What the bubble?!?

[Goriot]

So which part are you saying it's "VERY" flawed?  I think if you read my prior post, it says inflation will reduce the size of debt quote - "But, it will be good because we don't need to pay back Chinese for every $1 of debt because $1 of debt today will be worth $0.10[/b]."

The interest rate is on your notional principal not the discounted amount.  Yes, it's the real interest rate, I agree with you and I have mentioned that.  There are two ways to get out of this massive debt.  You inflate out by devaluing the USD thereby reducing the debt denominated in USD or through economic growth and deleveraging naturally.  So where is it flawed?

Everyone agrees that interest rates are going to gradually increase and bond prices will fall in the short-term in price and in the long-term in real term (a 30 year bond will not fall in price just prior to redemption since you still redeem it for full value).  What you are doing is making it seem like rising interest rates are going to be catastrophic. We actually want higher interest rates and higher inflation. The reason the FED has made the rates so low was to prevent deflation and to switch to inflation. 3-4% annual inflation would be a wonderful thing right now.

Paperboy.  If you see my post on June 12 at 4:40 pm, I states that gradual increase is ok/good because investors, consumers and regulators can react to the changes.  The above scenario is based on sudden, shock, catastrophic changes in the bond market which goes out of control as we have experienced in 2008.  Unfortunately, things always don't go smoothly especially these days in today's global economy.   

Btw,  Fed has the target inflation at 2.5%.  Anything above that Bernanke and his army will go nutty and get uncomfortable which means higher fed rates and interest rates.  Japan set their target at 2%.  It seems like 2% to 3% is the sweet spot.

 

[qwerty]

their population is shrinking with aging population and low birth rate. 

looks like i need to take my talents to Japan.

 

[usctrojancpa]

So which part are you saying it's "VERY" flawed?  I think if you read my prior post, it says inflation will reduce the size of debt quote - "But, it will be good because we don't need to pay back Chinese for every $1 of debt because $1 of debt today will be worth $0.10[/b]."

The interest rate is on your notional principal not the discounted amount.  Yes, it's the real interest rate, I agree with you and I have mentioned that.  There are two ways to get out of this massive debt.  You inflate out by devaluing the USD thereby reducing the debt denominated in USD or through economic growth and deleveraging naturally.  So where is it flawed?

Everyone agrees that interest rates are going to gradually increase and bond prices will fall in the short-term in price and in the long-term in real term (a 30 year bond will not fall in price just prior to redemption since you still redeem it for full value).  What you are doing is making it seem like rising interest rates are going to be catastrophic. We actually want higher interest rates and higher inflation. The reason the FED has made the rates so low was to prevent deflation and to switch to inflation. 3-4% annual inflation would be a wonderful thing right now.

Paperboy.  If you see my post on June 12 at 4:40 pm, I states that gradual increase is ok/good because investors, consumers and regulators can react to the changes.  The above scenario is based on sudden, shock, catastrophic changes in the bond market which goes out of control as we have experienced in 2008.  Unfortunately, things always don't go smoothly especially these days in today's global economy.   

Btw,  Fed has the target inflation at 2.5%.  Anything above that Bernanke and his army will go nutty and get uncomfortable which means higher fed rates and interest rates.  Japan set their target at 2%.  It seems like 2% to 3% is the sweet spot.

And Japan's 10-year bond rates have basically been at or under 1-2% for over 20 years. 

 

[usctrojancpa]

So which part are you saying it's "VERY" flawed?  I think if you read my prior post, it says inflation will reduce the size of debt quote - "But, it will be good because we don't need to pay back Chinese for every $1 of debt because $1 of debt today will be worth $0.10[/b]."

The interest rate is on your notional principal not the discounted amount.  Yes, it's the real interest rate, I agree with you and I have mentioned that.  There are two ways to get out of this massive debt.  You inflate out by devaluing the USD thereby reducing the debt denominated in USD or through economic growth and deleveraging naturally.  So where is it flawed?

