bostonbubble.com

[cueball]

I've been waiting and waiting to buy a house in northeastern MA. All I've heard since 2004 is 'the crash is coming'.

2005: Prices remain the same, no crash.
2006: Prices remain the same, no crash.
2007: Prices remain the same, no crash.
2008: ???

It seems like the crash has come for most of the country, but prices in northeastern MA are still relatively the same. Prices have even increased in some areas. People still seem to think they're entitled to $300k for their disgusting 2 bedroom money pits.

All I've seen on this board are repeated posts and articles about how the crash is coming...well...where is it? Are we still sure it's coming? Everyone predicted this year would definitely be 'the year of the crash' and now here we are, almost entering 2008 and nothing has happened, yet again.

What's the story guys?

[john p]

It is less than I imagined so far but it is being propped up by other forces that are outside the scope of housing, which make the natural course of events take longer, and perhaps increases the potential of a greater problem.

Look at it this way; prices were going up almost 10 percent or more a year (parallel with inflation). When prices remain flat, that 10 percent of growth steam is gone and then when you account for inflation 4% or so last few years it seems (using a real "basket of goods" for people in Massachusetts i.e. parking in Boston, MBTA, medical, property tax, gasoline, etc.) it's lost that 4% of steam. Then with prices going down about 7% last year and another 5 or 6% this year; there you go. A few flat years are like a big drop in one.

What is preventing a collapse is the big wind. Its condition could be tough, but we don't have a major recession (job losses) to blow the dead trees and wrinkle-tin structures over. The sub prime market may have increased prices 20 percent overall, who knows.

I think that right now is the best time to low-ball ever. I am hearing that although some sellers aren't serious, other sellers are desperate Two years ago, realtors were putting the arm on buyers, now they are attacking and beating down the sellers to lower their prices for the buyers.

I think the banks who started this insidious process are fearful that they might own property that they're upside down on, so they are putting the full court press on the FED to lower interest rates to make the homes more affordable and keep the prices up longer.

The banks learned that if people didn't have enough money to spend, they would offer them credit to invent money in the market. When credit cards got maxed out, they allowed equity lines of credit for their homes (like an ATM). Now with the US dollar as the "gold standard" for us, our country has a lot at stake for the valuation of our dollar. If a good percentage of our dollars in circulation today are drawn from credit cards or home equity lines or inflated stock prices in capital stock etc. the money we're using is only as good as the ability of those to pay it back. The less and less that ability becomes, the less and less that dollar is worth. If people in the future have to pay back more of their earnings to service loans they will have less money to spend and circulate in the economy. A financial term called being "financially bonded". Capital structure theory talks about the optimum amount of debt, cash and earnings to sustain real fundamental growth. One's ability to take on more debt is commonly referred to as "their top is open".

So what did Bush do to change the dynamic of economics? How was it possible to spend and cut taxes? He found a loophole in the economy called China. China wanted our dollars to build their country. They borrowed our dollars and gave us cheap products for our dollars. Now they are becoming an economic engine that is increasing the demand for oil and other resources like metals. So the tallest coolest buildings and bridges are being built by the oil producing nations and right outside these gorgeous cities are the poorest areas in the world (which is another reason why people would fight to have democracy and capitalism right?). Our country has bridges falling over and rotting out. We are in the decline of our civilization; we're intoxicated with our own decadence (decay). We're like the decaying yeast that rises and thinks that they are growing fundamentally when in fact they are decaying. George W. Bush had everything handed to him and he grew even though he continued to fail. He promoted failures and prolonged failures. Like Paris Hilton, he learned that America loves decadent flunkies.

Behind the scenes are educated, hard working Americans. Their hands are tied most of the time, but they are the real reason why we don't have a collapse. When our country decides that they ought to start eating healthy and find out that we have all we have the resources to have a better life here, we will empower those that can make a difference and we will be fine.

Ask yourself this: Would it have been better to be in Iraq or 3 years ago offer 100, 1 Billion dollar prizes for technology advances that significantly reduce oil consumption? Getting off of oil should be our number one priority for our Nation's economic and security. So what is our alignment here, hmmm, we've got an oil man as President, and flunkies at that. Doesn't sound like a good alignment to me? If we had a tobacco president maybe he'd have us all smoking to stop the civil war in Iraq?

