San Francisco Listed Inventory: 4/13/09 (
Inventory of Active listed single-family homes, condos, and TICs in San Francisco fell 4.7% over the past two weeks (versus an average gain of 1.9% for the same two week period over the previous three years) and is now running 17.5% higher on a year-over-year basis (up 8.7% for single-family homes and 23.5% for condos/TICs) and 71.3% higher than at the same point in 2006.
Sixteen percent fewer listings on a year-over-year basis for the first two weeks of April are partially to blame for the dip, but an increase in sales activity in the sub-million dollar market over the past two weeks has reduced Active inventory as well. And this time it’s not simply seasonality as our counts suggest as much as a twenty percent year-over-year bump in potential contracts written in early April.
It is, however, way too soon to call it a turn or even simply a trend.
The standard SocketSite Listed Inventory footnote: Keep in mind that our listed inventory count does not include listings in any stage of contract (even those which are simply contingent) nor does it include listings for multi-family properties (unless the units are individually listed).
SocketSite’s San Francisco Listed Housing Update: 3/30/09 [SocketSite]
SocketSite Sees Seasonality (Versus Signs Of A Rebound) [SocketSite]

66 thoughts on “SocketSite’s San Francisco Listed Housing Update: 4/13/09”
  1. Looks like the stimulus is working 🙂
    Grab the dangling oxygen masks, breathe deeply and calmly, and just don’t worry about it!

  2. Inventory is key.
    Decreasing inventory, especially if it is not only due to seasonality, will be positive for SF area home valuations.
    this is fairly big news, and it will be even more interesting in a few months when we have figures about inventory and also sales #’s and sales prices.
    is inventory going down because sales prices are falling and finally the market can clear? or are people making home purchases for more $$$ than in the past? the answer to this will be intriguing.

  3. Me likey! As I’m considering cashing out of a sub $1 mil rental condo I own. Priced right those props are selling. Btw, priced right means a 7-10% price decline from normalized 07/08 prices. Hell, with a 5% fixed rate this condo is cheaper to own than rent. I may even get the current tenants to buy, so I save the commish costs, which would be the cherry on top of the Sunday.

  4. All I can tell you is that *everyone* I know is either refinancing (those with equity), or looking to buy (those with downpayments), and a few are levering up (moving up).
    I hear stories of liar loans (mostly here), but I only have one anecdote of that.
    This stimulus is having the (desired?) effect of luring capital off the sidelines to aid price discovery “on the way down”. Of course it comes with some… cost, but we aren’t worrying about that yet.
    Don’t fight the Fed, especially when they go into business w/ the Treasury. There will be plenty of time to scream in pain later 😉

  5. “an increase in sales activity in the sub-million dollar market over the past two weeks has been clearing inventory as well”

    My realtor has me on a list to be automatically identified when properties under one million sell in areas 5-9. I certainly haven’t seen many properties sell recently, but have seen properties be removed from listing. Any data on the number of sales?

  6. Matlaw- I will soon have one! 3/2 condo, in 2 unit victorian, fully remodelled, views, no prkg, D9 (north slope bernal) walking distance to Valencia and BART 24th st. Probably $649k.

  7. What is the same rate for this graph, and how are you smoothing it? Looks like march and april have the same value, yet there is an arch between them. Do you have numbers for every 2 weeks, or just once a month?

  8. Does anyone have any feel for when Jumbo rates might soften? That’s clearly what is killing the higher than $700k market here.

  9. Grubber,
    Jumbo loan rates have never been lower. Wells Fargo has them at 6.5%, down about 50% from a year ago.
    I doubt it’s the rates, it’s more likely the downpayment and qualifying that’s killing those. FHA 3.5% is easy, Jumbo 30% is hard.

  10. Hi gowith flow – you asked me in another thread about where I got the 4.875% 30yr fixed rate from?
    it was via a broker, but with American Mortgage Network – and yes, was with points.
    Surprising graph by the way, didn’t expect that.