Everyone agrees that interest rates are going to gradually increase and bond prices will fall in the short-term in price and in the long-term in real term (a 30 year bond will not fall in price just prior to redemption since you still redeem it for full value).  What you are doing is making it seem like rising interest rates are going to be catastrophic. We actually want higher interest rates and higher inflation. The reason the FED has made the rates so low was to prevent deflation and to switch to inflation. 3-4% annual inflation would be a wonderful thing right now.

We already have 3-4% inflation even though the FED's selected basket of goods to calculate inflation says 1-2%.  They want inflation because it helps demand and it also takes a bite out of the national deficit.  If you have an interest rate locked for 30-years at 3% and inflation is running over 3%, inflation is actually eating away at your nominal debt balance.

 

[Goriot]

So which part are you saying it's "VERY" flawed?  I think if you read my prior post, it says inflation will reduce the size of debt quote - "But, it will be good because we don't need to pay back Chinese for every $1 of debt because $1 of debt today will be worth $0.10[/b]."

The interest rate is on your notional principal not the discounted amount.  Yes, it's the real interest rate, I agree with you and I have mentioned that.  There are two ways to get out of this massive debt.  You inflate out by devaluing the USD thereby reducing the debt denominated in USD or through economic growth and deleveraging naturally.  So where is it flawed?

Everyone agrees that interest rates are going to gradually increase and bond prices will fall in the short-term in price and in the long-term in real term (a 30 year bond will not fall in price just prior to redemption since you still redeem it for full value).  What you are doing is making it seem like rising interest rates are going to be catastrophic. We actually want higher interest rates and higher inflation. The reason the FED has made the rates so low was to prevent deflation and to switch to inflation. 3-4% annual inflation would be a wonderful thing right now.

We already have 3-4% inflation even though the FED's selected basket of goods to calculate inflation says 1-2%.  They want inflation because it helps demand and it also takes a bite out of the national deficit.  If you have an interest rate locked for 30-years at 3% and inflation is running over 3%, inflation is actually eating away at your nominal debt balance.

Yes.  Gov't likes to pretend that the inflation is actually lower then it is because they use CORE inflation which excludes price volatile goods like energy.  There is BAD/GOOD inflation.  Controllable inflation around 2% to 3% is GOOD.  But too much inflation (probably anything over what Fed will be uncomfortable with - right now probably >3% core inflation) will reduce your purchasing power and standard of living. 

Worst is deflation, which will make consumers not open up their pockets and economy goes into death spiral.  Why would you spend $ on a good that you think it's going to go down in few days.

At end of the day, too much of anything is bad.  Too much sugar (diabetes), too much salt (heart attack and kidney stone), too much sun (skin cancer), too much inflation, etc...

Perhaps too much money????  Balance is always the key.

 

[usctrojancpa]

So which part are you saying it's "VERY" flawed?  I think if you read my prior post, it says inflation will reduce the size of debt quote - "But, it will be good because we don't need to pay back Chinese for every $1 of debt because $1 of debt today will be worth $0.10[/b]."

The interest rate is on your notional principal not the discounted amount.  Yes, it's the real interest rate, I agree with you and I have mentioned that.  There are two ways to get out of this massive debt.  You inflate out by devaluing the USD thereby reducing the debt denominated in USD or through economic growth and deleveraging naturally.  So where is it flawed?

Everyone agrees that interest rates are going to gradually increase and bond prices will fall in the short-term in price and in the long-term in real term (a 30 year bond will not fall in price just prior to redemption since you still redeem it for full value).  What you are doing is making it seem like rising interest rates are going to be catastrophic. We actually want higher interest rates and higher inflation. The reason the FED has made the rates so low was to prevent deflation and to switch to inflation. 3-4% annual inflation would be a wonderful thing right now.

We already have 3-4% inflation even though the FED's selected basket of goods to calculate inflation says 1-2%.  They want inflation because it helps demand and it also takes a bite out of the national deficit.  If you have an interest rate locked for 30-years at 3% and inflation is running over 3%, inflation is actually eating away at your nominal debt balance.

Yes.  Gov't likes to pretend that the inflation is actually lower then it is because they use CORE inflation which excludes price volatile goods like energy.  There is BAD/GOOD inflation.  Controllable inflation around 2% to 3% is GOOD.  But too much inflation (probably anything over what Fed will be uncomfortable with - right now probably >3% core inflation) will reduce your purchasing power and standard of living. 

