the last forty years – that’s pretty amazing.

3. What about the cost of new homes over the last 40 years? On a per square foot basis using median home prices and median square footage, the inflation-adjusted price of new homes has been relatively stable since 1973 in a range between about $105 and $125 per square foot (see bottom chart above). And the price of just under $106 per square foot for new homes in 2013 was almost 16 below the peak of $125.50 per square foot for a new home in 2004, and also below the cost per square foot in every year during the 1970s and 1980s, and below every year of the 1990s except 1992 and 1993.


I would add that my wife's parents, who are early boomers, moved into the largest house they've ever owned when her dad retired in 2007 (nearly 6000 square feet for 2 people). Her Dad specifically bought a larger house because he expected to make more money on the appreciation as he'd done with every house he's ever owned. They live in a neighborhood filled with similar-minded retirees and near retirees, some with much larger houses. What happens when these folks finally realize how bad they screwed up and throw in the towel or must downsize due to deteriorating health or finances?

Anonymous hygate July 29, 2014 11:54 AM  

There was no welfare state in the 1930s to speak of. There is a massive welfare state today. People are buying iPhones and big screen TVs with welfare money. They don't pay rent, they don't pay for food. Any cash that comes their way is disposable.

I have a neighbor who owns a used car lot. He advises me to never buy a car during tax season. That is when all the poor blacks get their EITC and use it to buy the most expensive car they can afford, driving up the price of used cars.

Anonymous Athor Pel July 29, 2014 11:56 AM  

"Why is obesity and fatsos our main health problem?"



Deliberate Obesity Pandemic

Read, enjoy.

It also covers who actually benefits from the the government money going into the EBT system.

Anonymous YIH July 29, 2014 11:57 AM  

There has been some ''recovery'' in FL, but it's not 'natural' (people buying 'to put down roots'), it's an artifact of the '08 crash.
These are properties going in and out of foreclosure, mostly out-of-state 'all cash' buyers who then rent out property.
On my street alone I can point out five such homes. (Protip: How can you tell? Look at the front lawn, even without a sign the lawn tells the tale)
''Buy and flip'' is making a comeback too, also mainly to turn to rental.
But an 'X-er/Millennial' first timer? Almost unheard of. 'Boomers' are swimming in debt, or trying to sell to 'downsize'.

Anonymous Doug Wardell July 29, 2014 12:01 PM  

I'm going to be in the market for my first house within the next few years and I've already saved a solid down payment, though I'm also VA eligible. Any thoughts on when we can expect the market correction? Also, any thoughts on where my savings should be until then?

Anonymous hygate July 29, 2014 12:04 PM  

Will, I think landlords of the future will see more headaches. As more become renters, I can see laws changing to accomodate renters at the expense of property rights.

Renters already have significant rights. Here in Alabama, if the tenant knows how to game the system, eviction is at least a six month process.

But at least you are still able to check on whether or not a prospective tenant has been evicted before and refuse to rent to them. Eventually someone is going to claim disparate impact and that won't be allowed.

Anonymous roo_ster July 29, 2014 12:05 PM  

"And it is this collapse that will spur the economy-wide deflation that I have been predicting for the last six years."

VD:

I would be cautious using the gov't numbers to gauge inflation/disinflation/deflation and suggesting that inflation is not occurring. There is the usual downward pressure on the metrics' calculations imposed by bureaucrats and policritters over time to mask inflation. Also, there is the deliberate exclusion of fuel and food in the inflation numbers.

On the ground, food and fuel prices have gone, to use a technical term, "apey." Since everyone consumes food and fuel, the inflation felt by actual consumers is rather significant. This effect can not be sussed out from afar using gov't-generated metrics. There is the price of the items on the shelves. Then there is the diminution of container/portion size. Last, there is the decline in quality/substitution of less costly components. For many, they have the same or fewer number of dollars chasing goods that are pricier per unit. As time wears on, each dollar has less buying power, which is textbook inflation.

Your theory regarding credit-driven demand is reasonable, but may be limited to particular markets that are experiencing bubbles due to gov't meddling (housing and those that feed housing for example). We must not forget that our ruling class can so mess up the economy such that the usual natural reaction and re-balancing may not occur. Think the stagflation of the 1970s.

