Are we poised for inflation, or hyperinflation? Or will the opposite happen?
On the inflationary side, we have what appears to be massive expansion of the money supply by the Fed, a weak dollar, and rising gold prices.
On the deflationary side, we have higher unemployment, and a mentality in the populace of saving vs. spending. People are downsizing and contracting, and spending less.
Robert Prechter, of Elliott Wave fame, says: “An increase in money supply is only inflationary if it is used to RAISE the total amount of credit. This is NOT happening, as both bank credit and consumer credit levels are contracting for the first time since World War II.”
Let’s think about what is happening in the housing markets: We have the highest rate of foreclosures and delinquent mortgages in history. Even “A” paper, prime 30-year mortgages, are in foreclosure or delinquent. In fact, by sheer volume, there are more troubled prime loans than there are subprime (mostly because there are lots more prime loans). A much higher percentage of subprime loans are in trouble, however.
When a home goes to foreclosure (data as of 9/2009), the bank recovers about 30% of the loan principal. In a short sale, they recover closer to 60%. However, in either case, it is a massive loss for the institution, nationwide in the area of Four Trillion dollars.
When a bank agrees to a short sale, or forecloses, money is destroyed. When the markets fall, money is destroyed. The Fed, pumping money into the system as hard as they can, is not making a dent in the money supply – the bailouts are perhaps offsetting less than 20% of the destruction of money.
So is inflation likely? Probably not. If Prechter is correct (and he often is), then the Fed’s action is not increasing credit. In fact, the only lender in the housing market is the government – 85% of loans are FHA or VA. There are almost no conventional lenders anymore. They are all out of business. And, the bank regulators are insisting that banks specifically NOT loan on real estate. Credit is contracting, and will likely continue to do so for the foreseeable future. The future of real estate, particularly commercial real estate, is in cash.
A friend of mine who invests in commercial properties, recently told me that a building owner he knew had signed a lease in which, in return for the lease agreement, would make certain tenant improvements. This is common in commercial leasing. However, he does not have the cash to make the improvements, and no financing is available to make them! This sort of financing was easy to get and considered a normal way of doing business just a few years ago.
You have no doubt heard that the recovery is underway, and that the housing market is coming back. The truth is, we have a small dip right now in mortgage resets, but the bulk of the option ARM and other bad loans will reset in the next two years. The foreclosure and short sale situation we have right now is a fraction of what we are likely to see in the next year or two. Almost 10% of Americans are at least one payment late on their mortgage. The average American family does not have more than two months of buffer in the bank in case of job loss, and many will miss a house payment if they are unemployed for just two weeks (and miss one paycheck).
Business and commercial defaults are rising, and will be a huge contributing factor to the destruction of money, along with credit card losses. The credit card industry itself will change dramatically over the one to three years. It will be hard, and expensive, to get and own credit cards.
Inflation seems impossible to me, with all these circumstances. I am on the side of the fence with Prechter, Smorch, and the other Elliott Wave guys who think we are in for a protracted period of deflation. There is no credit; only cash works today. Still, I do own some gold. Just in case.
Patrick Harvey
Tuesday, October 20, 2009
Thursday, October 15, 2009
Co-Housing: Part One – Matters of Style
Query: ‘So, you’re arguing that everyone in detached housing ought to be mobile, right? Doesn’t that conjure up the North Shore Oahu crowd in the 1960s, living along the beach, or the movie-conjured, white-trash, trailer-court life styles?’
No, I’m not saying folks should be eager to pull up stakes and move their homes on 24 hours’ notice, or that a highly transient society is the optimal way to build neighborhoods. Of course, I’m not too sure that a lot of the communities built in the last 10 years in the conurbations feel like a neighborhood; and what do we mean by a “neighborhood,” anyway?
Recall the conversation between author John Steinbeck and the fellow with kids in the trailer court described in Travels with Charley. Steinbeck asks the man how he feels about raising his children without “roots.” The man replies: “What roots are in a housing development of hundreds and thousands of small dwellings almost exactly alike?” Then, for emphasis:
“Who’s got permanence? Factory closes down, you move on. Good times and things opening up, you move on where it’s better. You got roots and you sit and starve.” (See pages 78-79, Penguin Classics edition, 1997)
In a neighborhood of the idyllic type, the rooted would not “sit and starve,” because the neighbors wouldn’t let you starve, not if they could prevent it. Since I don’t exchange 1,000 words in a single year with more than twenty percent of my neighbors, my principal residence isn’t located in some idyllic gathering of family-minded, look-out-for-each-other folks. We are civil to one another, mostly, and we keep to ourselves, by and large, now that the common bond of young children was erased by the departure of ours from our street. Our back yards have six foot-high, block walls anchored at the common boundaries. I know the people in my office environment or in my classroom better than I do the folks along my street where I’ve lived 21 years. I don’t know my neighbor’s kids’ names or ages, for the most part. (Genders, well, those I’ve got figured out; it’s how they dress for school.)
