Housing Market - Bubble / Bust



Housing Market 2011

Home prices have slowed down their decline and in few areas they are actually up compared to a year ago. However, is it time to buy? According to Case Shiller index we are still 20% above long term averages. Typical bottom comes 20% below. Glenn Beck explains the abnormally high prices we are trying to sustain:


Deteriorating Housing Market - 2010, 2011, 2012

We still have these pesky resets that will hit very hard — and drop values further. There are two more waves of resets on more than $1 trillion worth of Alt-A and Option ARM borrowers, many of which could easily face foreclosure.

Expected Mortgage Resets

Another 2.7 million delinquencies and foreclosures haven't reached the market yet. U.S. home builders aren't confident. And there's a great possibility of another two million strategic defaults.

The Slope of Hope

Almost everybody who follows financial markets has heard about climbing the "wall of worry": the time when prices head up bullishly, but no one quite believes in the rally, so there's more worry about a fall than a rise.

What's the opposite condition in the market?

Bob Prechter named it the "slope of hope," meaning that as prices head down, no one wants to believe the market really has turned bearish, so there's more hope for a rise than fear of a fall.

Want to Know How to Prosper in a Deflationary Depression? Despite Bernanke’s printing press, inflation is no where to be seen. CPI is down third month in a row. If you haven't yet given Robert Prechter's deflation argument your full attention, you should know now that yesterday was the best time to do so. Download Prechter's 60-Page Guide to Understanding Deflation here. Deflation is the reason why we have unemployment, foreclosures, bankruptcies, bank failures in today’s economy.

The market has been rising recently, following a bearish decline from late April through the end of June, which makes now the perfect time to learn more about the slope of hope.

Excerpted from The Elliott Wave Theorist by Robert Prechter, published June 18, 2010

According to polls, economists are virtually unanimous in the view that the “Great Recession” is over and a recovery is in progress, even though “full employment will take time,” etc. Yet mortgage writing has just plunged to a new low for the cycle (see Figure 1), and housing starts and permits just had their biggest percentage monthly drop since January 1991, which was at the end of a Primary-degree recession. But the latest “recession” supposedly ended a year ago. How can housing activity make new lows this far into a recovery? The answer is deflationary depresssion which was predicted in Conquer the Crash. The subtleties in economic performance continue to suggest that it “was” not a “recession.” It is a depression, moving forward, in punctuated fashion, slowly but inexorably.

Slope of Hope - New Mortgage Applications Sliding

Despite this outlook, keep in mind what The Elliott Wave Theorist said last month: “Even though the market is about to begin its greatest decline ever, the era of hope is not quite finished.” For as long as another year and a half, there will be rallies, fixes, hopes and reasons to believe in recovery. Our name for this phase of a bear market is the Slope of Hope. This portion of the decline lasts until the center of the wave, where investors stop estimating upside potential and start being concerned with downside potential. Economists in the aggregate will probably not recognize that a depression is in force until 2012 or perhaps beyond. That’s the year the 7.5-year cycle is due to roll over (see April 2010 issue). Stock prices should be much lower by then, but optimism will still dominate, and it will show up in the form of big rallies and repeated calls of a bottom.

Prosper in a Deflationary Depression!If you haven't yet read Robert Prechter's deflation argument take the time to read it now: Download Prechter's 60-Page Guide to Understanding Deflation here.

Housing Market 2009

Have we seen the bottom yet? Some say foreclosure tsunami will last until 2012:


Below is a discussion of what causes the housing bubble and the bust.

Housing Bubble Pops - Irrational Exuberance Ends - for now

Housing prices are coming down. We need to recognize that there was a bubble. Everybody wanted to buy a home. If you did not buy, you would be left of the market for good. Your friends would get rich and prosper and you would be left out with an inferior life style. It was greed and fear of being left behind that moved them. Nobody asked why the hell on earth an investment that does not pay enough rent to pay the expenses would go up. All they wanted was to flip and get rich.

This boom was a result of credit inflation engineered by the FED which we will discuss on another page. If you research you will learn that house prices on the long run do not appreciate more than the CPI, so the bubble reached extraordinary levels by all measure.

As of now (April 2010), we still have a way to fall to reach normal levels according to Case-Shiller Home Price index. If the FED prints money, we all go to poor house and our 100 million dollar homes may be worth the same as a car in the near future, or if the FED does not print money, then the home values will continue to fall as the subprime mess is followed by resetting ARMs for other prime borrowers. After that we will be facing the commercial real estate bust since the consumers will be spending less and vicious cycle of job losses, bank failures, mortgage crisis will continue for a few years more.

Many experts such as Gary Shiller, Nouriel Roubini, Peter Schiff, Robert Prechter has warned us about the bubble. Unfortunately main stream media only cares about the profits and is not interested in giving equal air time to contrarian bears when it matters the most: During the time the bubble develops. Bears become popular after the bust which is too late for most investors and home owners.

Affordable Housing? Or a Ponzi Scheme?

In the past economy seemed to be doing OK solely due to credit inflation that FED has fostered. FED made it easy to borrow. America borrowed and spent. When we borrow money, banks create new money and give it to us. They do not lend existing money. Here is how banks create money.

