As I review the housing numbers each month, I see local housing prices rising quickly and no return of inventory to blunt the increases. Given those conditions, it’s likely that prices will continue to rise in 2013, perhaps significantly. What’s somewhat surprising to me is that my purely mechanical rating system continues to show improvements in market timing. I thought that rising prices would reduce affordability and cause the ratings to drop. That isn’t what’s happening. The declining interest rates have more than offset the rise in prices. In fact, housing affordability as measured by the monthly cost of ownership was at the lows for the year in November and December of 2012. There is still plenty of room for prices to be pushed higher before payment affordability becomes a problem.
Despite the bullish signs, there are many reasons to believe the recent market recovery is just another artificial market manipulation destined to fail when the artificial constraints and props are removed. One of the few remaining housing bears, Mark Hanson, reminds us why the so-called market recovery is not as robust as portrayed in the mainstream media.
US Housing 2013; The Hangover
by Mark Hanson on January 7, 2013
The overarching problem in resi housing is that it takes massive direct stimulus in order for it to respond.
This is one of the inconvenient truths the bulls don’t want to acknowledge. The interest rate stimulus over the last six years has been tremendous. We have quite literally cut interest rates in half since mid 2006. This increases payment affordability significantly. Rather than watch the nominal price of houses overshoot historic norms to the downside, by reducing interest rates, house prices are supported at inflated levels while the monthly cost of ownership overshoots to the downside. Payment affordability is the lowest relative to rents back to the limits of my data in 1988, perhaps ever.
For example, we saw conditions similar to what we are seeing today off the 2009/10 Home Buyer Tax Credit.
And we all know how that turned out. What happens if interest rates rise to 4% this year?
Now, 6-years after housing rolled over the sector to responding to unprecedented rates stimulus and the Federal / State Gov’t and banks’ national supply suppression efforts vis a’ vi mods, workouts, new laws, and outright delays.
Interest rate stimulus and supply suppression is what caused the bottom in 2012. These are artificial market manipulations, not the workings of a capitalist free market.
This time around the sector only responded after they pushed mortgage rates to levels that made it prohibitive NOT to borrow and buy and inventory to levels not seen in a decade.
As I stated above, my mechanical reports are very bullish right now. The payment affordability is so good, it’s cheaper to own than to rent in most markets, and in some markets its MUCH cheaper to own than to rent. These conditions make it prohibitive to stay on the fence. Anyone who can buy should buy with these conditions in place despite the risks.
They literally had to eradicate foreclosures and re-lever millions of bad borrowers into more exotic and toxic loans than from which they defaulted from in the first place through ‘modifications and workouts’ in order to set a stage in which housing would not drop.
Mark is correct in pointing out that the terms of most loan mods strongly resembles an Option ARM. Most of these mods have teaser rates which will rise to the market over time, many have negative amortization or interest-only features recently banned under qualified mortgage rules, and since missed payments, penalties, fees, and lost interest were merely tacked on to the loan balances, many of these borrowers are deeply underwater and have growing balances. This is one of the many reasons most of these loan modifications will fail.
So in short, we have a housing market almost exclusively dependent on rates stimulus and supply suppression. They rigged the market creating absolutely unsustainable supply and demand conditions — in the midst of a severe stimulus hangover from the 1.5 year long home-buyer tax credit that ended mid-2010 — and still residential housing could not reach escape velocity in 2012 and the YoY Case-Shiller did not even come within a country mile of the 15% increase in purchasing power (on flat incomes) buyers enjoyed from the 30% YoY drop in rates.
The reason escape velocity was not reached is because all along they haven’t thought this through well enough. As with the 6-year perma ZIRP and QE stimulus policies – they thought would be short term intrusions that lit the market on fire from which a self-perpetuating recovery would occur — it’s not turning out this way. That’s because everything in housing and mortgage markets’ bones wants to de-lever, which takes ‘decades’ not ‘years’. And the constant re-leveraging efforts only serve to lengthen the time it takes to truly de-lever.