  11. “I certainly haven’t seen many properties sell recently, but have seen properties be removed from listing. Any data on the number of sales?”
    There have been 22 SFRs and 103 condos sold in 5-9 since March 1.

  12. REp – thanks. Did you pull it in 2009? I was able to get one in 2008 at 6.125% 30yr fixed with hardly any points with Wells; was good at the time.
    I would have waited but the increased option was being cancelled out; with it re-instated again I may refi again and take advantage of the lower rates. I was hoping the larger banks were on board all ready however.

  13. as promised, the editor remains true to his word
    no promises yet that this is a trend, but the ‘biased’ editor has been willing to attribute this to something other than seasonality
    facts are facts on the way up, down, and whichever way we are going now
    my guess is that this is a slight bump down in both price and inventory – largely due the advancing process of price discovery – a good thing
    it will take a very long time for this process to play out, and even longer if this process of price discovery is slowed by declining inventories…
    oh, and jumbo mortgage rates have most certainly been lower (yes they are hard to qualify for now, but no, these are nowhere near the low rates that were available in the past two years!)

  14. This does add a nice twist to the recent theme! It will be interesting to see how the inventory plays out during this peak selling season.
    More info would be nice (not sure how much of this is readily available). What is the extent of the increase in sales activity and what does that mean? More pendings or more closings? (Closings were down YOY again in March but up from Feb: What is the trend YOY in places being de-listed unsold? How does this trend line play out at different price points? Is there generally a short break in new listings during Easter? 2006, 2007, and 2008 all saw pretty different trends in the April-August time period. Odd since they are very similar the rest of the year. We’ll see where 2009 fits in.

  15. “More info…” – don’t overthink it 🙂 The fix is in, and everyone is playing their part wonderfully!
    Not only that, but banks are going to KILL Q1. Not sure about everyone else, but you can bet the focus will be on the financials.
    Enjoy your spring, everyone – they are even delaying GM bankrupcy till June!

  16. Not surprising given the interest rate. Lower end market is at price/rent parity or better at 4.9%. A bozo was asking for $3k/mo for a claustrophobic unit under the bridge and claimed that a lot of people expressed interest. Why people would pay that when they can pay $2200/mo in mortgage for a spanking new Blue unit, I have no idea. High end, on the other hand, still has a long way to go to achieve the parity. And it’ll get only worse given the falling rent.

  17. Interesting point re: high end units rent price / parity.
    I had been looking at maybe buying for last year, but decided to upgrade to a nicer rental with the hope of living there for 1-2 years and snagging a deal on one of the many $1+ million units that have been taken off the market do not getting “what they’re worth”.
    No real estate centered data to back it up – but deleveraging of top 10% of US hh’s seems to me like will drive at least another good 20%+ drop off the $1+ million market.
    TBD if that works out – but will be interesting to watch.

  18. Pricing disparities seem great and may indicate a market in flux. For example, Marina house 321 Avila at $1.8m and a very similar house across the street at 268 Avila for $2.595m.

  19. A couple of other open houses I saw this weekend seemed to be priced for 2007: 1756 North Point for $1.595 and 1549 Francisco for $1.445. Both are the bottom floors of Marina houses, no views, shared parking and shared backyard, seemed expensive.

  20. Clay – my sentiments exactly. Rents appear to be less sticky than home prices, especially at the middle to high end of both markets. There are still some kinks in the banking industry that have yet to be worked out. So why not just stay a renter, accumulate more for a downpayment over the next year, and wait for a more stable moment in 18 months or so. The main argument against this is that interest rates will increase, but that also means prices will have to drop too.

  21. @ Postponed:
    Nice to hear have another kindred watch + waiter. Agree with your point on interest rates. IMO, they’re a complete red herring. Fundamental asset value, p/e is what drives prices. Interest rates are short term noise that net out vs. prices.

  22. No problem. I used a good broker – I would recommend him, anyway.
    Letme know if you want his name.

  23. Unwarrantedinlaw –
    I saw the 1756 north pt unit as well and thought the same thing. It was last sold for $1.9m in 4/07, ouch.