What this President is absolutely amazing at is framing the argument and dialogue. When the Democrats should have been on the attack, the President said "Wait until September to hear the Iraq Report". So he got his opponents to sit quietly when they had their opportunity to strike. These dumb flunkies outplayed the Democrats which tells you how smart they are. This President has every talk show, every pendant talking about Iraq. Iraq is not the answer to our problems yet our leaders seem to deposit all of our energy and resources to it. Hell, this President went to a summit on the Environment and all he talked about was Iraq. He is like the blitzing defense that wants you to focus on whatever they throw at you. We should be looking at the open man to put points on the board for us. Because this President put all his eggs in the Iraq basket, he is committed to the war. Our Nation has forgotten that Bin Laden should be the target of our military resources not to be nation building.

The Catch-22 the Republicans have is that they have created a 6000 lb gorilla in their own party. They knew that it was easy votes to enlist dumb lazy people that wanted easy simple answers. They made them feel macho and patriotic despite their laziness and the fact that they themselves weren't fighting or paying a price for the effort. Hell, let's lower taxes while others are losing limbs (that sounds fair, I'll put a yellow ribbon on my SUV to balance things out). Anyway, this coalition of the ultra wealthy and these meatheads is starting to go sour. It's going sour because the ultra wealthy are starting to see how much it cost to feed this gorilla. This gorilla wants red meat, they want to hear stories of Jack Bauer torturing a terrorist and saving America just in time for Monday Night Football. They want John Wayne kicking ass. They want to see crap blowing up on the news. The ultra wealthy are starting to understand that this costs money. Bush tells these dopes that it is all for free: most don't have to spill blood, we aren't asked to conserve anything, and we get to pay less in taxes. How does this play out?

I don't think that we've seen the crash yet because many are in a holding pattern until the next Administration.

[admin]

[john p]

BTW, I love the "cueball" moniker. In Fantasy Baseball / Football, I'm "Woodchipwedgie".

I would say that I've thought and felt what your sentiment a number is of times going back to 2004. This is because the market seems gravity defying. At the beginning, I described it like I was on the first car of a rollercoaster and even though I could see the dip below, the weight of the cars behind me (those that thought the track was rising) was holding my car back from the inevitable dip. I think now that a critical of mass is starting to get over the hump the question is why isn't it going down slower? This is called market stickiness. Think of it like how the majority of sellers have a cushion. It is really only the ones who bought in the last few years that are in trouble. If a person might have been financially tight four years ago and say got 5% raises since they bought, they might be ok. If they haven't gotten raises to keep up with the 5% or so real inflation of property taxes, commuter rail/MBTA, medical, insurance, gasoline, heating oil, etc. they might be over their heads a bit. You take them with those that are facing adjustable rates and those are the ones that will create the greater supply of desperate sellers. But in order for prices to drop, buyers need to show up with offers. If everybody stands on the sidelines and waits, the prices won't drop. People need to make low offers to actually create the statistics of price drops. It's a waiting game right now on a macro level here in Massachusetts. Think about Heinz Ketchup and that song "Anticipation". Heinz wanted people to understand the properties of their product. It was heartier and not watery. The properties of the materials in this asset class include the people who buy and sell. When things are good, people act irrationally and out of ungrounded optimism. When things start to go bad, people become stone cold sober. This conservatism is what changes the mental state between the gas/vapor rise to the solidification and sticky slow backslide. Add some heat to that Ketchup and it will flow down like water. The heat is what is missing here (a recession). Among the sticky sellers are some heated up and watered down sellers who are willing to deal, and once these folks have sold, all you will have left are those that are less desperate. Is it a good time to low-ball with a desperate seller now, or wait for the full weight of the decline from a seller who is more in line with normal affordability fundamentals?

I personally think right now is the best time to low-ball, and even if the market continues to drop, if you low-ball enough now with a desperate seller, it will be a wash. I think action is better than inaction now because you can hedge your bets. Who knows if interest rates go up, it will cost more to own, and if they go down you can refinance and prices might hold better anyway. I think more than half of the correction is behind us despite fundamentals suggesting it could go further. I think the balance of the correction will be in the form of price stagnation for a flat period and against inflation, would have the form of a decline. If the cost of capital (cost of interest) goes up, you don't gain as much in price declines.