What astonishes me is that policy makers truly believed they could ignite a self-perpetuating rally in the housing markets by applying short-term artificial stimulus. The only reason I think they may have moderate success in supporting prices now is because they are committed to near-permanent stimulus and inventory control for as long as it takes for housing to recover. Basically, we are committed to a path of housing market nationalization.
Where Escape Velocity Resides
In single family housing specifically, the 20+ MILLION mortgage’d homeowners without the equity to sell (pay a Realtor 5% and put 10% to 20% down on a new house) and rebuy (good credit and stable employment) is a perfect example of how much de-leveraging still must occur.
This is why the move-up market is nearly dead and will continue to be for another decade or longer. A third or more of a typical market is completely absent because they either bought too late in the rally or they HELOCed themselves into oblivion.
This group in a negative and ‘effective’ negative equity position throughout history has always been the sectors largest cohort of demand and supply. Now they are all dead to the market; they are zombies. They must be replaced in order for sales volume and prices to increase.
The main reason the conforming limit was raised from $417,000 to $729,750 in 2008 was to replace as much of the move-up cohort as possible with first-time homebuyers. There will be continued pressure to raise this limit in the future to bail out the banks, but so far, the Obama Administration has resisted this pressure and actually lowered this limit on GSE loans. Continued financial pressures at the FHA may compel them to do the same. Any continued lowering of the conforming limit will have a dramatic chilling effect on the move-up market.
In times of massive stimulus other cohorts show up to fill in some of the hole — private and insti investors for example — but they don’t have the numbers, capital, or staying power to sustainably replace the 10s of millions of zombie homeowners that 6, 16, and 60 years ago were the sectors drivers.
The sad part is that If they would have just let another 6 to 10 million foreclosures actually occur over the past 4 years there would have been demand for the purchases and lots of rental demand for all the investor landlord trades. Now they have neither.
I have long argued that foreclosures are essential to the economic recovery. More foreclosures would have hastened the deleveraging process, made houses more affordable, and put stable homeowners with equity in properties rather than zombie loanowners. Of course, such deleveraging would have cost the banks billions of dollars, so we took another path.
Why will 2013 bring better conditions?… Will mortgage rates go even lower than 3.5%?
No. We may see some lowering of rates as margins compress early in the year, but most analysts expect rates to rise.
Will income or take home pay increase dramatically?
No. Not in the face of continued high unemployment.
Will employment improve especially among the younger household formation cohort?
No. Unemployment among younger households will recover last.
Will taxes or energy prices drop?
No. Not a chance.
Will rents increase amidst the greatest surge in multi-family construction and rehab in decades?
No. As new supply comes on line, recent rent increases should moderate substantially.
In 2013 fundamental macro conditions must improve dramatically in order to achieve the same results as the housing and mortgage sectors from unprecedented rates stimulus in 2012. This is a stretch by any measure.
On residential the more likely outcome for 2013 is:
a) The only way for rates to improve from here is for banks to cut spreads. And with 2013 destined to bring lower resi refi and auto lending and looking to be the year that hundreds of billions in legacy mortgage and housing legal issues are settled or lost, this is a stretch. And remember, to get the same effect as 2012 YoY, rates would have to drop from 3.5% today to 2.625%.
b) The surge in multi-family starts and completions back to 2006 levels will reduce rents and demand for single family purchases.
c) The macro economy with respect to GDP and jobs remains lackluster — the consumer is falling apart right now — and the all-important first-time buyer can’t perform like they did in 2012.
d) 6 million mortgage mods and workouts continue to re-default at record levels.
This will “surprise” economists who currently have their heads in the sand.
e) 20+ million mortgage’d homeowners at 80% LTV or greater — without the equity to sell and rebuy (the lion’s share who sit above 60% total DTI) — will keep defaults elevated
This group will also be the source of many new short sales, assuming they don’t decide to default and squat.
f) Investors who have underpinned resi housing move past the ‘landlord trade’ as relative yields are viewed as undesirable. That’s of course unless prices fall, which on a YoY basis I think will occur.
