Charles Hugh Smith on The Housing Bubble

May 13, 2011 12:12 PM

Exquisitely Corrupt Charles Hugh Smith's predictions on the housing bubble, from almost five years ago, are proving accurate. Previously.
posted by mmrtnt (61 comments total)

Gosh, I hope he is wrong.
posted by bz at 12:16 PM on May 13, 2011

Not as wrong as I was about what text would end up where.

I wanted the title of the post to be "Exquisitely Corrupt"

Six months from now, when I try again to post something, I'll look back on this.
posted by mmrtnt at 12:22 PM on May 13, 2011 [7 favorites]

I'm sure he's right, it's simple demographics, there's not enough people of the right age to buy the houses. The housing bubble followed the baby boom bubble. Until the children of the boomers start buying houses it won't reverse itself. The leading edge of that crowd is about 27 right now, and they are a bigger cohort than the boomers so it should correct very well - but 5 or 8 years from now.

Another post-bubble is the recent silver bust last week, which I think will continue to decline and is a great short opportunity right now, but that's a much shorter term blip in the history of bubbles.
posted by stbalbach at 12:23 PM on May 13, 2011 [1 favorite]

Wait, so Charles Hugh Smith is not exquisitely corrupt?
posted by swift at 12:25 PM on May 13, 2011 [6 favorites]

The thing is, I don't think enough children of baby boomers are going to be in a position to buy houses in 5 or 8 years -- between people holding off selling because they're underwater on mortgages to the explosion of consumer debt and higher education bubble resulting in people having near-unaffordable levels of student loans, i really don't think we're going to see home ownership rates anywhere like we used to.
posted by rmd1023 at 12:35 PM on May 13, 2011 [8 favorites]

Man, if only there were several million people who wanted to move to the US and buy houses.
posted by empath at 12:35 PM on May 13, 2011 [39 favorites]

empath, immigration is actually making things a lot better, but still not enough. They'll increase immigration rates to make up for demographic drops in order to keep markets stable - as births drop, you increase immigration, with an overall slight yearly increase to keep GDP on a steady upward rise. It's almost sci-fi. The US as a giant machine with people as its fuel source.

i really don't think we're going to see home ownership rates anywhere like we used to

Unless housing prices come down, which is happening, and demand goes up, which will happen.
posted by stbalbach at 12:51 PM on May 13, 2011

Unless housing prices come down, which is happening, and demand goes up, which will happen.


Except in many cases the title is clouded by improper transfers. How can you buy a house when you don't know who legally owns it?
posted by eriko at 12:52 PM on May 13, 2011 [4 favorites]

Wait, so Charles Hugh Smith is not exquisitely corrupt

He's like a mobius strip of corruption. He's so corrupt he loops back around to be non-corrupt, but only via the twist of web formatting on the Blue.
posted by rough ashlar at 12:59 PM on May 13, 2011 [2 favorites]

Speaking of booms and silver:

The commodity boom .. started 115 months ago, in 2001.. That time frame is worth noting, because it’s about how long the tech boom lasted (114 months) and how long the housing boom lasted (113 months).

posted by stbalbach at 1:03 PM on May 13, 2011 [1 favorite]

How long has the higher education boom been running?
posted by thsmchnekllsfascists at 1:06 PM on May 13, 2011 [6 favorites]

hmmmm.... perhaps I should buy a lot and pitch a tent.
posted by norm111 at 1:10 PM on May 13, 2011

Gosh, I hope he is wrong.

Me too, I was hoping it would collapse faster and get the pain over with sooner.
posted by BrotherCaine at 1:15 PM on May 13, 2011 [1 favorite]

A recent review of home values at sale in the Bay Area was interesting - I found a couple homes that were turned over multiple times in the last 10 years. Those highlighted the correctness of many of these predictions.

In the bay area bubble, property everywhere DOUBLED in value over the course of just a few years. I still can't effing believe that. Thanks, banking/mortgage industry!
posted by cbecker333 at 1:21 PM on May 13, 2011

The thing is, I don't think enough children of baby boomers are going to be in a position to buy houses in 5 or 8 years -- between people holding off selling because they're underwater on mortgages to the explosion of consumer debt and higher education bubble resulting in people having near-unaffordable levels of student loans, i really don't think we're going to see home ownership rates anywhere like we used to.

