'The US housing bubble will disappear'

PS There may be a simple confusion here. For instance, negative amortization loans and reverse mortgage loans are two totally different kinds of loans. One allows you to temporarily save money on mortgage payments, whereas the other is primarily designed for retirees who want to use the equity in their homes to supplement their retirement. The first kind of loan is a big problem. I suppose the second could be a problem for the banks if housing severely tanks, but these are not the loans that I keep hearing everybody worry about.

Five years ago [gold] was trading for 280$ which is 308$ in 2005 dollars. So in the past five years it has yielded you 52%, great but long term? Ten Years ago it was 380$ or 473$ in 2005 dollars or a yield or 20%, again this is pretty good lets go further back. Thirty Years ago is was about 150$, today that is 544 dollars so now you have made 8% over thirty years.

Compound growth rates (using your numbers):
5 year growth rate --->16 percent. ($280 to $588)
10 year growth rate -->4.47 percent. ($380 to $588)
Thirty year growth rate -->4.66 percent. ($150 to $588)

No need to convert to 2005 dollars. The price of gold will already reflect that. Just use raw numbers ( like stocks).

So you are saying if I buy an ounce of gold for $600 in 1980, and sell the same ounce of gold for $600 today, I've broken even in real terms? Now I see why goldbugs brag about all the "bank" they make.

...gold dividends are still taxed at 0%...

"gold dividends"?

The only dividends I've gotten from gold have been dividends that I got from owning stock in gold mining companies; --unless we want to also count the huge tax loss write-off's from having owned gold.

Darn it, you're right. There is no dividend paid on gold. Never mind.

The years cited are precisely ones in which real estate prices rose 14-20% a year in Washington Mutuals major markets. Of course people with lots of equity from recent price appreciation may use an option ARM to take some of that gain in the form of a reduced interest payment. If I have 80% loan to value and the value then rises 50%, I now have almost 50% equity.

If I pay 3% rather than 5% during those years, the loan to value ratio still falls, it just falls less rapidly. It is not like the interest on ARMs remotely touched the rate of appreciation in that period. So there is nothing wrong with this whatever. Is it a one-off windfall, unlikely to repeat since prices won't rise that fast continually? Sure. So what?

None of it is what the bears are alleging, which is that people with zero equity are paying less than the interest. It is, instead, just people who bet correctly that real estate prices would soar after the Fed dropped IRs to zero after the stock market crash, taking some of their winnings instead of plowing every dime of it into a larger equity position.

The average equity an American has in their house right now is 55%. That's right, not zero, 55%. Not everybody bought last year or 3 months ago. The yearly volume even at peak levels is less than 10% of the size of the whole market, ergo almost everybody who owns a house has held it as it appreciated meaningfully in recent years. US household net worth is over $52 trillion, net of all mortgages. There are 3 million US households with liquid net worth not counting real estate equity, north of $1 million. That is 10 times the size of figures like "25% of this year's loans".

There are some aggressively financed RE lending vehicles out there, the subprime lenders e.g., which may well lose their shirts. There are some speculators who carry too much or bought at just the wrong time, as in every bull and bear cycle in anything. But people waiting for houses to cost $100k again are going to have as long as wait as those who expected them to fall back to $25-40k after the run up of the 1970s. It isn't going to happen.

The reason is simple - there are a lot more dollars today than there were 10 years ago. The Fed lets the money supply rise 6-7% per year, averaged over all cycles, and hits the gas every time the economy slows even marginally. That is not a recipe for price stability. But the ones who lose from it are those who lend in nominal dollars at 2-3% interest rates as the money supply gallops along as 6-7% instead. Not those who borrow at those rates, to hold real assets.

No, there really isn't much confusion, and a reverse mortgage is just a variety of negative amortization loan. Negative amortization simply means the principle flow is to note holder (the bank) rather than note writer (the homeowner). Whether that is justified by the writer not wanting to have any equity when they die, or by not needed as thick a cushion of equity as rapid price appreciation has handed them, is irrelevant. Either way, the risk taken by the bank does not decline with time as rapidly as it does with a standard amortization loan, and if prices are flat it rises. Whether the risk taken by the writer increases with time depends on whether the house price appreciates faster than the rate of principle flow.

Mortgagers are always on the hook the more leveraged they are, in the event prices decline. They also benefit more the more they are leveraged, if prices rise faster than their loan interest rate. The only relevant measure of risk is the portion of the home value covered by the note. If you expect prices to be mean reverting or the high end of the market to be more volatile or both, you might add in some desire for the equity position to be higher at higher prices.

Mortgage books always contain a mix of more seasoned and more recent loans, and the most recent ones are always riskier than the more seasoned. They haven't had as much time to build equity from price appreciation, or for the owner's wages or other income to grow since the loan was taken out, etc. The primary risk control over the effect of recent loans on the whole book comes simply from the low volume of current activity (the yearly flow) compared to the whole market or stock.

