not entirely convincing.  too little discussion of international aspects of our financial system

With the upward cyclic pressures of too long suppressed interest rates, the "wacking great" impact of major fuel/energy increases (just beginning to show major impact -- Northwest, Delta, etc.), and the imbalances and uncertainties due to localized high demand situations in the areas surrounding the Katrina damaged region...how much longer can the Fed hold the cost of funds to a reasonably slow increase?  Will market forces overwhelm the Fed's "braking action"?  And if interest rates surge, that's when the housing market (with the bubble effects cited) becomes markedly unfriendly for those who have, to now, benefited from leveraging via float rates, low interest loans, speculation driven price increases, and the like.

But the today's markets move with the speed of the internet: by the time the movement is obvious, it's over.

Even I can understand some of this.

we should sell the house and rent a place until the bubble bursts.  No dice; too attached to the home.  We lived in Boston back in the early 90's and knew lots of folks who had just bought homes only to watch their property values plummet by 30-50%.  Thank goodness we were renting then.  

I and others sensed the bubble before the millenium. Of course it was a rather worthless idea because the stock market continued yet another 100% upwards :-)

Luckily we were not shorting because we were "right" :-) When the bubble burst, the stock market didn't stop its fall in the level in which we had years ago sensed the bubble.

After the experience I'm Keynesian: "In the long run we are all dead".

Little knowledge is a dangerous thing. Everybody "knows" that there is a bubble. It doesn't matter. Only the timing matters and only few know how to do it.

What comes to this text, here we go again.

what happens to the California homeowners who have cashed in $100,000 of profit, and find themselves with a mortgage of $300,000 on a home worth only $200,000?  What happens to the bank holding the mortgage?  Is government going to step in to help with situations like this?

Very easy.

First alternative:

The home will be booked at its fiction value $300,000 but the owner can't sell it before (s)he has paid most of it. Then (s)he can sell it at its real value $150,000. Let's call this Japanization.

Second alternative:

There will be a wide spread inflation and the value of the house will be $3,000,000,000. The inflation will pay the mortgage. A hamburger or a similar portion of poisonous food will cost $10,000. Everybody will curse Numerian saying that he was an hopeless optimist.

Usually the banks do not care if they think that you are capable of paying the interest forever.

Note that the proportion of real estates owned by banks has probably increased faster than the value of the real estates.

Homeowners can "cash out" some of their equity by refinancing their mortgage, and the cash can be spent on vacations, new cars, college education - banks no longer ask questions about where the cash proceeds are going.  Consumers can even use this profit to invest in a second or third property, thereby taking advantage of the appreciation in value sure to occur down the road.

College education is an investment. Hopefully.

Don't consume - invest. If you can safely invest some of your equity by refinancing your mortgage, you should do it. Something what is not correlated to your current holdings and will probably provide you a better return than you a paying to your bank.

I assume that some plan cynically abusing the bankruptcy and debt laws :-)

we've gotten ourselves into.  It would add something like sections six, seven, eight to an already lengthy piece, but at the least we would have to discuss the global real estate bubble affecting most developed countries, China's official holdings of Fannie Mae and Freddie Mac paper (China's been told all along that this paper is equivalent to Treasuries, so who knows how prepared they are for the bottom to fall out), and the possible destruction of the dollar as the principal reserve currency.  The global effects of a severe recession in the U.S. would probably be amplified in some places like China, which has similar problems of over-building, compounded by even worse problems of fraud.  

Does the Fed increase rates out of fear of oil-price induced inflation, or does it hold steady to compensate for lost economic activity after Hurricane Katrina?  Similarly, does core inflation matter more to the Fed, or the real inflation consumers and businesses are experiencing in energy and commodities?

the "wacking great" impact of major fuel/energy increases (just beginning to show major impact -- Northwest, Delta, etc.

It is a local effect. Air carrriers here are booming.

should i downsize my living arrangements to approx half, now, selling my very nice but too big home, in a very desirable neighborhood, that has been appreciating at roughly 7% a year, on which i have a 5.3% fixed 30 yr mortgage, and at current re-financed a year ago value, making enough to almost buy outright another smaller, less costly, less appreciable, less desirable property?

i am thinking about it.

Numerian's original post and his reply to bernadene's question are brilliant in their plain English.  No wonder bankers, economists and lawyers use the lingo they do;  if sods like me could understand them, they'd be run out of town on a rail.

I inherited my parent's Depression-bred caution.  We just paid off our primary residence and intend to leave whatever equity we have right there.  We bought a second home in the country, and other than that mortgage we're debt-free.  Now all I have to do is move out of one specific IRA mutual fund that invests in real estate.....

