US Economy

[IamBatman]

the more I read, the more I'm afraid of the future of the US economy.

1. national household savings rate is negative
2. fuel, food, education, medical care, insurance prices sky rocketing; yet its not counted as part of inflation
3. US currency devaluating
4. housing bubble: I think its going to be a lot worse then most people predict.

here are some charts;
Shiller Housing Price chart. Adjusted for inflation, housing prices have stayed relatively flat until recent years.



What causes the huge run up in prices? income have stayed relatively flat to down. Population vs housing supply is flat or even skewed towards supply (Florida). one reason: The abundance of easy credit. We as americans are addicted to debt. People are buying stuff they can't afford.

speaking of debt. this is the ARM reset chart (From Credit-Suisse): as you can see, the subprime problem is just starting, and Alt-A ARM and option ARM hasn't even started to kick in yet. People are going to see their mortgage payments doubled, yet they are already stretched because they can't afford traditional mortgages to begin with, how can they pay for the elevated rates?



this picture speak for itself:


lier loans, '01 vs '06


discuss:

[Lotus Fury]

I think it's too hard to really make a prediction on the economy. When the standards for making predictions (eg Employment numbers, inflation etc) were made a while back they were good indicators of the economy. These days I don't see that as much. As you said about inflation not covering some items I totally agree with you. I think inflation is much higher than the indicators show, probably 6% or more.

And for the housing part of the economy you're looking at a sector of the economy that accounted for 23% of last year's GDP. How bad will it get? I don't know. If it carries on at it's continued pace then the other sectors of the economy seem to have kept it in check. Hard times yes, but not a total disaster (yet). And the rest of the world's economy isn't as reliant on the US anymore. They have dampened the impact also by buying our goods.

For Debt, banks have been giving people credit based on cash flow (monthly income) versus asset to debts, the old way. Mortgages still run this way but Credit cards and consumer loans don't. That's one of the reasons for the excessive debt loads. Banks have significant assets that need to be use so the solution is to ease credit restrictions and allow riskier loans. Too much easy credit leads to bad things. It's a cycle that repeats itself over and over again, no big revelation there.

The biggest thing that is in our advantage? Through sheer and utter economic incompetence the current administration has seen a significant drop in the value of the dollar. Our goods are cheaper to those outside the US. If you're an exporter, times are awesome. China may have cheap labor but we have a highly efficient work force. It ends up working out in the end that our products become much more competitive based on price. With the Rust Belt there are TONS of brownfield sites that would require minimal investment to be modified to a new manufacturing use. If China were to let their currency to float free then the USD should drop and it could be a massive boon to our economy.

My personal view point is mixed. The biggest item for me is what China does with their currency, that could really change the game.

[UKphil]

Not my specialist subject by any means but -

Doesn't China link its currency to the dollar?
Doesn't this mean that the US will never have a "currency value advantage" over China?
Also - what will be the effect of China's new policy of finding other ways of using the squillions of dollars it earns?
They used to buy US Government bonds (low yield but safe) - but are now investing in private companies in the US and the rest of the world.

They are also heavily subsidising infrastructure projects in Africa - to provide them with a new markets when the US becomes saturated.

Also - when I come in on my cooldown lap after a track session - I can hear a rhythmic squeak which goes away when the car has cooled down for a while.....

[Lotus Fury]

Yes it is to a point. It's pegged to the US$ but the Chinese central bank has allowed it to float within a very specific rage.

http://en.wikipedia.org/wiki/Renminbi

With the US$ going down Chinese goods are going down in price. The EU has started to put pressure on China to truly float their currency because of this. The US has been trying that for years and it hasn't gotten anywhere. I'm thinking it might happen, just not sure when. When it does it's going to mean pretty big setback to the Chinese economy for the short term. The US is going to be the big winner in that fight and the EU will get a boost too.

