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Deflation Watch
Robert Shiller knows something about real estate and if he is correct in the predictions contained in the above chart then U.S. housing prices have a good deal further to fall and they won’t begin to level off until about 2013. It seems unlikely that economic contraction will end before housing prices stop falling. Thus, the problem of deflation, at least in regard to housing, would have quite a long way to go if Mr. Shilling is right.
Today it was reported that U.S. home prices in October dropped 18% y/y, the most on record.
On a slightly less universal level of importance, another measure of inflation/deflation that is looking tenuous is the price of a ski pass at Vail, according to a Wall Street Journal report. Vail has decided to leave it the same as last year. That’s not exactly deflation, but it’s as close as you can come. A second WSJ story confirms that deals are common in the West this years. As the report says, “Snow has begun falling on ski slopes — and so have prices of lift tickets and luxury hotel rooms at many big destination resorts.”
As I have highlighted in recent posts (here and here), the question of whether the economy goes into a deflation for the fist time since the Great Depression is perhaps the single most important determinant of how long and deep this economic downturn will turn out to be. Clearly housing, commodities, and much of retail are in a deflationary trend. That does not mean that the economy as a whole is in deflation, but it’s a heck of a good start. I will be following the indicators closely.
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15 responses so far ↓
1 KV // Dec 31, 2008 at 9:23 am
Jim,
Thanks for the chart.
When I see such long term data, I simply draw an imaginary line by hand using a ruler on my monitor to decide where now?
With that we are looking at this index to be about 125 in 2010, from about 155 or a correction of another 20% in about two years placing us on the top of imaginary line. This is all correction from the bubble, not deflation.
The chart is predicting undershooting the line by about another 15 points and this is deflation and potentially worrisome.
If we stretch out the timeframe from two years to twenty years, things would not be as bad.
The key issue is whether the mortgage industry could absorb another 20% decline in coming two years without creating another financial crisis.
I am becoming optimistic for 2009.
Happy New Year!
2 jkingsdale // Dec 31, 2008 at 11:19 am
Good to hear from an optimist. Seems like the holiday market shares your viewpoint. We’ll see what happens when the pros get back to business “next year.”
3 P // Dec 31, 2008 at 12:38 pm
we are still pending Alt-A / NINJA loan resets in 2010. I don’t know if that data is priced in yet.
The next “recovery” will be interesting, because the dark clouds of peak oil loom on the horizon. Alot of U.S. housing was built far out in suburbian asteroid belts, and will require a reliable supply of fossil fuel to be of any value.
4 Karol // Dec 31, 2008 at 11:03 pm
Well Guys,
Look at the chart again.
Notice as how it shows a decline in the early stage of
GDI.
Then a rise until WWII.
Let us all pray that the huge rise and drop of the current boom is not a forecast of WWIII during GDII.
My guess is not.
I think that current property owners who have a rental or two is the next bubble to be burst.
With the coming of the New Year we will see labor wages rising more for the minimum wage earner then the blue collar non-union worker. Not good!
The property owner who depends on rent to cover his extended little money world is going to be hard pressed to collect the needed rent money. It takes here months to evict a non paying renter and that’s all lost money.
New companies will develop to buy out these new losers. Thus the great dissemination between the rich and poor land owners is well on its way to happening.
The previous Fed leader who I hear some people now calling Greenspam, argument of the value of home ownership is going to take a real beating.
Lastly, the idea of what is a Home is changing.
5 rdd // Jan 2, 2009 at 12:22 pm
Two thoughts:
1. I have never figured out why people thought that house prices would go up substantially more than average or median family income growth over time.
2. The quality of housing has improved since 1900. If you add in a couple of percent a year in the quality value of a cost of a home, this would generally come close to the the increase of family income over time.
I think it would be possible to justify home values at present to be 10% or more greater than in 1900, but double is definitely way out of line.
6 Karol // Jan 3, 2009 at 4:03 am
Well Gentlemen,
After reading Jim’s provided source Tobin’s Q Ratio a second time I think I see a flaw.