  24. >5-10% loss on 1756 North Point? It can only mean the current owner overpaid. The market NEVER goes down that much… /sarcasm

  25. Gowiththeflow – talked to Wells about the conforming limits and was told end of this month/May 1st is when they’ll roll out rates for the higher ($729K) limit.

  26. Jumbo’s were definitely lower in the past and certainly are impacting the market. There is no secondary market for them, so you must eat what you originate. As a result, the 150 basis point spread on a $1mm loan is easily $1000 month. That’s nothing to sneeze at with tigher ratio underwriting criteria. That was the point of my question, is there any easing on the horizon on jumbos?

  27. Count me in with those who are surprised by the decreasing available inventory. Regardless of the underlying factors, I think it may portend an increase in actual sales in the near term (at least above the recent depressed levels). But any increase in actual closed sales in not really evident in the MLS sales data (yet). Total sales for March 2009 (SFH + condos in SF) stand at 237 compared with 339 in 2008, 494 in 2007 and 538 in 2006. At this moment through Apr 13, there have been just 68 April sales. But there are 664 total listings in Active-Contingent/Pending status (136 of these have gone Active-Contingent since Apr 1). On the other hand, 379 listings have gone to Expired/Withdrawn status since March 1 – so there are still many discretionary (and discouraged) sellers pulling their listings.
    I think we’ll see a bump in sales soon when (if?) these listings under contract start to close.

  28. thanks, FSBO! more great data. one question, though. your write:
    On the other hand, 379 listings have gone to Expired/Withdrawn status since March 1
    that number seems really large. do you know if that is in line with march of last year (or much bigger or, perhaps, smaller)?

  29. Decreasing inventory? I’ll sit up and take notice when that 2009 line dips below the 2008 line. Still looks like pretty big YOY increases to me.

  30. Grubber: Banks and potential mortgage purchasers currently view condo loans as high risk compared to SFR and demand added premium on top of added safety with lower LTV and extreme scrutiny on credit quality. Insurance companies and pension funds are only biting the Fannie & Freddie backed comforming loans. Since there is no secondary market for Jumbo as you pointed out and banks are not interested in keeping these in their institutional portfolio as money is made by turning over loans and getting funds to make fresh ones unless yields are unusually high. I am guessing loan rates above $729k will not be coming down anytime soon. The only way a 1.5 mil home is sold is to someone with huge cash position or knock 30% off the sale price so someone with 25-30% down can qualify for the jumbo conforming. The drastic lowering of high end homes prices will pressure mid range home prices which in turn will pressure low end home prices. I don’t see this being good for real estate in the medium or long run…

  31. steve – the 379 listings that have gone Expired/Withdrawn since Mar 1 definitely represent a higher pace than in recent years. For the same period (Mar – Apr MTD) in 2008, the count was 233 and for 2007 it was 175. As we discussed in a previous thread, there appears to be significantly more recent expired and withdrawn listings. I’ve never focused much on the number of listings in the process of being sold (under contract with a status of Active-Contingent or Pending). It’s harder to construct historical metrics (after the fact) for this “in process” inventory – and ultimately the most important quantity is closed sales. But my sense is that this in-process pipeline is swelling.

  32. “Decreasing inventory? I’ll sit up and take notice when that 2009 line dips below the 2008 line. Still looks like pretty big YOY increases to me.”
    I agree. I don’t understand this focus on the dip when greenie is still way up higher than orangie.