One other interesting bit, Oil is generally traded in dollars. I read on Bloomberg that the OPEC countries have been thinking of changing to Euros. Not sure what would happen if the US$ were to tank. If China were to switch to Euros and oil were to also switch that could be cause a huge drop in the US$. Doubtful that will happen too close together though.

[25psi_Elise_Killer]

You have an account on Bloomberg Terminals?

[Moto44]

Originally Posted by serpentor

the more I read, the more I'm afraid of the future of the US economy.

Live within your means and keep your material expectations simple and you won't have anything to worry about.

[MattG]

I'm not overly worried about the housing market...it'll drop for some time, sure, but it'll be temporary and will bounce back. Just don't plan on selling your house for several years! If anything, it's an opportunity for those with means to get some great deals on some investment properties - which will in turn help keep prices from dropping too low as there will always be some demand.

The thing that worries me the most is the massive debt that George Bush has been forcing upon us, both immediate and secondary (the added expenses needed to care for the many disabled war vets). I fear that'll have the largest and longest lasting negative effect on this economy. I'd much prefer that he raised taxes to the point needed to ensure a balanced budget than what he's doing now.

[Lotus Fury]

Originally Posted by 25psi_Elise_Killer

You have an account on Bloomberg Terminals?

No, just happen to read the website a lot.

This article says that OPEC countries are investing in dollars (opposite of what I said):
http://www.bloomberg.com/apps/news?p...d=aZY4JSJcBHRs

Here's a few saying some countries are moving to Euros(older articles):
http://www.bloomberg.com/apps/news?p...d=affCa25VtRhU
http://www.bloomberg.com/apps/news?p...d=awhxEuPg0v8o

It's a mixed bag but I think at least that more investment diversification is going to weaken the US$, but the people doing it are smart enough to not to cause huge bumps. It's bad for them and us.

[MattG]

Originally Posted by Lotus Fury

This article says that OPEC countries are investing in dollars (opposite of what I said):

Of course they are. We're one of their biggest customers, and if our economy tanks, it hurts them too.

[smoseley]

Originally Posted by serpentor

Shiller Housing Price chart. Adjusted for inflation, housing prices have stayed relatively flat until recent years.

What causes the huge run up in prices? income have stayed relatively flat to down. Population vs housing supply is flat or even skewed towards supply (Florida).

I can answer this question at least for South Florida (and probably to a degree for California and Nevada). There are 3 factors that have contributed to the "huge run up in prices":

1. Very low mortgage rates for an extended period of time. Blame Greenspan for that one. Low mortgage rates provide the illusion of getting a house for less than you're actually paying by breaking it down into a "monthly budget" mentality. Most people are too ignorant to know the actual value of something and only determine its worth by affordability.
   
   
2. A very high Transactions/Price per sq. ft. (X/PSF) value for an extended period between 2000 and 2006. This is a figure I invented. X/PSF is an indicator of how "hot" a market is. If you have a high number of transactions relative to the price, the X/PSF spikes, and prices come up to adjust, If the X/PSF drops, the price is going down. Historically, in Miami-Dade County, we've had an X/PSF of about 20-22. Between 2000 and 2005, it rose to over 30, and property prices steadily rose. Today, the X/PSF at 10. That means prices will come down, probably for a while.
   
   
3. A weak dollar. Real-estate is one of our better "exports". At least in South Florida, there are many Euro and South American purchasers... there's actually an outflux of residents, because the area is crappy to live in during the summer (Hurricanes, heat), has a high cost of living, and a relatively low average income rate. So a lot of new buyers are seasonal residents.

Also affecting South Florida is the Florida "Save Our Homes" Amendment, which effectively locks property owners into a taxable rate on their properties. This makes moving a very expensive process, which has had a slight effect on resale prices.

