Russell Brand's Silly Ideas: Affordable Housing

http://www.independent.co.uk/news/uk/home-news/new-era-estate-victory-residents-with-russell-brands-help-stop-takeover-of-their-estate-9937074.html

http://www.citylab.com/housing/2014/12/paris-wants-to-keep-central-neighborhoods-from-becoming-ghettos-for-the-rich/383936/

http://www.mirror.co.uk/news/uk-news/social-cleansing-londons-council-estates-4076556

... Remember Shirley Porter and the Homes For Votes scandal? Now criticise Russell Brand, again... What a silly old Hector he is!

(source)

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Housing - plenty of room to drop

Charles Hugh Smith points out that in some areas, property values have already dropped by over 70% from their heady 2006 peak.

House prices - Wave 2

Karl Denninger looks at recently-failed US banks and by comparing their asset valuations with losses charged to the Federal Deposit Insurance Corporation discovers that they overvalued their properties - at the time of failure.

If you add up the nominal assets of the three banks - $903 million - and downgrade them to their real value as implied by the losses borne by FDIC - $602.3 million - you will find the collective assets were overvalued by 49.9%. In other words, current estimated real estate values should be cut by 33.3%.

These were banks operating in (now) economically distressed states - Florida, Illinois (both with official unemployment rates at or exceeding 11%), Maryland (over 7 % unemployment), so you can't necessarily apply that regrading to the whole of the USA.

Nevertheless, those states are relatively heavily populated, and so are the others now showing high rates of unemployment - see this US population map. So it may well be that the US housing market in general may need to be reassessed. If, as Denninger says, he is "generous" in estimating houses to be overvalued by 25%, that means we need to cut nominal prices by 20%.

This is borne out to some extent by reported house sale prices - see this real estate website - though the Northwest has shown a rise (why?).

And then we have to consider properties repossessed by lenders but not sold, and owners who are sitting on their properties and refusing to sell.

The UK, with its much more densely-populated land, maybe somewhat different; but I think that when all the recent financial stimuli stop and we get past the next General Election, we may see clearer evidence of declining valuations here, too.

ADDENDUM (10 March):

A counter-argument would be that the FDIC has applied a "forced-sale" valuation, as with individual or company insolvency. On the other hand, the FDIC must be in no hurry to overstate its obligations/losses - its own finances are already very shaky - and there are already many forced residential property sales actually ongoing, so the regrading of assets may to some extent reflect actual market conditions.

Housing (and the stockmarket) bear rally

For more, see Smith's redoubtable blog.

What's happening to houses?

Mish gives us a few interesting graphs on the US housing market and asks whether it's hit bottom yet. I did leave a comment but it disappeared, so here's the gist:

It looks as if most of the air has come out of the balloon - in the US. Houses doubled in 5 years, and in some cities have now halved again.

As the tide recedes, it uncovers evidence that the market is segmented - look for example at New York compared to the others. The "best" areas are holding up better, and I'll bet the best houses within those areas ditto.

I think this segmentation will continue to be important, because of growing inequalities of wealth. This has been going on over there since 1980, but also historically (as Fischer in "The Great Wave" points out) the rich get comparatively richer in times of crisis.

I also think that the not-the-best-but-better-than-average housing sector will enjoy support for some time, because I suspect that there are not a few people downshifting from the most sought-after areas. These will be aware that they could have got more if they'd sold in 2007 (when I was mooting a caravan to my dearest), but have still done okay and so will not haggle too hard to get that nice little place in the country, especially since many sellers are hanging on stubbornly, waiting for an upturn.

Here in the UK, we have much less land available for residential development, and nothing like the oversupply of housing that exists in the US, so quite possibly our house price bottom will not be so deep. Of course, if our government hadn't encouraged the (legal and illegal) import of masses of poor people who also need a roof over their heads, the picture might have been somewhat different.

In both countries, we still face long-term economic decline; lower real wages as we continue to lose our manufacturing sector, higher energy and food prices and so on. So I expect house prices to continue their decline in real terms over the next generation.

On average, that is. I think we can take the Blair's real estate coup in Connaught Square as not untypical of what will happen in the best end of the market. Speaking of whom, I note that Tony's practising the "sneer of cold command" these days. Pitiable, really.

House prices to sink further

Barry Ritholtz gives his reasons why house prices will continue to drop - 15% to the mean, probably more - say 20%? (htp: Michael Panzner)

But the market is segmented. Maybe it'd be more useful to discuss the projected impact on different regions and price brackets.

Gold, and theft by inflation

A killer graph here from Charles Hugh Smith. Interestingly, the steady real decline of average incomes begins at almost exactly the same time as Nixon shut the "gold window".

Smith's take is that "the speculative mania in housing was fundamentally a tragic last-gasp effort to make up lost ground via speculation in housing". And if housing reverts to mean, it has a long, long way to go yet.

Still a bear, for now

A letter to the Spectator (unpublished), posted here on 2nd November 2008. We seem to be edging towards the "unsurprising", though the market may give a leap of denial before then:

Sir:

Your leader (“Riders On The Storm”, 1 November) suggests that current investor sentiment is “excessively negative”. That depends upon one’s historical perspective, in both directions.

