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Of course, it went bust when that bubble popped, and the Boston-area savings bank that financed it also went belly-up, to become part of the $300 billion taxpayer bailout of savings-and-loans. I got to watch the auctioning-off of the remaining house lots (at $21K per), and eventually R.H. Gallo bought the residual acreage and built $110K houses (that's house and lot for $110K, rather than the $350K the Boston guys were going to overcharge). Only a few days ago the neighbors over there dug up and threw away the rotting "Westmont" sign, so "Westmont" now becomes just another ordinary Worcester (financial backwater of America) neighborhood.
I wasn't expecting to be able to watch the puffing-up of the current real-estate bubble in my neighborhood, because "Westmont" was the last large undeveloped tract in the area, which is now pretty-well filled in with houses. But the other day I realized that the signs of the bubble indeed are present in my neighborhood, all within a short walking distance from our house. So, I whipped out my trusty digital camera and took a few pictures to show you:
Every bubble-neighborhood has at least a few of these - the McMansion. Actually, by McMansion standards this is a pretty humble abode - call it the "mini-McMansion". It was built about three years ago on a formerly-empty lot, and I classify it as a "McMansion" because it's about three times the size of its immediate neighbors (most of which are one story ranches or 1.5-story capes) and of the great majority of the houses in the area. (In a more expensive suburban location it would fit right in.)
Down at the (dead-)end of the side street is this new home currently being built:
This home is "in the family" - that is, being built by a relative of the adjacent home (right rear of picture). It distinguishes itself from the "McMansion" by its custom features - fieldstone steps, detailed cornices and other exterior woodwork, front and rear porches, and its general non-cookie-cutter appearance. But it still will be a big place, so either its future resident has done really well, or we are witnessing creative financing to the max.
The house in the preceding picture, also still under construction, sits on what used to be the back yard of the house on its left. (Since I took this picture, a white barrier fence separating the two houses has been erected.) With city house lots currently commanding $100K and up, many homeowners are literally discovering gold in their back yards. All that's needed is sufficient square footage, and frontage (usually present with corner lots, as is the case here) to meet the zoning requirements. I have seen houses being tucked in places where I didn't think there was any room at all.... but there is..... and certainly where whoever originally laid out the lots never imagined another house being squeezed in. The city fathers call it "infill", and they don't seem to be bothered by it. But in most cases, I think it's ugly.
You've most certainly heard a lot about houses being "flipped". Well, the house pictured above is a "flippee". It was originally a single-story brick Cape with garage built (guessing from its style) in the early or mid-1950s. A few months ago when it went on the market, it was snapped up by a builder who ripped off the roof and added the "clapboarded" (actually vinylized, of course) second-story addition you see here. Then, with some further interior and garage renovations.... and without much time passing by, this work was all done in less than two months.... the house was put back on the market. Sorry, I did not see it listed in the real-estate magazines, so I don't know the before- and after-flipping asking prices.... but the house did sit for several months (as our local housing market peaked out) before finally being placed under contract this month (July).
Our last subject is the charming Victorian you see pictured here. Now, my wife and I like charming Victorians.... we live in one.... but we can testify to their being money pits. This house was owned by an older couple (now deceased) until bought in an estate sale by a young couple about three years ago. It has seen no major renovations or upgrades in over 40 years. The bedrooms are on the second floor, and the single bathroom is on the main floor. The wife is expecting her second child, and it's really hard to raise a young family when stairs separate the bathroom from the bedrooms. (The Victorians managed, but this is apparently beyond the abilities of modern families.) They have elected to move rather than renovate. The property does have a large lot, not subdividable. Asking price: $380K.
When "Westmont" went belly-up in the early 1990s, I witnessed house prices decline by 20% to 35%, and the prices of lots by 75% to 85%. It does make me wonder just how much prices will decline in our neighborhood when this, the mother of all housing bubbles, gives way for good. If we "muddle through", I would expect house values to be halved. If the bubble-popping in turn triggers the mother of all depressions (very possible but not guaranteed), prices of both houses and land could decline by 90%. That would bring them back to where they were in the 1970s.... actually much lower, after allowing for the depreciated purchasing power of the dollar over the last quarter-century.
At any rate, I will continue to observe and report on
the real-estate bubble and its demise in The
Contrarian's View. As a supplement to this issue
you will find a report, "The Housing Bubble Fact
Sheet" by Dean Baker of the Center for Economic
and Policy Research (redistributed here with
permission), just in case somebody should walk up
to you and insist there is no housing bubble.... you
can then enlighten them with the facts.