As prices move higher, cashflow investors lose interest. Perhaps some momentum buyers will take up the slack, but those will not be the professionals and hedge funds backed by billions of dollars.
g) Refi burnout: Refi fundings down 33% if rates stay at 3.5%. If they rise to 4%, refis down 50%. If they rise to 4,5%, refi’s down 67%. No matter how you slice it the drop in refi’s in 2013 is a serious consumer and macro economic headwind. …
The Bottom Line
The 2012 stimulus and supply deprived housing trade is now in the books. Thinking 2013 can outperform is extremely wishful. In my coverage universe I must rather press our China bounce related bets than anything related to US housing or the US consumer for that matter.
Real estate is a hotbed of magical thinking. I think most people believe 2013 will dramatically outperform 2012. They will be disappointed. I still think 2013 is a good time to buy, not because prices are about to skyrocket, but because current buyers can lock in a cost of ownership relative to rents that is the lowest in a generation. Buying for cashflow is always a better long-term strategy than buying for appreciation. And over the long term, you usually get both.
The Option ARM that Fannie Mae bought
Many Right-wing pundits blame the GSEs for the housing bubble. In reality, the housing bubble was inflated by private firms bankrolling stupid loans through the secondary mortgage market. Late in the bubble rally, the GSEs, in response to dwindling market share, did contribute to the demand for these toxic products by purchasing them for their own portfolios. Today’s loan was one of the Option ARMs they bought in 2005.
The former owners were minor Ponzis through most of the bubble. They did increase their original $133,487 first mortgage to a $174,000 first mortgage, and they took out a $68,000 HELOC, but by the standards of their peers, they were lightweights. However on 7/27/2005 they took out an Option ARM with a 1% teaser rate for $348,750 and piled on a $40,000 HELOC. That was enough to do them in. It looks like they rode out the teaser rate period, and defaulted in early 2012. Fannie Mae didn’t let them squat very long and took the property back at auction on 9/28/2012.
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Proprietary OC Housing News home purchase analysis
4531 LARWIN Ave Cypress, CA 90630
$414,900 …….. Asking Price
$135,000 ………. Purchase Price
9/3/1998 ………. Purchase Date
$279,900 ………. Gross Gain (Loss)
($33,192) ………… Commissions and Costs at 8%
============================================
$246,708 ………. Net Gain (Loss)
============================================
207.3% ………. Gross Percent Change
182.7% ………. Net Percent Change
7.8% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$414,900 …….. Asking Price
$14,522 ………… 3.5% Down FHA Financing
3.51% …………. Mortgage Interest Rate
30 ……………… Number of Years
$400,379 …….. Mortgage
$114,406 ………. Income Requirement
$1,800 ………… Monthly Mortgage Payment
$360 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$104 ………… Homeowners Insurance at 0.3%
$417 ………… Private Mortgage Insurance
$275 ………… Homeowners Association Fees
============================================
$2,955 ………. Monthly Cash Outlays
($341) ………. Tax Savings
($629) ………. Equity Hidden in Payment
$16 ………….. Lost Income to Down Payment
$72 ………….. Maintenance and Replacement Reserves
============================================
$2,074 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,649 ………… Furnishing and Move In at 1% + $1,500
$5,649 ………… Closing Costs at 1% + $1,500
$4,004 ………… Interest Points
$14,522 ………… Down Payment
============================================
$29,823 ………. Total Cash Costs
$31,700 ………. Emergency Cash Reserves
============================================
$61,523 ………. Total Savings Needed
The property above is available for sale on the MLS.
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36 Responses to “The housing recovery may stall in 2013”
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Since US wages are not indexed to inflation, what can not be sustained, won’t be.
If we start getting a lot of price inflation without rising wages, the standard of living will fall. Potential homebuyers will feel the pinch, and they will not be willing or able to put 31% of their gross income toward housing. If people don’t lever up to the max, house prices will stumble in places like California where buyers routinely max out their borrowing.