I'm a child of baby boomers, and Im never buying a house without saving the full purchase price beforehand. Growing up in the midst of 2 finance bubble has taught me that there's no reason to believe anything written on paper by a banker or real estate agent, period. They're not to be trusted to act in the mutual best interest of the agreement and will fuck me over at the first opportunity to turn a shortsighted profit.

I'll keep renting, apologies to Jimmy McMillian.
posted by T.D. Strange at 1:31 PM on May 13, 2011 [12 favorites]

In 2007 or thereabouts, I saw the data that median income in California had been flat since the late 1980s. Housing prices had doubled. It was then that I realized that there was no way that house payments could be affordable for most people based on their salary/wages. At least for housing you can get out of the bad situation in California if you walk away-- other than home equity line of credit, for most people who occupied their homes, they won't have to pay the balance due once the foreclosure sale happens.

But, as rmd1023 points out, there's the student loan situation hanging over people's heads, which is totally going to prevent people from buying houses. Worse yet, you can't get out of student loans in bankruptcy in the vast majority of cases. Just as the article linked above discusses a "double dip" housing crash, I expect something similar in the higher education market. Recent college grads (say 2007/2008) have been encouraged to go back to school and get "more marketable skills" or "wait out the recession." Most of them have done it with debt , starting in the 2009 school year. Many will finish their post grad programs in the next two years. They won't be able to pay those loans off-- having more education is little help when the jobs just aren't out there.

And that's about when the situation in the "American street" may get pretty ugly. Watch for 2012 and 2014 to have tons of stories about recent grads who can't afford to pay student loans, and are living with their parents in an apartment. The parents are going to be the people who lost their homes in foreclosure.

Jesus, this is just awful.
posted by wuwei at 1:32 PM on May 13, 2011 [2 favorites]

Until the children of the boomers start buying houses it won't reverse itself. The leading edge of that crowd is about 27 right now ...

Bill Clinton is 65. I'd say the leading edge of Boomer children is 40-45 already.
posted by mrgrimm at 1:33 PM on May 13, 2011 [1 favorite]

Watch for 2012 and 2014 to have tons of stories about recent grads who can't afford to pay student loans, and are living with their parents in an apartment. The parents are going to be the people who lost their homes in foreclosure.

That's happening right now, you don't need to wait.
posted by T.D. Strange at 1:35 PM on May 13, 2011 [4 favorites]

So... I need to save a boatload of money until 2014 when the next depression correction hits and buy up houses?
posted by Mister Fabulous at 1:37 PM on May 13, 2011

US population pyramid, animated at Wikipedia, with data taken from the Census Bureau's International Data Base. I can't link directly to the data - sorry.

The biggest five-year cohort is 45-49, which seems a bit weird to me -- they'd be born in the early sixties, and weren't birth rates highest in the fifties? -- but I guess the older boomers have started dying off already.

Anyway, there's a bit of a trough in the early thirties -- that is, people born in the late seventies -- and those of us born in the early eighties are probably the leading edge of whatever's going to happen. But whatever's going to happen won't be that big, because the "echo boom" was more spread out than the original baby boom. (That makes sense! It was an echo.)
posted by madcaptenor at 1:49 PM on May 13, 2011 [2 favorites]

BrotherCaine : Me too, I was hoping it would collapse faster and get the pain over with sooner.

Although I tend to agree in principle, consider what that would mean:

1) Homeowners, including many newish ones, collectively accepting the actual value of their homes.

Okay, unlikely, but let's take it as read that we get to deal with completely rational actors here. That leads to:

2) Everybody with less than 50% equity (assuming for simplicity that we had a 2x bubble) in their homes opting for a "strategic" default.

Hell, I bought a house a few years ago. And although I've remained "above water" on it, you could say that I've pretty much only done so by followed the tide in (the rate of loss of value has basically matched me paying down my mortgage). And if you told me tomorrow that I owed 200k on a 100k house, you can bet your ass I'd tell the bank to come and get it. Which would lead to:

3) EVERY bank collapses, as 10-30% of prime mortgages go bad on top of the subprime failures.