2005 will be a continual decline, while 2006 will mark the awareness of the "Greatest Depression". Please protect yourself; this is going to be horrific as we move forward. - John Mackenzie
As this year was kicking off, how many analysts and pundits were forecasting that most bellwether measures would be even in marginally negative territory as of June 30th? "Very few" is the correct answer, which means that something is not going per expectations. And what that is, I think, is the economy. I strongly suspect the stock market has been and continues to discount quite well an economy that is not as strong as the government's data say it is, and an economy headed for even tougher times in the months ahead. - Doug Gillespie
The low inflation rate and the multi-decade lows in interest rates, rather than being positive, could actually be the precursor of the dreaded deflation that Greenspan and company are so deathly afraid of. In actual fact, the stock market rally of 2003-2004 is really only proportionate to the 5 bear market rallies in the Japanese Nikkei Average during their 13-year bear market. The rebound in various economic statistics also is reminiscent of the Japanese deflationary environment. - Aubie Baltin
....the indicators of upcoming economic performance are signaling, at best, a significant slowdown ahead. Oil prices, which lead the GDP by about a year, are now up about 45% over a year earlier. The Fed is continuing to tighten, with another 25-basis-point increase in the funds rate almost a sure thing at the August meeting.... Money growth as measured by either MZM or real M2 is extremely sluggish on year-over-year basis, an occurrence that is usually a harbinger of economic weakness or recession ahead.... Judging by past economic recoveries, total employment is about 9- to 10 million jobs short of where it should be at this point in the cycle. In addition the 5% unemployment rate is somewhat misleading since the labor force has inexplicably dropped, and the participation rate is sharply lower. Topping it off, economic growth in most foreign economies has been slowing. - Charlie Minter
The histories of economies show the negative outcomes of a vast monetary expansion, large and growing deficits, asset bubbles, excessive consumer debt, and strong inflationary/deflationary forces. Still, investors here continue to turn a blind eye towards the great risks that are present in our economy, sometimes chanting such ridiculous mantras as "Don't bet against the US" or "Invest for the long haul" (at any price) or "Real estate has never gone down in value".... I think they're setting themselves up for an obvious disappointment. Central banks may never permit another Great Depression to clean out the financial system, but the likelihood of stellar forward returns from traditional asset classes is small. - Britton Fraley
I expect the big decline will settle in easy like now and will crescendo in mid-November. But would I play the short? Nope.... the market is too big to fail. It gives birth to the concept of a "prosperous depression" if you mix equal portions of Weimar Germany inflation with 1929 deflation in the US...which seems like about the track we continue bouncing down. At the end of it, half of the jobs are gone, life is run by the government, and oh yeah, the rich got richer while the middle-income earners disappeared. Oh yeah, and a nuclear terrorist event would change everything. - George Ure
Oil prices are where they are because of rising demand and the scarcity of refining capacity.... No matter how hard Wall Street tries to spin that news, sky-high oil prices will have a significant impact on our economy. Heck, I almost passed out at the cost of filling up the gas tank of my wife's Chevy Suburban. It may not be long before the price of a fill-up exceeds $100 for my family. - Tony Sagami
To be sure, we have probably seen a peak in discretionary spending, as well as in GDP growth. However, the real damage will come when consumers drastically curtail buying out of fear the economy is sinking. - Rick Ackerman
There is something big coming. It is the destruction of the economy at low rates. This is going to be the big surprise, that the economy will go into a prolonged slump even at very low nominal interest rates. - Peter Warburton
Our financial institutions have found ways to allow everyone all the credit they desire, and have kept the economy going on credit. The financial institutions think they are protected against bankruptcy because they had a clause inserted in the [new bankruptcy] law requiring financial institutions to be repaid even after bankruptcy. Squeezing blood from stones will give them and our courts something to do in the upcoming recession. - Thomas Dawson
This year alone America's current account deficit is likely to be $800 billion. To put this number in its proper perspective, $800 billion is equal to the combined market capitalization of the following fifteen Dow Jones companies: Alcoa, American Express, Boeing, Caterpillar, Coca-Cola, DuPont, General Motors, Hewlett Packard, Home Depot, Honeywell, 3M, McDonalds, Merck, SBC Communications, and Walt Disney. In other words, to finance just one year's purchases of consumer electronics, granite counter-tops, vacations, automobiles, furniture, appliances, clothing, toys, and net interest and dividend payments, Americans will basically give away the equivalent of half of the companies that comprise the Dow Jones Industrial Average. - Peter Schiff
