re jade, it may well be a bubble, especially as it is neither fungible nor divisible, and is certainly not monetary
having said that, in order for the world to be saved from price deflation and debt depresion, suspect jade could double, at least.
in the mean time, a thoughtful piece by one of the several e-mail roundtable anchors, just in in-tray, and i quote
THE WAITING GAME
Sept 2010
I feel like I am rafting down the Colorado River. This section is kind of calm but I know with certainty that there are sets after sets of class 5 rapids ahead. Looking around, there is no one in control of the raft. There are some Republican oarsmen who want to steer to the right. Some oarsmen are Democrats, they want to steer to the left. Then there is this Bernanke with a big oar, swinging aimlessly while mumbling "... it is not going to fail on my watch." Finally, there is this fellow in the middle who is giving speech after speech. Too bad the raft is not a hot air balloon. This fellow could easily lift us over the rapids with plenty of hot air to spare.
The only sensible thing to do is to grab a life jacket, find a safe spot on the raft, hang on for dear life and hope for the best.
In the real world, we know with certainty that the population is aging, baby boomers have no savings for retirement, pension plans are underfunded, States are bankrupt, federal budget deficits are escalating, job creation is going no where, unemployment benefits will end sooner or later, over 5 million mortgagors are not making payments, over 10 million homes have negative equity, one in seven is living below the poverty line, social security is paying more than collecting, medicare is not paid for, real estate financing exists only because of the government owned GSEs backed by the printing presses of the Federal Reserve ...........
While each of the aforementioned problems may be insurmountable in itself, the biggest problem is the inadequacy of our political system to address any of these problems. Disguised as a democracy, the United States government is nothing more than the will of a few individuals who managed to lie their way into positions of power. Unfortunately, lying cannot solve the nation's woes.
For example, hotly debated now is this "Bush tax cut". This week, Obama said during the town hall meeting that he cannot continue to give $700 billion to the rich, the top 2% taxpayers. These numbers are so outrageous that even math challenged public school graduates should be able to figure it out. Look at this table:
taxpolicycenter.org
(be sure to take a look at the estimates at the bottom of the table, I actually had one of those LOL moments)
If the so called Bush tax cuts truly amount to $700 billion, then we should have no problem. We would have an almost balanced budget in 2 years. In fact, had Bush tax cuts not existed, we would be sitting on a huge surplus. The top 2% of taxpayers amount to about 2 million returns. To extract $700 billion from that group, that would be an average of $3.5 million extra tax from each of these fat cats. Are they really that rich?
In the next month or two, the Democrats and Republicans would beat each other to death over this tax increase. Would it do anything to our ailing economy? NOT A CHANCE.
It is not my intention to turn this email into a big long political rant. I do have a point. This is the reason I stopped writing about micro real estate issues. My point is it does not matter. Monthly fluctuations of existing home sales, new home sales, foreclosures or loan applications would not change the big picture. Real estate has suffered complete systemic failure. Moody's just predicted that real estate will go down 8% more before recovery. There are other predictions, some more bullish and some even more dire. They are all silly. How do you predict when there is no free market system? Home prices are now set by the government and the Federal Reserve. Just imagine if real estate value does indeed go down 8%, how many more defaults would there be? All homes currently under water will be 8% deeper down. In addition, a new batch of previously above water homes would join the dive. Are policy makers going to stop intervening? Not a chance. Geithner can single-handedly move the market by instructing Freddie and Fannie to forgive principles, waive payments and refinance all delinquent loans. Bernanke can announce the Fed will purchase all agency MBS, even if they are interest free loans. Congress can extend tax credits at whatever amount needed. Market forces are in search of a new equilibrium but there is no chance the government is not going to interfere and set the price.
When things are going well, all the flaws of a system are hidden. In the case of real estate, things couldn't be better for decades with steady appreciation and no depreciation, that is until judgment day arrived in 2006.
In hind sight, it was easy to recognize the subprime bubble. Making loans to borrowers with no money, no credit, no assets and with payments that they cannot realistically afford do not made sense under any circumstance. It was a lot more difficult to recognize that the entire real estate system was a bubble even before subprime, and it is a miracle that it survived for so many decades.
Does it make sense to give mortgages to people with 5% or less downpayment AND allow these loans to be non-recourse so that all the borrowers have at risk is the downpayment? This model can only work under one condition - non stop appreciation of the underlying asset. It only worked because ever since the great depression, US real estate had never experienced the level of decline as we are experiencing now.
When the market turned sour, other weaknesses were exposed. This country not only does not have a housing policy, we do not even have anyone responsible for formulating a housing policy. There is the Federal Reserve whose mission statement has no mention of housing. They are only intervening now to protect the big banks. It is unclear why the Department of the Treasury is intervening in housing. HUD, Department of Housing and Urban Development, only sounded like the branch of government that should be responsible. No one paid attention to the recent Elizabeth Warren appointment in relationship to housing. Here is another individual with not a trace of real estate experience being in charge of promoting some socialist agenda.
creditslips.org
The current real estate market is unstable and unsustainable. The real estate system has failed but the market and policy makers are still in the denial phase. When we finally reach the class 5 rapids, there will be mass panic, Sunday night meetings at the Federal Reserve conference room and politicians will emerge Monday morning, flanked by Bernanke on the left and Geithner on the right, to announce how they have saved the country.
There was once a president who said, "Ask not what the country can do for you, ask what you can do for your country." That was a long time ago. The new slogan is, "Do not take any personal responsibility. Nothing is due to fault of your own."
The nation needs to be weaned off this entitlement mentality. In the case of real estate, Americans have to be convinced that homeownership is not a right. It is earned. It requires financial discipline to save for a downpayment and borrow what they can repay. We have strayed so far from responsible homeownership that the road back would not be painless.
Bernanke and Geithner need to understand that their actions had made it much worse, instead of believing that it would have been much worse.
The banking industry needs to stand on their own feet and come up with a sustainable secondary market, instead of living off the hand out of the Treasury and the Fed. Are there be any lenders who are willing to lend their own money at the same terms of a FRE/FNM/FHA loan? Not a chance.
Builders need to understand that economic conditions and demographics are shifting demand to shelter, not homes. Shelter is a roof overhead, close to employment and inexpensive. Stop building on desert land that is hour away from the nearest employment centers. They need to stop adding to the already excessive supply.
As I write this email, I can think of many solutions. None of them would be painless but needed. However, none would have a chance of being adopted. Even a simple idea such as consolidating FRE and FNM would end up in months of debate and lobbying, when it is so obvious that these are two duplicated bureaucracies.
The problems will not go away by themselves. They can be solved in advance with planning, or be resolved in panic when it is finally upon us. What will break first? This is the waiting game. I hope all of you are wearing your life jackets |