  33. @ Clay
    “Agree with your point on interest rates. IMO, they’re a complete red herring. Fundamental asset value, p/e is what drives prices. Interest rates are short term noise that net out vs. prices.”
    Unless you pay cash for a property, rates indeed factor into the P of your P/E if E is monthly rent you can extract from a property.
    At high rates, buyers will pay less, at low rates, they will pay more, so long as the spread between their monthly / annual cost and the E (rent) over the same period meets their needs. It’s all about cash flow.
    What do you think began the real estate bubble in the first place? LOW RATES because things seemed more afffordable on a monthly / annual basis to buyers. Then speculation on potential appreciation took over…

  34. I think it is because the expectation was that greenie would continue to go up and hide behind the legend.

  35. Unsure what’s causing the reduction in inventory, but I think there’s a tidal wave of foreclosures coming very soon.
    CA SB1137 stopped Notice of Defaults (NOD) in 08Q4, but they started right back up (at record levels) in 09Q1. It takes 4-5 months for NODs to turn into Notice of Trustee Sales (NTS), which means NTS’ are starting to shoot back up right now.
    It takes ~30 days for NTS’ to be bought by the bank and end up as a REO.
    So wait a month or two before breaking out the champers.

  36. If it is just the sub-million dollar inventory that is booming, what exactly is happening in the million+ market? Seriously, what is happening to their financing? Why are those homes sitting? And, will it ever impact the sub-million dollar market?

  37. This is the takeaway:
    What I’m saying is if your property was worth a $1million in 2006, it will be worth $2 million in 5 years because of inflation.
    Argentina, anyone?

  38. Michiko,
    Great rah-rah piece.
    The interesting sentence here is:
    “So while it may be bad for the country, it will be great for the real estate industry.”
    That pretty much sums up today’s situation. The RE industry hates affordable housing for Americans, but they sure love bailouts from the very same Americans’ taxes. The same can be said of bankers and mortgage brokers.

  39. What I’m saying is if your property was worth a $1million in 2006, it will be worth $2 million in 5 years because of inflation.
    Is this possible? I would think higher interest rates would have the opposite effect on housing prices.

  40. Just heard a snippet of interesting data from law firm that helps companies with layoffs:
    Q408: 1.0M layoffs helped with globally
    Q109: 1.5M layoffs
    Q209: on pace for 100k so far…
    Maybe companies are beginning to figure out what normal looks like moving forward.

  41. What I found funny was that the guy might be right in spite of his ignorance. He keeps talking about all the ‘stimulus’ money and how that is what is going to cause inflation. The stimulus money is pocket change compared to all the bailout money, TARP money, quantitative easing, etc that is being done by the Fed & Treasury. I’ve heard that the stimulus money represents just ~8% of the money the government and Fed is injecting into the economy in one form or another. Yet this yahoo is raving about how it is the stimulus money that is going to cause inflation.

  42. Well which is it? Will prices drop over the next few years per most people on this board or is the inevitable inflation going to drive prices higher? If the latter is true, getting in now with low interest rates could be golden.

  43. ^ it depends on alot of factors, particularily when and how fast interest rates change. One possible scenario is that housing prices will incur initial downward pressure from increasing interest rates, but eventually those higher rates will cause overall inflation, which will effect incomes…which will effect rents…which will effect housing prices too. And having a real, leveraged asset with a low fixed rate would be very desireable in the longer run. Especially for investment properties (since your personal residence will be a relative benefit- you still need to live somewhere.)

  44. If housing values double in five years the U.S. will be in the midst of Argentina-like hyperinflation. There’s an Argentine economist with a YouTube video (can’t remember the link) who argues just this point. Anything is possible, I suppose, but this meme is too much like the “buy now or forever be priced out” that took us into the latest debacle. Notice he got his real estate advice at a cocktail party.

  45. I bet in 5 years nominal housing prices in the US will be generally lower than they are now. In fact, I’m pretty sure of it, especially as regards SF.

  46. I’m certainly not losing any sleep over the idea that I’ll wake up one day and house prices will have doubled and I’ll have missed my chance to own.
    But I have no doubt that at some point nominal prices will bottom out and start rising again.
    Just not today.

  47. LMRiM – how high and how quickly do you see interest rates rising? How will this effect home prices in your opinion?

  48. I agree, diemos, especially with your use of the word “nominal” in regards to prices bottoming. Short of a total upheaval and collapse, I doubt we’ll live long enough to see the bottom in real prices, but I guess anything is possible.