Anonymous DeeptThought July 29, 2014 12:05 PM  

I own Rental Property in Central Illinois. I have personally seen property values in Peoria in the lower end of the market (< 100k) drop considerably. My tenants are also relying upon their tax refunds to pay rent when they fall behind. Yes it is not a smart business decision to let our tenants fall behind but we are a religious family and try to be compassionate and understanding to our tenants. For the most part, we have not been burned with this approach.

What we see is a struggling working class who are crippled by cheap immigrant labor and poor decision making (children out of wedlock, lack of discipline etc...). I do not believe our government understands the severity of the problem.

Anonymous Jack Amok July 29, 2014 12:11 PM  

If I wanted to go through the trouble of working it out, it wouldn't be a guess.

I know that, but I'd have to do at least a little "working it out" to even make a guess. James's idea sounds reasonable, I was wondering if you'd done something similar. Guess not - that's fine.

Anyway, as RedJack and Ashley pointed out, when the Boomers finally start going en mass to that big Jerry Garcia Concert in the Sky, the supply is probably going to increase, making the price drop worse. We'll have to make some changes to tax and banking laws, but I suspect the millennials saddled with student loan debt will get the last laugh. I just hope it doesn't come too late for them to get on the family formation track.

Blogger Brad Andrews July 29, 2014 12:12 PM  

JDC, I had been very much in favor of helping the poor like that. My father had monthly outreaches to the poor and got a fair amount of donated goods to give out when I was younger as well.

I am beginning to think that this kind of charity is not quite the "care for the poor" Christians are commanded to do, as it doesn't really change anything and often only creates more dependency.

I know we will always have the poor with us, especially since it is a relative term, but I think this area could use a whole lot more thought.

Blogger Brad Andrews July 29, 2014 12:13 PM  

I was thinking about the topic of "how many new houses can we sell" as I listened to a podcast on the way into work today. New home sales are down, but don't we have some maximum capacity of homes anyway, since old ones rarely go away? I believe that point is in the OP, but I thought it a good topic to consider.

Blogger Brad Andrews July 29, 2014 12:16 PM  

swiftfoxmark2,

It may be good to hold off on purchasing a home now, but I am not sure that saving up for a 100% down payment is always a wise choice. Don't believe hype, but also realize that you still have to pay to live someplace (in most cases) while gathering that 100%, so you are not completely saving things.

Locking in a low rate can be good

- If you know you will be living there for quite a while. (Not as certain in today's economy.)

- You can get a reasonable price on the property.

Anonymous Revan July 29, 2014 12:19 PM  

What sort of timetable are we looking at for the process to play itself out? Can a ballpark guess even be realistically made?

Blogger James Dixon July 29, 2014 12:24 PM  

> What sort of timetable are we looking at for the process to play itself out?

Which process? The housing bubble? Those tend to run in 10-20 year cycles. depending on whether your talking peak to low or peak to peak. So assuming a normal cycles means a minimum of another 4 years before the rebound starts.

The slow but steady collapse of the US empire is another matter entirely and operates on a different time scale.

Blogger James Dixon July 29, 2014 12:34 PM  

I had to look up where I'd found the 10-20 years housing cycle information, and I didn't find my exact source, but a good overview of the cycle seems to be found at http://www.cato.org/publications/commentary/great-18year-real-estate-cycle

Anonymous DrTorch July 29, 2014 12:42 PM  



I think you're right. My last home was a luxury, as it had a fully functional in-law suite (2BR, kitchen, separate laundry), wh/ we rented out. When we sold it was bought by a family that was ecstatic that it had a layout well suited for 3 generations, including multiple generations of siblings and cousins. (Headed by a matriarch, w/ 1 or 2 pre-teen boys as the only males).

But, I don't object to people living as extended family as opposed to nuclear ones.

I am beginning to think that this kind of charity is not quite the "care for the poor" Christians are commanded to do, as it doesn't really change anything and often only creates more dependency.

I've come to that same conclusion, and no longer provide assistance to my church (or other organizations) that follow this tack, especially since it is my children that will likely reap negative consequences.

Anonymous DrTorch July 29, 2014 12:43 PM  

Sorry, last post started w/ response to Ashley @ 11:39

Anonymous Anonymous July 29, 2014 12:45 PM  

> where is Hooverville?

Dude, they're not hard to find if you look.

http://fellowshipoftheminds.com/2011/09/30/the-2nd-great-depression-obamaville-tent-cities/

What you mean is, "when will Hoovervilles plaster the evening news non-stop?"