Namely, a bear market rally of two years.
I’ve always understood bear rallies to be short term in the range of a week or so. To say that a rally is going to last two years done not to me mean it is a bear rally. It means to me that the author is seeing a major problem in the future.
Well, I think we all are seeing an oil problem as Jim is constantly providing us with information on. Two years out could also mean another major war (i.e. Iran) or something like a dirty bomb in New York or even a Nuclear reactor disaster near a major city.
But wait!
If when see major stores such as the Home Depot marking down products (deflation) say 50% during the next years or so and we know that the markup was 300% in the beginning is that true deflation?
Just because customers become greedy and ask for more of a discount is that deflationary and going to be something hard to shake off?
If, as James Tobin claims, a bear market always ends when the stock market prices in deflation, then when is this current market going to price in housing deflation?
7 Karol // Jan 5, 2009 at 3:51 am
Help me on this one.
Is a bear market rally a sudden drop or is it a bull bounce?
A sudden drop with a retreat upwards? Could that be a bear rally in the market trending down?
8 Karol // Jan 5, 2009 at 4:12 am
Go figure the human element.
Let’s say I bought a house for 100k and I sold it for 200k.
I think this is understood as a 100% gain.
Now if I have this 200k house and sold it for 100k it would be a 50% lost. A 100% lost would leave me flat broke and I’d never do that…would I?
9 jkingsdale // Jan 5, 2009 at 10:08 am
A bear market rally is a rally in a bear market that does not become the start of a new bull trend and is eventually reversed with the market going lower, perhaps to new lows.
10 Rob // Jan 7, 2009 at 7:24 pm
Bear markets are punctuated by short sharp rallies when sellers get exhausted and shorts start to cover, which convinces people the low has been made; and with things looking cheap after the fall from the bear, people jump in, afraid to miss the ‘bargains.’ And then something happens and people realize the stocks they bought really aren’t cheap (and the shorts reshort) and the fall begins anew. This happens again and again throughout bear markets.
11 Karol // Jan 8, 2009 at 3:23 am
Thanks Rob and Jim,
My current guess as to which way the market is going is down. We have just seen a bull bounce/short sharp rally and now the “newness” of a new president that is already starting to wane. Such statements as a trillion dollar plus debit is not helping the new guy.
The two year bear rally Napier is forecasting is not possible by definition.
So what’s going to happen? I think outside of a major war. oil will be the key factor. That is to say the lack of it. We may be seeing a glut on the “shelves” but a growing sink hole on the planet is the concern. Just how fast is this sink hole growing?
Well, if no one in the know will tell us then we may be the blind leading the blind.
So for the next two years we will play along as if there is plenty…why there’s even a glut.
12 jkingsdale // Jan 8, 2009 at 9:57 am
Rob - thanks for the better description of a bear market rally. We saw a number of these as the market fell this fall and we are probably seeing another one now.
But it’s not so much that stocks look cheap as it is the fact that people know that as soon as an upturn in the economy can be seen in the distance there is so much money on the sidelines that markets will experience a huge rally and they don’t want to be left out of that. My discussion of the second derivative of decline is an attempt to suggest how one can see out into the distance to discover the potential for a turning point in economic growth.
Of course, just because a decline slows down (the economy declines at a slower rate) doesn’t necessarily mean it will turn up. It could level off for a while and then continue down again.
So a lot of money can be lost in trying to anticipate the end of a serious recession. Which is Rob’s point as well, I think.
13 jkingsdale // Jan 8, 2009 at 9:58 am
KV - for what it’s worth, I don’t think we will see a shortage of oil supply for two to three years at the earliest.
14 jkingsdale // Jan 8, 2009 at 9:59 am
Whoops - should have addressed that last to Karol.
15 Nik // Jan 20, 2009 at 9:56 am
From a technical analysis perspective, the chart tells me that it has settled on a long term support at around 110 from where we can break out either direction. The danger is a breakout below this which means we end up in the next support area of around 70. That is most likely since the decline from the peak has been so rapid… fingers crossed!
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