Today I’m posting an interview with another of my favorite bloggers, Dr. Housing Bubble.
I discovered the good Doctor’s blog back in early 2006 and have been a faithful reader ever since. At the time my wife was a real estate agent and the two of us became puzzled, then obsessed by the bizarre socio-economic implications of the then still-inflating housing bubble. This obsession led to discovering great blogs like Patrick.net, Professor Piggington, Peter Viles excellent blog at the LA Times, and of course, the subject of today’s interview., Dr. Housing Bubble.
The Doctor blogs anonymously. Perhaps this is because of his “Home of Real Genius” posts where he highlights -- and loudly cackles about -- some of the most ridiculously overpriced real estate listings on the MLS. If staying incognito helps him do his work, I’m all for it because his blog is such an amazing resource. There is a tremendous amount of erudition, expertise and a profound understanding of both history and economics that go into his writing. Dr HB can take complex and daunting economic theories and lay them open with a surgeon’s skill making them easily understood by all. This guy is good, really good. When he’s on a roll (which is frequently) I’ve actually found myself getting jealous that I didn’t think of that first or even worse, wishing I was as smart as he is! I suppose that’s the best style of compliment I could give the good Doctor, isn’t it? (Jealousy being such a visceral emotion...). I encourage you to check out his blog and to check it out often. The Q&A starts after the jump. Richard Metzger: What happens if the Paulson-Bernanke bailout and the best laid plans of the G8, um, don't work? What happens if housing prices still continue to drop and financial assets keep declining? And what happens when banks won't lend to anyone and there just aren't as many people anxious to sign up for mortgage debt in the middle of an economic downturn anyway? Are we all just fucking doomed? Dr. Housing Bubble: This has turned from a Paulson-Bernanke bailout into a global concerted effort to stabilize other countries as well. The Euro-zone and many of the BRIC countries were benefitting on the prospect that somehow a collapse in the United States will somehow leave the world unaffected. This idea of decoupling -- that is, the U.S. failing while other countries thrived -- seemed far-fetched from the beginning because places like Europe actually have countries with bigger asset bubbles than the U.S. I know, hard to believe but true. That is why you have seen an across the board correction on a global scale. China, Japan, Germany, Russia, and the U.S. for example have seen massive corrections in their stock markets.
At this point, the assumption is that this has to work. Yet there are many conflicting goals here. Are they seeking to unfreeze the credit markets or put a bottom on housing prices? What about maintaining lending standards yet increasing credit? These may be diametrically opposed. For example, say a bank now has capital to lend but the U.S. employment scene is getting worse. Who will you lend to?
In addition, the notion of protecting home prices is absurd. That is the reason we got into this bubble. Home prices exploding. The market will determine what a home price should go for. For example, in Los Angeles County we had a median household income of $50,000 yet at the peak, the median price hit $550,000. How did this make any sense? Even now with a median home price of $380,000 this may be out of reach for many. Historically home prices reflect local household incomes on a 3 or 4 times ratio. That is, if an area household income is $80,000 a median home price of $320,000 would seem reasonable.
Ironically trying to prop home prices up is going to hurt more people from becoming homeowners. Banks are going to have a challenge maintaining lending standards while finding a bulk of qualified buyers to create a sufficient market to move the glut of homes on the market. And if this doesn’t work, I’m sure they will try something else since we are in uncharted territory and clearly the staunch market fundamentalists have now been proven wrong. Let the market do its thing is easier said when you don’t have to look at your investment portfolio get creamed. Of course most of the middle class will benefit little from this.
Richard Metzger: Despite the market jumping 936 points on Monday, this whole mess doesn't seem anywhere even near the denouement... How do you see this moment in time, are we halfway to the bottom? Where are we in the greater event cycle, mid-October 2008?
