Tuesday, May 08, 2007

The Real Estate Bubble and California's Economic Growth

Economist Christopher Thornberg delivered this lecture at Humboldt State back in November. Note the little blurb about Sacramento at the very end of part 3 ("Sacramento saw the real estate bubble pop first....").


Part 1



Part 2



Part 3



Hat tip: Matrix

15 comments:

norcaljeff said...

Excellent video, thanks for sharing. I like the fact that he basically says the NAR is full of crap, just as we have. Not sure about the RE market being a bad asset to own. Still can't beat the fact that the leverage is unparalleled and gains after 2 years is tax free, for now, but I get his point.

Patient Renter said...

"Still can't beat the fact that the leverage is unparalleled"

True, true, but all the leverage in the world can't make the asset rise in value, or rise in value fast enough to cover the monthly debt payments, which is not the situation during normal housing appreciation.

wimpyVO2max said...

Real estate is a poor short-term investment. The liquidity is bad -- it takes weeks or months to sell. The transaction costs are ridiculous. 6% commissions are highway robbery. That means to break even on a house you need 6% appreciation to cover the commish.

Stocks are better. Commissions are usually $10, $20, etc. and liquidity is lightning quick -- less than a second.

norcaljeff said...

PR, you forgot the tax deduction and any expense related to obtaining a capital gain as well as limited downside in the long term, unlike stocks.

Patient Renter said...

It seems to me that the property tax argument is a product of the NAR. The deduction is just that... a deduction from the property taxes that you still do pay. It's not like the government gives you free money just for owning a home, they just merely make you feel good about yourself come tax time.

Capital gains are a real downside to stocks though.

Diggin Deeper said...

"It's not like the government gives you free money just for owning a home"

The government pays you to be in debt. As long as your heads down and working to repay all the debt you've accumulated, you're a solid citizen. The only time they give you free money is when you sell your home (with some restrictions) and take a profit of up to $500K. I couldn't resist and used it on the home I sold.

Diggin Deeper said...

Fed leave rates alone and state that core inflation is the key concern.

http://news.yahoo.com/s/ap/20070509/ap_on_bi_ge/fed_interest_rates_17

Again, what could they do? And how will this affect the overall economy, real estate, and California in general? Fedhead BB is in a fix and he's waiting for something to break before he reacts. Trouble is the Fed has a sound history of pushing the buttons late and then pumping the economy with more dollars to stimulate it. Still betting he'll reflate at some point, and let core inflation run. Too bad for all the folks on fixed incomes and those that cannot afford to pay $4 each for a gallon of gas, a gallon of milk, or a loaf of bread.
This should get really interesting as we move into summer. I'm guessing GDP goes negative within the next 3 months.

norcaljeff said...

PR-
Let's make one thing clear...I'm not an apologist for the NAR, in fact, I hate just about anybody in the RE industry.
You mentioned property taxes, that' not what I was referring to, I was specifically referring to mortgage tax breaks, which is about 12 times more of a tax break than the property taxes but thanks for bring that up as well :) When you pay rent, property taxes are built into the rent check you write each month so don't think you're getting around paying taxes.
Regarding interest rates, I kinda was hoping for higher rates (damned the thought!) just so I could see Jimmy's excuses to buy now, when we know homes would fall even further in value.

Patient Renter said...

Jeff,

I know where we all stand on the NAR :) I just wanted to play devil's advocate a bit.

"When you pay rent, property taxes are built into the rent check you write each month so don't think you're getting around paying taxes. "

Good point.

Patient Renter said...

diggin:

"Still betting he'll reflate at some point, and let core inflation run."

I'm not sure if you read Mish's blog... he had a good post today pointing out how M3 (and M3b) have been exploding but of course GDP and job numbers are barely above anemic, as he puts it. This points out two things - that the Fed has lost control of credit expansion and no amount of credit seems to be stimulating our economy.

This is all very bad, for us and the Fed.

Gwynster said...
This comment has been removed by the author.
Gwynster said...

Rip M3 numbers >; (

I'd like to get upset about the rates not rising but I just had a fabulous meal at Little Prague and I just can't get angry on a happy full stomach.

Which is too bad because I really wanted the rates to increase as well.

Diggin Deeper said...

PR...You and I think along the same lins.

"This is all very bad, for us and the Fed"

Agree!!

Don't get me started on M3...

Very familiar with Mish's work and also follow Daily Reckoning and Whiskey and Gunpowder news. Both take a contrarian view and present the "Bear" side of the Goldilocks story.

Looks like retail is finally starting to buckle.
http://news.yahoo.com/s/ap/20070510/ap_on_bi_ge/retail_sales_5

"NEW YORK - The outlook for consumer spending in the coming months grew dimmer Thursday after big retailers stumbled in April, their sales hurt by rising gasoline prices and the weak housing market."

This oil and gas scenario is going to hurt and the inflation it causes will hurt even more. Net result, imho, if we escape stagflation, real estate goes nowhere for a very long time, maybe a decade or more. If we do get stagflation, real estate prices drop dramatically due to affordability issues involving everything but real estate.

pepsi_one123 said...

"Still can't beat the fact that the leverage is unparalleled"

Exactly, and when price are falling, leverage will MAGNIFY your loses! I wonder how many people understand that one?

norcaljeff said...

Pepsi, that's true for both RE and stocks. My point was when you are a smart investor, the leverage is better with RE. Try and find a stock broker who will let you buy $500K in stock with Zero down.