Global Wage Arbitrage will see to that.
I thought 2012 would be the big correction year, but I underestimated the government’s ability to push down mortgage rates.
The big year of change might be 2014. You have will probably qualified mortgages, cap on deductions, credit down grades, increased FHA and GSE fees, higher mortgage taxes, and the wild card a fed chairman. The law of diminishing returns states in 2013 the money creation needs to be accelerated. Will the new fed chairman keep printing more and more money? You still have no supply, but new home sales will suffer.
Itemized deductions are phased-out starting in 2013. Joint AGI exceeding $300k will see a phase-out – 3% of AGI above $300k subtracted from itemized deductions, not to exceed an 80% reduction in itemized deductions.
Do you think Congress will tighten this even further in future debate?
I do. I think there will be pressure to lower this “Pease” phase-out’s starting point from $300k joint AGI down to $250k or lower. It’s a clever hidden way to limit itemized deductions without people knowing their deductions are being limited.
I heard most couple that make above $115K start to itemized instead of taking the standard deduction. I wouldn’t be surprised if it was lowered to there
Not this state, but I feel it’s coming.
Kansas governor proposes the elimination of the mortgage interest deduction
Kansas Gov. Sam Brownback joined a group of Republican governors Wednesday who want to close budget shortfalls in their states by taking away a key tax break.
Brownback said he wants to get rid of a popular state income tax deduction for interest paid on home mortgages. The governor’s proposal is likely to face an uphill battle though. Lawmakers last year rejected a similar pitch.
Brownback also wants to phase in a new round of income tax cuts over three years, while keeping the state’s sales tax rate at its current level, rather than letting it drop in July, as previously scheduled.
His proposals provide an additional $541 million in revenues for the fiscal year beginning July 1.
Remember too, that the FTB here in CA has said that they’ll start auditing returns starting with 2012′s returns, to ensure people are only deducting the 1% property tax (not mello roos, bonds, etc.) and the percentage tax on your auto registration (not the additional fees).
“and the percentage tax on your auto registration (not the additional fees).”
I can’t imagine this is worth the cost of the audit. They may find someone deducted $100 that they shouldn’t have. This will net the State less than $10.
Sean O’Toole understands the market. Financial reporters don’t. The headline speaks to the indoctrination of bullshit caused by the left-wing pander machine that’s convinced everyone that foreclosures are evil.
Can Foreclosures Be Good for the Market?
In a report released Monday, ForeclosureRadar boldly asserts that foreclosures are helping mend the market, and the government—backed by the banking industry—has created foreclosure delays to help bank balance sheets.
ForeclosureRadar argues “the real problem continues to be the negative equity created during a massive and unsustainable credit bubble,” not foreclosures, which are helping homeowners “escape a prison of debt.”
ForeclosureRadar’s report comes alongside the announcement that it has counted the millionth foreclosure in California since January 2007 when the firm began recording its data.
Starting with a foreclosure timeline between 120 and 130 days in 2007, California’s foreclosure timeline grew to 350 days by May 2011 as federal foreclosure-prevention efforts and the California Homeowner Bill of Rights lengthened the process to foreclose.
These delays “were the only real accomplishments of the government interventions,” according to ForeclosureRadar.
“In fact, we believe government officials and their backers in the banking industry actually want delays because even though they let some non-paying homeowners stay in their homes – in some cases for years – they also let banks push their mortgage losses into the future,” ForeclosureRadar stated in its report.
Furthermore, the firm called the government’s early loan modifications “the most toxic loans ever made” because they did not reduce principal and left homeowners underwater.
In that foreclosures reduce negative equity, ForeclosureRadar maintains they are good for the market.
“Certainly there are good arguments for why short sales or principal balance reduction loan modifications might be a better solution, but foreclosure remains an effective way to deal with the real problem… negative equity,” Sean O’Toole, founder and CEO of ForeclosureRadar explained in a statement to DSNews.com.