Dr. Housing Bubble: I think as a nation we are halfway through this mess. Some countries like England, Spain, and Australia may be a year or so behind us in their asset bubbles. We still haven’t seen how the credit default swap market is going to play out. We got a glimpse with the Lehman Brothers auction but that event was lost on most since the markets were collapsing at the time. The details of the current plan seem to be allocating a large portion of the capital to nine of the bigger banks. What of the other 8,000+ with many that are still filled with toxic assets? That is yet to be seen. During the S & L crisis we saw 747 institutions fail. So far this year, we have only seen 15.
In certain markets like California, we may be 2 to 3 years away from any bottom in housing prices. For example, the futures market for the LA-OC area are pricing in a bottom in for the middle of 2011.
Richard Metzger: How will history, do you think, view this bailout in retrospect?
Dr. Housing Bubble: That is a hard question but we can rest assured that it will be a pivotal point. What seemed to be a gigantic $700 billion U.S. bailout has turned out to be a multi-trillion dollar global bailout with many countries trying to calm their own markets. As of this week, it seems like the credit markets are responding somewhat to the colossal action taken. It is yet to be seen if this will trickle down and spur consumption and credit once again.
Let us not forget that consumption is roughly 70% of our nation’s economy. We are creatures that spend. With equity disappearing and many credit card companies locking credit or even lowering credit limits in a time when people “need” access to money, will only force people to buckle up. This will not avoid a massive correction. That is baked in. This major effort was to keep us from going into Mad Max territory.
Richard Metzger: What do you think the lay of the land (generally speaking) will look like in a year? In five years? Ten?
Dr. Housing Bubble: You know that question is highly dependent on how this massive infusion of money by the world central banks is going to play out. I think in one year we are still going to see housing prices come down. I think that is rather unavoidable given the magnitude of the housing bubble. In five years it is hard to imagine us spending like we once did at the peak during this credit bubble decade. In five years I still see housing prices lower. Japan did similar things after the bust of its real estate bubble and they experienced their lost decade which is still going on. They essentially propped up failing banks that should have failed and created zombie institutions that slumped along for years dragging down the overall economy.
Think about what was initially proposed by Paulson. He wanted to buy toxic assets from lenders who made irresponsible loans. How was this going to help out the nation as opposed to select lenders? That is why over the weekend, we have shifted from this policy to a more direct approach of capitalizing the biggest and healthiest banks in our country. That makes at least a bit more sense to most Americans. There are still proposal on how to deal with toxic assets which we will need to watch carefully because this is where the big money is going to be lost.
Richard Metzger: How will this depression differ from the Great Depression? What are the mitigating factors that could make it a) not as bad as or b) much worse than what happened in the 1930s?
Dr. Housing Bubble: Well it is rather apparent that we have a much more active central bank. Bernanke is an expert with the Great Depression and his philosophy would guide us to believe that he will do everything he can to avoid it. The question is, can we actually avoid a major correction? Many throw around the “Helicopter Ben” nickname since many believe he will start dropping dollars before allowing any deflationary environment to take hold.
In the best case scenario, we inflate our way out of this mess over a few years. Deflation would wreck havoc on a world economy with so much debt on the books. Why? Well look at what is happening with housing. A bank may have a mortgage that has a face value of $500,000 on a home that is now appraising at $300,000. The debt doesn’t move with the actual price of the home creating a problem for both the owner and the bank should trouble arise. And for the most part this is what has popped the bubble. After all, if that home inflated to $550,000 and you were in trouble, all you needed to do was sell it. That is how the decade housing bubble got pushed along.
The Great Depression also had the U.S. as a creditor nation. Most of Europe was still recovering from World War I during the 20s so we actually were in a better position to lend and adjust balance sheets. This time, we are a big debtor nation. Look at our national debt that is blasted through the $10 trillion mark and is twice as high since 2000. This is frankly unsustainable. I think a better model would be something to what Japan faced in their lost decade. Each crisis is different but we are at least guaranteed a severe recession. The only question that remains is will these actions avoid a global depression.
Richard Metzger: The so called FIRE economy is scaling down drastically. You've written that since 2000 nearly 30% of job creation has been related to real estate, including construction jobs, real estate agents, Home Depot, mortgage brokers, insurance brokers, stock brokers and investment bankers, etc. Those jobs have vanished and will not be returning anytime soon. How will these workers be reabsorbed into the work force?