This is no sorrowful reverie on the loss of community. The point is that home ownership in the conventional sense of an 8,000 square foot lot with a 2,000 square foot, 3-bedroom house built upon a concrete foundation with a two-car garage may no longer be purposeful, if our culture truly values sustainability and affordability. There’s no apparent justification for building from bricks, block, mortar and other “immovable” materials under the guise of creating “roots” in a village. At least where I live, the expense of ownership isn’t outweighed by a set of treasured friendships. When the market values went stratospheric in 2006 and early 2007, the profit-takers in our neighborhood grabbed the cash and fled somewhere else, sans a forwarding address. You move on where it’s better, the father said.
I uncouple the idea of conventional, permanent detached housing from the concept of community. Community exists, I think, when people value getting to know other people in close proximity for however long the opportunity exists to experience them. Whether there’s 20 feet or 2 feet between the walls of their respective dwellings and whether you own your own parcel of land seem mostly irrelevant, nuisance issues aside, to caring to know one’s neighbors.
Prefabricated dwellings are an option that combines affordability with the potential for mobility. They are still the tiny minority of residences in metropolitan Phoenix because large-scale conventional builders were efficient, when building, which reduced the cost advantage for manufactured housing. That, of course, was “back in the day.” How will those builders fare when the target population can’t get a loan from a conventional lender large enough for the balance of the price, and haven’t got enough savings to make a down payment?
There are four leading types of manufactured homes in circulation today: Modular (site assembled, pre-built sections called modules); panelized (walls with windows, doors, wiring and siding assembled at the home site); pre-cut (kit, log and dome-style houses); and classic mobile homes, built on a steel undercarriage and pulled to the home site where the wheels and axles are removed. There are many price points for manufactured homes from about $90 thousand northward, and some manufacturers are working on increased sustainability and energy efficiency to afford the homeowner some return on investment. Here’s the real issue: durability.
Manufactured homes still suffer from the “first two of the Three Little Pigs” stigma. That suffering isn’t completely undeserved; just watching footage of tornado strikes convinces most of us how devastating the destruction to a manufactured home can be. The industry has a response to the public’s skepticism, as follows: Most manufactured homes are built to withstand sustained winds in the range of 70 miles per hour. Above this range, a manufactured home will sustain damage. Only in the case of severe weather, such as a tornado, is the public likely to experience winds in excess of 70 miles per hour. Meteorologists estimate that approximately 40 percent of all tornadoes have winds exceeding 112 miles per hour. Tornadoes can have winds in excess of 200 miles per hour, in extreme cases. Current building codes and practices, for either manufactured homes or site-built homes, do not require dwellings to withstand winds exceeding 110 miles per hour. So, a direct hit from a Category F2 (and higher) tornado will bring about severe damage or destruction of any home in its path. A tornado's deadly force, like that of a hurricane, does not selectively discriminate between site-built and manufactured homes.
Yeah, maybe. The last proposition is almost certainly true, despite appearances; the difference, it seems to me, is anchorage. If the home is truly attached to the foundation and is made of heavy - enough materials, then gravity will save the superstructure from all but the most savage wind storms or storm (water) surges. But a manufactured home doesn’t have weighty materials, because they can be hauled long distances on an 18-wheeled tractor-trailer. So its walls are more susceptible to being ripped apart, especially when the walls are fastened with something weaker than mortar.
Which is why the manufactured home industry (and the site-built residential construction industry, for that matter), needs to turn its attention to employing new materials light enough to haul to a final-assembly site that are still relatively indestructible. Steel boxes known as “shipping containers” come to mind. There’s a few to be had, cheaply, in every port community in this nation, and in a lot of other U.S. cities. Now, there’s some stylin’; more next time.
-MNW
No, I’m not saying folks should be eager to pull up stakes and move their homes on 24 hours’ notice, or that a highly transient society is the optimal way to build neighborhoods. Of course, I’m not too sure that a lot of the communities built in the last 10 years in the conurbations feel like a neighborhood; and what do we mean by a “neighborhood,” anyway?