Which of course leads to:

4) How do you say "Would you like fries with that" in Mandarin?
posted by pla at 1:55 PM on May 13, 2011

Hard to believe the 45-49 cohort is the biggest, I'm 48 and hit the sweet-spot, being the right age and income to buy in the price trough of the mid 90s.

My street is in the vicinity of some more affluent Toronto neighbourhoods and I get the impression that wealthy old Boomers (who want their grandkids close at hand) are contributing heavily towards their children's home purchases and keeping prices high. I see young couples with toddlers spending 700K for run down three bedroom houses and think, "How?!!"
posted by bonobothegreat at 2:02 PM on May 13, 2011 [1 favorite]

Oh, the other thing about debt mucking with the recovery is the loss of generational wealth among current homeowners. Previously, if you were a family where people were owning homes, you'd have a spike in wealth at the point that the oldest generation died off and the (paid off) house got sold and money distributed to the adult children or something. Now, with savings rates near an time low (iirc), all these people attempting to die broke or in debt, and with home equity lines of credit paying for things like big tv's and vacation (rather than more durably-valuable things like house improvements), you're not going to have that influx. More wealth is being spent now rather than passed on down the line.
posted by rmd1023 at 2:07 PM on May 13, 2011

And if you told me tomorrow that I owed 200k on a 100k house, you can bet your ass I'd tell the bank to come and get it.

Why? If you're not trying to sell your house or open a line of credit based on equity, why do you care how much you would get for it if you did sell it? And why, upon discovering that you're upside down, would you suddenly want to live somewhere else?
posted by The World Famous at 2:11 PM on May 13, 2011 [2 favorites]

I agree that the wealth is being spent but I would say that many home inprovements are in the category of big TVs. I remember shopping in the early 90s when most houses had very few renovations or just had crummy 70s do it yourself remodeling. Even in the excesses of the 80s, it seems like most of the money was spent on grey and dusty rose paint, popcorn ceilings and ugly fixtures. It's only in the last decade that people have been taking out home equity loans to pay for new kitchens with marble counters and $2000 vent hoods. A barrage of Home & Garden shows have convinced people that you're just a schlub until you put in all new kitchens and baths. In the old days, I don't think people fixated on their homes so much.
posted by bonobothegreat at 2:24 PM on May 13, 2011 [1 favorite]

Now, with savings rates near an time low (iirc), all these people attempting to die broke or in debt, and with home equity lines of credit paying for things like big tv's and vacation (rather than more durably-valuable things like house improvements), you're not going to have that influx. More wealth is being spent now rather than passed on down the line.

Would reverse mortgages add to this problem as well?
posted by drezdn at 2:24 PM on May 13, 2011 [1 favorite]

The World Famous writes "Why? If you're not trying to sell your house or open a line of credit based on equity, why do you care how much you would get for it if you did sell it? And why, upon discovering that you're upside down, would you suddenly want to live somewhere else?"

Because cutting your mortgage payment by half would allow you to spend more money on other things or be mortgage free sooner. If you've got 23 years of a 25 year mortgage left to pay you can walk away, take a hit to your credit rating that won't go away for seven years, buy a house in seven and still own your home free and clear sooner than if you'd just stuck with your original house. If you can finagle financing faster then even better.

You lose the benefit of capital improvements to your own home though during the period you are renting. Stuff like seven years of tree growth or garden development is hard to buy and experience with the foibles of your house is pretty well impossible to accelerate.
posted by Mitheral at 2:31 PM on May 13, 2011 [1 favorite]

The World Famous: "Why? If you're not trying to sell your house or open a line of credit based on equity, why do you care how much you would get for it if you did sell it? And why, upon discovering that you're upside down, would you suddenly want to live somewhere else?"

Why would you continue make a horrible investment just to avoid the hassle of moving?
posted by mullingitover at 2:32 PM on May 13, 2011 [2 favorites]

FWIW, silver probably was in a bubble, and you might see some general commodity retracement. However, over the long term, prices in those areas will continue to rise a great deal because of the deep monetary disorder we're in. So while silver may drop a great deal in the short term, if they don't back off on the deficit spending, debt monetization, and outright money printing, it'll come back up sooner than you'd think. I certainly wouldn't be taking a position in it now, but if you took yours ten years ago, you're still in much better shape than anyone who bought into the Dow. Going forward, buying the Dow would almost certainly be smarter, but you're doing fine if you were paying attention at the ridiculous lows a decade ago.