While touting California’s millionth foreclosure as a milestone for the recovery, ForeclosureRadar maintains the market has a long way to go to a full recovery, pointing out that about 2 million California homeowners remain underwater today.
“Whether by foreclosure, short sale, or principal balance reduction, we won’t have a truly normal housing market until we have eliminated still far more of the negative equity that was created in the bubble than we have to date,” O’Toole said.
O’Toole argues that after foreclosure, homes can return to the market, where they will be purchased and maintained by new owners. As for the displaced, former homeowners, “loan programs are available for those that have lost their home in foreclosure to repurchase in as little as three years,” O’Toole told DSNews.com. “All while eliminating the real problem, negative equity.”
Regardless, ForeclosureRadar anticipates further recovery in California this year with rising demand, declining foreclosures, increasing prices, and continued low interest rates.
Consumer confidence responds positively to media optimism bias
Improving news on housing and employment has given a lift to consumer confidence, despite “fiscal cliff drama,” according Freddie Mac’s U.S. Economic and Housing Market Outlook for January.
The report noted the 155,000 jobs that were added in December and the overall gain of 1.86 million jobs for all of 2012.
Freddie Mac expects the U.S. economy to see another two million news jobs in 2013, which would eventually lower the unemployment rate. However, the projection was based on the assumption that uncertainty over fiscal policy debates in the first quarter won’t “derail the economic expansion,” the report stated.
The GSE also highlighted the increase in home sales, and said over the first 11 months of 2012, homes sales have climbed 9 percent from the same year ago period. The GSE expects sales to display similar gains in 2013.
“As we begin 2013, the economy is undoubtedly at a better place now than at this time in 2012. And despite the clouds of fiscal uncertainty facing the country, positive jobs reports and the strengthening housing market continue to be the bright spot as we begin the New Year,” said Frank Nothaft, Freddie Mac VP and chief economist.
Although the Conference Board’s consumer confidence index took a hit in December, falling to 65.1 from November’s 71.5, Freddie Mac noted some positives.
“Regardless, consumer confidence is up from its Great Recession low, and as consumer attitudes on the economic outlook improve, more potential homebuyers will emerge and feel financially secure in making an offer to purchase a home,” the report stated.
To answer the question of the role of policy uncertainty in influencing the economy, Freddie Mac pointed to research by economists from Stanford University and the University of Chicago.
According to the research, “increases in policy uncertainty precede declines in economic growth and employment.”
“For instance, increases in policy uncertainty equal to the increase observed from 2006-2011 could cost the US economy up to 2.3 percent in lost GDP and 2.3 million fewer jobs,” the report explained.
With the Consumer Financial Protection Bureau’s release of a finalized qualified mortgage rule, Freddie Mac says some of the uncertainty regarding mortgage lending guidelines may have cleared.
Huh? So basically if we say things are good, even when they are not, people will believe it? Yeah, probably.
The media has been doing that since the beginning of the housing crisis. Particularly in 2008 when things were really bad, I used to see articles all the time that started with some good-news headline but then went on to describe a deteriorating picture. If you didn’t read beyond the headline or first paragraph, you thought things were getting better. The same optimism bias exists today, particularly in the financial media. Everyone wants to be the first to tell people they are rich and prosperous.
You know, when I hear the stories of my friends and colleagues and their current employment situations, I don’t believe there is much economic difference today than there was 4 years ago in 2009. We can all fool ourselves and think things are getting better. Many I know have taken lower paying jobs in different industries, and others may have different jobs in their industry now but they are allowing themselves to be abused and put up with undesirable situations because they are paranoid about finding another job. It’s not as if they CAN’T find a job, it’s simply they can’t find a job paying enough for their skill level and/or that provides them with satisfaction in their work.