A reversion to the mean (over the last generation) for UK house prices would be some 3.5 times household income, which on 2007 figures would imply average valuations around £120,000. Turning to shares, the progress of the Dow over the past 80 years (adjusted for consumer prices) indicates that a return to 6,000 points should be unsurprising, and a low of 4,000 not impossible.

But in addition to the business cycle and recurrent bubbles, there are deep linear changes at work. While maintaining the Western consumer in his fantasy of idle wealth, the East has been building up its human and physical industrial resources. We are focussing on the present recession, but not what the world will look like afterwards. When Asia has sufficiently developed its domestic demand, it will lose its enthusiasm for US Treasury debt, and the credit markets will tear at our economies with higher interest rates. Already, the search is well under way for an alternative to the US dollar as a world trading currency; and foreign investors, sovereign wealth funds and oil-rich governments are building up holdings in our bellwether businesses (e.g. Barclays Bank), thus converting imbalance into equity and exporting our future dividends.

Besides, the Dow and FTSE companies derive an increasing proportion of their income from abroad, so stock indices no longer reflect national prosperity. Real wages have stalled, and seem set to decline against a background of rising inflation and global competition; this, plus an interest rate correction, might strengthen the downward trend for house prices.

In short, successive governments have failed to repair our economic structure, and bear market rallies notwithstanding, I think we must eventually recalibrate our measures of normality.

Cruising for a losing

Mish's graph suggests houses could lose another 40% or so over the next 7 years.

And the solution?

Anyone who saw Brian Cox as Titus Andronicus at the Swan in Stratford in 1987, can never forget it. I remember seeing a girl in the audience with her mouth hanging open, paralysed, as Titus stunned us with his almost gloating description of his suffering. And what a master Shakespeare was, understanding that when emotion is heightened, it is also complex.

TITUS Ha, ha, ha!

MARCUS Why dost thou laugh? It fits not with this hour.

TITUS Why, I have not another tear to shed.

Humour can also unblock the mind to work creatively in a disaster. But there is also the "We're doomed, I tell ye!" John Laurie type who only cheers up when it's as bad as he always said it would be. Watch out for them, because unconsciously, they may steer events to match their temper.

iTulip explains succinctly, below, the problem caused by the house price crash. For me, though, it's a reminder of how wonderful the old cartoons are.

$700 billion: cui bono?

Hunter in the Daily Kos (HTP: my brother) says that the $700 billion rescue plan has no relation to the (much smaller) likely amount of mortgage defaults; instead, it's designed to prop up the derivatives scam that banks have been running for years.

I've thought recently that the bankers and traders are, in effect, being offered absolution without confession (1), restitution (2), doing penance (3) or a "firm purpose of amendment" (4).

1. Full disclosure of all liabilities and "assets"; admission of each person's part in the debacle. This should be Watergate Plus: there's a lot more than four burglars and the damage to third parties is incalculable.
2. Preferably, repayment of past bonuses awarded at a time when the recipient knew, or ought to have known, that the game was destabilising his own firm and the national economy.
3. Ideally, jail time, for some; at least, loss of office for those responsible.
4. Adoption of regulations designed to maintain the value of the currency and prevent future speculative bubbles.

From time to time we hear the defence that the consumer was at fault, too. Perhaps, if you're thinking about home equity withdrawals; but even the boll weevil is "just looking for a home" as Leadbelly sang, and when banks opened the money sluices house prices doubled. The buyer had no option to purchase a home at 2002 prices in 2007 (and I'm not sure what happened to the cost of rent in that time). The lenders should have known what they were doing; the poorest borrowers were not their equals in expertise. There was a duty of care.

What would houses cost, if it had always been illegal to use them as collateral for debt? What would the US and UK economies look like, if the vast sums sunk into housing had gone into small business enterprises? How much wealthier would we be?

Sell your house now?

If Karl Denninger is right and the long-term trend for house prices is 3 times income, instead of 5 or 6 as it seems to be now, then houses remain overpriced in real terms.

So even though house sales are seizing up and prices dropping, shouldn't we go ahead and sell anyway?

A snippet from Alice

Just a reminder from Alice's powerful Picasa presentation on house price trends (see also her Youtube version - top of sidebar).

Advisers and analysts who haven't been in the game long enough to yellow their teeth, may be emotionally unprepared for severe and enduring reversals of fortune.

House prices underpinned by shortages, boosted by inflation?

The Centre for Economics and Business Research reckons house prices will steady next year and shoot up for three years after that, thanks to housing shortages and building project cancellations - reports The Grumbler.

"Real estate could become a very good investment and inflation hedge once the government starts seriously printing money," commented Jim from San Marcos (who still has a realtor's licence) after his July 27th post.

The housing bubble: 5 - 12 years to the turn

According to iTulip, we are at Step D in a timetable (published in January 2005) that implies we have quite some years to go before a housing upturn.

Their point about real estate being an illiquid market seems valid to me, and I've suggested before now that we should expect a decline and a long stall, rather than an equity-style crash.

