CA Housing Forecast: A Realtor's Analysis of the San Diego Housing Market

What we have is a system wide failure; Market, Corporate, Government, Consumer.. how ever you want to slice and dice the system it allowed a bubble to occur and it put itself(the system) in jeopardy.

We don't have the anything near pure capitalism certainly that's clear. But I think Greenspan is right to have been surprised by how badly the markets have overpriced certain things and how out of whack so many of the markets got. Why was risk management so bad at so many firms?

Why did firms and investors allow compensation packages that were so tied to short term performance when it was clear that many of these people were doubling down on bets that would eventually go bad and bankrupt the whole company, this is as true for the Government backed corps as it was for the private ones. One might argue that the bond investors (china et all) were rationally accounting for implicit government backing, but the same can not be said for those that held the stock of Friedy, Fanny, Bear etc.

But its not like the Government or its host or regulatory or legislative bodies identified the problem in 2003 and started trying to fix it. No suddenly after everything is obviously in collapse then they know how to fix it.. right I feel so much more confidence now that they are taking bold action.. sigh. Where was law enforcement when the fraud was happening, making examples of people and putting some fear into those that needed it. Now when its to late they can punish, but they did not protect.

And there is all of us regular folks, so many of which lost all control in buying and selling houses acting like we were making value and being so smart. Those of us who saw the bubble and stayed on the sidelines were obviously unable to persuade the others to calm down, we were ineffective at sharing our incite, so we failed as well.

Now the powerful use this as an opportunity greater than war to move the wealth of the present and the future around to their favor. Those who could not anticipate and prevent this, now broadcast their ever changing solutions for the problem of the day. Ultimately this will all smooth out, even the real depression was a blip almost unnoticed by history, except for lives of the people that had to suffer through it. So to will today pass, the knowledge and technology that is growing will dwarf the turmoil of the present. In the long run the power of politics is insignificant compared to the force of technology...the empire of Rome is long since ash...only the arches survive.

Good post, Rob..but I wouldn't be too sure that the rich & powerful are going to escape this..deflation hurts them the most..witness the bets Buffett has made and lost ; BSH is down nearly 50% and the
Oracles net worth is down almost as much..yes, trying to reflate helps the wealthy the most but the powerful forces of deflation are upon us..these trillions of dollars of bailout have to be lent out and leveraged to create any form of inflation in asset values..who among us presently is willing and or able to borrow at 6-8%? It's not so much the increase in the money supply but the velocity of money that counts here..

On technology and its power/benefits I couldn't agree more with you but folks have got to get past shelter, food, and health care necessities before they can benefit from the marvels and productivities that advancing technologies bring..unless we (the U.S) become 100% socialist (and that appears to be rapidly happenning) a persons cell phone,IPOD,internet, aand digital TV are going to be long gone in favor of getting 2-3 squares a day..

I don't think its a good idea to treat the "rich and powerful" as a class that all gets affected in the same way. The hundreds of billions of dollars flowing from Washington will help some and miss others. Some of the politically connected will thrive, others will wither.

I wish there would be some deflation, quick dose of it followed by a nice steady 1-2% deflation for a decade is just what is needed to restore price levels to where they are needed, and to put the risk of getting a loan back in balance. I think the fear of deflation is highly exaggerated and misunderstood. Intel et all has done real well with a full product line in rapid deflation, why can't the rest of industry operate the same way?

But people with debt prefer inflation to deflation, and the biggest debtor is the government. And as James Hamilton has argued, even the most incompetent of governments can cause inflation when they want to. So I don't expect a long term deflation trend, much more likely they will overshoot on inflation. But who will overshoot the most the EU, China, US others? I have no idea. I agree that effects of the velocity of money could swamp the aggregate for a time, I am to ignorant of the details, but given high levels of uncertainty in the markets the velocity seems very hard to predict.. things could stay in balance as the total money supply is growing while the velocity declines but swing rapidly if the velocity reverses mid stream and with unexpected vigor.

My technology view is more long term, on the scale of decades, I don't pretend to know how bad the short term pain will be. But I am hopeful it wont be as bad as you fear.

For some optimism:
http://nextbigfuture.com/
http://mjperry.blogspot.com/

Rob..rising unemployment, stagnation in wage growth and countless
trillions of wealth destruction in stocks & real estate almost
certainly are a perfect storm for deflation..why else the reckless
actions of the Treasury and Fed?..unprecedented certainly in my lifetime of 62 years..the Fed has yet to monetize any of these bailouts as foreigners seek out our currency as a safe-haven..when that stalls as it enevitably will we will have a megadose of
stagflation that will make the 70's seem like a Sunday walk in the park..the real question before the house is how long can the US continue to borrow to fund these bailouts w/o interest rates shyrocketing..

Time will tell on the deflation. I agree that given a stable currency the fundamental economic forces should lead to deflation. Housing and commodity prices have plummeted, labor is slack, consumer spending is down, technology is making things cheaper...why would prices not go into free-fall? (there has been a small about of deflation) But the currency is not stable, its controlled and the people that control it have a strong interest in having inflation over deflation. If Zimbabwe can make inflation I am sure we can. I mean whats the point in having a monopoly over printing money, if you never print money? They are going to play a game to see how tightly they can balance the system. I wish they wouldn't play the game, but if they are I hope they win.

The Volcker appointment to me is a clear signal that out of control inflation because of the political response to the crisis is the big worry and that they are symbolically saying they will keep it under control. I think symbols should stay in poems and novels and out of politics, but then I am not the target market. I think all us normal people will get the short end of the stick, particularly the normal people that are not highly in debt (like myself). It seems like people with bad house loans are about to get a year of free rent. I feel paralyzed because I think so much of what will happen will be based on political whim, and therefor even harder to predict than normal economic trends.

The carpe deim site has some interesting comparisons between now and the 80's and they make the now look pretty good by comparison...but we are early yet in the process. Paulson seems to be going crazy looking for reasons to spend as much of the 700 Billion as he can before the new administration gets in. Everyone is now talking stimulus packages, china is dropping rates. I have no idea where all this capital is coming from, so my guess is that that the governments are just going to start making it up a few bits here a few bits there.. then we have some real money! I think projecting interest rates is beyond me, but clearly if the inflation gets going interest rates will follow... but if interest rates go north of 10% what can possibly stop housing prices from imitating a lead balloon?

To me the Republicans of the last 8 years can best be understood (economically) as a group of people who studied public choice economics and looked at it as a tool to see how much money and power they could swap. I think the new (old) Obama (Clinton) guys are about to play that same game, they just have slightly different friends. I am sure that I am not one of their friends.

To recap, the first order problem is deflation, but the response to the deflation is to create inflation and I think the big worry is that they will overshoot on this, not that they will undershoot. Thats my story~ I am open to forth order counter arguments :)

Thanks for the responses and giving me a place to vent my mind :)

No disagreements here, Rob; just a matter of timing of events perhaps but make no mistake the little guy with zero or no debt and
savings is going to be mugged in this via the ravages of inflation
sure to come..they, indeed, most certainly will overshoot..they already have!

Your story is very similar to mine..like minded..both of us certainly to
be victims of this travesty one way or the other..

Happy Holidays To All

First deflation, then inflation. iTulip made the case for this several years ago, in some well researched work. Eric Janszen is right on target! He backed up the truck and bought gold in 2001. In the late 90's, he sold all his internet businesses (source of his cash). He's simply brilliant, go read his site, itulip.com