The $6 Trillion Bubble

[twaddle]

Over 18 months ago, I predicted that the housing bubble would wipe out $7 trillion in wealth by the time it had unwound and lead to a banking crisis, unemployment, etc.

http://www.early-retirement.org/forums/showpost.php?p=400891&postcount=27

At the time, I didn't notice anybody else making similar predictions. Over time, economists finally started making predictions: $2 trillion, then $4 trillion....

Finally, we're up to $6 trillion.

U.S. 2008 Growth Forecast Cut in Half by Merrill

What's taking these guys so long to get the picture?

 

[dumpster56]

Over 18 months ago, I predicted that the housing bubble would wipe out $7 trillion in wealth by the time it had unwound and lead to a banking crisis, unemployment, etc.

http://www.early-retirement.org/forums/showpost.php?p=400891&postcount=27

At the time, I didn't notice anybody else making similar predictions. Over time, economists finally started making predictions: $2 trillion, then $4 trillion....

Finally, we're up to $6 trillion.

U.S. 2008 Growth Forecast Cut in Half by Merrill

What's taking these guys so long to get the picture?

What is so nutty is how the realtors down here in the raleigh nc area are reacting. Oh its only the slow time of the year!! Oh prices are still rising here etc!!

Bottom line I live in a place now that MANY americans want to move to. A growing area, a desirable area many new subdivisions, new towns, Cary, Apex Holly Springs all areas that have mucho growth. And my home which we bought new with all the extras you know the granite counters, the wood floors the brick and hardy board exterior, 2 zone heating and cooling great lot private, for 330 in June of 06, I could not sell it today for more than 300!!! That is correct the housing correction is happening EVERYPLACE IN America! There are 22 new homes that are sitting just finished with prices by the builder that started at 345 in September of 07 and today are now listed at 299 all the same sq footage as mine all similar in extras all in the same neighborhood.

Heck my place is paid for so no mortgage no worries, I like it here, but things are ugly.

 

[Dawg52]

Wow, you need to go on CNBC and compare notes with all the talking head guru's. You could probably hold your own with those guys.

 

[Walt34]

For some reason I just don't care about RE prices. Ours is paid for (i.e., I've got mine) and my position is that the only time the price matters is when it's bought or sold. It's not a source of income, it's a place to live in. Wife watches prices though.

 

[al_bundy]

What is so nutty is how the realtors down here in the raleigh nc area are reacting. Oh its only the slow time of the year!! Oh prices are still rising here etc!!

Bottom line I live in a place now that MANY americans want to move to. A growing area, a desirable area many new subdivisions, new towns, Cary, Apex Holly Springs all areas that have mucho growth. And my home which we bought new with all the extras you know the granite counters, the wood floors the brick and hardy board exterior, 2 zone heating and cooling great lot private, for 330 in June of 06, I could not sell it today for more than 300!!! That is correct the housing correction is happening EVERYPLACE IN America! There are 22 new homes that are sitting just finished with prices by the builder that started at 345 in September of 07 and today are now listed at 299 all the same sq footage as mine all similar in extras all in the same neighborhood.

Heck my place is paid for so no mortgage no worries, I like it here, but things are ugly.

not every place, my little corner of NYC my cheapo co-op apartment went up by like 20% last year

i hope prices stop going up though, it's getting too expensive. but i was checking home prices in Scarsdale in Westchester County and they are coming down to sane levels. my guess is they will fall around 50% from the peak by the time it's all over

 

[Sandy]

Twaddle,

To answer your question - they didn't want to come right out and say it. Either (1) the feared it would create panic (2) they would be laughed at (3) they would be fired for singing such a sad song while things were still going well (by external appearances).

The news is reactive not predictive. Better to drip the bad stuff in, until it can't be avoided.

