The Real Estate Bubble officially began in 1970

[william the wie]

An explanation first. On another board an annoying poster was rehashing the CRA to prove that the Dems caused the bubble and bust.

So anyhow I started a thread that pointed out according to Case-Shiller the start of the bubble was in 1994. But something about that number bugged me. I started looking through my bookcases and ran across "Paper Money" from 1981. The book published under the pseudonom "Adam Smith" had a chart I vaguely remembered from the Federal Reserve Board that dated the housing bubble's beginning to 1970. (No links I'm afraid.)

So here's the problem if the 1943 furlough babies, the leading edge of the Baby Boom, started a bubble in 1970 at age 27 and it ended when the trailing edge of the Baby Boom, 1964 birth year, began hitting 52 then when the 1982/3 start of Generation Y hits 27 the housing bust will hit bottom and turn around. That will be 2019/20. The Bubble had many interruptions such as the S&L crisis of the 1990s and the ongoing bust has had and will have many interruptions but no economic policy will stop or even seriously slow down the decline prior to about 2020.

That should have a lot of effects on economic policy and I was wondering what other people on this board thought they might be.

 

[Pepe]

I have read many economic writers use the same time frame (2020) before the decline ends and a slow rate of growth resumes.

And that is best case with adults finally in charge in DC.

Should the Dems and Pubs, aka the Duopoly, continue to only plan for the next election, then we could be looking at the collapse of the Amerikan Empire and Balkanization long before 2020.

My personal thought says the Late Great USA will be finished in the next 36-60 months.

 

[loosecannon]

An explanation first. On another board an annoying poster was rehashing the CRA to prove that the Dems caused the bubble and bust.

So anyhow I started a thread that pointed out according to Case-Shiller the start of the bubble was in 1994. But something about that number bugged me. I started looking through my bookcases and ran across "Paper Money" from 1981. The book published under the pseudonom "Adam Smith" had a chart I vaguely remembered from the Federal Reserve Board that dated the housing bubble's beginning to 1970. (No links I'm afraid.)

So here's the problem if the 1943 furlough babies, the leading edge of the Baby Boom, started a bubble in 1970 at age 27 and it ended when the trailing edge of the Baby Boom, 1964 birth year, began hitting 52 then when the 1982/3 start of Generation Y hits 27 the housing bust will hit bottom and turn around. That will be 2019/20. The Bubble had many interruptions such as the S&L crisis of the 1990s and the ongoing bust has had and will have many interruptions but no economic policy will stop or even seriously slow down the decline prior to about 2020.

That should have a lot of effects on economic policy and I was wondering what other people on this board thought they might be.

Great post.

It underscores the way in which the fruits of war (World wide baby boom) cast a long shadow upon the world's economy, and not always resulting in good.

In this case the baby boom stole a huge chunk of future wealth from their children just in the form of premature real estate valuation. Not to mention entitlements and a debt as large as GDP.

As for real estate recovering post 2020, I dunno. By about 2019 the bulk of the baby boomers will be passed from the workforce entirely and living on government assistance. I might add living large on assistance.

The reduced workforce will be heavily stressed to support that quintuple burden of debt, debt service, supporting their parents entitlements and paying their own taxes, and providing for their own retirements. Esp if inflation is as rampant as many expect.

Try buying a home on top of all of that, or sending your kids to college.

I always said that FDR failed to do the math 3 generations out.

 

[william the wie]

An explanation first. On another board an annoying poster was rehashing the CRA to prove that the Dems caused the bubble and bust.

So anyhow I started a thread that pointed out according to Case-Shiller the start of the bubble was in 1994. But something about that number bugged me. I started looking through my bookcases and ran across "Paper Money" from 1981. The book published under the pseudonom "Adam Smith" had a chart I vaguely remembered from the Federal Reserve Board that dated the housing bubble's beginning to 1970. (No links I'm afraid.)

So here's the problem if the 1943 furlough babies, the leading edge of the Baby Boom, started a bubble in 1970 at age 27 and it ended when the trailing edge of the Baby Boom, 1964 birth year, began hitting 52 then when the 1982/3 start of Generation Y hits 27 the housing bust will hit bottom and turn around. That will be 2019/20. The Bubble had many interruptions such as the S&L crisis of the 1990s and the ongoing bust has had and will have many interruptions but no economic policy will stop or even seriously slow down the decline prior to about 2020.

That should have a lot of effects on economic policy and I was wondering what other people on this board thought they might be.

Great post.

It underscores the way in which the fruits of war (World wide baby boom) cast a long shadow upon the world's economy, and not always resulting in good.

In this case the baby boom stole a huge chunk of future wealth from their children just in the form of premature real estate valuation. Not to mention entitlements and a debt as large as GDP.

As for real estate recovering post 2020, I dunno. By about 2019 the bulk of the baby boomers will be passed from the workforce entirely and living on government assistance. I might add living large on assistance.

The reduced workforce will be heavily stressed to support that quintuple burden of debt, debt service, supporting their parents entitlements and paying their own taxes, and providing for their own retirements. Esp if inflation is as rampant as many expect.

Try buying a home on top of all of that, or sending your kids to college.