Silver has been in a bubble, but using that same term for such a tiny market and huge ones like the Nasdaq and the housing bubbles is kind of misleading. I'd call those 'manias', not ordinary bubbles. Bubbles are damaging, but manias go to a whole different level of destruction.

What's driving the bubbles is too much liquidity. Money matters a great deal; it's one of the primary methods by which the economy communicates relative abundance and scarcity. The hijacking of the money system for political ends always causes problems that are much worse than the ones they were trying to fix. The existing problems are hidden, temporarily, but not solved. Further, the flood of liquidity sends false messages into the economy. In the case of silver, the basic price rise was caused by overdriven physical demand from over-expanded industry (much of it in China), which itself was stimulated by the liquidity, while that same liquidity and huge leverage available to speculators compounded the basic price increase.

Unless we back off on the money printing, and the fundamental promise by the Fed that they'll do their best not to let anything bad happen, ever, the bubbles will only get worse. Waves of inflation and deflation will sweep through the economy, wreaking havoc, and enriching primarily the financial operators, the people close to the money source.

I was reading late last year that there's some new theory at the Fed, one even more dangerous than the old ones, if you can believe it. I think it was from Bernanke himself. His new view is that price declines in areas he doesn't like can't be allowed; if prices reach a given level, no matter that they were driven by prior monetary disorder, then any amount of intervention necessary to bring prices back to those distorted levels is appropriate. This in turn sets off even more distortion and damage, and then that distortion and damage validates even more intervention. There's no way off that train.

Economies are too complex to manage. It simply can't be done. Any model of the economy always has effects ON the economy, and no model can ever correctly include itself, its own effects on what it's modeling.

If a given phenomenon is complexity Y, and the model is complexity X (where X will always be less than Y; otherwise, it's not a model, it's the real thing), then using X to change Y will always increase the complexity of Y. Then X has to be updated to include the new complexity, which in turn increases Y's complexity further. It's at least additive, and probably multiplicative. I suspect the latter is true, because any attempt at modeling and management will be exploited by other players in the economy for their own benefit.

If, for instance, as a large financial player, you know that you are Too Big To Fail, this will encourage you to load up on risk, because taking risk is profitable. If your risks then come to pass, and the payouts are too large, then the government or the Fed will step in and make good on your debts. You, as an employee of that entity, get to keep all your profit from the risks you took, while the government bears the consequences. So, as a direct result of trying to decrease systemic complexity and instability, the government's modeling and intervention increases both.

Capitalism works, but it only works when markets are free to go down. It's incredibly important that they BE allowed to go down. The process of removing bad models and bad ideas is why capitalism works. It's always painful and unpleasant, and people hate it, but if it's removed from the system, the system stops working. It becomes unstable, and eventually disintegrates.

The massive intervention to stop the housing bubble from popping is already having very visible bad effects all over the world, most visibly inflation and mass overinvestment in China, and these effects will continue to compound into new bubbles and new blowups. Things will only get more and more and more unstable until we admit that the interventionist policies don't work, and accept that things will have to rebalance themselves. The longer we take to admit that, the worse the problems will become, and the more overwhelmingly painful that rebalancing will also become.

It can be argued that the largest bubble of all is the US government deficit and debt. That bubble started in 1981, under Reagan. Looked at from the broadest perspective, if that eventual bubble pop and subsequent economic collapse holds up to roughly the same rules that most of them seem to, the economy should eventually return to 1980 levels of economic output, with some time spent even lower than that. And the larger we let that bubble inflate, the longer we let the politicians spend borrowed money, the deeper that dip will be, and the longer it will last.

Thirty wasted years. At least. And you thought Japan just had a disaster.
posted by Malor at 2:35 PM on May 13, 2011 [9 favorites]

Because cutting your mortgage payment by half would allow you to spend more money on other things or be mortgage free sooner.