If we get depreciation of the dollar, which I expect. These are the steps I see: We get less liquid (less access to money here) due to the FED making it harder for banks to lend out money (tightening the credit or unearned money). China discounts their prices (who might lower their prices like they have on electronics). Then, in order for China to maintain, they have to produce more stuff, which requires more global resources like oil and metals. Circuit City, who was written about as one of those "Good to Great" companies is really the canary in the coal mine, has felt the weight of this globalization step. So we are in this bizarre mix of having on the one hand cheaper stuff from China and more expensive gasoline. The banks are playing monkey math by picking and choosing what stuff goes in the "basket of goods" which indexes are based, i.e. hey gasoline is out of control so let's get rid of it on our index. Further, the dilution and bizarre behavior of indexes has a lot to do with a global housing and credit bubble and currency fluctations.

Check out this structure:

http://myninjaplease.com/wp-content/uploads/2006/11/plot-peoples-building-2.jpg

At one point when the two structures become one the forces need to flow to either side. When the frames start to join, the behavior of forces can be erratic and they need to be connected very carefully. Right now, the financial structures of globalization are feeling the stresses of the interconnectedness.

People like hedge fund managers want a liquid market so they can cream off the top. When a financial market gets too liquid it is like a soil that turns into a swamp with too much water. There is so much money out there floating around that prices don't reflect earnings (high P/E ratios) or even costs to make the products. When the financial markets have too much money and things aren't behaving based on their rooted fundamentals, all the excess capital that is on top of the soil like a pond is just floating and it is harvested by the hedge funds like a wet harvested cranberry bog:

http://www.saveourbogs.com/bog/images/harvest1.jpg

The way the hedge funds work is similar to the cranberry wet harvest, they watch the wind carry the cranberries that float to the top and wait for them to collect on one bank and scoop them out. In fact, hedge funds create "noise" or chatter in the markets that create their own winds and they can direct the money where they want with technical analysis (or a study of the behavioral "waves" and ripples and trends). The hedge funds need water (liquidity) to harvest in this manner. The hedge funds are pissed at the FED because he is drying out the cranberry bog and they will have to dry harvest like typical crops.

The Federal Reserve has to deal with the excess liquidity like the Cranberry Bog analogy as well as the financial structural stresses of the interconnectedness created by globalization.

I suggest to Mr. Bernanke this analogy: the "slump test"

http://www.cte-inc.net/images/slumptest.jpg

This contractor after mixing concrete needs to test the amount of water. If the physical resultant / angle of repose are too watery it will slump too much, and if it is too dry, not enough water, it won't slump enough. Again, I keep harping on the fact that you need to understand the properties of the materials in order to build properly. The markets are too liquid and are slumping too much. Secondly, you need to understand the Section Modulus and we need a circuit breaker to prevent certain structural loading to transfer from one country to collapse another. The indexes are supposed to function as those circuit breakers but people keep monk eying with them.

[john p]

In case you north shore folks don’t know about cranberry bogs: They create these flat areas with a trench around the sides and an earth berm around them. Then, they grow the cranberries on bushes and when they ripen, they flood the bog and the fruits float to the top. They run tractors through the bog to loosen the fruits and then the wind blows the cranberries across the surface of the water to where they have these suction machines and suck them right into a truck.

This excess liquidity is a form of aggression on our nation: We need money to fuel the war so we create liquidity through bonds. Our economic competitors are trying to swamp us with debt, inflate our economy and consumption so our debt looks small in proportion. In naval tactics, if you can weigh a boat down by flooding it with water it will sink. We are being economically swamped by other nations right now. Secondly, our parasites from within (hedge funds) want liquidity to harvest easy money playing surface current games not rooted in fundamentals, and most dangerous, third, our real advisory (Bin Laden) is the most brilliant of all: If you are fighting an overwhelming enemy, try to get them stuck in a swamp so that they fatigue and get disease. Bin Laden couldn't be happier that we're stuck in the quagmire in Iraq, depleting our resources and creating more resentment in that peninsula. We need to be less John Wayne and more cat.

[cueball]

Great responses guys. Thank you for taking the time to reply.

John P., lots of good information. I loved the cranberry bog analogy. I have a much better perspective of the market now that it has been put into layman's terms. I'm sure others will benefit from your posts as well. Thanks again!

