bostonbubble.com

[Boston ITer]

It's been a while but I haven't seen a really good doom/gloom thread concerning the future of housing, future of non-Wall St sector work, future of overpriced higher education, future of non-stop offshoring, future of rising health care costs, etc.

All those who're non-hedge fund trust babies, please feel free.

[balor123]

I still think Boston housing is headed for a major bust but the timeframe may be too long (5 - 10 years) to make use of. It will be some combination of baby boomers dieing/moving and interest rates rising, not to mention changes to FHA loan standards and mortgage reform to increase taxes. As a nation, I think Congress likely won't intentionally put any policies in place which are expected to kill housing prices again nor will they try to reignite the bubble. Instead, I think they'll opt for keeping housing prices neutral, which means losing 3-4% year on it, which is huge over 30 years. At least those in less leveraged states can say they're getting something in exchange for this cost: a nice house at roughly construction cost. Here? The same house + a bunch of money to make the previous owner wealthy or whole.

[Kaidran]

I think what you wrote is very plausible. My only concern is if we move to higher inflation and people start buying houses as a hedge against it.

In general though I'm feeling very optimistic. I think prices are too high right now and I hope they drop but if they dont I'll just not buy a house. I may move to a nicer rental though. If rents go up without salaries to make living harder in general I'll just move out to OR and use my down payment to buy something outright. I am really just enjoying the idea of having options and not being tied to a house.

[balor123]

I'm hoping that next Fall my wife will find a teaching job in Austin and interest rates will still be low so I can buy a very nice house cheap. If not, then I'll probably stick around here and will want interest rates to soar. I suppose the cost of a good building runs about $150k - $250k in Texas so maybe I would prefer high interest rates in either case as that's within a few years reach of aggressive savings (when using a Boston 20% downpayment).

[Kaidran]

High interest rates seem like a good thing to wish for. I'm still very disappointed each time I look at Bankrate.

Anyone know how the Greece mess will play out in the US? Will the PIIGS problem in Europe make US debt more attractive as it is safer or will it discourage purchase of all debt and mean that the rates will go up?

[CL]

Re: mortgage/interest rate: typically higher mortgage rate means lower affordability means lower pricing, but the relationship is not as clean as you think. So you will have periods with rising rate and rising price, or vice versa.

As for Greece, a couple implications: 1) financial market is being stressed so stock market falling worldwide, 2) treasury as safe haven (still) so strong demand in long term treasury and dollar, leading to a drop in long rate (and mortgage rate), 3) Gold price up, but mainly vs GBP and vs EUR since the USD is rising as well.

[renterstill]

I'd add another factor - peak oil looming over our heads. We are already post-peak. Prices of commodities will rise, this is inevitable, as cheap oil production declines (not even factoring in political situation in the Middle East), and will have broad socio-economic consequences. Just think of the world when a barrel of oil will be $200-400-500. Cost of goods, transportation, food production (fertilizers are crude oil based), and globalization as we know it will quickly become the thing of the past.
anyone follows theoildrum blog?

[JCK]

How long have you been reading the oildrum blog?

I started reading that site around the time of hurricane Katrina. Lots of gloom and doom, predictions that oil had peaked in May 2005, that both Russia and Saudi Arabia were on the very of catastrophic collapse, etc. etc.

NONE of these predictions ended up being correct, and each year the goalposts are moved (conveniently enough, by one year). Peak oil is always RIGHT NOW, according to these folks, or it happened five minutes ago.

They massage the evidence to suit their conclusions, and ignore any evidence to the contrary. The "science" behind their

They have no credibility in my mind, and I stopped reading them years ago once it became clear that they really have no idea what they're talking about. If they can't make an accurate prediction about the single issue in which they claim to be experts (i.e., date of peak oil), then why on earth would I listen to their social commentary and political/societal predictions?