 

[FinanceDude]

Over 18 months ago, I predicted that the housing bubble would wipe out $7 trillion in wealth by the time it had unwound and lead to a banking crisis, unemployment, etc.

http://www.early-retirement.org/forums/showpost.php?p=400891&postcount=27

At the time, I didn't notice anybody else making similar predictions. Over time, economists finally started making predictions: $2 trillion, then $4 trillion....

Finally, we're up to $6 trillion.

U.S. 2008 Growth Forecast Cut in Half by Merrill

What's taking these guys so long to get the picture?

So why am I NOT watching YOU on CNBC these days??

 

[honobob]

So why am I NOT watching YOU on CNBC these days??

Contractual commitment to the Cartoon Channel.

 

[FinanceDude]

Contractual commitment to the Cartoon Channel.

I like twaddle, but it's EASY to be smart AFTER the fact........

Yeah, I shorted QQQ in December of 1999, and put all my clients in Treasuries...........yet here I am still working...........

 

[ERD50]

For some reason I just don't care about RE prices.

.... my position is that the only time the price matters is when it's bought or sold. ....

I'll go you one further - it does not even make much difference when you buy or sell, unless you are upsizing or downsizing. If it is a buy/sell and moving to a similarly priced home - not really much difference, is there?

-ERD50

 

[FIREd]

Has anyone tried to figure out how much wealth has been wiped out so far including not only the RE crisis, but also the financial crisis that ensued and now the stock market crisis (though that all those are still unpredictably unwinding)? Or have all those things been taken into account in the $6-7 trillion estimates? Household balance sheets gotta start looking uuuuggggllllyyyyy (Homes are people's biggest assets after all, followed by retirement accounts).

 

[FinanceDude]

Has anyone tried to figure out how much wealth has been wiped out so far including not only the RE crisis, but also the financial crisis that ensued and now the stock market crisis (though that all those are still unpredictably unwinding)? Or have all those things been taken into account in the $6-7 trillion estimates? Household balance sheets gotta start looking uuuuggggllllyyyyy (Homes are people's biggest assets after all, followed by retirement accounts).

Have we really "lost money"?? I mean, even though if I did sell my house tomorrow, and would sell it for $30,000 less than two years ago, did my house "lose money"? After all, it has doubled in value since I bought it in 1995............

I must look at RE differently. Overbid values to me are "fake" unless you are selling your home and not buying another one. Otherwise, you're selling your home for too much and buying someone elses for too much............

I'll agree the estimated 2 million folks who SHOULD not have been allowed to get homes and now can't make the payments are hurting things, but is that enough to wipe out everyone? Overblown, I say...........

Plus it's easy to throw big numbers out there. How much has your portfolio MADE from 3rd quarter 2002 until the end of 2007? A LOT I bet and we still haven't given it all back like 2000-2001.........

 

[honobob]

Have we really "lost money"?? Overblown, I say...........

Plus it's easy to throw big numbers out there. How much has your portfolio MADE from 3rd quarter 2002 until the end of 2007? A LOT I bet and we still haven't given it all back like 2000-2001.........

So are you suggesting that the wealth has maybe been transferred? Possibly to consumer goods. Interesting idea.

 

[maddythebeagle]

I must look at RE differently. Overbid values to me are "fake" unless you are selling your home and not buying another one. Otherwise, you're selling your home for too much and buying someone elses for too much............

I'll agree the estimated 2 million folks who SHOULD not have been allowed to get homes and now can't make the payments are hurting things, but is that enough to wipe out everyone? Overblown, I say...........

I believe Twaddle had a similar argument along the way as well.... See he would be great on CNBC...

 

[W2R]

I'll go you one further - it does not even make much difference when you buy or sell, unless you are upsizing or downsizing. If it is a buy/sell and moving to a similarly priced home - not really much difference, is there?

-ERD50

Exactly, and it has to be a considerable upsize or downsize to make much of a difference, too!

Looking at an example roughly modeled on a real life situation - - I plan to move in two years to a home worth 75% as much as my present home. Let's call the present price of my house H1, and the present price of the new house H2.