A country that outsources its manufacturing and its R&D abroad doesn't have jobs for its own engineers and scientists.... As my free-market friends are fond of saying, "The market works". It certainly does. The market is working to close down the great American middle class and to dismantle the ladders of upward mobility. The U.S. economy in the 21st century has been able to create new jobs only in non-tradable domestic services. A labor market orientated toward domestic services is the hallmark of a Third World economy.... In the short-run, the corporations benefit. The lower labor costs raise profits and executive bonuses. But the long-run effect is to destroy the U.S. consumer market for the goods and services that the corporations supply from abroad. - Paul Craig Roberts
You can continue to believe the wizards of Wall Street and Washington, who claim their inflationary brew will perpetuate prosperity, or you can listen to the classical economists who have combined the lessons of history with the basic principles from two centuries of sound economics. Whether you choose to listen or not, be assured that the following inevitable consequences of inflation will cloud your future: An ongoing financial and economic crisis, moral and cultural disintegration, stagflation, bigger government, escalating hatred of business, runaway social spending, the criminalization of success, higher taxes and a shrinking dollar. Somewhere out there lies complete and total collapse. That utter collapse is coming as surely as the sun will rise tomorrow and the government will keep inflating until the bitter end. - James R. Cook
As a nation, the United States has no idea what inflation is, how to measure it, where to detect it, and has gone so far as to bless its effects in higher asset prices as virtuous and favorable, and its effect on consumer staples as undesirable and damaging. All inflation is harmful, some clearly in your face now, some looming overhead for future wreckage. - Jim Willie
Being wealthy in retirement is workable only for a minority. When their numbers increase demand from boomer retirees will be unbalanced through the absence of their productive output. It must correct by sucking in imports and depressing the value of a fixed retirement income. At the same time wages must escalate to increase the differential between being unproductive and productive. Soon foreign goods and foreign travel become too expensive for the fully retired and those who don't work will lapse into subsistence - the normal condition for unproductive people.... [I] recently wound up the estate of a great aunt, who died aged 95 after a 35-year retirement. Having been fortunate in enjoying a retirement package which provided her full 1969 retirement income until her death, by 2004 the total annual revenue from it failed to pay her local property taxes. To her credit the subsisted happily enough. - Paul Tustain
It's obvious that no one likes to hear comparisons between home prices today and the stock market bubble that burst in 2000. The obvious differences between real estate and equity shares duly noted, there is one undeniable and disturbing similarity, to wit: During the stock market bubble, traditional valuations did not matter to shareholders. Valuation matters only if you believe that the stock's price should reflect the worth (or value) of the company. But stock investors could have cared less about value. They were willing to pay outrageous prices because they believed a greater fool would pay a more outrageous price later on. So too are homeowners now willing to convert every dollar of equity into debt: They believe the link between a home's value and its selling price has been broken. They themselves and/or recent homebuyers in their neighborhood may pay a foolish price for a home today, but they believe greater fools and higher home prices will be just as abundant tomorrow. - Robert Folsom
We have witnessed the fastest, longest, priciest real estate market in history worldwide due to low interest rates and reduced regulations. This bubble is what has supported the world economy since 2000. Residential property in the developed world has risen by $30 trillion to $70 trillion over the past five years. This bubble is larger than the stock market bubble of 1929. When the bubble breaks, and it must break, it will be the biggest financial collapse in history. - Robert Chapman
The housing bubble is not local, but national - not surprising since it's driven by economy-wide forces: investor zeal for high returns but skepticism over stocks, ample cheap mortgage money, and lax lending standards. Indeed, these forces and the housing boom are global. Earlier U.S. housing booms-busts were driven by local business cycles such as the rise and fall of the oil patch along with oil prices in the 1970s and 1980s. Since houses are much more widely owned than stocks, the bubble's likely demise will shake the economy more than the early 2000s bear market. It could change the good deflation of excess supply we foresee to the bad deflation of deficient demand. The most likely bubble-pricking pin is massive speculation itself, and as prospective buyers stand aside, mounting inventories will precipitate a downward price spiral. - Gary Shilling