I always said that FDR failed to do the math 3 generations out.

Worse yet he was told that at the time.

 

[william the wie]

I have read many economic writers use the same time frame (2020) before the decline ends and a slow rate of growth resumes.

And that is best case with adults finally in charge in DC.

Should the Dems and Pubs, aka the Duopoly, continue to only plan for the next election, then we could be looking at the collapse of the Amerikan Empire and Balkanization long before 2020.

My personal thought says the Late Great USA will be finished in the next 36-60 months.

60 months is too early and it really depends on what comes out of the commission on entitlements this December. However there is a political curveball coming at your prediction.

This and last year is the time to decide who runs redistricting at the state level and the Ds have been concentrating on the national level. My guess is that as many as 50 Democratic seats in the house will effectively be redistricted out of existence and that is more the number of seats that will change from state to state by almost 100%. The 200 or less surviving members after 2012 will have average victory margins somewhere well north of 60%, quite possibly north of 75% while the 250 or so Republicans will average more like 52-56% victory margins which means the GOP will be highly vulnerable to 3rd party challenges. If population trends continue the 2020 census will see the complete regionalization of the Democratic party with a high likelihood of Northeast quadrant secession.

 

[Toro]

Gee, I don't know William. It looks to me like things got out of hand this decade.

 

[william the wie]

Indexed for inflation yes but note two things:

It is not indexed for amenities such as indoor plumbing, paved roads, electricity and so on.

Nor is it indexed for sq. footage inflation adjusted: a 500 sq. ft. shotgun shack in 1890 is in no way comparable to a 2000 sq. ft. typical house of 2010 or a 1000 sq. ft. house in 1969 even though that is close to median for all three eras.

That is why Shiller is so careful to point out how narrowly defined his index is to investment risk/reward over time as opposed to the use value of home-ownership. I am fairly certain that if measured against aftertax net rents paid as a yield vs. treasuries the graph would be quite different i. e. single family real estate stopped being a cashflow positive investment in 1970 and became a speculative asset play like wheat futures. That doesn't make it illegal, immoral or fattening but bigger fool is a rough and tough game.

 

[loosecannon]

Worse yet he was told that at the time.

please do tell!

 

[loosecannon]

Gee, I don't know William. It looks to me like things got out of hand this decade.

Pretty typical, Toro. Assert a strictly academic argument detached from real world special circumstances, a recipe for misleading yourself.

That is why economics is not a science. The economy is a complex dynamic organism. Economics is incapable of measuring and weighing the myriad special, real world circumstances that influence (dominate) each event or era mathematically.

Give Warren Buffet $10 and Tim Geithner $10 and revisit them each in 60 years to see what happened.

The academic won't win.

 

[william the wie]

Gee, I don't know William. It looks to me like things got out of hand this decade.

Pretty typical, Toro. Assert a strictly academic argument detached from real world special circumstances, a recipe for misleading yourself.

That is why economics is not a science. The economy is a complex dynamic organism. Economics is incapable of measuring and weighing the myriad special, real world circumstances that influence (dominate) each event or era mathematically.

Give Warren Buffet $10 and Tim Geithner $10 and revisit them each in 60 years to see what happened.

The academic won't win.

I hate to defend this position because I have actually lived in houses built prior to 1890.

Take sq. ft enclosed usually less than 600 in 1890 vs. about 2500 today for a median home but have you ever tried to verify original enclosure areas on houses that old? My father who grew up in the house he bought from his sister when granny died was only vaguely aware of the original log foundation of the core house. When I helped with the rewiring I believe he said that he thought all of the log foundations had been replaced but that was not so which made running cable a bitch. The house had been extensively remodeled to bring it up to nearly 3000 sq. ft. but the sales records and deeds were useless for figuring out when that had happened. But the original residence had been about 625 sq. ft. enclosed. So what was the sq. ft in 1890? Real good question. The same was roughly true of the houses of my maternal great grandparents, my granduncles and so on. Case-Shiller is simply a first cut to put later researchers on the right path when enough data becomes available to correct for errors.

Take amenities. An 1890s existing home would be substandard for a Latin American slum in today's market. While I am certain that some poor benighted soul somewhere lives in even crappier homes today that is extremely rare in the modern world. For example Pitcairn Island one of the most isolated places on the planet used to have a slang term for toilet tissue: "fahilo". The term came from the Hawaiian port that they imported the bumwad from Far Hilo. Correcting for that problem will also take decades.

My hat is off to Case and Shiller but they are simply defining the problems that need to be addressed to figure out housing prices by future researchers.

 

[Toro]

Gee, I don't know William. It looks to me like things got out of hand this decade.

Pretty typical, Toro. Assert a strictly academic argument detached from real world special circumstances, a recipe for misleading yourself.

That is why economics is not a science. The economy is a complex dynamic organism. Economics is incapable of measuring and weighing the myriad special, real world circumstances that influence (dominate) each event or era mathematically.

Give Warren Buffet $10 and Tim Geithner $10 and revisit them each in 60 years to see what happened.

The academic won't win.

Go away.