H1-H2 = .25*H1 profit in 2008

Suppose that by 2010, both homes drop to 80% of their present values.

(H1*.80)-(H2*.80) = .25*(H1*.80) profit in 2010.

The difference in my gain due to depreciation of the two homes is only 5% of my home's present value.

(.25*H1) - (.25*(H1*.80)) = .20*.25*H1 = .05*H1 decline in profit

To me, that is within the "noise level" of negotiating and although I am pretty tight with my money, it would not be a huge concern. It's certainly not a deal-breaker.

A larger difference could occur due to differing real estate dynamics in the two areas causing differences in percentages of price drop, or else due to not selling and buying at the same time.

 

[FIREd]

Have we really "lost money"?? I mean, even though if I did sell my house tomorrow, and would sell it for $30,000 less than two years ago, did my house "lose money"? After all, it has doubled in value since I bought it in 1995............

Perhaps I could agree with your argument that for most people, the loss *so far* has been paper loss... (though it is more real for those 2 million people who have lost or are about to lose their home to foreclosure). BUT I think that such paper loss will have a REAL impact on the economy. When people see their retirement net egg go down in value, when people see the *perceived* value of their home go down, people FEEL poorer and they, the real engines of our economy, cut spending. Suddenly a paper loss becomes a real loss for the economy at large.

I understand the argument you make about your house. And I can make the same about my stock portfolio. Yes compared to 2001 I am still ahead, but there is no question that I am way down from 2007. Which one do you think I care the most about?
When in 2000, the stock market plunged, do you think people looked back and said, well compared to 1988, I am still doing OK, or do you think people looked at the 70% drop in their portfolio and still felt the hurt even when they did not panic and sell anything? That paper loss felt a lot like a real loss if you ask most people (otherwise people would not be still talking about it 8 years later on this forum and elsewhere!).

 

[DJRR]

A larger difference could occur due to differing real estate dynamics in the two areas causing differences in percentages of price drop, or else due to not selling and buying at the same time.

That's my master plan. NOVA real estate seems to pop about every ten years or so and it usually pops earlier than other areas. I hope to sell at the next pop and reinvest in a retirement area before it pops. The best laid plans......

 

[al_bundy]

Has anyone tried to figure out how much wealth has been wiped out so far including not only the RE crisis, but also the financial crisis that ensued and now the stock market crisis (though that all those are still unpredictably unwinding)? Or have all those things been taken into account in the $6-7 trillion estimates? Household balance sheets gotta start looking uuuuggggllllyyyyy (Homes are people's biggest assets after all, followed by retirement accounts).

my guess is $0

for every person who is now foreclosing because they paid too much for a home is someone else who took that cash and put it in the bank after selling the home. same thing with stocks. you buy BAC at $50 and sell it at $30. you lost money, but the money didn't vanish it just now belongs to someone else.

i think recessions are nothing more than an after effect of the stupidity of millions in allowing too much wealth to fall into too few hands. not the evil rich but someone like my inlaws who earn in the bottom half of the income earners but who have over $1 million in RE and business value. if they sold everything to someone who would overpay for the assets and bought a cheap condo like they are thinking they wouldn't spend all that money at once. it would sit in a bank account. multiply by millions.

 

[twaddle]

The federal reserve tracks net worth in their flow of funds report that comes out each quarter. The last report was for Q3 2007, and as of that date the total net worth for housing was $20.99 trillion, and the total net worth for stocks was $6.08 trillion and $5.21 trillion in mutual funds.

Watch this space for updates.

 

[clifp]

When in 2000, the stock market plunged, do you think people looked back and said, well compared to 1988, I am still doing OK, or do you think people looked at the 70% drop in their portfolio and still felt the hurt even when they did not panic and sell anything? That paper loss felt a lot like a real loss if you ask most people (otherwise people would not be still talking about it 8 years later on this forum and elsewhere!).