How much did you pay in points (plus all the other closing costs) up front for the refinancing?  Often this is obscured by the bank but comes to several thousand dollars on a typical mortgage.  You then need to figure out how many years it will take you to recover the points.  For example, if you paid $4,000 in points and your savings is $200 per month, that would be 20 months to recover your outlay (forgetting about interest lost on the $4,000 out the door).  

In the old days bankers would tell you not to refinance if you don't intend to stay in the house long enough to recover the points.  But I doubt bankers are all that concerned about your welfare anymore.

If you've already recovered this expense - or if it is not too significant to you - then how important is it to downsize?  This is obviously a personal decision for you, but if the space is simply too big, and you are in a "frothy" market (7.0% p.a. appreciation doesn't sound too bubblish but it's certainly handsome), then it makes sense to downsize.  Just remember if you stay in your community you may be selling at a peak price, but also paying a peak price for your next house.  And of course there are all sorts of tax implications for taking your profit out.  I know people who are vacating the east or west coast and moving to the hinterlands to get a bigger house at much less cost, because they can't afford a similar house in their own community.

This is just my personal opinion - I don't know your situation well enough to give better advice.  You'll need a trustworthy real estate broker and banker to help you with this.

in your smaller place? Houses are good investments, but as I've discovered, they're dandy places to live - especially when nobody can ever take them away from you.

Have you considered that if you own your smaller place outright you might be able sooner or later to conservatively leverage a second place against it and rent it out to pay its mortgage? If the balloon does go up there are ways to firewall yourself against losing your main house.

the last real estate guy i had, i could have had his liscense because he did everything for the buyer of my last house, and everything for the seller of the house i bought!  no kidding.

downsizing for me has a lot of advantages, the disadvantages being i love my house and the area and the property.   the only financial being the steady appreciation of my house.

what i am really concerned about is, in staying with my present fairly large mortgage payment, and if the bubble bursts, which, i agree is not too large in my area, will i be losing the phantom equity, when i could get it out now?

then using the cash to invest in something else, and decreasing my payments for a smaller property, thereby having even more cash to save and have for on hand expenses, thus getting rid of my credit card debt and decrease the possibility of having to incur more for large unexpected expenses?

i think i might have just answered my own question.

also significantly reduce the expected value of our real estate holdings in our retirement planning!

They may have substantial holdings in the financial industry.  I suspect most major financial concerns in the U.S. will be trading below $10/share when all this is over.

Some other statistics of alarm regarding the financial industry: this industry represents about 25% of the market capitalization of the S&P 500, and 40% of the S&P 500 total profits during the past five years.  This is an extraordinary high concentration of S&P value and earnings in one industry.  The only recent comparable concentration was in 1999, when the technology industry dominated the S&P 500 market cap and profitability.  Contrarians use these statistics as signs of a top in an industry, and so you can see since the start of this year a growing weakness in the financial industry stocks.  

The other thing to note is that the industry is not just banks or American Express.  General Motors and Ford have not made money for years on cars; their only profit is in their financing arms.  Same with Sears and now even General Electric.  When you throw in these "industrial" heavyweights into the mix, the U.S. stock market is even more dependent on financing profits than it appears at first.  Yet another bad sign.

As some bearish economists like Stephen Roach tend to say, the U.S. has ceased to be a manufacturing economy and has turned to finance as its principal business.  This is not a healthy model in the long run.

"I love my house and the area and the property."  Homes are first and foremost emotional purchases with an enormous investment in family memories.  Giving up your phantom profit may well be worth it if you love your home.  You didn't buy it for speculation in the first place, so a speculative gain should be a secondary consideration.  

I'd guess I'd put overweight on the speculative gain only if over the past few years I had been counting on it for retirement.

if you lose your job and have to accept one for 60% of what you are currently earning, could you still afford your home?

Sure you are going to die one day and you try to avoid it, which makes it unpredictable. If you can't predict it, does it make sense to worry about it?

The same applies to the housing bubble.

Think the other possibility which might be a wide spread inflation in the future. It might pay your fixed mortgage.

Or which measurement of risk do you prefer? How about this: Which possible scenario you would regret most?