Dr. Housing Bubble: Lately I’ve been paying attention to local community college enrollments here in California since I think this is a quick indicator of how people will retool. We are seeing major jumps in healthcare training in jobs such as nursing, dental hygienist, and x-ray technicians. Relatively well paying jobs with only 2 years of training. The problem as many know, California is royally in the hole and community colleges here in the state are highly subsidized. In fact, all it would cost you is $20 a unit to go to school here. The best bargain around. Given the economy enrollments are skyrocketing and many are not being able to get into these programs. That is the balance that many states will face. How are we going to retrain the workforce when many states are royally in the hole?
In addition, such a large part of our economy is based on this industry that it will not filter out in 1 or 2 years. Other areas that are growing are engineering – certainly if we have a big work creation program in alternative energy – and also in accounting. When I say accounting I do not mean finance. Accountants with the ability to understand international standards, auditors, and tax professionals (hey the government is going to get theirs since these times are tough) are probably areas which will see growth.
Yet these fields require 2 to 4 years of training. An agent here in California needs only a G.E.D. to take the test. Think about the additional retraining needed here. After the tech bust, you had a fleet of people with bachelor degrees in computer programming / science who were easily absorbed into sales and the FIRE economy. These few job fields require additional educational training which will cost the economy money. Money that is getting allocated to bailing out Wall Street firms and other institutions. We are going to need to make hard choices in our philosophy of what we view as crucial and critical to the sustainability of our country.
Richard Metzger: If there is a very serious and protracted economic depression, it seems that certain other job descriptions -- ones which have nothing to do with the FIRE economy -- will also be lost. For well over a decade, America's main driver of economic growth has tended towards borrowing and debt -- and usury for that matter -- and because we hardly manufacture anything anymore, can the nation survive by purveying products like ESPN, Pinkberry and "Gossip Girl" in the world marketplace? If not, what'll we do?!?! It's not like anyone wants our cars anymore!
Dr. Housing Bubble: Precisely. The FIRE economy logically will see the biggest hits. But you will also see major declines in other ancillary industries. I think a rather clear indication of this is looking at Best Buy and the Family Dollar Store. Year to date Best Buy is down 47% while Family Dollar Stores are up 30%. People are shifting from “want” based items to “need” based items. That is also a reason Wal-Mart is up 14% on the year while the overall market even with the massive bounce rally is still down nearly 30% for the year. The consumption economy is going to face some major changes. I think we are going to see a major trend to frugality based items and cultural ways of living.
Richard Metzger: What professions seem safest to you? Which lines (FIRE-related jobs aside for a moment) of work do you see as the most vulnerable moving forward?
As I previously noted, I think healthcare and engineering fields have good growth potential. We have an aging baby boomer population which almost guarantees a customer base for the foreseeable future. If we get on with major government spending in alternative energies, engineers will be in high demand as well. I think the lucrative high paying finance jobs are going to be far and few for those looking for that brass ring. I think a similarity we can draw from the Great Depression is the shift of power from Wall Street to Washington D.C. We are seeing the seeds of that already. Fannie Mae and Freddie Mac are now for all practical matters, nationalized. We now have a large stake with A.I.G. This equity sharing plan with the banks? A partial nationalization. What we are seeing is a quick shift of power. Make no mistake. When the dust settles there will be new and stronger regulations and once again you’ll see the pendulum swing to D.C.
Richard Metzger: In the Great Depression the further away from the city-centers people lived, the harder time they had finding jobs, so obviously it just made sense to move to the most population dense areas to find employment. Do you see the demographic map of America changing over the next decade as parts of the population migrate to different regions looking for work? What parts of the country do you see doing better off than others? Where do you plan to be and what are your own plans for riding out the shitstorm that is about to strike?
