2011 March 22 Tuesday
Great News: Cheaper Housing In The Offing

Coming soon to a town near you: cheaper housing!

Sales of previously owned homes fell sharply in February, setting the stage for steep discounting in the spring market.

The National Association of Realtors reported Monday that existing home sales dropped 9.6%, and the median price, $156,100, was the lowest since February 2002.

Why no parades and celebrations about more affordable housing? The goal of many Congresses, to make housing more affordable, is clearly happening. Politicians aren't taking credit for this happy turn of events. Why no calls to shut down no-longer-needed government-funded afforable housing programs? The market is making housing cheaper than it has been in 9 years. If we adjust for inflation the cost of housing is probably cheaper than it has been in 10 to 15 years. Great news for those who do not already own. Though with the trend in male incomes housing will have to drop much more to be affordable to the median.

But wait, don't rush out and buy too soon. More price drops are on the way. If Yale housing economist Robert Shiller is correct then stay strong and resist the temptation to buy.

Then Robert Shiller, the Yale economist and co-founder of the S&P/Case-Shiller home price indexes, dropped this bomb: "There's a substantial risk of home prices falling another 15%, 20% or 25%," he said.

Of course, in some parts of the country housing prices have already crashed. The buy-rent ratio in Las Vegas is ridiculously low. Though Las Vegas still has a high vacancy rate. Still more downward pressure on prices. The vacancy rates in Florida are highest. So prices still have a way to go down in Florida.

The luckiest person buys at the very bottom of the market right before hyperinflation takes off. Then your mortgage gets inflated away. If your salary can keep up to even part of the inflation rate you'll be able to pay down the mortgage with inflated dollars. Better make sure you can afford food though.

What about hyperinflaton? Well Dallas Fed president Richard Fisher says on our current course insolvency looms.

"If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when," Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt.

"The short-term negotiations are very important, I look at this as a tipping point."

Of course we know both political parties and the majority of the voters are so irresponsible that we aren't going to veer from our course. Fisher says our leaders will come to their senses and do the right things. But who is he kidding?

Fisher says we are monetizing the debt.

"In essence what we have done as a central bank is to monetize the entire US debt through the end of June," he lamented. "Had I been a voter last year, which I am this year, I would have joined [Kansas City Fed President Thomas] Hoenig and would have voted against what is known as QE2." It is "indisputable" that "there is plenty of fuel" for American businesses to invest and get people back to work, he said.

QE1 and QE2 will be followed by QE3 when the oil price spikes high enough to cause another recession. Going into the next recession the US government will not be able to afford to do counter-cyclical spending. Instead, as the already $1.6 trillion deficit soars to levels that thoroughly spook the bond market the US government will be forced to either print money (hence the prospect of hyperinflation to pay down mortgages) and/or to cut spending as tax revenues plunge. The next recession is going to be very ugly and the recession after that will be brutal.

Hyperinflation is the big puzzle for me. Will we have a deflationary or inflationary depression as Peak Oil strangles economic growth and forces a long term contraction?

Share |      By Randall Parker at 2011 March 22 09:13 PM  Economics Housing

James Bowery said at March 22, 2011 10:46 PM:

Now if only Ron Paul can be elected president so the Austrian School Economists can fill those houses with the several billion people who want to immigrate to the United States -- it will be the Coup de gr‚ce on the founding stock Americans. Imagine the horror if at the peak of the entry of Boomers to marriage age in the early 80s they had access to 5% mortgages instead of 19% mortgages. Good God Almighty, they might have formed families!!!!!

The Horror....

The Horror....

Jeff Maylor said at March 22, 2011 10:53 PM:

How long before Peak Oil hits? It seems like I've heard about it since the 70s. When is worldwide oil production estimated to peak now?

Matt said at March 23, 2011 5:14 AM:

James, Ron Paul does not focus on it but I would bet that the US borders would be until control if he were president.

James Bowery said at March 23, 2011 8:01 AM:

Ron Paul has repeatedly proclaimed "The Austrians" to be his intellectual betters and they are founded on the work of von Mises of whose philosophy was that the only reason open borders is a problem is the welfare state. This is a principle also supported by the Chicago School of Economics. Indeed, Ron Paul has made statements to that effect.

So, yes, we can expect that if Ron Paul has even a modicum of integrity, the first thing he will do as President is secure the borders. The next thing he will do is privatize the welfare state, which will tank housing prices even further. The final thing he will do is allow his young advisers and assistants from the von Mises institute to act on their "philosophy" as expressed in this observation from mises.org.

B.B. said at March 23, 2011 3:21 PM:

Ron Paul has been given a C- rating by Numbers USA.

Luke Lea said at March 23, 2011 4:10 PM:

I see a replay of the 1970's with the next Volker slamming on the breaks well before hyperinflation. As for peak oil, we can produce oil from shale in Canada for around $50 a barrel. That kind of substitution will cushion any peak that takes place. Peak oil is for cranks.