Worst is deflation, which will make consumers not open up their pockets and economy goes into death spiral.  Why would you spend $ on a good that you think it's going to go down in few days.

At end of the day, too much of anything is bad.  Too much sugar (diabetes), too much salt (heart attack and kidney stone), too much sun (skin cancer), too much inflation, etc...

Perhaps too much money????  Balance is always the key.

Agreed, the FEDs job is to keep the soup from getting too cold (deflation) or too hot (inflation).  I think that there's still a good bit of deleverage that needs to happen (credit bubble don't fully deflate in a few years....Japan is a great example of that....so the FED's money printing is just keeping us from going into a deflationary death spiral).  I give Helicopter Ben a lot of credit for doing what he has done and not made the mistakes that the FED did back during the Great Depression. 

 

[Irvinecommuter]

So which part are you saying it's "VERY" flawed?  I think if you read my prior post, it says inflation will reduce the size of debt quote - "But, it will be good because we don't need to pay back Chinese for every $1 of debt because $1 of debt today will be worth $0.10[/b]."

The interest rate is on your notional principal not the discounted amount.  Yes, it's the real interest rate, I agree with you and I have mentioned that.  There are two ways to get out of this massive debt.  You inflate out by devaluing the USD thereby reducing the debt denominated in USD or through economic growth and deleveraging naturally.  So where is it flawed?

Everyone agrees that interest rates are going to gradually increase and bond prices will fall in the short-term in price and in the long-term in real term (a 30 year bond will not fall in price just prior to redemption since you still redeem it for full value).  What you are doing is making it seem like rising interest rates are going to be catastrophic. We actually want higher interest rates and higher inflation. The reason the FED has made the rates so low was to prevent deflation and to switch to inflation. 3-4% annual inflation would be a wonderful thing right now.

We already have 3-4% inflation even though the FED's selected basket of goods to calculate inflation says 1-2%.  They want inflation because it helps demand and it also takes a bite out of the national deficit.  If you have an interest rate locked for 30-years at 3% and inflation is running over 3%, inflation is actually eating away at your nominal debt balance.

Yes.  Gov't likes to pretend that the inflation is actually lower then it is because they use CORE inflation which excludes price volatile goods like energy.  There is BAD/GOOD inflation.  Controllable inflation around 2% to 3% is GOOD.  But too much inflation (probably anything over what Fed will be uncomfortable with - right now probably >3% core inflation) will reduce your purchasing power and standard of living. 

Worst is deflation, which will make consumers not open up their pockets and economy goes into death spiral.  Why would you spend $ on a good that you think it's going to go down in few days.

At end of the day, too much of anything is bad.  Too much sugar (diabetes), too much salt (heart attack and kidney stone), too much sun (skin cancer), too much inflation, etc...

Perhaps too much money????  Balance is always the key.

Agreed, the FEDs job is to keep the soup from getting too cold (deflation) or too hot (inflation).  I think that there's still a good bit of deleverage that needs to happen (credit bubble don't fully deflate in a few years....Japan is a great example of that....so the FED's money printing is just keeping us from going into a deflationary death spiral).  I give Helicopter Ben a lot of credit for doing what he has done and not made the mistakes that the FED did back during the Great Depression.

Totally agree.  I mean my baseline strategy is to look at the Great Depression and do the exact opposite of what they did between 1929 and 1933.

 

[Goriot]

Nah,

Human behavior never changes and history more then not repeat it self over and over.  it's the human behavior/emotion that is a big contributor in causing bubbles and busts.  humans are greedy and emotional, etc (war and conquest, bubble and bust)

Actually, we haven't learned much from the past.  What economist so call "Black Swan" or Outlier shock events are actually getting alot more frequent in recent times due to globalization and policy changes.  We see more frequent bubble and bust cycles in recent generation compare to history.  Remember, Long term capital that were started by Scholes and Merton and one other Noble prize winners.  That thing collapsed because they were surprised by the frequency of this black swans out there relative to algorithm based on the past.