The answer to that is, "the evening of the next Republican President's inauguration".

Anonymous hygate July 29, 2014 12:47 PM  

I am beginning to think that this kind of charity is not quite the "care for the poor" Christians are commanded to do, as it doesn't really change anything and often only creates more dependency.

There is a book called "When Helping Hurts" that addresses this issue from a Christian perspective.

Basically it states that it is a lot easier to simply give goods and money, or go on a mission trip, than to actually engage with the poor and try to address the underlying problem that is causing the poverty in the first place.

Anonymous VD July 29, 2014 12:48 PM  

I would be cautious using the gov't numbers to gauge inflation/disinflation/deflation and suggesting that inflation is not occurring. There is the usual downward pressure on the metrics' calculations imposed by bureaucrats and policritters over time to mask inflation. Also, there is the deliberate exclusion of fuel and food in the inflation numbers.

Seriously? Have you read The Return of the Great Depression?

Anonymous Porky July 29, 2014 12:51 PM  

I am beginning to think that this kind of charity is not quite the "care for the poor" Christians are commanded to do, as it doesn't really change anything and often only creates more dependency.

What are Christians commanded to do then?

Blogger James Dixon July 29, 2014 12:53 PM  

> What are Christians commanded to do then?

The best we can, Porky, whatever that might be.

Anonymous Koi July 29, 2014 12:55 PM  

What a tough call though. I remember this same conversation 3-4 years ago here at VP. I ended up buying a post-foreclosure (someone bought it for cash, did some work themselves, then re-sold it at 10% profit). Even after 3 years, I still don't know if it was a good call.

Time frame? Everything is highly volatile, from prices to your neighbors. Find a good neighborhood? The PTB will HUD it up. Good schools? We'll bus in the kids from corrections. And on it goes. Go too far out in the country and gas will kill extra funds easily.

At best, I think you have to be prepared to walk away and leave the furniture, TVs, and anything you can't carry.

Blogger James Dixon July 29, 2014 12:58 PM  

> ...Good schools?

That's a oxymoron, and has been for a good 30 years now.

Anonymous Will Best July 29, 2014 1:07 PM  

Basically it states that it is a lot easier to simply give goods and money, or go on a mission trip, than to actually engage with the poor and try to address the underlying problem that is causing the poverty in the first place.

Well the poor, working, middle, wealthy, and owners no longer live anywhere near one another. You don't have doctors, bankers, janitors and firemen attending the same kids bday parties anymore. The lack of vertical integration has resulted in the poor no longer trying to emulate the wealthy and the wealthy no longer attempting to be good stewards of the economy.

Blogger tweell July 29, 2014 1:13 PM  

Recovery!!

"You keep using that word, I do not think it means what you think it means."

Anonymous Anonymous July 29, 2014 1:25 PM  

For example, where are the bread lines?

We dealt with this the other day: they're in line in front of you at the grocery store, paying with EBT cards. There are about 15,000 EBT users for each Wal-Mart.

Why do you still see lower middle class people with iPhones and buying large screen TVs?

Because the banks, manufactures, and government are all providing credit in order to keep consumption from falling like a rock.

Why is obesity and fatsos our main health problem?

Because the cheapest and easiest foods, processed carbs and seed oils, are the most fattening.

Anonymous hygate July 29, 2014 1:26 PM  

The lack of vertical integration has resulted in the poor no longer trying to emulate the wealthy and the wealthy no longer attempting to be good stewards of the economy.

True, another factor is that poverty is actually provides economic benefits to the wealthy. I read an interesting blog post this morning that states that JP Morgan processes EBT cards in 26 states. The more people on EBT, the more money JP Morgan makes.

Blogger Chris Ritchie July 29, 2014 1:54 PM  

Thank you so much for this. We just closed selling our house and we are renting now. I'm trying to explain to my wife why we did this now. I'm betting that sometime in the next 24 months that the market will finally turn and the credit inflated house prices will come down 30% to 50% - or more according to Vox. In the meantime we will be saving $ for a larger and larger down payment so the rising interest rates shouldn't be a problem at all. The longer we wait, the lower the house price and the greater the down payment - interest rates be damned.

Thanks again.

Blogger Chris Ritchie July 29, 2014 1:58 PM  

I concur on the landlords + depreciation comment, if for no other reason than it's one of the ways I plan on profiting from the decline.