Housing prices took off in the Netherlands between '97 and 2000. Thereafter, they did not crash; they just stopped rising so fast. The Dutch economy had become "hostage to the housing market", say analysts. When housing cooled off, so did the economy, which has been in a slump for the last five years. - Bill Bonner
In this over-heated real estate market where homes are selling above list prices and speculative buyers are quickly flipping properties at a record pace, the House Poor are keeping up with the rising cost of living by paying the bills through home equity extraction, home-equity loans and cash-out refinancing. While many homeowners believe they can live like the upper class and appear to be wealthy, they'll be the first to end up in the poorhouse. Those easy money real estate speculators who purchased several investor properties are now beginning to see that renters are more difficult to find these days but the bills to maintain their properties keep coming in. Indeed, homes have a tendency to actually make you poor because they need to be finished and furnished; older homes become deep money pits.... and yards need constant care. Worse yet, when it comes to the state and local government, they are always looking for someone to tax. As soon as you buy a house, you have just raised your hand and announced "please tax me"! - Richard Benson
"Wealth creation" is the prevailing euphemistic American interpretation. According to reports, American households are amassing wealth in this way as never before, vastly outpacing their soaring debt growth. For us it is scandalous that policymakers and economists can propagate this nonsense without a single voice of protest... This unmistakably qualifies as "house-price inflation", not as "wealth creation". - Kurt Richebächer
A housing bubble is very different from a stock market bubble. A stock market bubble is a financial phenomenon; a real estate bubble is an economic one. When a stock bubble explodes investors are hurt. When a property bubble pops, ordinary people feel extraordinary pain. That is when prices collapse back to real value and we will find out what stuff we are made of. We say that because it will come as a great disappointment to many people to discover what their houses are really worth. When tech stocks crash, most people read the news with approval; they never bought the stocks anyway and are pleased to find that they weren't such idiots after all. But when property goes down, the shock of it is likely to upset them deeply. - Bill Bonner
Russell suspicion (of course, I could be wrong) -- Greenspan continues raising Fed Funds until the housing bubble is close (close but not there yet) to toppling over. Greenspan leaves office in January. A month later the stock market keels over. The housing market buckles and consumers cut WAY back on their spending. A severe recession begins. Greenspan is gone, and the word is, "Lordy, Lordy, if we only had Greenspan back, this wouldn't be happening...Greenspan, Greenspan, why did you forsake us"! - Richard Russell [Nick's comment: Yeah, unfortunately, it could happen this way. Life is not always fair.]
Yes, we are in an extreme casino society and it can become bigger. But one thing is sure: One day it will end badly when this whole financial bubble and asset bubble is deflated very badly. What the catalyst to that will be I don't know. The Federal Reserve and other central banks of the world will of course do whatever is possible to keep this bubble alive, simply because to deflate the bubble would be economically extremely - and I repeat, extremely - costly. So the moment the Fed sees a crisis - whether it's the S&L crisis in 1990, or the Tequila crisis in 1994, or LTCM, or they sometimes totally misjudge events, like Y2K - they just print money like there is no tomorrow. And the next time the economy cools down, presumably because the housing market no longer goes up - it doesn't need to collapse, just no longer going up - or because of an implosion in China, or a slowdown in China, or whatever may happen, you can be sure the Fed will be there to print money, and the other central banks the same. - Marc Faber
Staving off deflation, which is evidently part of the programmed DNA transfer that is required when you become a member of the Fed, will not be as easy the next time as it was last time. Ben Bernanke, who is the man I think will be the next Fed chairman, will have his job cut out for him. I fully believe him when he says that the Fed would "move out the yield curve" in a fight against deflation. He will help the market bring down mortgage rates to help stimulate the economy. Simply lowering short-term rates may not be enough. But what would you have them do? Sit to the side and do nothing as the U.S. slides into a steep deflationary recession? You can argue that there should not be a Fed, but that is not reality. There is and they will act to fight deflation. The die was cast when they decided to use housing asset inflation to offset the bursting of the stock market asset inflation bubble. The fact that it became a bubble was not helpful. - John Mauldin