[john p]

I don't know if some of you have come across these articles, but they strike me as a decent overview and perspective.

http://www.itulip.com/housingpriceregionscascade.htm

http://www.itulip.com/housingnotlikeequities.htm

written in 2004...

http://realtytimes.com/rtapages/20040624_perfectstorm.htm

[john p]

old article from a totally smart Aussie:

http://www.leithner.com.au/circulars/circular25.htm

great current overview, but check out page 7:

http://www.leithner.com.au/newsletter/Dec07%20Newsletter.pdf

This is how I have been looking at this situation:

Think about the norm and then think about surcharges to the norm. The Big Dig was a huge surge for the construction industry and general economy in Boston. It had a what, 15 years span right? Think about emerging industries like the Internet; that was a surcharge that had a certain percentage grow beyond and the Internet will be with us for a long time in my view. Like a professional athlete's career, many surcharges have short life cycles.

Now, think about people's perceptions of these surcharges. Many realize that there are short unsustainable life cycles, but others misjudge the product lifecycle and invest more boldly without realizing that the party is over.

My current view is that the economy has overshot the target and we are reeling back in the overcast.

Now let’s think about margin. If someone could lend you 100 bucks and expected 105 bucks back in a month, you'd need to make that 100 dollars work beyond the 105 bucks in a month’s time or otherwise it wouldn't be worth the effort right? What if you could take that 100 bucks and invest it and make 120 bucks in a month? You'd clear 15 bucks. Hell, next month you'd ask the guy to borrow $200 bucks so you could make 30 dollars. Lots of corporate debt is based on this margin. They can borrow cheaply and earn or get a greater rate of return than the cost of their capital (the interest). So guess what, companies are borrowing and borrowing to get this margin.

Now think about this; this margin is creating its own form of surcharge. The more money borrowed the more unearned money in circulation. This confuses many because companies see the potential growth of expansion and invest to expand to capture the money available in the market. I see this like plasma. The margin, the field between, becomes electric and is ionized with activity and it becomes its own form of matter.

http://en.wikipedia.org/wiki/Plasma_%28physics%29

Now think about transformations of the properties of the constitution of the economy in many areas. Take Boston, it was a blue collar town filled with poor hard working immigrants. Those hard working immigrants used their work ethic to pull themselves up. Boston has increased the education quality and level of its children and we are now a world leader in many disciplines. Comparing fundamentals when Boston was a poorer place isn't comparing apples to apples.

Another transformation is the integration of women in the workplace. It seems commonplace now, but when "fundamentals" were established, a good portion of wife’s didn't work.

Now think about how projectiles run out of steam. If you chuck a stone in the air, eventually gravity will find it and it will fall. As two incomes became the norm, the area had more and more money to fork over to buy things. Eventually you max out two working professionals (a wife that makes more than the cost of day care). Today's fundamentals for buying a home are based on two working professionals. "Traditional" families have a tougher time. Even Boston as the professional Mecca only runs out so far. If a Boston professional makes way, way beyond what a reasonable alternative someone from Providence makes, its curtains for Boston.

Now think about the potential risks of the change in state between the shifts away from manufacturing to white collar work. When Boston gets soft, loses their work ethic and lose their "tooth to tail" capabilities, they lose the awareness of the integrated connectedness of all things. That knowledge is power and certain regions find their sweet spot and drive their capabilities a mile with it. It's like a stance in Kung Fu. On the one hand your legs are rooted to the ground while at the same time you feel as if your head is being lifted on a string from above. Many times yuppies aren't grounded in work ethic and forget where they came from. They risk uplift, being blown away like an umbrella. Cement heads don't have vision or aspire for anything so they don't get anywhere due to the sinking weight of their shrinking perspective. The sweet spots are the grounded realists who are dreamers and have the skills to manage and get from A to Z and get along with everyone along the way. Boston's success in the past few decades are due to the fact that it was in its sweet spot. I hope that it remains focused on this source of power and enlightenment.

Now think about operating costs. Think about times when you're not stressed for money. Think about your mindset when you're driving somewhere with plenty of time to get there. Think about what your emergency fund wants to be what your savings wants to be etc. Now think about the economic environment when you can make decisions based on a position of power and stability. Think about when people choose their careers based on their strengths and talents and not due to economic bubbles that make some careers a better choice than others; in which case you get people who suck at what they do and do it only because it gives them more than what their true calling would. Think about the Woman’s Liberation Movement. You used to see cowboys slapping women in the Westerns in the 50's. Well once women started making money and could pay for their own food and shelter, that bitch slapping stuff was over. Moreover, it became a crime.