I'm not sure that outweighs the drawbacks of foreclosure and bankruptcy. But I wasn't foolish enough to buy a house during the bubble, so I'm not really one to speak.

Why would you continue make a horrible investment just to avoid the hassle of moving?

What investment?
posted by The World Famous at 2:37 PM on May 13, 2011

Why would you continue make a horrible investment just to avoid the hassle of moving?

If I ever buy a house, it'll be so I have somewhere to live that I can't (easily) be made to move out of, and that I can customize to my heart's content.

Why would you ever make any investment that puts such a huge percentage of your net worth into a single asset? No diversification at all? Awful idea.

I buy a car because I want to drive. I buy a bike because I want to ride. I buy a laptop so I can read Metafilter. All of these things can be resold, but I don't buy any of them with the expectation that it'll be a good investment - I buy because they're useful. If I buy a house, it'll be because I want to live there. Period. So if my house goes down in value by some metric... okay? Fine? I'll still be living there. Because that's why I bought the damn place to begin with.
posted by Tomorrowful at 3:01 PM on May 13, 2011 [8 favorites]

I have been fascinated by the whole housing debacle since I moved from Tucson to Las Vegas in 2005.

At the time, I sold a house for $330k. It was 2200 sqft, burnt adoble block, saltillo tiled on a 1.5 acre hilltop with a block wall enclosing a black-bottom pool/jacuzzi with BBQ/sink ramada.

In 2005 in Las Vegas, $350k would get you a mud-and-stick, 1600sqft, mid-sixties rancher on 1/4 acre that needed roof work.

I'm not the brightest sheet in the ream, but I knew something was wrong.

About 2006, I heard the phrase "housing bubble". I looked around on the net and I found:

Patrick.net
Ben Jones Housing Bubble Blog
Piggingtons

and a couple of others, which are now inaccessible or redirected...

The bad news, as I understand it, is if you have a mortgage that is less than 15 years old, prices are still going down.

The good news is, houses are going to get a lot more affordable.

I have heard that this won't be over until the median price of a home is 1.5x the median wage in any given area - that's the historical norm.
posted by mmrtnt at 3:02 PM on May 13, 2011 [2 favorites]

If silver was a bubble, what about gold? The ratio of gold to silver prices was way out of proportion to historical values even before the price of silver dropped, from what I understand.
posted by empath at 3:06 PM on May 13, 2011

If silver was a bubble, what about gold?

Wondering about this too. There might be more uses for gold, but are there enough to keep it immune to an adjustment?
posted by drezdn at 3:12 PM on May 13, 2011

"As long as the nation obeys the whip of the Fed and allows it to print $1 trillion to buy Treasury debt every year, then the travesty of a mockery of a sham can continue."

Heh.
posted by mr_crash_davis at 3:13 PM on May 13, 2011

So about 4-5 years ago my parents were setting into action their plans to buy a retirement lot of land in Wisconsin and build a house there, and were plotting a lot of the financing around the sale of their current house - lived there 25 years, paid off, etc. They had it appraised the year before for something like 350k, which was about 120k more than the previous appraisal. "Sweet!" they said, and so their plans began to roll along.

"You know," I said, "you might want to think pretty hard about selling the house NOW, instead of waiting 3-4 years, and then just finding a nice small place to rent in the meantime before you're ready to move. Because... this house appraisal is the top of a bubble, and it's about to implode."

"Oh, that's completely overblown" says my Da, "and I know, because my new job is at Freddie Mac." (he worked software support department, not evil machinations division)

"Ummm... I just am worried that you're building plans based on finances that are a lot shakier than you realize, and your employers might have a lot vested in spiking the kool-aid." My dad is a stubborn fellow, howe'er, and so they continued on their merry way... until he was laid off during downsizing a few months later. And then the house market value dropped over 100k. And their retirement investments took a 25-30% loss in the market. They've managed to recouperate and the plans are still in effect (with a couple year delay)... but it sucks being right sometimes.
posted by FatherDagon at 3:14 PM on May 13, 2011 [1 favorite]

"In 2007 or thereabouts, I saw the data that median income in California had been flat since the late 1980s. Housing prices had doubled. It was then that I realized that there was no way that house payments could be affordable for most people based on their salary/wages."