  49. stu,
    LMRiM – how high and how quickly do you see interest rates rising? How will this effect home prices in your opinion?
    I’m not terribly worried about substantial and sustained increases in interest rates in the medium-term (say within the next 2-4 years), or about price inflation generally over that period.
    It’s very hard to forecast timing exactly, obviously. But it seems pretty clear to me that the clowns running the Fed and the USG will not be able to engineer what they appear to wish: namely, anchored inflation expectations around 2-3% annual, coupled with low rates reflecting these anchored expectations.
    At 370%+ debt/gdp, they will either err on the exploding currency base side and trigger huge and quick increases in rates, which would utterly collapse such a leveraged economy, or they will fail to arrest the debt deflationary aspects of the deleveraging which is taking place.
    My gut tells me it’s going to be the latter, partly because it is very very hard to “print” enough currency to overcome the huge deflationary impact of an economy that can no longer service its debts and cannot fund its collective lifedtyle out of income (as Japan found out).
    But like I said, anything is possible, and they could err on the side of the former, which would require an order of magnitude larger money “printing” than they have undertaken so far. In that case, we’ll probably get total chaos, and I wouldn’t rely too heavily on the nominal price of assets that require extreme leverage in an enviroment where lending ceases (which is basically what happens in hyperinflationary economies). Debt, however, would be great if it were financing income producing assets, and so investment property owners who are relying on cash flow (not appreciation) as thir base case should do well.

  50. Stu- as u just whitnessed, there are alot of bears on this site. For all kinds of reasons. they think strictly logical ones, i think they are also heavily influenced by psychological ones, as the buying of real estate, especially in SF proper, seems to trigger alot of strong reactions.
    I own my home in SF, as well as several investment properties in the city. Matter of fact I live off them. I listen to the predominant arguments put forth on this site, but I also listen to opposing perspectives. And I observe what is happening in the marketplace, as well as the psychometrics of people who wish to own in SF. And on balance, while I think doubling of prices in 5 years is highly unlikely (if a not a bit silly), unless you want to throw global civilization back 80 years, the human condition (and it’s economic benefit) will continue going forward, and SF RE will do the same (if not be in it’s lead.) I have given my varied reasoning for this in numerous posts in the past. And if inventory levels continue to decrease this spring, and properties below $1 mil continue their selling spree, at least some of my prognosis will have proven to be right 🙂

  51. Well which is it? Will prices drop over the next few years per most people on this board or is the inevitable inflation going to drive prices higher? If the latter is true, getting in now with low interest rates could be golden.
    House prices are not an inflation hedge because of some God given law; i.e. the price of apples went up, so my house must worth more, too.
    The “use-value” of a house is the stream of rents that it generates, net of taxes/maintenance expenses, discounted by the mortgage rate. Now, the stream of rents has a certain growth rate, which is just the general income growth rate, as contract rents are a fairly fixed fraction of incomes.
    If you try to model this, you end with a relationship of the form:
    use-value = Income*Multiple
    Where the Multiple is dominated by the
    spread of the mortgage rate and the income growth rate. If the income growth rate is high relative to the mortgage rate, the multiple is higher.
    Mortgage rates are set nationally, but income growth rates can have local divergences, so the multiple can vary from city to city, or even neighborhood to neighborhood (i.e. based on the changing incomes of those who live in the neighborhood).
    Because of this, the use-value of a house should be resistant to inflation, because in the above expression, Incomes will grow with inflation, whereas the multiple will mean-revert, as inflation cancels out in the spread, and the remaining terms such as productivity growth, tend to secular trends.
    Having said all of that, house prices currently have nothing to do with the use-value. Even now, they are about double the use-value, given the present potential rental incomes and any reasonable assumption about future income growth rates.
    Currently, we are using a different valuation model: borrow as much as you can afford
    This is actually an improvement, since at the peak, the model was to borrow more than you can afford — hence the banking crisis.
    Under the current valuation model, a sudden change in inflation rates will drive nominal prices lower, as real bond rates tend to hiccup as inflation volatility increases.
    However, inflation or not, the key driver of prices here is not inflation, but psychology. A bubble is impossible without a delusional view of the world, and the unwinding of the bubble can be viewed as the dismantling of these delusions. Rather than just following the prices, also follow people’s attitudes.
    The first to fall will be the fantastic estimation of incomes. Hence the common view that an average SFH can be consistently rented for 4K or more, or that there are enough 200-300K households to absorb the inventory being placed on the market. Now that lending standards have increased, the “income ceiling” will be the key immediate driver pushing prices down.
    Now, in the event of inflation, upper-tier incomes will *fall* due to wage compression. It is medium and lower tier incomes that control inflation, and these tiers have historically not been buyers. Therefore inflation, even if it occurs during this stage of the unwinding, will not increase SF house prices, although it may help house prices nationally.
    I believe the last delusion to fall will be the optimistic estimation of income growth rates — this is hard, because of the eternal optimism in SF and the nation generally. People confuse higher incomes with higher income growth rates, and so assume that in rich cities, the Price to Income multiple should be high. Because this is an estimate of future growth, this mis-estimation can persist for years. To give an idea of how far we need to fall, in 1990, the price to income multiple was 4*. In 2007, the multiple is 7. But even a multiple of 4 needs to mean-revert to the national average of about 2.5, and this assumes that historical growth rates will continue into the future.
    *Note that I am defining the multiple a bit differently than the popular definition of dividing the value of the average house by the average household income — I am only considering the median incomes of mortgage holders compared to the size of their loan + downpayment. If their income is double the median, then my multiple of 2.5 will be 5 by the popular definition.