Now think about the renaissance. The Renaissance man had tons of free time to learn. They learned lots of things in a variety of disciplines and advanced all by learning and synthesizing from all. Ben Franklin and many of the founding fathers were those alpha (all of the above) people. What annoyed me about the Bailey American History Book (standard issue for High Schools) is that they say that the rugged terrain of Greece made rugged individuals which spurred Democracy. A professor from Greece told me that it was the opposite. In fact because it took less time to harvest the olives, people had tons of free time to go to the assembly. In both instances you had wealth, free time, and access to information.

Now, with the internet, you can access just about anything and learn just about anything. The problem is even though we are boundless as individuals; people compartmentalize knowledge and roles in companies. Think about the personal departments that ask the dumbest questions and outline the dumbest, laziest unstimulating career path strategies and are aghast if someone thinks that they can do a range of things. People get angry and confused by a renaissance man, even though information is at our fingertips with the internet. We don't even need the time that Ben Franklin needed to organize and get the information that he sought out. What do you think Ben Franklin would be up to these days with the Internet? (Besides watching fraternity kids doing fire farts on youtube).

My hope is that because the internet is more mainstream here in Massachusetts than in other areas from a tooth to tail perspective, that we will be among the first to transform and awaken to the enlightenment of the renaissance mindset and break the bonds and forms that bind us down. An impediment to this is our economic situation for younger people. Without the financial flexibility, people won't choose careers that align with their strengths and passions and people will settle with a write off as a life and will get frustrated and angry when they see others who do have passion for what they do. Even though people can expand their interests by researching on the Internet, they might not choose to because it only reminds them that they are stuck in a place they don't like. Now this resistance is nothing like what our parents endured so those with the work ethic will be able to prevail. However, when a kid gets out of college with over $100k in debt and house prices are upwards of 5 times the median family income, that's beyond what a hard working educated kid can reach. That is when you know that your region has passed its sweet spot; when the hard working, educated, play by the rules types can't make it.

Now think about what the constitution will be down the line if the great majority of children are raised in day-care. I think it is hit or miss about the quality of the care and that ideally a Mom or Dad is the best caregiver, so I don't think you can argue that less and less of Mom and Dad is a good thing. Will our children get the love and care and guidance that we got growing up?

Now back to Ben Bernanke and the FED. Bernake knows that the margin of low interest rates is creating this margin and uplift and surcharge and unrealistic expectation for growth and expansion which makes everything overshoot the target, so he is worried about inflation and he thinks about raising interest rates to slow inflation. The problem is that you can't put the brakes on too quickly. Those that have overreached have to reel in as quickly as possible right now and they can't reel in unless someone else is buying i.e. they can't sell the house they couldn't afford to begin with if new buyers sit on the sidelines. If interest rates go up, people can afford less so they won't buy even if they wanted to. Moreover, if they foreclose in mass it will be awful. If they can't readjust their rates at a decent rate then they are screwed so he is trying to hold rates lower so the knuckleheads who got ARMS can refinance.

To add insult to injury on this is currency. If there are too many unearned dollars out there, the value of the dollar drops. It's like having a smaller amount of shares of stock. People don't trust that the future value of the dollar will be worth as much, so fewer and fewer people will buy our Treasuries and pay the interest on the reserves in their banks.

The US is now in Iraq and spending billions. Our debt is growing, yet despite the artificial GDP amounts due to fantasy borrowed unearned dollars in the system, politicians still compare the debt as a percentage of the GDP. This economic credit bubble is creating a large shadow to hide our debt. The Euro, on the other hand is gaining ground, mostly because their policy isn't run by a cowboy who got us in entangling nation building situations and run up debt. Many of the ARMS are tied to the LIBOR index which is based on the pound which is doing much better than the US dollar so the index for the LIBOR is killing the ARM resets for many new homeowners.

Now think about that plasma. Think about the ionized field that the margin creates (the delta between cheap borrowed capital and unsustainable bubble earnings that you can get with that cheap capital). Think about where that surcharge is going? We have a thing called the trade deficit going. The excess steam that is generated with this economic win fall isn't building bridges, infrastructure, schools; it's going to China and Dubai. So we're borrowing tomorrow's earnings and we're not at least taking care of business here.