The affordability part of this can be answered by the emergence of two-person earners in families.

"In the bay area bubble, property everywhere DOUBLED in value over the course of just a few years."

I'm pretty sure this is more the result of straight supply and demand, and less the banking/mortgage industry: lots of people want to live in the Bay Area, lots of forces in Bay Area fight to keep housing from being built.

So my goal, demographically speaking, is to be in a position to buy a house in 5-8 years to beat out my cohort, and to ride rising prices? Ride da next bubble!!!
posted by stratastar at 3:15 PM on May 13, 2011

Man, if only there were several million people who wanted to move to the US and buy houses.

So why not open up the borders to any foreigner who is willing to buy a house in the U.S. and pay for it in cash? Better yet, why not open the borders to any foreigner is willing to pay cash for the privilege of being a citizen? Why not auction citizenship? Use the money to pay down the national debt. When we've used this means to settle the bigger economic problems, we can go back to pretending we need more poor people.
posted by Faze at 3:21 PM on May 13, 2011 [3 favorites]

Tomorrowful: "Why would you ever make any investment that puts such a huge percentage of your net worth into a single asset? No diversification at all? Awful idea."

Yeah! Let that be a lesson to whomever said that your house should be your only investment. You sure showed that person who's boss!

If you can walk away from your lost cause of a mortgage and pay less to rent, you still have a roof over your head. You also have a lot more money in your pocket. I fail to see what's rational about overpaying in breathtaking fashion.
posted by mullingitover at 3:25 PM on May 13, 2011

So why not open up the borders to any foreigner who is willing to buy a house in the U.S. and pay for it in cash?

1. Foreigners are not dumb enough to want to pay the current inflated home prices in the U.S.

2. Are you suggesting this plan for primary residences only, or are you suggesting allowing citizenship for anyone well-heeled enough to buy investment property in the U.S.?

3. Are there really that many people with half a million dollars or so in cash who want to be U.S. citizens but who cannot find some avenue other than blowing all that cash on an over-valued home?
posted by The World Famous at 3:28 PM on May 13, 2011

Why not auction citizenship?

*golfclap*
posted by thsmchnekllsfascists at 3:38 PM on May 13, 2011

Because that's why I bought the damn place to begin with.

The bank bought it, you just live there. You only own it to the extent of the ratio of your equity over the current market value. When 100% of your mortgage payment is just going to keep your credit from taking a hit it's time to re-evaluate. Your argument makes as much sense as saying that you aren't moving from a rental despite the landlord doubling the rent because you chose to live there.

The affordability part of this can be answered by the emergence of two-person earners in families.

No.
posted by BrotherCaine at 3:56 PM on May 13, 2011 [2 favorites]

Capitalism works, but it only works when markets are free to go down. It's incredibly important that they BE allowed to go down. The process of removing bad models and bad ideas is why capitalism works. It's always painful and unpleasant, and people hate it, but if it's removed from the system, the system stops working. It becomes unstable, and eventually disintegrates.

I agree with everything you said there, apart from the bit about it working.
posted by cromagnon at 3:58 PM on May 13, 2011

I agree with everything you said there, apart from the bit about it working.

Capitalism does work. The question is what "working" means. Capitalism accomplishes the goals of capitalism. And, unfortunately, those are not very good goals.
posted by The World Famous at 4:05 PM on May 13, 2011 [6 favorites]

3. Are there really that many people with half a million dollars or so in cash who want to be U.S. citizens but who cannot find some avenue other than blowing all that cash on an over-valued home?

Even poor people need to live somewhere. If they rent, that's paying someone's mortgage.
posted by empath at 4:08 PM on May 13, 2011

Pla, I'm not sure if it matters if the loss is on the bank's books or on the homeowners. It impacts the economy either way. I'd rather see the banks that failed to do due diligence take the hit, and the few banks that knew what they were doing see some success for their fiscal responsibility.
posted by BrotherCaine at 4:12 PM on May 13, 2011

Even poor people need to live somewhere. If they rent, that's paying someone's mortgage.