[KingOfJericho]

Housing has been treated like any other investment in recent years and something like 2 million people will likely lose their houses to forclosure in the next 2-3 years. I always laugh when people who just bought houses tell me that I'm missing out. Sorry everyone but the only people who are making the money in housing are those who purchased in the late 90's. A house is an investment and just as the chart shows, it has it's ups and downs. When the flippers and stretchers flood the market with their houses in the next 3 years because noone is buying (read those who really can't afford a house unlike the previous cycle when everyone was given a loan) due to rising rates, I'll be sitting on a pile of cash to buy the house I was "missing out on" just 3 short years ago. Time will tell but I've got a hunch.

[slaughtr]

I'm doing great.


Yeh me!!!

[MattG]

Originally Posted by KingOfJericho

When the flippers and stretchers flood the market with their houses in the next 3 years because noone is buying (read those who really can't afford a house unlike the previous cycle when everyone was given a loan) due to rising rates, I'll be sitting on a pile of cash to buy the house I was "missing out on" just 3 short years ago. Time will tell but I've got a hunch.

I think there are a lot of people in your situation, as well as many that WANT to buy right now but can't quite afford it. That's why I don't think the market will fall too far, for there are plenty of people waiting on the sidelines to step in and get some great deals.

[KingOfJericho]

Originally Posted by MattG

I think there are a lot of people in your situation, as well as many that WANT to buy right now but can't quite afford it. That's why I don't think the market will fall too far, for there are plenty of people waiting on the sidelines to step in and get some great deals.

sure but with rates going up, prices will have to come down significantly for many buyers to get into the market. Rates go up = prices go down. This is the same reason I think the market will be "flooded" in the next few years because many who in reality couldn't afford a house we given these creative loans and they will certainly not be able to afford the payments when that ARM becomes fixed at 3% more. This will not be seen in places like Manhattan and San Francisco but very obvious in places with less jobs and a glut of housing... like Florida. I may be a unique situation as I get paid a crappy salary (relatively...) but my annual bonus is a multiple of my salary so when the time comes I just have the cash right there vs. saving my butt off like most of america. I just wait until the next year if this one ain't the year.

[KingOfJericho]

Additionally, many of the flippers who bought the houses with ARMs to sell at a premium will be forced to simply dump these properties or rent them out as the flipping market will not be the same in the coming swing.

[IamBatman]

excellent points KOJ.
for the people that doesn't think prices won't go down SIGNIFICANTLY, I direct you to the first graph by Shiller. just looking at the chart, you can deduce that prices will either crash hard in a few short years time, or slowly and painfully stagnate and decline for decades (like what happend to Japan, starting from the 80s to now) untill prices get in-line with the mean . remember, houses don't grow by itself like stocks. Prices are determined by income, credit, population and supply. the only thing that's changed in the last 5 yrs is credit, and its going away.

[Moto44]

I don't even want a house. I just want a large garage. Unfortunately, large garages are almost invariably attached to large houses.

[IamBatman]

you take away the credit. you start losing demand, driving down prices, specu-vestors pull out driving down prices even more, people with upside down ARMs forclose adding to supply, job loss (building, furnishing, finance, real estate) from downturn reduces income, people loses ability to use their houses as ATMs fueling economy slowdown... it all snowballs...

[Moto44]

There is a wild card in this equation that can never be predicted or quantified - perception.

Take gasoline, for example. You can also make similar economic forecasts based on fuel consumption and costs. However, perception over what is a high cost for a gallon of gasoline changes. The same is true of housing costs. Priorities can also change.

[IamBatman]

exactly, right now houses are still perceived as an excellent and SAFE investment that never goes down, so people are ok leveraging crazy loans and putting most of their income into mortgage payments.

Exact quote from a friend: "hey my house just went from 500k to 900k in 4yrs, if it keeps going, I can retire in 10 years"
yeah... if it keeps going up, the only person that can afford to buy it from you is Bill Gates.

that is starting to change, go to the business section of any news site like CNN and all you see is housing downturn, subprime, and hedge funds imploding....it takes a while to sink in, its not like the dot.com bubble where you can see the ticker go down..