Back to housing, I don't think we're ever going to be happy with the price/selection in Boston. Housing here is expensive, period, compared to the rest of the country, and if you're comparing prices to Texas or North Carolina, you won't be happy unless there's a 60% drop from today's prices. I think this is extremely unlikely.

Higher interest rates are not going to be panacea, especially if they're tied to inflation. In that case, you have two forces pulling out housing prices: higher rates which will tend to decrease prices, and inflation which will tend to increase prices. I have no idea which of these is going to dominate, but I do think that merely hoping for higher rates as a solution to the cost problem might be wishful thinking.

I guess you're best bet is hoping, like Boston ITer, seems to believe, that we're becoming a white-collar Buffalo. In that case, I would expect that housing prices will not increase. But that seems like a pretty poor trade-off to me...

Personally, I'm keeping an eye on inventory, something that hasn't been discussed much lately. Inventory is running 7% higher than last year, and this is the first year in a long time that we've seen an increase in inventory over the previous year. If inventory increases (i.e., more sellers/buyer) then I can see price cuts starting to happen. If inventory remains low, then I think we'll just keep moving sideways.

I use www.housingtracker.net for inventory numbers.

[Kaidran]

Well peak oil is certainly the doomiest and gloomiest of doom and gloom topics. I read the Oil Drum now and again. It does seem to contain a lot of data, just how they choose to interpret it can be off a little. There seems to be a mix of energy insiders who are worried and hippies that are relishing he idea of a fall of industrialism. Some of the hard facts are difficult to ignore though, like the drop off in discovery vs production and fields the size of Cantrell in decline.

I'm not sure I buy into the $200/barrel idea just because it is hard to see how society could maintain that as anything but a spike that resets to a lower level after a die off of some industrial production. Unless you are thinking of a bumpy plateau followed by a precipitous decline.

I guess the future looks dim but we will only know it after it has happened. Since we will all be in it together it is hard to plan for it. I think on that score all you can do is to be as productive as you can, live near public transport and dont get tied to a particular area. I'm not even sure about public transport because I guess I'd be unemployed before I could no longer afford gas. Anyway, it seems like a good argument for renting and saving, unless you think we will get hyperinflation and be trading in carrots.

[Boston ITer]

JCK, I completely concur about the Peak Oil issue. It's more or less, a myth with no legs. It's only natural that a 25 yr oil field would be less productive in its 3rd or 4th decade. At the same time, there are always new offshore (or on-land) fields being explored by the likes of a BP or Exxon-Mobil. Likewise, deep drilling technologies also improves extractions.

And finally, if/when a Peak Oil crisis hits, it'll be cheaper to extract the Canadian oil sands, Colorado shale, & Synfuel (coal -> gasoline) and thus, add another century of supply to the world markets. During that century or two, we'll hopefully establish solar stations to microwave power back to the surface a/o ramp up geothermal and ocean wave technologies.

The issue is currently political in nature, in part, due to the green movement and the CO2 global warming crowd.

[JCK]

The great irony of peak oil is that, because we waste so much oil in this country today, it will be trivially easy to cut our usage when prices spike.

That's frankly why I'm not that worried. Most of the gloom and doom assumes that people will act irrationally, i.e., continuing to drive over-sized vehicles, rather than make simple changes (i.e., trade in the SUV for a subcompact) when gas prices spike.

I mean, if you go from a 15 MPG SUV to a 45 MPG subcompact you can effectively withstand a tripling of gas prices with no change in your budget.

We've already seen that gas usage drops when prices spike, so we know that demand is not inelastic. A more severe spike -> more extreme measures. The world will change, not end, and we have DECADES to sort this out. Even the gloomiest of peak predictions suggest that we'll still have lots of oil over the next 10-20 years.

And as Boston ITer points out, higher prices only make that much more oil economically feasible to recover.

[Kaidran]

Didn't you want doom and gloom?