I think for most people it was a combination of both. In 2001, I think a lot of people had thoughts like these "I am still a lot wealthier than I was a few years ago, but damn I was nice to dream of the airplane, vacation home, boat, Mercedes." I don't know about the rest of the country but I think in Silicon Valley and San Francisco anybody over 25 and with any common sense knew we were in a bubble. All you had to do was listen to the media. Once I started making calculation like my friends IPO for a company with 0 revenue, being worth more than all of the real estate sold in Silicon Valley in the last year it was obvious. There never was a question that it would burst, just a question of when, and how far it would fall.

 

[FIREd]

my guess is $0

Good, then there shouldn't be a recession if we as a collective group have lost no money. The people who lost some will spend less, those who made some will spend more... it all evens out right? heu, I think...

Let's look at it a little more closely. Say you bought a house for 300K in 2003. And you decide to sell it at the prevalent market rate right now, say 250K. So you have lost 50K. The people buying it 250K, don't experience an immediate wealth increase of 50K. They have to wait for the RE market to recover before their wealth increases by 50K. So wealth was not merely immediately transferred from the seller to the buyer and we have a temporary negative wealth effect. Sure over the long run, it will even itself out, but not right now. Same with stock. If you sell right now your wealth takes a hit. If you buy right now, you're not richer than you were yesterday. So somebody lost money today but you will have to wait for a market recovery before getting that money back.

 

[Running_Man]

my guess is $0

for every person who is now foreclosing because they paid too much for a home is someone else who took that cash and put it in the bank after selling the home. same thing with stocks. you buy BAC at $50 and sell it at $30. you lost money, but the money didn't vanish it just now belongs to someone else.

No the money has vanished for you and everyone else as well. The only time someone would make money on the downside is the people who are short the stock. But that is usually a relatively small percentage of the stock outstanding. I

 

[haha]

I like twaddle, but it's EASY to be smart AFTER the fact........

Yeah, I shorted QQQ in December of 1999, and put all my clients in Treasuries...........yet here I am still working...........

Well, it is nevertheless true that Twaddle was a housing bear way before this all started, and in fact followed his own advice and got rid of an extra house he was holding. Similar moves were made by several other posters.

It is hard to realize now, but being bearish on housing while living on the West Coast was quite a feat in and of itself. Even now here in Pugetopolis many cannot bring themselves to believe that prices are headed down. I accept it intellectually but resist it emotionally, and I have much more to gain from price drops than I have to lose from gains

Ha

 

[clifp]

No the money has vanished for you and everyone else as well. The only time someone would make money on the downside is the people who are short the stock. But that is usually a relatively small percentage of the stock outstanding. I

No the person who sold you the BofA stock at $50 is wealthier by $20 than if he had waited to sell the stock at $30. You lost $20/share but you keep him from losing $20 thus no wealth is created or lost.

Of course if you and the other BofA shareholder were twin brother traveling in a spaceship near the speed of light than time would stand still and the age of the universe would change, but no wealth would be created...

 

[haha]

No the person who sold you the BofA stock at $50 is wealthier by $20 than if he had waited to sell the stock at $30. You lost $20/share but you keep him from losing $20 thus no wealth is created or lost.

Maybe if you have gone over to the other side. But here on earth we don't have perpetual balance sheets. If I have $2 million from stock trading, but I sold BRK years ago, is my balance sheet equity actually minus $200 million?

If so, why can I still go out and borrow agains the $2 million?

Huge amounts of wealth are wiped out when equity quotes go down. If they go back up again, that wealth is re-created. This would even be true if no trades were made. Say a nuclear bomb is exploded in London while our US markets are closed. Likely they would not open the following morning. But do you think that you could find a private buyer for your shares at anywhere near the price ahowing prior to the blast? Maybe if your shares were all armaments makers, but otherwise good luck. And do you think that this is just a temporary problem? I think it very much depends on your definition of temporary. You could run out of resources, or out of lifespan before things righted themselves.

HA