Further, we're allowing casinos in to help with a short time fix to pay for the fatiguing infrastructure and to help pay for the clean up of the mess, the puke, from the hangover. What is so friggin dumb is that the Casinos will cause more of a hangover and more of a mess to clean up and the money goes right out of circulation for Massachusetts. So instead of the contractor making his money on the Big Dig, you have Joe and Mary Smith blowing their money to fix the roof at the casinos.

A couple other things about the casinos. We will never have honorable politics if we allow sleazebags with the power of money they have. Their money will pollute our politics for generations. If you don't go along with the casinos they will break you. The time is now for backbone and a love for the Commonwealth.

Lastly, my wife and her grandmother went on a bus tour to Niagara Falls. It was a senior citizens group trip. Well the bus driver had sent a proposal to these senior citizens for a bus ride from Albany area to their hotel for a certain amount. It was sort of like a time-share deal and they had to commit to spend a certain small amount of time at the casino. Well the day before the person brokering the deal told the old ladies that he had to make a last minute change because he wasn't making enough money on the deal. He told the old ladies that they were required to spend something like a minimum of 5 hours at the casino each day. What kind of fucking scumbag predators target old ladies. Casino people, that's who, and we don't want to contract that bird flu.

[admin]

As usual, you make a lot of great points. I've got to dissent on the point of the fundamentals not being comparable over time, though. Change is always present, and I don't think it is an open and shut case that women entering the work force is necessarily more of a disruptive change than all of the other ones, such as the shifts from farming to manufacturing to services. Change by itself is business as usual and it's hard to get an intuitive feel regarding whether the rate of change is changing. People probably had similar things to say about "tooth to tail" disruptions when the economy was shifting away from farming.

I don't think change necessarily invalidates the underlying fundamentals of housing prices to incomes. If you compare price to income now with price to income in the past, using family income would account for the change in number of earners per family. As you pointed out before, there may be some skew on the income side caused by older families not needing as high of an income to support their much older housing purchase. That skew should self-correct given enough time. Also, I think that the effect of the skew would probably be substantially reduced if you also account for the opportunity cost of those families not selling or renting out their house now - they may have bought ages ago, but that doesn't lock in opportunity cost.

I've been doing a lot of thinking about interest rates over the holiday and my current thinking is that their low level has distorted all major aspects of our economy, not just housing. Check out this inflation adjusted graph of the Dow Jones Industrial Average:

http://home.earthlink.net/~intelligentbear/com-dj-infl.htm

The first thing that jumps out at me is that the Dow hasn't really performed that well over time, contrary to what you will hear from Wall Street. Most of the gains have just been due to inflation.

Secondly, and of more relevance to this discussion, the great bull market which started in the early 80's accounts for the bulk of the real gains and also corresponds directly with falling interest rates:

http://en.wikipedia.org/wiki/Image:Historical_US_Prime_Rate.png

That makes sense because when interest rates are lower, the alternatives to stocks are less attractive, thereby driving up the price of stocks and other assets (like housing). The problem is that the price appreciation resulting from the transition from higher rates to lower rates then gets mis-attributed to the quality of the underlying investment. People then buy under the assumption that the appreciation rate was endogenous and will therefore continue. (One of the articles that got me thinking along these lines, although it doesn't draw the connection to interest rates, is at http://seekingalpha.com/article/23268-on-p-e-ratios-in-the-21st-century-lower-your-expectations-for-market-returns .)

Unfortunately, the same mechanism would also work in reverse. If rates were to increase, it would work against the natural appreciation of assets like stocks and housing. I consider higher rates to be a very real possibility given that they are still below the historical average, given that they are still being pushed down by China, et al, and given that The Fed is coming under increasing pressure to curtail the weakening of the dollar.

- admin

[john p]

Depending on the timing of things the whole portfolio of where all these pendulums are swinging, you have to play a hand; meaning that you might have to wait for certain things to come around into balance. I think the resonating waves (the dialogue of wavelengths that amplify eachother) could create a collapse of a significant amounts in the financial markets.