Randall Parker said at March 23, 2011 8:20 PM:

Jeff Maylor,

Charley Maxwell expects the peak in the 2015-2017 range. But 4 reasons why the effective peak per Westerner comes sooner:

1) Oil consumption is rising faster than oil production in oil exporting nations. So the fraction of their produced oil available for export is declining. Saudi Arabian oil exports may have already peaked.

2) Oil demand in industrializing Asian nations is rising and they are absorbing an increasing fraction of the oil that gets exported.

3) The energy cost of extracting oil is rising. So the net energy return is lower. So at a constant rate of oil production the amount of oil available would actually decline.

4) Population growth. If the US maintained constant imports and constant domestic production then per capita oil consumption would decline.

My guess is that US oil consumption per capita has already peaked.

Luke Lea,

Look at the price of oil. The rate of growth of oil production has been slow since 2005. As world economic growth has outpaced oil production two things have happened: oil prices have risen and economic growth has slowed.

James Bowery said at March 23, 2011 11:18 PM:

The reason hyperinflation hasn't hit is because the CPI numbers have been rigged to hide the explosion in the real cost of family formation ever since the boomers started hitting fertility in the early to mid 70s. To non-zombies, this is hardly news. It was a SHOCK to Elizabeth Warren when she, as a Harvard bankruptcy specialist "discovered" that somehow this reality had escaped everyone's notice -- although she "discovered" it way too late to salvage the next generation of the Posterity of the Founders. Nor does she have anything to say about the resulting demographic vacuum, let alone the fact that this de facto genocide's demographic vacuum is now being filled by immigration very alien to the Posterity of the Founders.

And she's the best we've got in Washington DC!!!

Oh, well there is also the ridiculous centralization of wealth from all of this, causing demand collapse. Moreover demand collapse can't be solved by lowering interest rates to the central banks. That merely lets those with favored access to the central banks buy up the hard -- inflation-proof -- assets at collapsed prices prior to the money trickling down to the folks who need the assets. When price inflation hits the inflated wages will have to bid for assets owned by the wealthy who are sheltered from the increasing consumer prices.

The alternative offered us by the so-called "progressives"? Public sector trickle down to those with favored access to the government. That's all Keynesianism is: Public sector trickle down economics. So the reason I support Ron Paul is he might force the "progressive" slime molds into considering something like a citizen's dividend (or something along the lines of Charles Murray's proposal "In Our Hands"). At least then the hyperinflation will start with the citizens being able to grab the inflation-proof assets before they are no longer affordable, rather than the friends of the central banks or central government.

Jeff Maylor said at March 27, 2011 3:25 AM:

Follow up question on Peak Oil: What about the role of the Fischer-Tropsch process to get oil from coal? It is my understanding that it becomes economically viable at about $50-60 per barrel. Apparently, it takes a big investment up front and investors have to know oil won't come crashing down again. But once it became obvious that oil was going to be north of $60 forever, wouldn't there be a switch to coal? I know there are environmental problems with coal, but China doesn't seem to care much. And if gasoline goes to $6 or $7 a gallon, we won't either. Doesn't this put an upper limit to how bad dwindling oil can affect the economy?

I got my information from the book "Physics for Future Presidents" a nifty little book I recommend for people out there.

RX said at March 27, 2011 12:52 PM:

If you want to understand hyperinflation, here is a good article: http://pragcap.com/hyperinflation-its-more-than-just-a-monetary-phenomenon

The causes of hyperinflation are usually paying your money in something else. For example, Weimar Germany had to pay their debt in Pounds and Francs so they desired to keep the German Mark strong and at high conversion rates. The notion that the State wanted to inflate does injustice to reality and actual history. Underlying weakness was sensed by Bear Raiders, who shorted the currency driving it down. Private banks in Germany issued new Marks to cover the short, and they ended up in a destructive feedback loop. The gold standard was in place during this period by the way. Argentina had to pay dollar loans, and so on.

Cheaper housing is actually a problem because it extends our balance sheet recession. This is the economic phenomenon we are gripped in now. The Great Depression, Japan circa 80's, and now the U.S. is a balance sheet recession. Richard Koo does a good job explaining what happened in Japan, and you can see some of his interviews on you tube. Whenever a bubble collapses, the population stops taking out bank loans. Since 97% of the money supply is bank loans, then a country can quickly go into severe deflation.

Our balance sheet recession is due to the housing bubble collapse. The Government is deficit spending to counter the money supply contraction. Further decline in housing puts people more underwater, and thus the recession will continue. The overall money supply continues to decrease as people donít take out new loans. The decrease in housing values means that people are even more underwater, and hence will not take out new loans untill they become solvent. This extends the recession out into the future.

Iím not defending our system, it needs reform badly. But, we wonít be having hyperinflation anytime soon as our fundamentals donít match historical cases. Our fundamentals instead match balance sheet recession.

Gold and commodities will continue to get driven up as deficit spend money is mal invested (seeking safety), causing sector inflation.

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