Me too. We're FINALLY getting back to capital accumulation in anticipation of this event.

Anonymous YIH July 29, 2014 2:00 PM  

Now take that number of people and put them in bread/soup lines living in BamaVilles outside the cities. Sure looks as bad if not worse now.
Also look how the jewsmedia plays it:
During Reagan, Bushdaddy: homeless, homeless, homeless.
Clinton: *poof*! Either ignored altogether, or portrayed negatively; 'crazy bum' stories.
Shrub: Too distracted with other things.
0bama: Housing crash, major welfare transfers to the Tribe.

Blogger JDC July 29, 2014 2:14 PM  

I am beginning to think that this kind of charity is not quite the "care for the poor" Christians are commanded to do, as it doesn't really change anything and often only creates more dependency.

I don't disagree with your statement, but that is a hard sell to someone who lands on your doorstep and they don't know how they are going to feed themselves or their children that evening. I know their are plenty of hucksters out there ready to lie and deceive to get free food and/or assistance, but I also know there are people who actually fall in that category.

I suppose I could just tell them to hit the road and get a job and that I would pray for them, but I won't enable their dependency. That's one strategy I suppose. (P.S. If one applies this strategy I would recommend not meeting people face to face - it becomes much harder to send people away in that situation).

In seminary I had a buddy who came from Nigeria, where he helped run an orphanage. He was attending Seminary, and planning on returning after he graduated. He referenced the saying, "Give a man a fish and he eats for a day, teach a man to fish (you know the rest)." Their Christian mission was to do both. That's how I see my Christian mission, and the mission of our congregation as well.

What could be simpler than Jesus stating, "You give them something to eat."

Anonymous mistaben July 29, 2014 3:05 PM  

We've been renters our whole married life, and I was leery of buying a house from discussions here and elsewhere. We only bought in October because it was clearly what God wanted for us, and that's how we roll. Of course it doesn't guarantee we won't completely avoid trouble, but it was definitely the right thing to do. Now to look into buying a rental...

Anonymous TJ July 29, 2014 3:19 PM  

Recall this blog VD? The housing bubble blog

I recall you linking to it a at least once way back in 2003 or 2004. I used to read it daily back then (and comment here as "closehauled"). I guess it is time to start looking at it again. I have totally ignored housing for a while because of disinterest but was thinking recently of buying a couple of small homes for rentals and getting out of the stock market. Nothing but bad housing news on that blog ... and in OC and SD which should be doing well.

Anonymous FUBAR Nation Ben July 29, 2014 3:22 PM  

Real estate is going to be declining for a long time, probably over the next generation (20 years). The only real estate sector that is doing well is the high end cash-only deals in markets like Manhattan which involved rich foreigners parking their money because they have nowhere else to go and need a safe haven.

After having seen an entire generation destroyed by debt, I have resolved not to go into debt ever again. I don't care what pressure is brought to bear to buy the right to pay property taxes (house) or any other debt, it's not going to happen. I don't think I'm alone in my generation (26). I refuse to become a debt slave.

Blogger Conan the Cimmerian, King of Aquilonia July 29, 2014 4:08 PM  

I have an answer for the Limit on Demand.

How about we import a bunch of immigrants from someplace like Mexico and Central America?

Everything fixed.

Blogger Brad Andrews July 29, 2014 4:14 PM  

JDC,

Seeing the same people at highway exit corners year after year kind of puts a kibosh on the claim they just fell on hard times recently.

Also having several children who went back to the way of their birth family and live on public support, with quite the sob story to tell makes me a lot more skeptical than we want to be.

Just giving them food only helps for the moment. Though even then, doing it with some accountable is much more productive than just giving them stuff.

You can make a decent living if you are willing to dress down and panhandle and/or tell sob stories. At least you can do well enough that some are happy with continuing down that path.

Are you really arguing that the current approach is working?

Nigeria is a great example of the flaw. Your buddy may have been aligned well, but I know my father was taken for a chunk of change "helping" several people in Nigeria with ministry and other activities.

A story is not always what it appears. Remember the story of the Gibeonites in the book of Joshua.