Very aggressive lenders or speculators can artificially "goose" that risk level, by selling off their seasoned loans in securitizations, keeping the recent stuff. And can write dodgier loans to lower tier borrowers, tolerate higher loan to value averages, forgo mortgage insurance, etc. Typically they are willing to do all but the last, expecting mortgage insurance to cover their other "sins". If leveraged enough, that can bite a lender. Any leveraged bet in an asset that can go both ways can blow up and some will.

But none of that has anything to do with the basic soundness of the total mortgage book of the whole banking system, or the position of the average American household. It is ordinary cycle stuff. Recessions are also ordinary cycle stuff. We aren't in one - unemployment is under 5% and so are interest rates etc. The construction industry is flat, as single family homes decline and commercial building is rising enough to offset that.

Every screaming commentator wants to pretend the world is ending and the sky will fall. Never happens. Prices drop as well as rise, speculators are burned for being too aggressive, and the ship sails on majestic. Our prosperity is a result of our work and our trading bravery, not a flimflam, and it isn't going anywhere. (Absent nuclear attack).

Yes, there is a need to convert. If I spend 280 dollars in 1975 its not breaking even to get 280$ today..

The price of gold already includes inflation. If you bought gold for $280 in 1975 and if it is the same price today, then you lost money. Inflation is already built in. If you bought a share of stock for $280 thirty years ago whatever the price today would reflect any increase including inflation.

==The average equity an American has in their house right now is 55%. That's right, not zero, 55%. Not everybody bought last year or 3 months ago. The yearly volume even at peak levels is less than 10% of the size of the whole market, ergo almost everybody who owns a house has held it as it appreciated meaningfully in recent years.

Your reply brings up much larger issues. You bring up an interesting point re: average equity. What you left out of that statistic is that average equity has fallen from 70% to 55% since the mid-1980s.

And it would seem that the steady decline in home equity is directly linked to falling interest rates.

Meanwhile, consumer and mortgage debt outstanding has been steadily increasing during this same period.

And it takes ever increasing amounts of household debt to sustain GDP. In fact, household debt almost equals GDP!

I argue that these are unsustainable numbers and scream recession or worse. Real estate is just one piece of the puzzle, but a real estate bust could easily initiate the "doomsday scenario" that so many on this thread do their level-best to deny. Do the above stats strike you as a conservative approach to finance/spending/economics? I could go on posting charts ad infinitum. For instance, in addition to the charts above, the USA has long running budget, current account, and trade deficits. And then there is the 8.5 trillion dollar national debt. In short, we are a nation of debtors. And nobody in either party seems to be willing to do anything about it, except to print more money, borrow money from foreigners, and encourage the public to go into even more debt.

In short, instead of resting on broad BLACK base, our economy is balancing on an ever narrowing tip of RED.

There is nothing remotely unsustainable about them. Of course people are much more willing to carry a portion of their house with debt that costs 6% than when it costs 12%, as it did back in the early 80s when home equity was appreciably higher. Likewise, people are less willing to carry personal debt at 24% rates than in zero to 4% promotions as they recycle balances from one CC promotion to another, etc. The money supply has grown, wealth has grown, the economy has grown. Of course debt has grown as well. Debt rises secularly whenever IRs are reasonable. And since the early 90s they have been much more attractice than merely "reasonable", for borrowers. Only a few blips into the 7% range excepted.

Why? Because the Fed engineered 2 separate periods of very low short rates in the first half of each decade, and because the rest of the world has sent rates to near zero and left them there. Japan has not be bidding for capital at all, instead shoveling its savings out to the rest of the world with 0-1% rates for the past 15 years straight. The Bundesbank has given way to the Euro, and no longer offers 8% interest rates in a sound currency - now it offers 3%, as unemployment remains stubbornly high across the EU. China meanwhile leaves its yuan ridiculously undervalued, taking our nearly printed dollars for goods.

One will not open their capital market, another will not open their labor market, another will not open their consumer market. All capital therefore heads to the US where all are open, IRs while still low are higher than anywhere else in the developed world, business investment actually makes money and those who earn it are permitted to keep it, etc. We reap the rewards of our greater willingness to take risks, as they lend us money for nothing and we buy palaces rising 14% a year in price, or invest in businesses growing their earnings 10-15% per year.

Somebody in the piece is indeed a patsy. But the smart ones aren't those taking freshly minted dollars at tiny interest rates and lending all their capital to others, who are reaping much of the rewards of other's savings and other's work.

Sure, but people who have them have equity in their homes. Making things up remains lying by any other name.

No, the borrowers don't have equity in their homes. They are first time buyers. Lenders have been selling Payment Option ARMs to them. The borrower can choose to pay less than what is required to cover even the interest on the loan. The difference is added to the principal.

It's not that hard to understand. So what is the point of your accusation? Does it mean that if you yourself aren't familiar with something, then it must be a lie? Is that omniscience or simple infallibility that you possess?

From AP News this morning:

In other economic data, the Commerce Department reported a stronger-than-expected increase in September housing starts. The figure rose 5.9%, rather than falling 1.2% as had been expected.

This data indicates a soft landing ahead for home prices. Demand is stronger than many people think and with inflation and interest rates declining recently I think we will see only a modest correction in home prices on average nationwide.