Recall the conversation between author John Steinbeck and the fellow with kids in the trailer court described in Travels with Charley. Steinbeck asks the man how he feels about raising his children without “roots.” The man replies: “What roots are in a housing development of hundreds and thousands of small dwellings almost exactly alike?” Then, for emphasis:
“Who’s got permanence? Factory closes down, you move on. Good times and things opening up, you move on where it’s better. You got roots and you sit and starve.” (See pages 78-79, Penguin Classics edition, 1997)
In a neighborhood of the idyllic type, the rooted would not “sit and starve,” because the neighbors wouldn’t let you starve, not if they could prevent it. Since I don’t exchange 1,000 words in a single year with more than twenty percent of my neighbors, my principal residence isn’t located in some idyllic gathering of family-minded, look-out-for-each-other folks. We are civil to one another, mostly, and we keep to ourselves, by and large, now that the common bond of young children was erased by the departure of ours from our street. Our back yards have six foot-high, block walls anchored at the common boundaries. I know the people in my office environment or in my classroom better than I do the folks along my street where I’ve lived 21 years. I don’t know my neighbor’s kids’ names or ages, for the most part. (Genders, well, those I’ve got figured out; it’s how they dress for school.)
This is no sorrowful reverie on the loss of community. The point is that home ownership in the conventional sense of an 8,000 square foot lot with a 2,000 square foot, 3-bedroom house built upon a concrete foundation with a two-car garage may no longer be purposeful, if our culture truly values sustainability and affordability. There’s no apparent justification for building from bricks, block, mortar and other “immovable” materials under the guise of creating “roots” in a village. At least where I live, the expense of ownership isn’t outweighed by a set of treasured friendships. When the market values went stratospheric in 2006 and early 2007, the profit-takers in our neighborhood grabbed the cash and fled somewhere else, sans a forwarding address. You move on where it’s better, the father said.
I uncouple the idea of conventional, permanent detached housing from the concept of community. Community exists, I think, when people value getting to know other people in close proximity for however long the opportunity exists to experience them. Whether there’s 20 feet or 2 feet between the walls of their respective dwellings and whether you own your own parcel of land seem mostly irrelevant, nuisance issues aside, to caring to know one’s neighbors.
Prefabricated dwellings are an option that combines affordability with the potential for mobility. They are still the tiny minority of residences in metropolitan Phoenix because large-scale conventional builders were efficient, when building, which reduced the cost advantage for manufactured housing. That, of course, was “back in the day.” How will those builders fare when the target population can’t get a loan from a conventional lender large enough for the balance of the price, and haven’t got enough savings to make a down payment?
There are four leading types of manufactured homes in circulation today: Modular (site assembled, pre-built sections called modules); panelized (walls with windows, doors, wiring and siding assembled at the home site); pre-cut (kit, log and dome-style houses); and classic mobile homes, built on a steel undercarriage and pulled to the home site where the wheels and axles are removed. There are many price points for manufactured homes from about $90 thousand northward, and some manufacturers are working on increased sustainability and energy efficiency to afford the homeowner some return on investment. Here’s the real issue: durability.
Manufactured homes still suffer from the “first two of the Three Little Pigs” stigma. That suffering isn’t completely undeserved; just watching footage of tornado strikes convinces most of us how devastating the destruction to a manufactured home can be. The industry has a response to the public’s skepticism, as follows: Most manufactured homes are built to withstand sustained winds in the range of 70 miles per hour. Above this range, a manufactured home will sustain damage. Only in the case of severe weather, such as a tornado, is the public likely to experience winds in excess of 70 miles per hour. Meteorologists estimate that approximately 40 percent of all tornadoes have winds exceeding 112 miles per hour. Tornadoes can have winds in excess of 200 miles per hour, in extreme cases. Current building codes and practices, for either manufactured homes or site-built homes, do not require dwellings to withstand winds exceeding 110 miles per hour. So, a direct hit from a Category F2 (and higher) tornado will bring about severe damage or destruction of any home in its path. A tornado's deadly force, like that of a hurricane, does not selectively discriminate between site-built and manufactured homes.
Yeah, maybe. The last proposition is almost certainly true, despite appearances; the difference, it seems to me, is anchorage. If the home is truly attached to the foundation and is made of heavy - enough materials, then gravity will save the superstructure from all but the most savage wind storms or storm (water) surges. But a manufactured home doesn’t have weighty materials, because they can be hauled long distances on an 18-wheeled tractor-trailer. So its walls are more susceptible to being ripped apart, especially when the walls are fastened with something weaker than mortar.
Which is why the manufactured home industry (and the site-built residential construction industry, for that matter), needs to turn its attention to employing new materials light enough to haul to a final-assembly site that are still relatively indestructible. Steel boxes known as “shipping containers” come to mind. There’s a few to be had, cheaply, in every port community in this nation, and in a lot of other U.S. cities. Now, there’s some stylin’; more next time.