Anonymous Luke July 29, 2014 4:36 PM  

The areas to buy real estate? Figure out where the borders are collapsing, the local or state government is the most counter-productive in its policies, the gibsmedats are most numerous and bold, where crime is highest -- and find the opposite. For me, that's places like MT, ND, ID. Certainly, NOT in any state bordering Mexico, any state on either coast (extreme east OR/WA or north ME might be okay), plus the former Confederacy (too diverse), IL, etc.

White flight used to mean to the suburbs. Now it means to different cities up to hundreds of miles away. Before long it will routinely mean to different states, even different regions.

Blogger Ashley July 29, 2014 4:41 PM  

For those of you considering buying real estate as an investment right now, I'll offer a personal story from my family history that might give you some perspective.

My great grandfather was a farmer and the postmaster of a small town in VA, about 50 miles southwest of DC. He had 5 sons (7 children). His steady cash income from the postmaster job and well-managed finances enabled him to purchase 5 additional farms in the late '30s and early '40s. He gave one to each of his sons.

My grandfather received a 250 acre dairy farm complete with a nice farmhouse and several, large, well constructed barns that served him well for the next 55 years. This farm cost my great grandfather $5,000 in 1940, which equates to $85,000 in 2014 dollars (and yes I know the CPI has arguably been broken for a couple of decades).

In 1995, my grandfather, under pressure from falling milk prices and financial mismanagement (taking on debt at the insistence of a partner and family member) sold the farm for $450,000.

Various pieces of it changed hands over the years, but the single largest piece of land left is a 70 acre chunk including the now decrepit house and barns. The current owner of this 70 acre parcel paid $1 million in 2006 or 2007. He has poured virtually all of his personal and business wealth into this property. He is now reduced to living in a small apartment and logging the trees on the property in his last struggles to make payments and keep his "investment" until prices go up enough to sell.

What happens when people like this realize real estate prices are actually falling again? If prices fall back to post-depression levels, this 70 acre, $1 million dollar property will be selling for around $25,000.






Anonymous WaterBoy July 29, 2014 5:10 PM  

JDC: "Detroit continually raises property taxes while the properties themselves are sliding into the 5th layer of hell. Detroit has an income tax which is continually increasing. Demand for services increases while people are becoming more and more dependent on the government to fill this gap. "

And another sign of desperation in that particular market is the effort to pay delinquent water bills via charitable donation.

Anonymous Amok Time July 29, 2014 5:11 PM  

"The answer to that is, "the evening of the next Republican President's inauguration".

The sweetest sound I will hear will be the airplane engines on Jan. 20, 2016, as Dear Leader Obamista takes his final flight out of Washington as an ex-President! The next sweetest is media referring to him as EX-el presidente!

Anonymous WaterBoy July 29, 2014 5:14 PM  

Ashley: "What happens when these folks finally realize how bad they screwed up and throw in the towel or must downsize due to deteriorating health or finances?"

Depends on how close to the tip of the sword they are. If it's only going to be a few years down the road, they'll have the younger Boomers who are eager to do the same thing to sell to. If they plan to stick it out there a while, they'll have fewer and fewer prospective suckers as time goes by.

Anonymous John Regan July 29, 2014 5:51 PM  

@Ashley:

I could relate a similar story or two, though not, I think, as dramatic as yours in economic terms.

I think many family historical narratives would chronicle deteriorating personal wealth throughout most of the 20th century measured from, say, the 1930's With each generation starting its children off in adult life poorer, at least in terms of their balance sheets.

The die was probably long since cast by 1957, when an interesting little vignette of a movie called "No Down Payment" as released. Last time I checked you could see that on You Tube!

Anonymous roger u July 29, 2014 7:01 PM  

"Where that is in practical terms, I do not know, but a rough guess would be a two-thirds collapse in home prices."

Vox, I hope you're correct as I would love a farm, but down here they're still building Mcmansions and upscale apartments for the Yankee snowbirds. I have been watching since 2008 and prices have dropped a bit, we're around $1500 an acre right now in the rural areas, and the farther afield you go the cheaper it is, of course, but those retirement neighborhoods with golf courses are popping up even out in the boonies. Its pissing me off.

Can you guess at when the drop will begin in earnest? Another commenter said there is about 4+ years until a rebound begins, do you think there will be a rebound?

Blogger Cataline Sergius July 29, 2014 7:08 PM  

@ Amok Time

The sweetest sound I will hear will be the airplane engines on Jan. 20, 2016, as Dear Leader Obamista takes his final flight out of Washington as an ex-President!