  52. Robert,
    Nice analysis on real housing values.
    If you had the time, I’d be very interested in hearing your thoughts on how Prop 13 affected prevailing multiples over the last 25 years or so. I strongly suspect that whatever effect was there is now fading, and will result in additional downward pressure on real values in resource-constrained areas that were previously boosted by the insurance aspects of the tax distortion.
    Also, like you, we’re big savers (we’re basically retired now, but total annual living expenses are typically only a smallish fraction of investment income/experience). Again, if you had the time, I’d be interested in hearing your broad investment theses/asset class views over the medium- (say, 3-7 years) and long-term (7 years+) horizons.

  53. Robert- “use-value of a house is the stream of rent it generates”. Let me stop you there. That is a rational definition. But people (especially wealthy ones) also see prestige, pride, etc with their home. One could say it’s the biggest status symbol of all for it effects who is around you, who you associate with, etc. Use-value is heavily influenced by psychomeyrics for people with options.
    On a previous thread I said SF buyers tend to be some of the brighest people around. It got strong reactions (interestingly from seemingly ‘smarter’ bay area peeps :). Okay I’ll recant. SF buyers are some of the most hard headed and persistent buyers out there. They just luuuvee Ess-Eff, and will pay and pay and pay to live here. From old money barbary coast folks, to Chinese families, to high tech hipsters, this stuborness crosses both cultural and generational lines. It may sound like a realtors line, but I would not give realtors that much credit (sorry anonn :). And, given all the legacy money here, as well as future innovation based money (I don’t think the founders of twitter are buying in Tracy) aren’t these people, collectively, throwing use-value/real housing value (literally) out the window? The wealthy have the privilege of not having to act rationally. That is a definition of success, in their book.
    You guys should consider the art market. I’d like to see a use-value applied there. Sure, an impressionist work or a Picasso could be valued against the ‘cultural capital’ it possess through collective museum ownership, influence in art history, etc. But what about a jeff koons? Or damien hirst? Horst is now one of the top selling (living) auction artists. Some can call it horse sh!t, but there is enough of an infrastructure to the art market to keep values going. Sure, in a recession art values can drop alot, but if people can hold on they will retain intrinsic asset value, as defined by the others out there who have these investments, and more importantly by the many more others who want these precious plums of cultural cache.
    I suggest to you that the (relatively) small and exclusive SF housing market has similiar components to it.