We ALWAYS think this time will be different but it never is.  Just the timing part is impossible to predict.  Bubble and bust will happen.  this time is not different, but don't know when.  it could be 3, 5, or 10 years.  We are now in a final debt/bond bubble frontier - real estate (late 80s) - tech bubble (90s) - real estate bubble (2002 to 2007) - final frontier the gov't treasury bubble

 

[irvinehomeowner]

As much as we talk about The Great Depression... isn't time and technology different now?

Take the last bubble "collapse" as an example, everyone thought the market would be absolutely destroyed back to the Dark Ages yet government intervention, market manipulation and consumer stubbornness prevented it.

I realize that we often repeat history... but just recently, history was "different".

 

[Goriot]

As much as we talk about The Great Depression... isn't time and technology different now?

Take the last bubble "collapse" as an example, everyone thought the market would be absolutely destroyed back to the Dark Ages yet government intervention, market manipulation and consumer stubbornness prevented it.

I realize that we often repeat history... but just recently, history was "different".

Sorry, but it's not different.  What the Fed did was temporary transfer the PRIVATE (consumer/commercial) debt --> PUBLIC (treasuries) debt and spread it across the population --> tax payers still have to put up the bill for it eventually.  As you notice, the bubble and the bust cycle is getting more severe and severe.  Savings and Crisis in early 90s wasn't bad as the Tech Bubble bust and Tech bubble bust wasn't bad as the Financial Crisis in 2008.  Next bust, which likely would be the bond bust will be more severe because debt is just getting bigger and bigger. 

It's not different at all.  You feel that will because gov't temporary makes you feel that way as they temporary parked their debt out of your hands to gov't hands and we live in one of the wealthies city (irvine) in the U.S. (luckily)  Nationally, we are so much worst off compared to our past generations.  Please see below.

1.  Total U.S. debt (private and public) increased from $10 trillion to $55 trillion between 1990 and 2010.  Check out the link below in explosion in total debt.  We haven't really de-leveraged much in the past 5 years.  Below link will show.http://www.caseyresearch.com/articles/coming-crash-bond-market

2.  We have a flat inflation adjusted wage and growth in decades, which means we are way worse off compared to past generations.  Both of the spouses now have to work to make their ends meet.  Before it was just one person that was sufficient to support a comfortable lifestyle.http://www.outsidethebeltway.com/wage-growth-over-past-ten-years-worse-than-during-great-depression/

3.  Wage gap in the U.S. is the largest in generations.  Earnings and net wealth between top 1% and 99% rest is the largest in centuries.  Middle class has shrunk to the lowest level in decades.http://www.theatlantic.com/business...y-its-worse-today-than-it-was-in-1774/262537/

4.  46 million people on food stamps, which is a record (both as aggregate and % of total population) in the history of the program.http://www.cnbc.com/id/48898378

5.  Poverty level is the highest on record.  46.2 million people living in poverty or 15% of total population.  http://www.businessweek.com/article...-s-dot-poverty-rate-holds-as-inequality-grows

6.  Younger generation (below 40s) and (below 30s) worse off in decades.  Especially age group below 30s had half the net worth compared to past generation (inflation adjusted).http://www.businessinsider.com/younger-generations-are-worse-off-today-urban-institute-study-2013-3

7.  Recent retirees are worse off in 80 years compared to past.http://www.presstv.com/detail/2013/02/17/289412/retiring-americans-worse-off-than-parents/

 

[calimark]

So sad... and our parents' generation (e.g., Buffett, Gross, Lynch, any real estate mogul, etc.) had a "tail-wind" and benefitted from a most favorable multi-decade period of growth in the value of risk assets too...  8)

Meanwhile... we're all facing headwinds (as noted by goriot)...  :-\

 

[irvinehomeowner]

So it is 6 months after I posted this poll and resale prices still seem to be elevated.

We've seen 2 more home communities open (Cypress Village and Pavilion Park-Great Park) and it looks like several more are on the way (Orchard Hills, Northwood Paseo?, Cypress Village East?, Hidden Canyon?, and the rest of Great Park).

By the poll, the majority thinks it's a mini-bubble... but with all this new inventory coming out... is it turning into a medium bubble? Shouldn't the mini-bubble have lost air or popped by now?