Dr. Housing Bubble: I think areas that had major bubbles like California and Florida are going to have very difficult times adjusting. Many of these states depended heavily on a healthy and bubbly housing market and projected (incorrectly) that this would go on forever. Of course it wasn’t but that is the way they plan out their year. That is why already in California we are facing a projected short fall. The budget just passed a few days ago after a record long stalemate.
I think even if we move toward alternative energy that is years away. Oil demand even as it falls is still here with us. Areas in the mid-west with low housing prices and good paying oil related jobs may see mini boom markets.
I am sticking it out in California. Born and raised here. Really can’t see myself anywhere else in this country. This is where my friends and family are. I think the pressure for many working professionals is how can someone own a home in such an expensive area? I think that is why there is so much anger toward the bailout plan. Whenever I get that pressure loaded question of, “do you ever plan to buy?” I always say, “I already own property. Just not here in the state.” There is a cultural pressure to buy a home whether for family reasons or subtle cultural cues that if you don’t own a home, you are like a nomad. For the past few years, I’ve enjoyed the benefits of leasing in an area of my choosing while owning rental property out of state. I won’t say this is the path for most since it does take time and I won’t be like an infomercial and say, “you can make $50,000 by simply flipping this place!” Many were mistaking luck with actual investing skill. Like hitting blackjack three times in a row in Las Vegas.
Richard Metzger: Do you think that there are going to be any economic surprises revealed by the Bush administration as they walk out the door?
Dr. Housing Bubble: Of course. The entire decade has been one big jack in the box surprise. Here we have the staunchest of the free market fundamentalists who derided regulation getting the comeuppance of their own philosophy. In fact, even in the early stages of the formation of the bailout bill you still saw this desire to keep things privatized. It was the ultimate form of crony capitalism. That is, "we’ll socialize your losses and privatize your profits." You can’t do that without compromising your actual belief. This is 26+ years in the making here. This is simply the logical extension of the crony capitalistic wild west. The market simply followed the lead of the government. Why look at your income or any down payment? Who cares! Free market for everyone. Since all this was operating in the actual free market fundamentalist system and was working, it simply reinforced their belief and on and on it went.
The envelope kept getting pushed. Sub-prime, interest only, and pay option ARMs were all manifestation of the Wild West view that was flying around. I think most logical people realize that extreme free market views are wrong just as staunch socialist views are wrong. They suffer from a principal-agent problem. Lenders who were supposed to serve a fiduciary responsibility to borrowers didn’t care since the loan wasn’t going to be in their hands after a day or so. They simply were driven by the fee. The fee structure was setup in a way to create a Ponzi scheme. Some of what people are calling a credit freeze is simply the market returning to more historical and standard loan practices.
Richard Metzger: Between now and the end of the month... any predictions?
Dr. Housing Bubble: The California housing market will continue to face pain. Things will heat up in the Presidential race but the economy will drown out most of the political rhetoric. A new law signed by the Governator will require lenders to try a little bit harder with borrowers to avoid foreclosure. This will cause the foreclosure data to appear as a big improvement which it is not. It is simply delaying the inevitable for a few more months.
Richard Metzger: What is the most comforting thing you could say to someone who is freaking out about the future reading this very interview???
Dr. Housing Bubble: As a nation we have been through tougher ordeals. World War I, World War II, the Great Depression, and the Civil War. We have come out stronger and better when we focus on what binds us together, not what keeps us apart. We need to accept the brutal reality that things will be tough for a few years. But if we follow what the fear mongers tell us, things will actually be worse. This is a time to think with a clear head and think about what we really want from ourselves and our country. We have a very crucial election coming up so go out there and vote.
If you are a future buyer work on keeping your finances in check and you may actually be able to afford a home without putting yourself into massive debt. Ultimately what most fear right now is instability and I can understand that. Keep yourself healthy (both mentally and physically), spend time with those you care about, and remember that we will come out of this but it is important to figure out how we want our future to look. If we make moves out of fear, our future will reflect action taken in fear. If we make logical decisions and follow courses of action based on clear thinking, we will have a better chance of improving our current situation. It really is up to us and that should make anyone feel empowered.
(Richard Metzger is guest blogger.)