I definitely agree that people predicting a date for PO are being very foolish but to simply dismiss it as a myth seems equally silly. By your own post you are not surprised to see a field decrease in supply after a few decades (23 years for Cantrell, which for those that dont know is a huge field in Mexico and a major source for the US). If we are not discovering reserves of a similar size to replace them, while demand is increasing or remaining constant, I just dont see how you can avoid the idea that production will ultimately fall below demand. If we start seeing discoveries of new supergiants then yes we can stop worrying for a good few decades but the discoveries that are being made today are tiny in comparison to what we have been relying on up to now.

The enhanced drilling techniques seem to be mainly to get at the oil more quickly, accelerating the process, not mitigating it eg North Sea. CO2 and water injection can increase the expected output but I think that is usually factored into recoverable projections. Since nobody knows where the OPEC numbers really come from; those are anybodies guess. Unless you are meaning yet to be discovered technology, who knows you could be right.

When I look at the arguments it seems that it is mainly geologists that are speaking up worried about PO and economists or politicians are condemning the notion. I personally lean towards the scientists. There are definitely a lot of greeny people around but they tend not to be making the serious arguments, at least not the ones I read.

Anyway, I'm not advocating buying 100 acres and a shotgun but it would seem it should be something we should at least keep on the radar.

More information than anybody should want to know:

http://en.wikipedia.org/wiki/Peak_oil

[renterstill]

I'm not buying all arguments on peak oil, just trying to keep it in mind while planning long-term, but I do believe that cost of fossil fuel-based energy will increase. I don't see any arguments/data on the other side either, that we will have unlimited supply of CHEAP oil to sustain our life style for another 20-50 years especially considering demands coming from Asia (China, India). Granted, there are unexplored oil fields, the reason they are unexplored is the energy that will have to go into it to extract energy, this ratio will determine the oil price. Off-shore drilling is expensive.
All alternatives WILL be more expensive also since oil IS the most energy condensed source and in some cases will be irreplacable vide jet planes.
All it takes is to increase the energy price and it will have an impact on all aspects of our lives.
Canadian sand? If it's that cheap, why nobody extracts it now? Because is not cheap considering the energy that's being put into it and quite dirty technology, same with biofuels (worked on this some). If we have to resort to that we might be paying 15-20/gallon at the pump, instead of 2.80. In Europe, gas is $8-9/gallon already. How would it impact American life style if we had to pay current European prices?
Sorry, but all alternatives albeit attractive in silico will not sustain the life style as we know it now ei. cheap Walmart goods, cheap food, or suburban living and communiting 80-100miles to and from work. The way I see it, it would be a come back to VERY local economy as it used to be in say XIX century for life's necessities, everything else will be luxury.
If you think of it, it really doesn't take much to tip the scale.

[balor123]

I'm mixed on peak oil. The real wildcard is the emerging markets and it's hard to know what demand from them in 10 years will look like. The development of products which reduce the need for oil is also unclear. I don't think we've hit peak oil yet but the prices sure seem to be volatile and that is affecting housing prices unfortunately. Houses further from Boston I imagine are having a harder time selling now that gas costs $2.50/gal. What we're all hoping for, I think, is higher mortgage rates without proportionally higher income. We just need to reduce Bostoner's appetite for debt. You're right about the cost of housing except that even a 60% drop wouldn't cut it as our housing stock is in significantly worse shape than most other states so to be happy one would expect them to actually be cheaper than those you can find elsewhere.

[Boston ITer]

In terms of housing, I'm wondering when it would be feasible to switch the heating, from an oil burner to that of natural gas? Or electric? I think the Peak Oil effect, if it's an inevitability (which is still debatable), will take a lot longer to trickle through the real economy then let's say the more volatile futures market for natural resources.

As for offshoring/"race to the bottom", it's happening all around us real-time. And unlike the south and soutwest, the Boston area isn't doing well in keeping its corporate mainstays. We're hopelessly relying upon past industrial "American century" performance (Polaroid, DEC, EMC, Boston Scientific) to predict the future, which is basically looking like a handful of startups plus govt sponsored enterprises (iRobot).