  54. So, SF RE == fine art?
    Prices of the latter fluctuate wildly, too … as you pointed out.

  55. No no silly, not =. But there are valid analogies. Especially how a diverse, globally based set of investors can keep an asset class going and going and going irrespective of demonstrative, rationally based use-value.

  56. I think 45YOH is right that there is some “art-value” factor at play in SF. It is not all “use-value.” But this is also true in many, or even most, places. People in San Diego luuuve San Diego and will pay and pay to live there. Ditto Orange County, LA, New York, Miami, etc.
    The question is whether the art-value factor has so trumped the fundamental use-value factor in SF that prices will never fall back to the use-value levels that prevailed for decade upon decade here. Could be, but I certainly would not bet on it if that were the premise of the single biggest investment I have (and a leveraged one at that). It is equally plausible that intangibles such as job-mobility, debt-aversion, etc. become prominent and supersede any art-value to bring prices below standard economic use-value. Nor would I buy a single piece of fine art as my biggest investment for the same reasons, even though that would have been a very good move if I bought in 1997 and sold in 2007.

  57. All of you real estate bulls and bears talking about inflation. Nice to see. Keeping your eye on the ball. Inflation will be alive and kicking categorically in the next 3 to 5 years. There is absolutley no way it won’t happen with Obamanomics.
    Housing prices may be supported because of inflation simply because “cash” is the worst place to be during inflationary times. You want to own assets, commodities, homes, etc. Printing all this bailout dough will make the Jimmy Carter years look like a picnic.
    Good luck to all.

  58. All of you real estate bulls and bears talking about inflation. Nice to see. Keeping your eye on the ball. Inflation will be alive and kicking categorically in the next 3 to 5 years. There is absolutley no way it won’t happen with Obamanomics.
    Housing prices may be supported because of inflation simply because “cash” is the worst place to be during inflationary times. You want to own assets, commodities, homes, etc. Printing all this bailout dough will make the Jimmy Carter years look like a picnic.
    Good luck to all.

  59. Interesting article on inflation:
    Seems to go directly to whether the “Ka-Poom” of inflation will occur (conclusion is yes), so I am curious to see who agrees / disagrees.
    Key Points (IMO):
    “Historically speaking, the composition of the Fed’s balance sheet has been mostly Treasuries. And the Federal Open Market Committee would typically raise rates by selling Treasuries from its balance sheet into the market to soak up excess liquidity. However, because of the Fed’s decision to purchase up to $1 trillion in Mortgage Backed Securities (and other unorthodox holdings), it will not be selling highly-liquid US debt to drain reserves from banks. Rather, it will be unwinding highly distressed MBS and packaged loans to AIG. Not to mention the fact the Fed would have to break its promise of being a “hold-to-maturity investor” of such assets.”
    “Our economy has become more addicted than ever to low interest rates. But because bank assets will now be collecting income at record low rates, when and if the Fed tries to raise rates it will only be able to do so on the margin. If Bernanke raises rates substantially to fight inflation, banks will be paying out more on deposits than they collect on their income streams. Couple that with their already distressed balances sheets and look out!”

  60. I saw that, Tom. I’m not sympathetic to the “inflation” arguments until aggregate debt levels are reduced dramatically. Until that happens, price inflation is self-correcting: rise in equilibrium interest rates (the government market is dwarfed by private credit creation, or destruction) collapses a highly leveraged and stretched economy, leading to dramatic deflationary pressure.
    This guy’s a little out there, and you’ll have to do a little additional reading regarding his theory of lower interest rates depleting capital, but this article is an interesting counterpoint:
    The key paragraph imo:
    The presence of risk-free bullish bond speculation imparts a huge additional bias to the economy, virtually guaranteeing a falling interest-rate structure, as demonstrated by the past quarter of a century, during which interest rates have been driven down from the high teens to close to zero. It may distort the ultimate outcome of this latest tragic experimentation with irredeemable currency. No longer can it be taken for granted that the denouement of unlimited money-creation will be hyperinflation with the Federal Reserve notes rapidly losing purchasing power. On the contrary, it could be an unprecedented deflation with the Federal Reserve notes being hoarded by the people, firms, and institutions as their purchasing power is actually increasing (in fact, they are already being hoarded by foreigners in the second and third world countries in unprecedented amounts). The dollar will not be the first among irredeemable currencies to be annihilated in this latest hecatomb of currencies. It will be last one.