More bad news, he doesn't leave office until Jan. 20, 2017

Anonymous Skip July 29, 2014 7:22 PM  

Meanwhile in Australia the Chinese, backed by foreign money, are buying up all the best real estate and reducing the locals to perpetual renters....

Anonymous Michael of Charlotte July 29, 2014 7:25 PM  

I've been watching housing prices now in Charlotte NC for about 6 months. Can't say I've noticed a trend up or down. But I have noticed that there's a lot of people who bought low income housing around 2009 and are looking to sell them at nearly double what they paid for them.

I'm sitting on about $75,000 with no place to spend it. I'm actually looking into starting my own placement firm. I figure where this country is headed, I'll do better when times are tougher. I've already seen the big energy company in my area cut contractor rates across the board by 35% so there doesn't seem to be much future in working for others.

But hey, he did say he was going to fundamentally change this country...

Anonymous Anonymous July 29, 2014 8:18 PM  

Student loan debt is the reason I am buying foreclosed properties to rent. These kids are not going to be buying anything. I was simply going to do a flip, but when I listed it, I received 5 inquiries per week from rent to own seekers. They can't get loans! Guy put 25% down. I am only giving him $100 per month of the rent price toward equity if he pays all 36 months on time. If not, or he cannot get his own financing, I keep his 30K and all payments as rent. He was begging me to do it! I even told him it was a terrible idea on his end. Just picked up my second foreclosure. Rinse and repeat (10% down is more likely though).
Also don't forget the same artificial demand limit is being reached in the auto industry with sub prime buyers. Wait until next fall and you can begin to pick up nice repo cars just like foreclosed houses.

Anonymous Anonymous July 29, 2014 8:25 PM  

Then, like article states, I can take an equity loan at only 4% against 80% of the full value (not foreclosed acquisition price) of one of the properties when my personal cash is tied up, to work the next flip, flip and make 20G, buy more gold and farmland while the renters pay the note and I still make a huge profit every month.

Just thought I would share in case anyone here has not considered this. Smart people, so I bet many of you have.

Anonymous Anonymous July 29, 2014 8:36 PM  

Michael of Charlotte,
First house was 75 cash. Put 11K into it including closing costs. Sold it for 119,900. Guy put down 30g. Out of pocket now only 56K. Rents for 925 per month. Taxes and ins 160 per month + 100 per month I will credit him at end of 36 month term. Additional 24k profit from rent. Then he still owes balloon 86K at end. Consider it.

Anonymous Luke July 30, 2014 5:12 AM  

Michael of Charlotte July 29, 2014 7:25 PM

"I'm sitting on about $75,000 with no place to spend it."

Yes you do. Buy gold. That amount would fit into a shoebox at least four times over.
(Much easier to hide for uniformed thieves than land is.)

Anonymous Luke July 30, 2014 5:13 AM  

"from", not "for"

Anonymous Michael of Charlotte July 30, 2014 5:52 AM  

Brad, that sounds pretty good. And the idea of screwing over a Democrat out of that 30k is very appealing. I may need to look into that.

Luke, I tried that with silver, it didn't go very well.

Anonymous Luke July 30, 2014 8:13 AM  

Michael of Charlotte July 30, 2014 5:52 AM

" Luke, I tried that with silver, it didn't go very well."

Did it not arrive, or was it counterfeit?
You don't buy precious metals for a quick profit. You buy them as the surest path to preserving wealth into the future, when wealth and the ability of the productive to produce it are being destroyed all around you.

Anonymous Titus Didius Tacitus July 30, 2014 10:03 AM  

Skip: "Meanwhile in Australia the Chinese, backed by foreign money, are buying up all the best real estate and reducing the locals to perpetual renters...."

Which according to the theories of those who think only landowners should be allowed to vote means it's time to officially deprive Aussies of the franchise, and have elections as well as prime property sales advertised only in Chinese.

Anonymous Michael of Charlotte July 30, 2014 5:56 PM  

Luke,

"Did it not arrive, or was it counterfeit?"

I bought at the high, not the low. I almost bought gold at 1900 and I'm real glad I didn't.

Blogger James Dixon July 31, 2014 6:41 AM  

> I bought at the high, not the low. I almost bought gold at 1900 and I'm real glad I didn't.

As with most investments, dollar cost averaging is your friend. :)

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