The only economic difference I see in January 2013 and January 2009, is that 4+ years ago, when companies and industries began mass layoffs and cutbacks in large quantities, it came as a shock to most people who were comfortable with their situation in life. At that time, many people were simply being overpaid commensurate with their skill and experience. Nowadays, you aren’t seeing the mass layoffs, and most people haven’t been overpaid because every non-government employer was forced to clean up operations and tighten their belts. In 2013, everyone has just kind of adjusted to a “new normal”, but I don’t believe it means things are improving. It’s a matter of perspective.
In places like OC where self-indulgence prevails over everything else, most people are desperate to hear what they want to hear. Sad really.
That is why there is such a strong optimism bias in financial reporting. Everyone wants to hear that their investments are going up in value and they can expect huge pay raises.
You’re not a fan of Orange County, eh?
Au contraire… big OC fan, and will remain so, as long as the large cadre of Ivy League’rs (who’ve infiltrated the Newport area) don’t start to migrate up the coast
Since we work in the same general industry, we are seeing the same things. For all the talk about how a recovery housing is supposed to be a boost to employment, I’m not seeing it. There is little or no hiring in homebuilding, land development, engineering, architecture or any of the related fields. The people who do have work are often under-employed because there simply isn’t any work in their field of expertise. We may see some improvement in 2013, but the situation is nothing like what the mainstream media leads everyone to believe.
Ditto in my area (software development) and within my circle of friends, (medical, financial, and engineering).
It used to be in the olden days of 10/20 years ago that after an weekend outing we would sit around at some dinner joint and brag about the raises we were all getting.
Fast forward to 2013. Now the talk is about no raises for years on end and stealth salary *cuts* in the form of reduced benefits. (And, in a few cases
actual salary *cuts*)
Even with professional salaries, I know too many folks who way over their heads with debt. In general, I just don’t see happy days returning any time soon.
Maybe the folks who think the good ‘ol days are coming back live in some sort of parallel galaxy. I sure would like to know the name of that solar system.
I heard the saying, ‘keeping your salary and benefits is the new promotion.”
With persistently high unemployment, most workers will be fortunate to keep their salaries intact. The super low interest rates will help them tread water on their huge debt burdens, but they won’t make much progress on paying them down. Further, when interest rates start to rise, their debt burdens will increase even if they take on no future debt. A rapid expansion of consumer debt doesn’t seem likely under those circumstances.
1. house prices don’t matter.
2. mortgage monthly payments are what matters.
most people finance the purchase of their house so it’s monthly payments, not purchase price, that matter.
in a healthier market you’d see reasonable prices and reasonable payments.
today you see high prices, but low payments due to fed manipulation of interest rates.
low rates are just a bridge to buy time to allow the gap between price and payments to stabilize.
it would be interesting to see a chart with the ratio of median national prices to median national payments. i bet this ratio is higher than ever.
“1. house prices don’t matter.
2. mortgage monthly payments are what matters.”
that’s true only if the loan is assumable! if not… well, when the rates move up and the prices move down to keep the payment constant… GOOD LUCK selling it…
i believe that is how people got stuck and became “zombies” in the 1st place… when the prices collapsed!
The qualifying mortgage rule will probably create two tiers of FHA. How many banks will lend to the riskier tier. I had the article but my computer crashed.
In terms of rental parity – I get it. If you want a 3/2 2,100SF SFH, your monthly payments in SoCal are likely to be less if you buy with these low rates than if you rented a similar SFH. But that assumes that your only option is to rent or buy the 3/2 SFH. You could also rent a duplex, triplex, converted condo, apartment etc. for way less, save your money and not be an idiot who just paid a ridiculous amount of $$$ on a SFH just because “rental parity.” Or am I missing something?
People will buy based on monthly payment. That’s just the reality of the market. During the housing bubble, the monthly payment was made artificially low by toxic loan products. Today, it’s artificially low due to manipulated interest rates. The difference between then and now is that the underlying mortgage product today is stable, whereas the mortgages during the bubble were not. A buyer today could survive the full term of the mortgage. The bubble buyer could not.