  61. LMRiM,
    I’m certain that Prop 13 effects have been fully baked into prices since the early 90s, and in fact will exacerbate the decline, but it’s very difficult to model this. People tend to respond irrationally; there is a loss aversion bias and an insurance bias, and both are at work here, and contribute to removing liquidity from the market. This is particularly true in SF, which has huge tenure variance. Short story, I think that the insurance premium falls in value as expectations of price appreciation diminish, and at the same time the reduction in liquidity adds to downward pressure on prices. However, we are talking about just a few percent swings here, in either direction. The mortgage interest deduction and zoning ordinances have had an order of magnitude greater distortion on prices than prop 13.
    For asset classes in general– this is really tough 🙂 It’s much easier to make money when everyone agrees. Also, I don’t think any asset class is so over or under-valued that you can expect more than low to mid single digit nominal annual returns, and yet we are seeing greater swings than this on a monthly basis, so sentiment is king.
    Nevertheless, in that time frame, my own bias is for low sustained inflation, compressed profit margins, wage compression, and an elevated risk premium. Any inflation spikes will be met with a withdrawal of demand and prices will be forced back down.
    Because of this, I believe that bonds are attractive here, in terms of cash-flow. In particular, I think the market is over-discounting the risk of default for investment grade debt and even below. This is not to say that the risk premium will reduce in 7 years — it may, but on a cash-flow basis, the coupons are attractive. Corporate balance sheets are actually pretty good, and coming into this deflation, profit margins were at record levels, so there is a lot of cushion, not for growth necessarily, but to maintain debt service. I also believe that the policy response is biased towards bond-holders, and will remain so. I think munis are at least as risky as corporate bonds, overall, and expect the USG to throw pension holders and unions under the bus.
    Once you leave the U.S., there is more currency/inflation risk, particularly in the smaller economies that are price takers or that have a different political alignment vis-a-vis debasement. If you have access to good data and a sense of where the political winds are blowing, you could probably do well buying private-sector emerging market debt as well. Brazil may be worth a look.
    I don’t expect equities or most commodities to do all that much, based on fundamentals, but these have been known to stray from fundamentals:) I am bullish on commodities in the long term, but I don’t think demand will pick up greatly in the time frame you mentioned. It’s worth looking at agriculture or natural gas, particularly as I believe we will add infrastructure allowing sales of the latter to europe. I think the gold price is driven by people who don’t understand debt-deflation, so who knows, it may spike up and then fall when the doomsday scenarios don’t arrive. Generally speaking, if the quantity of gold is fixed, then demand for it should increase with global GDP, so I see no reason, other than speculation, to expect real gold price increases for some time. Longer term (e.g. 10+ years) equities — as well as the economy — will be fine, once we adjust our expectations towards more realistic growth rates and unwind some of the trade imbalances, but I don’t know if this will happen in the given time window. If equities reach a more historically appropriate dividend yield, say matching that of bonds, then I would become more bullish, but I still think unwarranted optimism is ruling the day.
    I’ll post something if I have time to look at things more seriously. However, I would be careful about China. I think they will find themselves enmeshed in this longer than the rest of the world. Current policies seem to be aimed at snuffing out any potential for domestic demand, while at the same time forcing banks to dramatically increase lending to unproductive enterprises. They also have demographic head-winds ahead of them. But that is a very fluid situation, and a bright future is only a single upheaval away 🙂
    Thanks for putting a human face on some of these dynamics. Regarding art-value, I do think that many of the houses here are beautiful. We’ll just have to wait and see if elite foreign buyers appear on the scene to help out our debt-burdened neighbors.

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