Right, but I was responding to the assertion that the U.S. could raise significant revenue by offering citizenship to those who pay cash to purchase a home.
posted by The World Famous at 4:22 PM on May 13, 2011

All popular immigration destinations already "sell" places on their citizenship ladder for sizable investments. I think the U.S. will give you a greencard for a $500k investment in a business. There may be European countries who grant residency merely for buying an expensive house.

You might not get yourself citizenship immediately, or ever in Europe, but you become a permanent resident.. and you'll avoid many citizen obligations. There are countries that'll grant you a passport immediately of course. I've even heard claims that Ireland or someplace sells black (diplomatic) passports.
posted by jeffburdges at 4:27 PM on May 13, 2011

My predictions, the predictions of a score of other Mefites, the predictions all over the place of people who were actually paying attention: all coming true.

It's not like it was hard thing to predict.
posted by stavrosthewonderchicken at 6:27 PM on May 13, 2011 [1 favorite]

Malor, a new UN report warns that humans could triple the natural resources they consume by 2050. Thus commodities are a no brainer in the long term, your right. However we are probably currently in a commodities bubble that is probably in the process of unwinding over the next few months anyway, we'll see how serious it gets.

I personally think the low interest rates and inflation are overplayed by many people when looked at in light of the overall size of the economy. A small move in inflation causes huge moves in commodities which makes no sense. It's as if people are expecting Zimbabwe-style inflation. Sure inflation is a problem, and it should cause some increase in commodities, but nothing like we've seen can justify it but fear, and greed. I also think the dollar should be stronger (and will be), which will further cheapen commodities.
posted by stbalbach at 6:29 PM on May 13, 2011

the largest bubble of all is the US government deficit and debt.

The US gross debt is very large (#1 in the world), but when looked at as a percentage of GDP, the US debt actually ranks below the world average. In other words, the US has less debt than most countries in the world, when adjusted for the size of the economy.

Is the US debt a bubble? It does seem to have started in the Regan period, and really took off with the 2008 financial crisis. It's still lower than it was in the Truman era. Maybe if it breaks new highs we could call it a bubble? It sorta becomes a political term.
posted by stbalbach at 6:46 PM on May 13, 2011 [1 favorite]

If silver was a bubble, what about gold?

Gold's a commodity too, so should respond likewise, but it's also unique in many ways since people see it as an alternative currency and buy it as gifts (more gold is sold as jewelry than for any other purpose, including investments such as coins and bars). So it has some gravitational pulls of its own. From what I hear most people think gold is still moving upward long term.
posted by stbalbach at 6:53 PM on May 13, 2011

immigration is actually making things a lot better, but still not enough.

Better how? Houses were grotesquely overpriced. Now they are a little less so. Immigration pushes them a little higher again and this is good why? SO the guy who made a bad purchase can fob the high price onto someone else? Does that second guy get a break as well? Eventually that loss has to be paid, only question is, who by, and under what terms.

At the end of the day, you can't force people to buy houses. Market rules and market is ruling against the housing market just now. The 8k tax incentives of a few years ago brought in a few suckers but it didn't change anything, just slowed it down. Me, I'm still on the side lines and will remain here until everyone, and I mean everyone, is standing next to me. When HGTV goes off the air, when Better Rents and Garden magazine becomes a reality, when people stop going into realty for a living - that's when I'll start looking seriously.

(I'm curious if anyone has studied what effect the squatters' rent phenom is having on sales, that is, those who don;t pay because they know the bank has lost the paperwork and cannot foreclose. If/when these people want to leave/sell, I would think they would have difficulty proving to a buy that the property is free and clear. I wouldn't touch a house in those circs; for all I know, the lien holder could be a Russian bank, and those guys don't play nice.)

Stalbach, your second link says the facts in the article are disputed. Maybe yes, maybe no, but re-cite in either event is called for. Also, during the Truman era the US and her gold backed dollars were basically the only game in town. We could pull a lot of crap that we simply cannot anymore. As to our relative GDP, just because the next door neighbor has flu doesn't mean that you're in spanking good health. Much of Europe these days scares the hell out of me, financially and demographically speaking.