My focus is mostly new buyers entry to the housing market. I think the greater percentage of new buyers have dual incomes. Now I don't think that certain areas of the country will require dual incomes but as a barrier to entry for some cities, I do think that dual incomes might be the order of the day for some time. My feel is that 3.5 times the household salary might be the realistic fundamental target for younger buyers for now. I think that if kids are in the picture, the single earner would need to be at about 3 times his or her salary when the other decides to stop working or at least buy down the mortgage to 3 times when it goes down to one earner. This is what I think of as managing the surcharge. As these buyers on the sidelines wait and wait for houses to drop; at what time do you think they will pull the trigger? I think at about 3.5 times unless we hit a recession. Sure it might go back to 3 times in other less competitive areas. Further, if babyboomers retire in masses, it could dial back down to 3 times, but that will be in about 5 years in my mind.

Lastly, after reading some of the links you sent, I think that the end of the Cold War really blew open the expansion of capitalism. Since, we've had expansion into cyberspace, and now India and China, maybe in a decade, Africa... We've got the nukes, but the weaker dollar and foreign holdings have given a lot of countries a grip where we don't want it. To many we are a life raft, but to others, they might want to swamp us. I bet on the US Dollar any day but if we want to globalize and trade with the world, we need to go through a phase where we mix our medium of exchange to facilitate this trade. I think too much at once has risks, but our Nation seems to think that the opportunity to expand now that we are the only superpower is worth it, so we signed NAFTA, and we're all economically bonded with China. I hope Russia remains stable so that we can rebalance for the next few decades.

[john p]

One word for 1985 - Gorbachev.

from your post:

http://static.seekingalpha.com/wp-content/seekingalpha/images/PEratio_01.jpg


This is a nice cross section article regarding Europe in 1999 (ten years after the removal of the Berlin Wall).

http://businessweek.com/1999/99_45/b3654002.htm

As much as we look at Europe as a mature market, it really isn't. It was completely fragmented during the Cold War. If we look at the European Union as an emerging environment, it is less of a surprise to see the currency rebalance as it is. When they first introduced the Euro, don't you think there were risks with that whole scenario? Now that it seems to be working out ok, more and more people feel less risky about investing in Euros. Because it is emerging, it is a growth market. In economic reality, I think Europe is more of a growth market and the US is more of a mature market. I'm honestly happy that it is working out for them over there. It is better for us if they are stable and balanced. I think that it would have been unrealistic to expect that a growth market wouldn't exceed a mature market. In time, with enough global transactions, things will settle down. People say that the weakened dollar has to do with the US Credit bubble. I think that Europe has the same housing bubble, so it is more than that; perhaps it is the dialoged between China's currency and the US Dollar that people want to be careful with?

Then, step back and ask yourself, won't lots of US financial companies want to invest in "growth" markets overseas? Margins are growing right? If in the end, US investments in these growth markets bring more wealth to the US isn't that good for us? Don't you think that Europeans will be worried if their society has too many US corporations over there?

I often thought that throughout history, aristocrats looked at sovereignty and local politics as the fruitcake mobs that they need to keep in line and control and until we got an educated society, governments needed to be controlled like a puppet. What is so dumb is that people are so simple; they want everyone to follow the "Golden Rule". You don't need to be Tolstoy or JFK to understand this and most folk’s think that the world is more complicated than it really is. People are people.

JFK said "For in the final analysis, our most basic common link is that we all inhabit this small planet, we all breathe the same air, we all cherish our children's futures, and we are all mortal."

I think what put him in the crosshairs was that those that think humans are an immature mob that needs to be controlled by an elite class couldn't swallow his belief and trust in the nature of mankind. What sucks is that if they thought he was naive, what do they really think about democracy?

Globalization is going pretty fast now, so depending on who is in power and what their disposition is towards trusting regular folks no matter where they live will be the big wildcard in the policies that are set up. If they have less faith in a society, they will put up a puppet regime which will be resented and eventually challenged. The US will be asked to come in and defend the leaders that are perceived as illegitimate. What if, however, some really crazy people seized control of a population and had some very harsh policies for neighbors like wanting them to be pushed into the sea or something. Is the US responsible for aiding a democracy while it is on its training wheels? Whether or not we have a crash will depend on if we have a healthy balance of realism and optimism. I think the safest play to get there is to allow everyone a chance to move the line of scrimmage forward for their people and not create winners and losers.

Lastly, if people can say, hey, our country prospered when the US was the lone superpower, we will have a better chance of remaining the lone superpower. The political capital you get through the testimony of happy neighbors carries more weight than what you try to sell directly. If you think that the US’s presence is having a positive impact worldwide, we may hit a bump or two, but our future will be positive and we won’t have a crash.

[Guest]