 

[Toro]

Indexed for inflation yes but note two things:

It is not indexed for amenities such as indoor plumbing, paved roads, electricity and so on.

Nor is it indexed for sq. footage inflation adjusted: a 500 sq. ft. shotgun shack in 1890 is in no way comparable to a 2000 sq. ft. typical house of 2010 or a 1000 sq. ft. house in 1969 even though that is close to median for all three eras.

That is why Shiller is so careful to point out how narrowly defined his index is to investment risk/reward over time as opposed to the use value of home-ownership. I am fairly certain that if measured against aftertax net rents paid as a yield vs. treasuries the graph would be quite different i. e. single family real estate stopped being a cashflow positive investment in 1970 and became a speculative asset play like wheat futures. That doesn't make it illegal, immoral or fattening but bigger fool is a rough and tough game.

Sure, that's fine. I get your first argument. The quality of the product has risen over time. But if that's true, then when adjusting for quality, Shiller's graph would be downward sloping, which makes your argument more difficult. How can you be in a bubble when the quality-adjusted price is falling?

As for measuring aftertax net rents paid versus Treasuries, I have no idea. Do you have anything to back it up? But if your argument is correct, then why would Shiller's graph not be upward sloping from 1970 onward? What burst of housing technology and amenities occurred after 1970 that did not occur before 1970?

I don't know if you're right or wrong, but it was cheap to buy houses in the mid 70s and mid-90s. You could buy five story co-ops on Central Park in Manhattan for less than $150k in 1975. Today, those homes go for $10-$12 million. Decent apartments in NYC could be bought for $200k in 2000. Those same apartments are now $1 million.

 

[Neubarth]

Simple fact of the matter is that when people are starting to pay more than it would cost to build the house on the same tract of land, they are paying too much. That aggressive price inflation started about twenty years ago. I was well aware that it was out of control in 2000 when I was prepared to sell my house to the Mormon Church for $740,000 and get out of town. My wife changed her mind about selling and the house probably would not get 450,000 now. That was a Big Loss we took by not selling into an out of control market in Southern California.

Houses are not as low as they can get, but they could turn around in value fairly quickly if we started to see 8 percent inflation (or more) in the coming months. Projecting five to ten years out for a restoral of increasing prices is totally nutz. Only a fool plays that game.

 

[loosecannon]

Go away.

Bite me!

 

[loosecannon]

What burst of housing technology and amenities occurred after 1970 that did not occur before 1970?

Wrong question. Look at your graph. When did the McMansion trend begin? 1997, 2002?

I don't know if you're right or wrong, but it was cheap to buy houses in the mid 70s and mid-90s. You could buy five story co-ops on Central Park in Manhattan for less than $150k in 1975. Today, those homes go for $10-$12 million. Decent apartments in NYC could be bought for $200k in 2000. Those same apartments are now $1 million.

Please stick to discussing the USA, not Monaco West.

The real estate in posh neighborhoods in NY is fueled by the Wall Street financial sector where annual bonuses are obscene.

Main street not Wall street.

And bite me again.

 

[Toro]

Wrong question. Look at your graph. When did the McMansion trend begin? 1997, 2002?

Pay attention.

And go away.

 

[Trajan]

Gee, I don't know William. It looks to me like things got out of hand this decade.

frankly looking closely at the chart it looks the discussion of and repeal of glass-steagall ramped it up. (1999)

 

[loosecannon]

Wrong question. Look at your graph. When did the McMansion trend begin? 1997, 2002?

Pay attention.

And go away.

answer the question and bite me.

Unless of course you are too intimidated to answer the question, in which case, yes you can cower in isolation if you must.

If you bite me.

You continually make the mistake of overestimating your grasp of any topic while assuming the same about others when it isn't always true.

Maybe YOU should pay attention for once!

 

[william the wie]

Toro, the standard measure for real estate is $/sq. ft. It tells you whether to build or buy existing property or rent for a given acreage. That was standard when Granddad used a workout to buy the house I lived in after granny died. And he had been a contractor in the late 1890s.

Two things happened in the 1970s the development of the nail gun and a lighter recipe for building block. The next iteration of Case-Shiller will be build/buy/rent ratios which are much more important than the current index but the current index does create a starting point for more fruitful research. At the moment just a quick down and dirty index does start the ball rolling and is long overdue.

 

[loosecannon]

Gee, I don't know William. It looks to me like things got out of hand this decade.

frankly looking closely at the chart it looks the discussion of and repeal of glass-steagall ramped it up. (1999)

It had to be an advent in the securitization industry. Glass Steagal was specific to the firewall between investment and commercial banking.

Clinton signed the "repeal" of GS in late 1999. The chart begins it's vertical ascent in 1997. That more closely coincides with the growth of the derivatives markets. Most likely CDOs. But I am just guessing. I have no idea.

In any case the low interest rates that began in 2002 would be the expected cause of such a spike, but somehow the data doesn't match well.

Maybe a combo of the excess dot com liquidity and later the low interest rates had a seamless effect on driving RE prices like a rocket.

Or it could have just been that homes were significantly more value added and larger, like super sized, after 1997 while external factors played minor roles in the escalation of prices.