Gold is in a bubble as well. But it's a relatively thin market and can gyrate dramatically. Where it stops, nobody knows. But, cf above on house prices. If most people say its going higher, time to eye the exits.
posted by IndigoJones at 7:05 PM on May 13, 2011 [2 favorites]

Stalbach, your second link says the facts in the article are disputed.

which link?

just because the next door neighbor has flu doesn't mean that you're in spanking good health.

Well in a way it's a zero sum game because global money has to go somewhere, and if your the best of the worst, then it will go there. That's why China keeps sending US money. It's all relative to a point, the globe could melt under too much debt.
posted by stbalbach at 8:39 PM on May 13, 2011

Better how?

Not just housing, but all markets. With shrinking demographics, markets (housing, motorcycles, pants, etc.) will contract, businesses fail, joblessness goes up, tax revenue goes down, government obligations go up, debt goes up, etc.. sound familiar? Immigration helps offset shrinking demographics and thus stabilize markets and ultimately keep society stable, though it's a balancing act given the xenophobic nationalism that can arise in response to too much immigration, as in some Europe and Tea Party types.
posted by stbalbach at 8:55 PM on May 13, 2011

So why not open up the borders to any foreigner who is willing to buy a house in the U.S. and pay for it in cash?

faze, i've got to admit, you're on the right track here - historically, this is how the u s has kept growing and reinventing itself - by getting the ambitious people from other countries to come here and contribute to our society

this is also why we should consider an amnesty for illegal aliens - by and large, these people have come here to make good - and if they make good, we make good

there's a lot to be said for easing the path of citizenship for those who want to come here - and if they can buy a house outright and figure out how to make their own way here, why shouldn't we let them?
posted by pyramid termite at 9:01 PM on May 13, 2011

The World Famous writes "I'm not sure that outweighs the drawbacks of foreclosure and bankruptcy. But I wasn't foolish enough to buy a house during the bubble, so I'm not really one to speak."

In a non-recourse state you don't have to declare bankruptcy, you just hand over the keys and walk away. You lose you down payment but that is probably less than the negative value of the home.
posted by Mitheral at 11:16 PM on May 13, 2011

It's not like it was hard thing to predict.

QFT. I saw the real estate bubble of the 80s in So Cal go bust, had a neighbor get "stuck" in the house she bought to flip at exactly the wrong time. Had a very bad feeling this time around, too.
posted by epersonae at 12:34 AM on May 14, 2011

gold is totally in a bubble. i assumed that silver started bubbling because of all those folks who couldn't get in on the gold bubble.

now people are trying to pump up a *copper* bubble. including some odd financing leveraging of copper in china
posted by rmd1023 at 7:27 AM on May 14, 2011

sweet! Looks like I can afford a house in the bay area in a couple years!
posted by luvcraft at 12:47 PM on May 14, 2011 [1 favorite]

>Which link?

This one

With shrinking demographics, markets (housing, motorcycles, pants, etc.) will contract, businesses fail, joblessness goes up, tax revenue goes down, government obligations go up, debt goes up, etc..

The great example of economic consequences of declining population is the aftermath of the black death, after which wages rose (more competition for labor) and the price of grain and goods went down. That's an over simplification and there were some down sides, but on balance, if you made it through the worst of it, good times ensued.

Government expense is a whole other subject. Their obligations, IOUs written on whim, are not a law of nature and will be repudiated either directly or via inflation. A rising population from eager immigrants or from American loins will not change the math, it will only postpone the day of reckoning. Trees do not grow to the sky, nor do pyramids.

Well in a way it's a zero sum game because global money has to go somewhere, and if your the best of the worst, then it will go there. That's why China keeps sending US money.

China's currency trade is a little more complicated than simply Beijing's going for the best return on investment. It's largely a means of keeping the yuan cheap so they can export more easily than if the currency floated more freely. Beggar thy neighbor sort of thing - China has a long history of mercantilism. And once and if they start off loading those in a big way, well, good night nurse, as they say.

Other countries in the world find their behavior annoying because it is hurting the recovery. (NB also that China is diversifying significantly where possible. South America and Africa where commodities are found figure high on the list. Then there's their deal with the Panama Canal.)
posted by IndigoJones at 3:50 PM on May 14, 2011