-MNW
Monday, October 12, 2009
Co-Housing: Forward – Residential Life in Community
A few weeks back, I announced my intention to write on how I suppose residential communities might be organized in the next 100 years. Two things prompted me to fuss around with this. First, an abstraction: What is the impact of tens of thousands of foreclosures and even more “short sale” workouts, with their accompanying credit reporting, going to have on the slice of the public for whom money will remain “an object?” While banks have to lend money to someone – at least hypothetically so – will credit be extended to dwellers with abysmal credit scores affected by losing their equity and their residences? Like in the good old days, where 5% down payment seemed an excessive consumer contribution?
Second, a concretion: Why can’t renters understand the value of my rental house? I can’t get anyone to offer what the current fair rental value of the house is. Don’t tell me I love the house more than I should - I’m already intent on demolishing it in a few years! But there are dozens of folks who approach the rental of my place (to whom I have not disclosed my “demo” plan) like transients; I sense in our discussions that most of them think they won’t be there for even one year. If they see no benefit in my crib, other than as a place to reside for a little while until their fortunes improve, then why should I have any confidence they won’t just abandon it sometime during the lease term, defying me to pursue them for the remaining rent owed? I’m paranoid about my wee cottage, maybe, but I get this vibe that the attitude toward residences as the “homestead” or “where I’m taking my stand” is eroding in large numbers.
Are single-family, detached subdivisions as lately executed sustainable, as a community concept? Are they desirable? Are they affordable, should economic conditions return to some semblance of normalcy? I wonder. I don’t think defaulting borrowers are going to be permitted to borrow, at low interest rates, big bags of money secured by personal residences for a bunch of years, and perhaps even beyond the turning point where the inventory of available housing shrinks substantially. Not unless “credit scoring” is wiped clean by some lender-industry-wide agreement or governmental edict, or there’s a whopping amount of the buyer’s equity-skin in the game. Well, maybe if there’s some new form of government-backed, guaranty program that ensures the Treasury’s printing presses are hopping.
My hunch is that the concept of “affordable housing” over the next few decades will not be as traditionally defined, in terms of the poverty level index. So what will Mother, Father and the kids be living in 15 years from now? I suspect the face of attached housing may remain about the same; apartments will continue to serve basic roof-top needs, although perhaps less well the mental and physical health needs, of a big segment of the urban populations. It’s the face of single family, detached housing that I think will be altered, perhaps radically so; and here’s how.
First, I think corporate ownership of private (opposed to state/federal) land will grow relative to the volume of individual (family) land ownership. In short, I think big lots with big houses will become the near-exclusive province of the well-to-do, meaning the top 5% of households in the American population. Affordability is one reason, but aggregation in the most highly-urbanized areas will be a second driver of this change. It isn’t popular, maybe it’s even apostasy, to say that suburbia is “toast,” but unless extensive, fixed rail, urban transit systems become the norm in American cities, suburbia likely to get browner as the urban core gets greener.
I’m not predicting the death of conurbation altogether; I just think it’s going to hug transit corridors, while development sprawl radiating outward from transit nodes will lose traction. In the desert southwest, potable water source shrinkage will hasten this inevitable outcome. Urban lands in this scenario become too precious, hence unaffordable, to the great majority of individual American households. When the individual ownership of fee title land is stripped out of new communities, enormous liberation results in the potential for alternate communities. It will change the anthropology of those neighborhoods, too.
One new paradigm is a movement of “purposeful” communities known generically as co-housing. A cohousing community is a type of intentional neighborhood composed of private homes with full kitchens, supplemented by extensive common facilities. A cohousing community is planned, owned and managed by its residents, by groups of people who want more interaction with their neighbors. Common facilities vary but often include a central kitchen and dining room where residents can take turns cooking for a larger segment of the community. Other facilities may include a laundry, pool, child care facilities, offices, internet access facilities, guest rooms, game room, TV room, workshop or gym. Through spatial design and shared social and management activities, cohousing facilitates multi-level interactions among neighbors, for the attendant social and practical benefits. There are also economic and environmental benefits to sharing resources, space and items. But the underlying land of the neighborhood isn’t something that requires parceling out among the dwelling occupants. A corporation, either controlled by the original developer or the association controlled by the dwellers, can own the land.