I could say more but it might be construed as advice and then I'd have to fill out a mile high stack of paper concerning disclosures. LOL.

all my mutual funds AGAIN?   i just got out of Big Pharma, Ford and the creeps that lost about 50% of my gains by investing hugely in ENRON.

right now i have diversified holdings that cannot go under the original amount [unless the whole darn company goes belly up...Ok it's Pacific Life]

and a super conservative holding yielding about 3%.

not very speculative, but in this market with Mr. Magoo's grandson, and the Corleone's cousins at the helm, who the hell knows?

not the smaller one i just looked at tho. but the right one, certainly.

my present place has a lot of ascetic appeal to me.

it really is a great place. and actually not that much too big. i could live smaller tho.

so i guess i am house poor, huh? never had that happen before. my daughter turned 18 so i lost child support, at the same time as expenses [taxes etc, -thanks W you  criminal, good-for-nothin' except destruction nincomepoop,...but i digress] have risen, so it's a lot tighter.

but my salary will go up right?  and that 5.3% will stay the same, and the property will appreciate...so i can always sell if that 60% thing happens...

or go back to hospital nursing...arghhh!

maybe i'll get a second job.  something i like, like teaching.

but the admonishment is still the same: be careful about taking financial advice from someone on the internet.  You don't know their background and they don't know your financial situation.  The best any of us can do is offer general advice for people in that general situation, but ultimately the reader has to consult trusted friends and professionals.

And I didn't mea to imply that I read your posts and immediately phoned my broker, Numerian!  But the accumulation of financial reading material - in plain language - linked here by mauberly, nuerian, Sean-Paul and others is good stuff, and is sometimes a welcome relief from partisan politics.  

Not that the news is good!  I was just expressing relief above that my instincts are keeping me on the higher ground (risk-wise) above the fincials levees.

Certainly it is a possibility.  Banks would prefer mild inflation, and about two years ago there was some comment from the Fed that they would prefer mild inflation above 1.0% p.a. CPI.  This allows consumers to pay off their debts and avoid bankruptcy - assuming corporate America follows through and rewards workers with inflationary pay increases.

This is one "if", and another is that the Fed knows mild inflation can lead to serious inflationary pressure, so it is already discussing the risks of the housing bubble.  Another consideration is that manufacturing and industrial processes are already under global deflationary pressure.  This is keeping costs down otherwise.

At the moment the gold market is telling us inflation is the bigger problem.  This must be getting some notice at central banks around the world.

After experiencing some wild economics personally I'm not afraid of bubbles.

The question is, how to take advantage of bubbles (or at least live with them) instead of having misleading feelings like worry about them. This is one of the things I don't like here in Agonist. If you waste your time worrying during a boom, you'll be poor the rest of your life. Agonist's mood is permaworried (permabearish?). That's going to hurt people.

I pointed out the speculative abusive use of the US personal bankruptcy laws. Can the risk of the bubble left to lender?

Another constructive way of handling this is thinking, what will be good hedges when a bubble bursts and the liquidity in the housing market dries up. Puts on Fannie Mae?

(Rumours had been spread in the internet that Fannie Mae will bankrupt due to Katrina. I assume that the properties in New Orleans have mandatory insurance and it is the problem of insurance companies. Instead of bankruptcy, Fannie Mae will start tender offers to buy back up to $19.2 billion of callable debt securities this week.)

Renting should work as a hedge often.

If somebody really wants to be involved in the difficult timing game, I think that UK and Australian housing markets lead US. Or start dating a real estate broker to get a better view on the market.

There were a number of hedge funds which saw the collapse of the NASDAQ tech stocks coming and shorted the market from 1996-1999.  Unfortunately some of them didn't survive, but those that were able to hang on profited nicely.  

For the average investor who is only ever long the market, the tech collapse was a disaster.  I have friends still down about 55% in their portfolios.  Since shorting stocks is difficult and risky, not many people were able to benefit from the decline in the market from 2000-2002.

There are some housing stock indexes you can short, and this is a pretty good proxy for protection against a bubble collapse.  The home builders (Toll, Ryland, Hovnanian, etc.) have had a spectacular run these past five years.  Their executives are aggressively bailing out of their stocks, so now is a good time to join them.

Other than that - as you point out - you can rent and not own housing.

I've noticed the leftist blogs have a lot of negative economic outlooks, which must partly be a reaction against Bush economic policies.  I agree with you that this can be defeating from an investment perspective, at least in a normal market.  But this is not a normal market.

The breakdown in political consensus and amity in America is an important phenomenon that is now spilling over into the economic sphere.  Liberals and opponents of the current administration think and talk about the coming recession, the housing bubble, the fiscal crisis, the weak dollar, peak oil, and the indebted consumer.  It is important to look at this objectively: 1/3 to 1/2 of adults are concerned about, or maybe obsessing over bad economic times ahead.  They are assuredly reining in their spending and changing their behavior in other ways that affects the economy.

When so many people think and act in negative ways, it has the potential to drive the country into a recession.  The fragile political situation in the U.S. is intricately linked to the weak economic situation, and can push the economy over the brink.