 

[nosuchreality]

So it is 6 months after I posted this poll and resale prices still seem to be elevated.

We've seen 2 more home communities open (Cypress Village and Pavilion Park-Great Park) and it looks like several more are on the way (Orchard Hills, Northwood Paseo?, Cypress Village East?, Hidden Canyon?, and the rest of Great Park).

By the poll, the majority thinks it's a mini-bubble... but with all this new inventory coming out... is it turning into a medium bubble? Shouldn't the mini-bubble have lost air or popped by now?

I think we need a new poll, what's the current price premium sellers are demanding due to lack of supply?

At present, there's 752 homes listed on Zillow in Irvine, Redfin shows 551.  In both cases, roughly 50 of those are listed at over $2 Million.

Sales show 352 in September, we still have basically a 2 month supply, but roughly a 1/4 are on more than 90 days which is dog years in this market. 

 

[irvinehomeowner]

@Tyler:

Your definition of bubble is interesting.

I think it still applies to the current market because prices are high even though money/financing is not as easy to acquire.

Prices now, seem to be above the 2006 level, which was considered near the height of the previous bubble.

I was in the market then and am looking now, and they seem very close, maybe higher. In my area, there wasn't many <2000sft SFRs going for over $800k back during the last bubble, but now they are, and these are older homes built in the 70/80s.

When there is easy money, that's at least a reason why prices go up, but with money harder to find, unemployment still high... why are prices on the uptick? Inventory can be cited but back when inventory was half what it is now and interest rates were lower, prices were lower too.

#confused

 

[nosuchreality]

His definition is based on rational.

It's not a bubble when prices are escalating due to supply and demand.  Limit supply, less limited demand == increasing prices.

It is a bubble when people buy solely because they're expecting prices to rise and want to profit from that rise.

We are in the former, not the later.  Well, not completely in the later.  I'd say the market is probably 80/20 limited supply stretched buyers versus profit seeking speculators.

Or in car parlance, when the only stuff available to buy when you need to buy a car is a $125K Tesla S, $20K used Pontiac Aztek and $15K 1976 Pinto with 300K miles on it, don't be be overly surprised when the Aztek gets bought.

And the Pinto too.

 

[irvinehomeowner]

It's not a bubble when prices are escalating due to supply and demand.  Limit supply, less limited demand == increasing prices.

Supply is higher now than it has been it the last 2 or 3 years. Interest rates were also lower in the last 2 or 3 years. So it's more demand?

It is a bubble when people buy solely because they're expecting prices to rise and want to profit from that rise.

Isn't that part of what's happening? Isn't that why people try to buy in the 1st phase of a new home project despite land toxicity, jail/dump proximity and exorbitantly high extra taxes?

We are in the former, not the later.  Well, not completely in the later.  I'd say the market is probably 80/20 limited supply stretched buyers versus profit seeking speculators.

Considering how prices are compared to the previous bubble, I don't think 80/20 is right. Where would I fall in that group? I'm a supply stretched buyer (have been for 3 or 4 years) but then I'm also worried about future appreciation (although not really, just stable affordability and if some life event makes our home no longer affordable, then price stability is a concern for an exit strategy).

Houses we were shopping were in the $700-$800k, they are now in the $900k-$1m+ range and that only happened this year. What happened? If not a bubble, then what?

 

[nosuchreality]

It's not a bubble when prices are escalating due to supply and demand.  Limit supply, less limited demand == increasing prices.

Supply is higher now than it has been it the last 2 or 3 years. Interest rates were also lower in the last 2 or 3 years. So it's more demand?

Three years ago, supply was down say 25%, but buyers where down 50%.

Now supply is down 50% and buyers are???  Good question, because frankly, the supply is so low they're selling almost every home they can each month.  Really, redfin shows 5 weeks inventory below $2.5 million.

that's why prices are going up.  Buyers are frankly, desperate because most of them have been bid out of multiple previous houses.  A buyer looks at a house and if it isn't grossly over-priced, they buyers know that they won't get a chance to come back and look at it again.  That is why prices are going up.

 

[Irvinecommuter]

It's not a bubble when prices are escalating due to supply and demand.  Limit supply, less limited demand == increasing prices.