Living in the SF Bay Area, I can only shake my head in amazement reading about how rental parity now exists in most parts of the country. Here, over the last 12 months asking prices have increased an average of 41%–bringing them almost back to bubble peaks. Of course, the number of sales compared to “bubble” times is lower, as is the inventory.
An increase in interest rates would likely have a significant impact here. A reduction in the FHA conforming limit would probably have an even bigger impact.
Were seeing much the same in Orange County, particularly near the coast. If the conforming limit were to go down, and people had to come up with 20% down, sales would plummet, and prices would reverse. The market is also going to become much more interest rate sensitive, particularly now that the qualified mortgage rules will make lenders much less likely to offer affordability products to keep the music playing.
This article–Dodd-Frank Qualified Mortgage Rules Will Create a New Bubble–seems to disagree that the qualified mortgage rules will discourage affordability products. Would you agree with it?
Thanks.
I don’t agree with his basic premise because of this:
“Dodd-Frank’s suitability rules are enforced with a sledgehammer, with damages too high for most lenders to risk. Effectively, lenders subject to the regulations will be forced to make only loans under Qualified Mortgage’s safe harbor that protect them from liability—or loans that exploit Qualified Mortgage’s loopholes.
The safe harbor requirements were only loosely based on empirical evidence of the causes of default. Some requirements, such as bans on negative amortization, interest-only, and no-doc (no borrower income or asset verification) loans, will probably make borrowers less likely to take on risks they don’t understand. ”
and…
“The Qualified Mortgage regulations set the maximum debt-to-income ratio at 43 percent”
We will get other regulatory bodies weighing in the minimum down payment that’s required.
I would counter-argue back to him that because of the restrictions put in place, we are far less likely to reflate another housing bubble, and if we do, it won’t be backed by the US taxpayer. The threat of lawsuits from borrowers will keep the lenders in line.
Yes–that seems to work against the title of the article. Glad to hear you think the Qualified Mortgage rules may actually have some teeth.
There’s one joker in the deck here, which is the price of energy. IR, you said there’s “not a chance” that price will go down. That is unlikely. There is an oil and gas boom going on now the likes of which the United States hasn’t seen since the 50s:
http://www.time.com/time/magazine/article/0,9171,2127202,00.html
There’s jobs to go with this, too, often in Freezeyerballz, ND:
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4852
But also in Texas:
http://www.chron.com/business/energy/article/What-recession-Texas-oil-and-gas-jobs-rebound-2081373.php
It’s hard to know how this will all work out, still harder to know whether the inverse Midas touch of the Obama Administration can manage to kill off even this golden goose with some moronic toxic brew of taxation hell, cronyism with their pals in dying and anemic industries, and monetary madness.
But…generally speaking energy prices have a profound effect on the economy. We often credit no small part of the 70s stagflation to the steep rise in energy prices that occurred in the early part of the decade, and at least some of the 80s and 90s boom to the substantial drop (after adjusting for inflation) in energy prices during that decade. Energy costs, after all, form a substantial part of the retail cost of absolutely everything, from a bag of corn chips to the new roof you put on your house.
So who knows? In 1979 Jimmy Carter told us to turn down the thermostat and get used to a steadily declining standard of living, because the weird circumstances of the immediate post-war period (Europe and Japan in ruins) was over, and America’s days of being the major industrial producer were gone forever. Five years later, as the Reagan boom got well underway, that seemed like a strange horrible dream. This could happen again, in principle. And if GDP growth takes off, the way it did in Reagan boom — 4-6% a year — then we could quite easily see rising interest rates and rising prices and deleveraging, such is the magic of rising real wages and falling unemployment.
But even if that were true (and there are significant demographic and cultural factors today than in 1980 that argue against it), it says nothing about what will happen to California. Detroit didn’t especially prosper in the 80s and 90s. Texas may grow spectacularly, thanks to oil, gas, a rapidly growing tech sector, and a powerful culture of fiscal conservatism and rationally minimal government, while California could become the next Michigan or New York City — a place with enclaves of the fabulously rich sprinkled among a countryside of miserable impoverished government dependents.
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