Government and homelessness

The "Pathfinder" project for urban renewal has come in for some criticism, because so far it's meant a net loss of 9,000 homes and many of those whose houses have been demolished have not received sufficient compensation to buy something similar elsewhere (see here and here, with an attempt at more balanced discussion in the Liverpool Daily Post).

I suspect we don't have a housing shortage, but a housing misallocation. There are lots of old people rattling around in houses too large for them, and too expensive for them to maintain properly. And how many million bedrooms have been converted into domestic gyms, games rooms etc? We simply expect far more space than we used to, and so the "shortage" is a function of our choices.

But there is a limit on land space, if we want to retain the capacity to feed ourselves in hard times. Maybe we should review policies on housing, housing benefit, local taxation etc. And the policy of using foreign labour to keep down wage rates, and so create traps for our working and under-classes. And is there a Gramscian plan to undermine the cultural cohesion of the country by means of deliberate negligence in border controls, with the side-effect of worsening the pressure on accommodation?

Governments have a talent for creating problems that will long survive them. After four centuries, Northern Ireland still has its difficulties. And look at Fiji, where a century ago British planters imported Indians for indentured service periods of ten years. By the end of their contractual decade, quite naturally the labourers had married, had children and put down roots in the island. The historical result is festering resentment between ethnic groups, leading to outbursts such as George Speight's rebellion in 2000.

Similarly, covering England's green and pleasant land with concrete, tarmac and brick will also have persistent unpleasant consequences. And is there any way to change it back? Could we put a foot depth of earth along a disused motorway to convert it to arable use? So, new building on agricultural land, flood plains etc is tricky, and now we are seeing some of the problems of brownfield development.

But there's a huge number of houses built in the Thirties that need refurbishment. There may be a boom in plumbers, plasters, electricians and bricklayers; while at the same time we may see growing white-collar unemployment, as a result of outsourced information-processing. Maybe the working class will be victorious, after all, while the chattering classes fill holes in their shoes and jumpers with old copies of the Guardian.

I know it can happen, because it did happen in the Thirties - read Helen Forrester, whose debt-burdened middle-class father made the mistake of leaving London post-Crash, to return to his Liverpool birthplace, where the parish had no statutory obligation to support him. Helen wrote that if the Depression comes again, the things to stock up will be newspapers, razor blades and soap. And in her case, a purse inside her clothes so that her own family couldn't steal her meagre savings.

It's going to be bad...

Mike Morgan, quoted in Mish's, is now convinced that we are headed for outright economic depression. Builders, banks and the rest of us are going to be hit very hard. This is, of course, the view of a real-estate expert in Florida, but he sees this as hitting the whole country.

We in the UK will not be immune from the general economic malaise to follow, even if unregulated immigration and a slower past housebuilding program help keep our housing assets from falling quite so far.

Property slump or stall?

Karl Denninger says house prices over the last 100 years have averaged three times income. What's the implication for us?

This BBC survey says the average semi (a standard unit of housing, one would think) is "worth" slightly over £200,000; official statistics put household income at £33,492. So houses cost around six times earnings.

That suggests a 50% drop is due. But as Keynes observed with wages, house prices tend to be "sticky downward": no-one is in a hurry to realize a big loss on their home equity. Death, divorce and redundancy may force some sales; others may choose to wait, or go for house swaps.

Or wages could double. Up till recently, it was a standard assumption that "inflation" would run at 2.5% p.a. and wage increases 2% above that. Using the "Rule of 72", it would take 16 years of 4.5% wage increases to double nominal incomes.

Whether wages will always rise in real terms, is another matter. One of the effects of globalization is to hold down wages in the developed countries; and food and energy costs look as though they will continue to rise as the rest of the world gets richer and more populous.

What's your house worth?

Home prices WILL contract so that the median house is 2.5-3x the median income

says Karl Denninger. Now do your sums.

Some interesting comments and suggestions (including my usual twopenn'orth) on this post at the Capitalists@work blog - people seriously discussing inflation hedging and survivalism, here in the UK. We're getting beyond ivory-tower discussion.

Going down

Another grizzly, this time Captain Hook:

You should know that when banks begin to fail in the States, and they will, things could spiral out of control to the extent controls will to need be placed on both digital and physical movement. Transfers between banks will cease up completely, debts will be called in (so pay them off now), systems from food distribution to medical care will break down, and Martial Law will be the result as the population retaliates. Life will change as you know it.

[...] Japan has never really escaped the credit crunch that gripped their economy back in the 90's after bubblizing the real estate market. That's the tell-tale-sign a bubble economy is on its last legs you know - when master planners need resort to bubblizing the real estate market. Generally it's all down hill after that on a secular (long-term) basis because this is a reflection of not just a turn in the larger credit cycle; but more, and the driver of credit growth in the end, this is the signal demographic constraints have turned negative. [...] It's a simple numbers game, where an aging population is less prone to take on debt.

He considers the possibility of a Japanese-style asset deflation, which gels with my earlier thoughts regarding a generation-long UK property slump.