Supply is higher now than it has been it the last 2 or 3 years. Interest rates were also lower in the last 2 or 3 years. So it's more demand?

It is a bubble when people buy solely because they're expecting prices to rise and want to profit from that rise.

Isn't that part of what's happening? Isn't that why people try to buy in the 1st phase of a new home project despite land toxicity, jail/dump proximity and exorbitantly high extra taxes?

We are in the former, not the later.  Well, not completely in the later.  I'd say the market is probably 80/20 limited supply stretched buyers versus profit seeking speculators.

Considering how prices are compared to the previous bubble, I don't think 80/20 is right. Where would I fall in that group? I'm a supply stretched buyer (have been for 3 or 4 years) but then I'm also worried about future appreciation (although not really, just stable affordability and if some life event makes our home no longer affordable, then price stability is a concern for an exit strategy).

Houses we were shopping were in the $700-$800k, they are now in the $900k-$1m+ range and that only happened this year. What happened? If not a bubble, then what?

Looking at prices in an era of low interest rates is not the right way to look at it.  Regardless of long term soundness or reasonableness, the basis of a bubble is affordability.  More specifically, whether the monthly payments + costs are affordable.  If they are, it's not really a bubble, just inflated prices. 

At the current interest rates, you are paying 25-30% less as compared to 5-8 years ago on a monthly payment basis. 

Also, super strict lending standards and FCBs dramatically mitigate the risks of a bubble. 

 

[Ready2Downsize]

It's not a bubble when prices are escalating due to supply and demand.  Limit supply, less limited demand == increasing prices.

Supply is higher now than it has been it the last 2 or 3 years. Interest rates were also lower in the last 2 or 3 years. So it's more demand?

Three years ago, supply was down say 25%, but buyers where down 50%.

It seemed like prices dropped to where they were in 2003 and stopped about there. So we're looking at a rise in price from where they were 10 years ago.

My neighborhood is definitely over the peak prices but NOT in terms of payments.

If interest rates were to travel back to where they were a few years ago, I'm quite positive people would not be paying the prices we see now cuz they wouldn't be able to afford them.

Down the road, if interest rates rise, I'm guessing we'll see a whole lot of people who have bought now refusing to move cuz their payments would look so good.

Now supply is down 50% and buyers are???  Good question, because frankly, the supply is so low they're selling almost every home they can each month.  Really, redfin shows 5 weeks inventory below $2.5 million.

that's why prices are going up.  Buyers are frankly, desperate because most of them have been bid out of multiple previous houses.  A buyer looks at a house and if it isn't grossly over-priced, they buyers know that they won't get a chance to come back and look at it again.  That is why prices are going up.

 

[irvinehomeowner]

It's not a bubble when prices are escalating due to supply and demand.  Limit supply, less limited demand == increasing prices.

Supply is higher now than it has been it the last 2 or 3 years. Interest rates were also lower in the last 2 or 3 years. So it's more demand?

Three years ago, supply was down say 25%, but buyers where down 50%.

Now supply is down 50% and buyers are???  Good question, because frankly, the supply is so low they're selling almost every home they can each month.  Really, redfin shows 5 weeks inventory below $2.5 million.

Must be a delayed effect. Last time supply was over 500 was April 2012 (and prices were still low). It got down to the 200s in December and stayed in that area until April 2013. That's when prices jumped... and more supply came on board (additionally more new homes also became available which does not show on the MLS).

So supply is 100% more than what it was late last year, yet prices are much higher. Did 2013 trigger some massive buyer influx?

that's why prices are going up.  Buyers are frankly, desperate because most of them have been bid out of multiple previous houses.  A buyer looks at a house and if it isn't grossly over-priced, they buyers know that they won't get a chance to come back and look at it again.  That is why prices are going up.

Isn't that bubble behavior though?

I've been told that bubbles are defined by non-fundamental reasons for a rise in price. Back when homes were this price during the last bubble, everyone said that it was a bubble because homes should not be worth that based on fundamentals.

So are they based on fundamentals now? Therefore not a bubble? What is different now that explains $400-$500+/sft pricing when it wasn't okay back then?