Excellent reasons to buy gold!!! /goldbuggery off

With all due respect, when you said

"...the borrowers don't have equity in their homes. They are first time buyers..."

you were painting with an over-broad brush. Last year, the 25-year-old son of a good friend bought his first house (a condominium) for $140,000 and invested $50,000 as his down-payment.

He could have bought something bigger -- but he did not want to have to sell any of the stock in his portfolio.

So I don't believe for a minute that ALL first-time home-buyers are as "stupid" or "over-extended" as you claim they are.

Since your claim has been proved to be false, why doesn't the "L-word" accurately describe you?

When you borrow money from your credit card to buy gold, is that debt bad?

=There is nothing remotely unsustainable about them.

That is a very pregnant statement. Is it your contention that there is no such thing as being in too much debt? Or are you saying that there is no limit to the measures Americans will take to stay ahead in a loose lending and falling interest rate environment (that encourages debt)? If you mean the second, then I agree. If you mean the first, then you are living in a fantasy world.

==The money supply has grown, wealth has grown, the economy has grown. Of course debt has grown as well. Debt rises secularly whenever IRs are reasonable.

The problem is, household debt has been growing "secularly", and at an exponential rate, ragardless of the interest rate environment.

==Somebody in the piece is indeed a patsy. But the smart ones aren't those taking freshly minted dollars at tiny interest rates and lending all their capital to others, who are reaping much of the rewards of other's savings and other's work.

While we have all been doing what we can to stay ahead in a falling interest rate environment, I think we are all being taken for patsies (Americans and foreigners alike). As I noted in my last post, it is taking ever greater amounts of risk/debt to generate the same amount of national income. This has continued unabated for decades. And, as Pelham has noted, any hint of deflation could topple the house of cards, while loosening credit and expanding the money supply only exacerbates the problem.

Finally, let me give you an idea of how far our economy could fall once the excess debt gets shaken out. And remember, the market almost always over corrects, so take this as a minimum. Jas Jane posed this very question back at the beginning of 2005. Here is his conclusion:

"If you are persuaded that the Household Debt is excessive, based on 450%+ increase in number of Personal Bankruptcy Filings over the past 20 years and many other indicators of debt-distress among households, then the question arises: What will happen to the economy if the Household Debt could not be increased as the % of GDP and at some point it gets back to historical levels?"

"Another way to ask the above question would be: Where would the US GDP be today had the Household Debt, as % of the GDP, remained at the historically high level before the current run up? What if the GDP growth came from growth in the income of households and Household Debt growth that was at 45% of the growth in GDP? The primary reason that I picked the 45% number is that it is the average for 19 years, 1965-1983, and that after 1984 the Personal Bankruptcy Filings exploded. So, we are not talking about a case of no growth in Household Debt; we are simply talking about growth in household spending coming primarily from growth in incomes. Such a GDP would be a Secular GDP with organic growth. As some of you may know, growth in household incomes, in real terms, has been poor over the past 5 years (negative for the last twelve months). How long can debt be a substitute for growth in household spending when income growth is hard to come by?"

"To answer the questions posed in the above paragraph, I decided to recompute the GDP by assuming that the growth in Household Debt was at 45% of the growth in GDP. Further, I assumed that one dollar of additional Household Debt translates to additional dollar of GDP; this I believe to be a conservative number, because it could be closer to $1.5 of GDP growth for each additional dollar of increased Household Debt. Such a recomputed GDP I have termed Secular GDP. Fig. 3 shows graphs of Reported GDP and Secular GDP."

"You will notice that during 1940s and 1950s the Secular GDP was above the Reported GDP, with peak difference at the end of the WW II. Longer term, the Secular GDP has the Pull Effect going forward. Also, you will notice that about half the time, notably 1955-1984, the two graphs are close to each other; this doesn’t prove anything but lends some credence to the methodology employed in arriving at Secular GDP. During most of the Fall and early Winter of the economic Longwave, the red is expected to be above the blue line, but before the Winter could end the blue comes on the top decisively. It will happen again over the next twenty years."

"The wide gulf that has opened up between the red and blue, especially, over the past 5 years, reminds one of the gulf between the Red States and the Blue States in America! Currently, the Secular GDP is 58% of the Reported GDP; this means that the US GDP would have to decline by 42%, in real terms, just to give back the borrowed growth from excessive borrow-and-spend by the households. And thing are likely to be worse than this because the red will fall significantly below the blue before it is fully resolved. This would be Greater Depression in all caps and would lead to massive dislocations of the economies and the governments all over the world."

My question to you you is...WHERE DOES IT ALL END? Can we keep inflating and piling on debt forever? If so, please demonstrate how this is sustainable. If not, what happens when we finally reach the point where we are truly pushing on a string? As the first chart in this post demonstrates, a society with too much debt is extremely vulnerable to market shocks. And we all know, or at least should know, that a highly leveraged society can and will implode, especially when deflation sets in and all those margins come a calling.

My question to you you is...WHERE DOES IT ALL END?

At gold $1650. LOL!

especially when deflation sets in and all those margins come a calling.

Ummmm....if deflation sets in, your gold will never hit $1650.

Right, and right. But I'm assuming they will keep inflating for years to come.