Ironically, it was the abuse of the gold standard, the Fed's credit-creating habits of the 1920s, and its subsequent mischief in the 1930s, that not only gave us the Great Depression, but also prolonged it. When the government can replicate the monetary unit at will without regard to cost, whether it's paper currency or a computer entry, it's morally identical to the counterfeiter who illegally prints currency. Both ways, it's fraud. - Jim Puplava
Since Greenspan took the helm almost 18 years ago, we have witnessed a pathogenesis toward the bizarre in monetary leadership which qualifies as incompetent and heretical, the near opposite [of the] path laid by Paul Volcker. Sadly, there is no way back. No path of bread crumbs can lead our system back to normalcy.... An argument can be made that the USFed has morphed into a gigantic monetary drug-dealer enterprise. - Jim Willie
Greenspan.... is confused because.... their asinine econometric equations and hopelessly convoluted computer models.... and all the rest of that neo-Keynesian stupidity is telling him that everything should be fine. They lowered interest rates, and now everything should be perfect! But things are obviously not fine. No wonder the poor dumb bastard is confused. This is because economics is a social science, and not a physical science. At least the psychologists gave up trying to model human behavior with equations decades ago. But the idiot savants at the Federal Reserve keep on, bizarrely, trying to do that very thing, and failing failing failing. Which proves that Psych majors are smarter than Econ majors, just as I and all my hoodlum friends said as we slouched outside the Student Union, smoking cigarettes and acting cool. - Richard Daughty
I am surprised at the hostile reaction to the Supreme Court ruling in Kelo v. New London. The crux of the case is.... that the state can take property from A to give it to B because B will pay higher taxes. The people don't like that? Hahahaha! I shake my head in wonder! This is the exact same loathsome Leftist lunatic philosophy that has permeated everything for the last half century! But now, NOW, they are upset? The government is continually taking something away from you, whom I will refer to as A, to give it to some other guy, whom I will label as B. But now, just because it is their houses on the line, people are getting upset? Hahahaha! What morons! - Richard Daughty
Admittedly, "The Star-Spangled Banner" lacks a certain something, musically speaking. But over the years,
singers ranging from Kate Smith to Richard Tucker have been able to do it justice, merely by singing it simply
and sincerely. But at some point during the past 10 years or so, certain female singers have decided that the
only way to perform it was as if they were auditioning to provide orgasms for a porno soundtrack. - Burt
Prelutsky
Today's equivalent is, a government-propped-up stock market predicts zero of any number of recessions. In other words, the stock market has changed from being a (sometimes-inaccurate) leading indicator of the economy to being (at best) a coincident indicator, and very possibly a lagging indicator. In the fall, when it has become evident to enough people that the economy is getting sicker and the crowd psychology shifts, I expect stocks to follow.... as the PPT's stock-futures manipulations lose their clout.
In the meantime, as I wrote last month, expect a choppy summer. July was more bullish than bearish; I expect August to be more bearish than bullish.... but not spectacularly so. The bear market won't aggressively return until the very late summer (post-Labor Day) or early fall.
The risk of systemic failure through the summer is
about 15%. In the fall, I'll take another look at it.
A. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $17,965.18
Increase: $ 7,266.18 [+67.91%]
COMMENT on "PIG": There is no change from the last issue.
TIAA/CREF 403(b) retirement plan; I switch between indexed stock/bond/money funds:
(No transactions since June 30, 2004 due to my retired status. Update soon, I hope!)
Values, 27Jul2005: stock, 198.71; equity-index, 81.16; MM, 22.33; bond, 75.87; inflation-indexed bond, 45.40; real estate, 224.82; TIAA current yield in
SRA, about 5.2%. Current money-market yield is 3.05%.
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993:
3.08%; 1994: 4.07%; 1995: 4.80%; 1996: 5.28%; 1997: 5.38%; 1998: 5.72%; 1999: 5.12%;
2000: 9.99%; 2001: 1.11%
Gain, January 1 through March 31, 2002: 0.97% (3.86% annual rate of return)
Total gain since January 1, 1988 (14.25 years): 223.43%
Compound annual rate of return: 8.59%
Gain shown excludes the impact of additional monthly cash contributions.
(Please note that I have not had the time to calculate my rate of return beyond March 2002, and
may not get the time until 2005)
Buying CREF stock on January 1, 1988 and holding it gained 422.38%, for a compound annual rate of
return of 11.46%.
COMMENT on NYSE "Timer's Trend": We are currently on a BUY signal of May 17, 2005..
COMMENT on NASDAQ "Timer's Trend": We're on a BUY signal given July 8, 2005.
NEXT ISSUE - may appear near the end of August. I am contemplating producing an August issue again this year, and skipping one of the winter months.