主题：A smoking gun -- 大众河蟹

久仰xlin, jtian, McArthr 诸位，不知何时有机会一见。

Regional history could be biased, if it's not considered under overall environment. The SF area housing boom in the early 90's were mostly localized, but the current house booming, if it's not nationwide, at least, it's much more widespread. It covers almost all the 'developed' regions in the US: From Boston to DC and Florida on the east, and CA on the west. I'm not sure about Chicago and Seattle areas, if that's also the case, then basically the house booming covers almost all the 'red states' and battle states during recent elections. By saying this, I just want to remind people the local housing/economy will likely affected by other areas with similar situation for this time.

The job factor is only one aspect of the game. basically I think it reflects the supply and demand. The assumption is: with sustained job creation in the area, there are will be sustained demand for housing, and there is limited supply in the area, therefore, the housing price will:

case 1: continue to go up

or case2: at least won't go down much.

But there are other factors can make this assumption wrong:

Housing will be still "Affordable" to meet the demands.

To achieve this, we have to see:

A dramatic increase in income to catch the housing price increase. Basic on the following American Community Survey by Census Bureau, the household income did not increased much (if not decreased) in the top tier US counties which cover large areas in the DC metro,

http://factfinder.census.gov/servlet/GRTTable?_bm=y&-geo_id=01000US&-_box_head_nbr=R2001&-ds_name=ACS_2004_EST_G00_&-redoLog=false&-format=US-31&-mt_name=ACS_2003_EST_G00_R07_US31&-CONTEXT=grt

Interest rate stays low and "easy money" continues.

That is not likely to happen. We've seen mortgage banks using 0% down, ARM, balloon and interest only loans to keep the monthly mortgage payment as low as possible. It can hardly go any lower. But with the soared energy price and gradually re-valued RMB, we are more likely to see higher inflation, that translates into higher interest rates. If China or other foreign buyers stop to buy treasury bond, not even mention if they starts to dump T-bonds, interest rate will increate even faster. All these means the monthly payment will be higher for the same amount of mortgage for new buyers. Also, property tax and utility cost also go higher, further limit the housing affordability.

Meanwhile, because the "easy money" policy, mortgage banks have put them vulnerable in the raising rate environment. Here is a two-year chart for Fannie Mae, look at how ugly it is for the longs. FNM and FRE hold much of the US mortgage loans. It is a ticking time bomb. If it collapses, then the whole U.S. economy will be dragged down.

https://www.bigcharts.com/custom/datek-com/datek-rt2.asp?osymb=fnm&symb=fnm&time=2yr&freq=1dy&compidx=aaaaa%7E0&comp=&type=4&ma=5&maval=25&uf=8&lf=1&lf2=4&lf3=32&sid=1899&x=61&y=8

To protect themselves, the lenders are tightening up mortgage policy: gradually, they will rise the down payment requirement, tighten appraisal policy and income/credit check, and fewer people will be qualified for ARM or Interest only loans if there is still such loans available. So, even some people want to buy a bigger home, they just can't get enough loan for it.

The whole US economy will be in a good shape:

With the recent gas price surge, how many of you have reduced your driving to save gas, how many "there would be" spending has been cut, such as vacations, shopping? The U.S. consumers are counted for 70% of US economy, if they spend less because higher gas and utility bills, then it is a bad news for the whole US economy - the only good news is we are going to have deeper discount for the holiday seasons.

The demand is guaranteed:

If the whole economy goes worse, we will see more layoffs and more individual bankrupt, and foreclosures. The recent amendment for personal bankruptcy law makes it harder for one to go out of bankruptcy. Higher un-employment rate will translate to less demand.

For this area, the job creation highly depends on federal spending. With the government deficit mounting up, it can't go forever. If the government continues to create deficit to a breaking point, we will see dollar devalue rapidly, which means hyper-inflation, hyper-interest-rate, or the government is forced to cut budget. The government contacts will be the first on the line, which has a direct impact for the local job market. The Katrina effect on NO has just draw it to the breaking point one big step, where do you think the 200B re-building fund comes from? BTW, those money will have little benefits for our area.

When the wide-spread housing bubble bursts, some areas are faster than other areas. Business will adjust themselves, which draw more areas down. If the CA or New England housing price down 50% from its heights, it will become more attractive to some business, and draw jobs from other places to that area. Don't say there is no way we will see house price down 50%, Japan and Hong Kong all saw that happened in the 90S, why that can't happen in the hottest market in the US?

The supply will continue to be tight:

Although there are limit houses will be built in this area, there are also many people heavily involved in RE investments, which creates another source of supply, when the house price stops to go higher, these people, mostly using home equity loan or other types of short term loans to finance their investment, will be the first group to dump their investment.

I think all the factors I talked are legitimate concerns (and leave out those most drastic scenarios, such as the collapse of US dollar or Fannie Mae) except we are not sure when we are going to see the effects. People have been calling "wolf" for long time, and yet we see the wolf. That doesn't mean there is no wolf, it only means we are not good to timing the event based on fundamental reasons. But we do know it is really close this time. To predict to timing of an economy event or path is truly a daunting job. At the end of Clinton era, the experts were forecasting trillions of surplus, and in a few years, we are seeing the largest government deficit in human history, things can just go that wrong. However, it's better safe than sorry, to say at least. For people involves in RE speculation, I can only see, the risk is much larger now than before, the reward is much less now than before, so think twice on what you are going to do.

I think we will need a few months to see the true evidence of the bursting bubble and when we do see it, it will be too late for many people. If housing market in the coming spring season is worse or flat as this spring, then it might be too late for many people to sale. I've heard sellers are withdrawing selling and wish for a good coming year which truly a bad sign already, but we don't have the statistics to say what it's going to be. We will see. It is going to be a unforgettable drama, only comparable to the NASDAQ collapse. Some people call it Episode II of the same drama.