That is what leverage does in an up market. In a down market it multiplies percentage losses and it is not always easy to unwind debt.
"Given the growth of our net worth, this statement is more about emotion than fact."[you wrote in regard to the negative savings rate]
See the previous comments on leverage. Leverage on housing has gone way past that available in bucket shops in the 1920s. Options ARMs. No down payment mortgages. 125% cash out refis??? Do these sound like something that would appeal to wealthy and prudent investors or the real estate equivalent of crack addicts?
"The only mystery here is how you fool someone into believing this nonsense when they understand that net worth is calculated by subtracting debt from assets."
An interesting non response. Absolutely true. But almost irrelevant in a highly leveraged situation until gains / losses have been realized. There were a lot of millionaires in September of 1929 who were broke a couple of months later. Donald Trump after being worth hundreds of millions was saved from bankruptcy once by owing so much more than the liquidation value of his assets that his creditors did not foreclose to avoid realized losses that would threaten their capital structure. Part of the risk of loss came from the lower fire sale type pricing that would have applied in a foreclosure. Three lessons: (i) Leverage is indeed a powerful tool but it cuts both ways; (ii) Mark it to market works for commodity trading, but may not yield a true picture in the case of something illiquid such as real estate; and (iii) We aren't Donald Trump or alternatively if you are going to fail, fail big.
"And, naturally, these people are not paying that liability off which is why our net worth is shrinking...no wait, never mind."
Negative. Net worth is going up because certain assets are inflating faster than aggregate debts are rising. But aggregate debt is rising. Assets can deflate. Short of bankruptcy debts must be serviced.
"LOL. It's always entertaining to me when folks here claim to know more than the bond market."
You might be right on this one. OTOH we may be witnessing something out of the ordinary. I think your hero Greenie referred to it as a "conundrum". My belief is that he could explain it, but did not want to as it might spook the herd or more properly the flock.
"And to think I've always been told that the dollars strength is a monetary phenomenon that has little to do with budget or trade deficits. You're not much of a supply-sider are you?
I believe in minimal Government and honest money. We are about thirty years into the era of universal fiat money, but see no reason to believe that the current dollar has much of a future.
The death of the dollar would be a calamity to put it mildly. Responible monetary / lending policies would give the dollar a fighting chance.
Just for fun, please read what the Constitution has to say about money.
"Another interesting tidbit from you considering real incomes in this country have increased at an average annual rate of 2% over the last century."
And your point is that real incomes went up 2 percent per year due to real estate [or for that matter stock] speculation??? Real income went up because we worked hard, saved, invented stuff, and invested in productive assets.
"Yup, and many of them downsize when they retire. Of course, we need to remember that only 21% of our household net worth is attributable to home equity."
True, but between now and retirement it isn't liquid in any sense other than through cash out refis [more debt.]
"But the average American household still maintains 57% equity in their home. You do like to worry though."
Also probably true ... but most probably could not afford to buy their own houses today's prices. At the very least this does not bode well for further appreciation.
"Our budget deficit for 2005 was more than $450 billion? Even if it was, it's still smaller, as a percent of total GDP, than it was in the 80's under Reagan."
Wrong. The reference to debt was to all debt not just the national debt. Think in addition to the deficit about mortgages, credit cards, state and local bond issues etc. Aggregate debt went up at more in dollar terms last year the economy grew.
" ... [omitted] Trade surpluses have always been achieved during recessions."
Don't count on it this time. There are an astounding number of things that we just don't make anymore and China's factories are newer and her workers are hungrier.
"You guys keep claiming the sky's going to fall. When exactly is that tipping point going to occur? Because, I'm not seeing any of the negative effects. Keep waiting?"
Yup. But IMO it probably won't be long. There is an old market adage that the market can stay irrational longer than you can remain solvent. The doesn't mean that the market can remain irrational forever. In support of your position, optimism is the better investing approach over the long run. Having said all that, economies run in cycles and this cycle appears to exhibit imbalances of epic proportions.
In reference to construction being cyclical you wrote: "Yes, so what? You said housing was not a productive asset. Maybe we define our terms differently. How can something that creates 2 million jobs and offers an averages wage (that has increased faster than inflation since 1994) of about $20 an hour, be non-productive? That makes absolutely no sense whatsoever."
The theory is that a the end of the day a house is essentially a consumer good. It can throw off a stream of rents, but without appreciation it is not a viable economic asset when upkeep, taxes and any sort of positive ROI is factored in. That is why almost all purpose built rentals are multi unit.
The point about cyclicality means that most of the 2 million addition jobs created will not survive even a normal housing market leaving aside the potential for a bursting housing bubble.
"If you read the article I linked, you would know that the bulk of the rapid increase in housing costs has been limited to a relatively small number of regional markets. I could sell my house, move to numerous other markets, buy a larger home for much less money and bank a very large amount of cash. Many in these markets have chosen to do so. Try telling them that housing is not a productive asset."
Yes and IMO by selling you would have come out ahead under an excellent example of the greater fool theory. [And you point is?]
"Remember that real estate here hasn't shown a year over year decline since before WWII. Lots of population growth and increasing wealth here. No population growth and declining wealth in Japan. Our economy is nothing like Japan's."
... and the weather is great in [fill in the blank]. First you made the argument that the real estate market was hot in only a few places. Then you apply the rationale that only a national decline would be a problem. I agree with you to the extent that a crash is less likely in places where prices have not dramatically out paced incomes. That is in essence one of my key points. I am not certain that Fannie and Freddie could survive a moderate decline in more that one or two of the following: Southern California, South Florida, NY, Boston, Phoenix, or Las Vegas. If all of these markets were to take a hit simultaneously?
As to Japan, leveraged real estate and inflated stocks have come down from lofty heights. How is the U.S. immune from those sorts of occurrences. BTW, have Japanese incomes actually declined or is it simply that the air came out of their asset bubbles?
In regard to a comment I made about debt levels and consumer spending pattern you wrote: "Problem is you just can't prove your assessment. Many here try but they always seem to forget to post just how much we own is assets. Any discussion about debt means absolutely nothing without a full accounting of the amount of assets we own."
Assets prices can decline. See Japan. Debts must be serviced or repudiated. See Japan. American assets may be seriously inflated. See what the future brings. You seem to believe that Naples Florida is a screaming deal because it has doubled in the last three years. Based solely on the recent price action you describe it, my guess is that it more likely to be a screaming sell because it is still the same place it was three years ago except that it is maybe a little more congested and thereby objectively less desirable. Under this scenario sooner or later the flock will be sheared [shorn? ... whatever].
You are correct about me not reading your links in detail. However, judging from the quote I extracted from the first one, you might have given them a more thorough review yourself. It made one of my points very clearly.
Finally, do you actually believe that total destruction of the dollar by Brenake [and his helicopter corps] is more desirable than a deflation? Think very carefully about this question.
This exchange could probably go on for weeks, but it is time to wrap it up. Time will tell who is correct. Please feel free to ping me if it occurs to you in the future that I have been proven wrong or just want to trade a few probably opposing opinions.
GJ
Do you understand what deflation is?