Second, mobility becomes a by-product of liberating dwellers from the burden of land ownership. The wave of foreclosures and short sales arose from the fact that property values and loan balances were “upside down,” right? But if land value were the main cost component peaking and troughing, and the improvements costs appreciated or depreciated comparatively modestly (assuming enduring construction materials), then two propositions arise. One is that the likelihood of devastating economic circumstances driven by a housing inventory glut and sinking prices diminishes significantly. Another is that future buyers may serially nest in myriad neighborhoods, using the identical dwelling. What kinds of communities enable that phenomenon?
-MNW
Second, a concretion: Why can’t renters understand the value of my rental house? I can’t get anyone to offer what the current fair rental value of the house is. Don’t tell me I love the house more than I should - I’m already intent on demolishing it in a few years! But there are dozens of folks who approach the rental of my place (to whom I have not disclosed my “demo” plan) like transients; I sense in our discussions that most of them think they won’t be there for even one year. If they see no benefit in my crib, other than as a place to reside for a little while until their fortunes improve, then why should I have any confidence they won’t just abandon it sometime during the lease term, defying me to pursue them for the remaining rent owed? I’m paranoid about my wee cottage, maybe, but I get this vibe that the attitude toward residences as the “homestead” or “where I’m taking my stand” is eroding in large numbers.
Are single-family, detached subdivisions as lately executed sustainable, as a community concept? Are they desirable? Are they affordable, should economic conditions return to some semblance of normalcy? I wonder. I don’t think defaulting borrowers are going to be permitted to borrow, at low interest rates, big bags of money secured by personal residences for a bunch of years, and perhaps even beyond the turning point where the inventory of available housing shrinks substantially. Not unless “credit scoring” is wiped clean by some lender-industry-wide agreement or governmental edict, or there’s a whopping amount of the buyer’s equity-skin in the game. Well, maybe if there’s some new form of government-backed, guaranty program that ensures the Treasury’s printing presses are hopping.
My hunch is that the concept of “affordable housing” over the next few decades will not be as traditionally defined, in terms of the poverty level index. So what will Mother, Father and the kids be living in 15 years from now? I suspect the face of attached housing may remain about the same; apartments will continue to serve basic roof-top needs, although perhaps less well the mental and physical health needs, of a big segment of the urban populations. It’s the face of single family, detached housing that I think will be altered, perhaps radically so; and here’s how.
First, I think corporate ownership of private (opposed to state/federal) land will grow relative to the volume of individual (family) land ownership. In short, I think big lots with big houses will become the near-exclusive province of the well-to-do, meaning the top 5% of households in the American population. Affordability is one reason, but aggregation in the most highly-urbanized areas will be a second driver of this change. It isn’t popular, maybe it’s even apostasy, to say that suburbia is “toast,” but unless extensive, fixed rail, urban transit systems become the norm in American cities, suburbia likely to get browner as the urban core gets greener.
I’m not predicting the death of conurbation altogether; I just think it’s going to hug transit corridors, while development sprawl radiating outward from transit nodes will lose traction. In the desert southwest, potable water source shrinkage will hasten this inevitable outcome. Urban lands in this scenario become too precious, hence unaffordable, to the great majority of individual American households. When the individual ownership of fee title land is stripped out of new communities, enormous liberation results in the potential for alternate communities. It will change the anthropology of those neighborhoods, too.
One new paradigm is a movement of “purposeful” communities known generically as co-housing. A cohousing community is a type of intentional neighborhood composed of private homes with full kitchens, supplemented by extensive common facilities. A cohousing community is planned, owned and managed by its residents, by groups of people who want more interaction with their neighbors. Common facilities vary but often include a central kitchen and dining room where residents can take turns cooking for a larger segment of the community. Other facilities may include a laundry, pool, child care facilities, offices, internet access facilities, guest rooms, game room, TV room, workshop or gym. Through spatial design and shared social and management activities, cohousing facilitates multi-level interactions among neighbors, for the attendant social and practical benefits. There are also economic and environmental benefits to sharing resources, space and items. But the underlying land of the neighborhood isn’t something that requires parceling out among the dwelling occupants. A corporation, either controlled by the original developer or the association controlled by the dwellers, can own the land.
Second, mobility becomes a by-product of liberating dwellers from the burden of land ownership. The wave of foreclosures and short sales arose from the fact that property values and loan balances were “upside down,” right? But if land value were the main cost component peaking and troughing, and the improvements costs appreciated or depreciated comparatively modestly (assuming enduring construction materials), then two propositions arise. One is that the likelihood of devastating economic circumstances driven by a housing inventory glut and sinking prices diminishes significantly. Another is that future buyers may serially nest in myriad neighborhoods, using the identical dwelling. What kinds of communities enable that phenomenon?
-MNW
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