Why does it matter? Well, all of our money supply is bank credit. It is borrowed money. It needs to be paid back as principal + interest. The interest portion is not even created yet. Borrowing MUST increase exponentially so that principal+interest amount exists in the economy so that people can earn it and pay back what they owe. What happens when borrowing stops? Deflationary crash occurs. Read about the debt problem here.

FED and the US government are running a ponzi scheme that is about to stop now. There is a limit to how much people can borrow. To make it last what did they do? They allowed people to deduct mortgage interest from income tax. That made mortgage more attractive. So people borrowed more and injected new money into the economy. This new money makes the current administration look good. In fact, they guarantee a future bankruptcy but who cares. As long as they get re-elected. The solution to the problem was delayed and left for future administrations to deal with.

Government talked about the American Dream and Affordable Housing. Now home prices are becoming affordable, but instead of celebrating, they are scared to death, they are trying to inflate prices again. But it won't work. Home prices are down, sales volume is down. After prime borrowers were exhausted, they changed the rules to allow sub-prime borrowers get big mortgages. Now sub-prime is exhausted and the crash has started. 8K tax credit won't work. Home prices must increase exponentially to sustain a recovery. People must borrow HUGE amounts to provide new money to the economy. Who is going do that? Here is why FED's easy money policy does not work beyond some point.

Where does that leave us? It leaves us at the top of the greatest bubble ever! What ever you do, make sure you do not take on more debt! Pay off existing debt! If you have existing savings in cash or cash equivalents such as short term US treasuries you should be fine for a few years. At the bottom of depression you may have to jump out of US dollars if FED freaks out and really prints money!

Deflation Hits Housing, Stocks, Commodities

All of the prices, and salaries you see around you were based on inflated credit that happened over 50 years. It is based on a money supply that is almost entirely bank credit. People borrowed and borrowed and spent. The amount of money borrowed reached sky high. You earned in good times! Now, it is reversing course!

Deflation is here!

There is nothing FED can do about it. Credit inflation happened for last 50 years. The bubble is inflated. The cause is in place, the effect will follow. It will deflate. For inflation to happen, all of the following must happen:

1. FED makes credit available. [Yes they do]

2. Banks must lend. [No they don't, because they don't think they will get their money back]

3. Borrowers must borrow. [No they don't, because they don't think they can pay it back]

4. Consumers must spend extravagantly and chase too few products with too much money. [Consumer is a saver now]

The best thing you can do now is to pay off debt and become debt free, because it will get harder and harder to make money in an economy where the total money supply is shrinking at record speed. M1, M2 does not matter. The bulk of the money supply is bank credit! 99% of our money is borrowed money. It has principle + interest to pay back. So, we have the principle since we borrowed it. Where will the interest portion come from so that we can earn it and pay it back??? It does not exist! It is a ponzi scheme. The music has stopped! In a credit based monetary system, we must keep borrowing or the economy will stop. That is what is happening. It is called deflation. The money supply is deflating. When there is 10 times less money in the system, it will be impossible to keep the current prices and salaries at the current levels. Pay off debt now and be debt free. Get ready for days where there is no money to be earned!

Stocks are over valued by wide margin. Prices are based on credit inflation of 50 years. It is like South Sea bubble! Stocks can crash and not come back for 100 years! We have not seen the stock market bottom yet!


But you got to listen to Peter Schiff, in his speech to Mortgage Bankers back in 2006:


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Let’s revisit the old debates on TV and reflect on how things turned out to be:


Peter Schiff argues that hyper inflation will be the result of FED and government efforts that result in excessive debt. He thinks the US dollar will loose it’s value and investors should invest outside the US. So far, he has been wrong about the inflation and the US dollars value.

On the other hand, Robert Prechter argues first deflation will take place (already happening) as de-leveraging runs it’s course and devastates the economy. After that hyper-inflation may happen if FED uses excessive effort to re-inflate the money supply. According to Prechter, the fate of US dollar depends on the health of other currencies since a world wide economic collapse may effect every major currency. But he argues that since most of the debt in the world is nominated in US dollars, when deleveraging occurs, that would create demand for US dollars and increase it’s value relative to other currencies. We have seen this happen end of 2008 also.

Even though Peter Schiff was correct about the housing bubble, it is too soon to call for inflation. Deflation will have to show it’s ugly head first. Before you jump onto inflation band wagon, please read our inflation / deflation - credit bubble page first.

Discover The Biggest Threat To Your Money Right Now

If inflation is a quiet thief, then deflation is an armed burglar. You wouldn't invite either into your home, yet chances are that one of the two is stealing your money right now.

Elliott Wave International, the world's largest market forecasting firm, has just released a free report that reveals which of these threats you should prepare for right now.

The free 8-page report is adapted from Bob Prechter's New York Times best-seller, Conquer the Crash, which was published far before the latest headlines warned of inflationary and deflationary dangers.

With October 2008 consumer prices plunging at a record rate not seen in more than 6 decades, now is hardly the time to ignore Prechter's prescient message of how to survive and prosper in the today's market environment.

Protect yourself and your loved ones.

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