Guest Post: Phase Shift - The Next Leg Down in House Prices

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Phase Shift: The Next Leg Down in House Prices

Housing has supposedly "hit bottom." Perhaps it will drop abruptly in a phase shift to much lower valuations.

Way back in August 2006, near the top of the housing bubble, I suggested a two-part scenario for the housing bust: it would take eight more years to play out, and the declines would occur in sharp downlegs following a phase-shift model.

Phase Transitions, Symmetry and Post-Bubble Declines (August 2, 2006)

Here is the chart I presented at that time as a possible time model:

A few months later, literally at the top of the housing bubble in early 2007, I suggested that a mere 4% of homeowners defaulting could trigger a collapse of the entire U.S. housing market.

That is pretty much exactly what happened, for when the 4% who couldn't pay their subprime mortgages folded, they took down an exquisitely corrupt and vulnerable banking sector and the FIRE (finance, insurance, real estate) economy which had come to depend on it.

Can 4% of Homeowners Sink the Entire Market? (February 21, 2007)

As I noted in Phase Shifts, Stick/Slip and the Demise of Our "Socialist" Housing Policy (February 26, 2010), the "recovery" in housing visible in the chart below was entirely the result of a 99% "socialist" Central State intervention/prop job: the Federal Reserve bought $1.1 trillion of dodgy mortgages to mask the bad debt and keep interest rates low, and the Federal government flooded the housing market with fee money via subsidies and absurdly cheap, central State-guaranteed FHA loans.

Now that this massive Central State intervention has ended, housing sales and values are succumbing to gravity. home sales and prices fall:

The National Association of Realtors said Monday that sales of previously occupied homes fell last month to a seasonally adjusted annual rate of 4.88 million. That's down 9.6 percent from 5.4 million in January. The pace is far below the 6 million homes a year that economists say represents a healthy market.

Nearly 40 percent of the sales last month were either foreclosures or short sales, when the seller accepts less than they owe on the mortgage.

One-third of all sales were purchased in cash - twice the rate from a year ago. In troubled housing markets such as Las Vegas and Miami, cash deals represent about half of sales.

The median sales price fell 5.2 percent to $156,100, the lowest level since April 2002.

Sales of new homes tumbled 16.9% in February from the prior month to a seasonally adjusted annual rate of 250,000, the lowest level since the series began in 1963.

The median price for a new home sold in February fell 13.9% from the prior month to $202,100, the lowest since December 2003.

Here we see the first phase shift decline and the "recovery," which is now rolling over.

I submit that the forces acting on price are mutually reinforcing to the point that price will drop rapidly in a second phase shift, with the target noted on the chart: a return to the price levels of 2000.

Once we get into the 2012-14 timeframe, then I expect a third phase shift will drop prices back to 1987 levels. As many observers have noted, bubbles don't retrace to historical averages--they over-correct to extremely low values.

What forces are working to push housing prices to new lows?

1. As I reported on Daily Finance, new mortgage broker compensation rules are about to wipe out independent, small mortgage originators and brokers. Mortgages will probably become harder to come by and more expensive as the "too big to fail" banks will consolidate their grasp on the mortgage market.

2. Interest rates will rise. Most financial analysts are supremely confident that the Fed can keep interest rates near-zero forever. I suspect their confidence is misplaced. As I discussed yesterday, the Fed has backed itself into a corner, where if it pursues QE3 then it will fire up inflation that will destroy profit margins and household purchasing power. If it ceases to buy U.S. Treasury debt, then interest rates will shoot up.

As interest rates rise, the amount of money home buyers can borrow drops. House prices follow this dynamic.

3. Income for the bottom 90% is stagnant. All the bogus "housing is now affordable again" charts floating around all base their rosy conclusions on median income, neatly avoiding the reality that the top 10% has garnered the majority of income gains. Factor out the top 10% and you find real incomes have actually declined for the lower 90%.

The same effect is true of the "wealth effect" powered by the speculative risk trade bubbles in stocks and commodities. These portfolio increases have only enriched the top 10% who own the vast majority of the financial wealth.

So yes, real estate favored by this top 10%--Manhattan, Westwood, San Francisco, etc.-- will hold its own as those benefiting from fat Federal contracts, Wall Street's renewed license to practice piracy, the bubble in lighter-than-air Web 2.0 stocks, etc. try to outbid each other, but for most housing, the support created by demand has just melted like dirty ice on a hot Spring day.

4. There are too many houses and not many buyers. The demographics are this: Baby Boomers are trying to sell to cash out or move, and the impoverished generations behind them cannot afford bubble-era prices. Just because prices have retreated to 2002 levels doesn't mean they're cheap--2002 was already a bubble, as you can see in the chart.

5. The Federal-supported "recovery" is in trouble, politically and financially. As long as the nation obeys the whip of the Fed and allows it to print $1 trillion to buy Treasury debt every year, then the travesty of a mockery of a sham can continue. But as I noted yesterday, this policy is destroying the dollar and the purchasing power of households. That game cannot run for long without political pushback. Saving the "too big to fail" banks and the Financial Plutocracy might be Item #1 on the Fed's list, but it ranks decidedly lower on voters' agendas.

6. Every investor who bought with cash because "this is the bottom" will 1) be underwater and anxious to sell and 2) be out of cash, having bet their capital playing "catch the falling knife" with real estate valuations. Sorry, cash buyers: the knife is still falling.

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TruthInSunshine's picture

I guess I missed what, precisely, is so "stunning" about it.

That aside from the fact that is has what to do with housing prices?

Aquiloaster's picture

There are enough new stories on this site that regard Israel-Iran tension that you don't need to litter a housing story with unrelated (though potentially interesting) links. WAIT FOR IT!

PuppetRepubl1c's picture

so Israel sees Iran as a threat and is looking for help againts them? this is not new to anyone

SunBlaster's picture

What's NEW is how this effects house price in US!

New Survivalist's picture

Hyperstagflation, bitchez.

Thomas's picture

Charles did not get the memo about houses never dropping in price.

Aquiloaster's picture

Not only are houses an investment, but the rent that you homeowners would hypothetically pay if you didn't own a house is incorporated into our inflated GDP numbers.

Xkwisetly Paneful's picture

Why buy a house now?

Fed has made it  abundantly clear they are going to force rates down into the future,

and those who specialize in prolonging the economic pain figure to be offering $50,000 home buyer credits before all is said and done.


Besides who wants to deal with the 100pages of legalese the nanny state and it's 7 soon to be 8 federal agencies created to accompany a mortgage?


At some point once the excess supply is cleared 2018 maybe,

going to have a whole nother bubble as home prices catch up to the underlying commodities.


Of course if prices continue to move inversely, they just may start deconstructing homes for the underlying materials-that would be quite the perversity.

alien-IQ's picture

By the looks of things...home values could drop another 75% and the market would just continue to rally taking REIT's and homebuilders to new all time highs.

Trying to apply logic and reason to this market is an exercise in futility.

Xkwisetly Paneful's picture

No doubt fighting the fed is completely illogical and absent reason.


traderjoe's picture

No, I don't need to read this. Housing is NOT in a double dip. Cramer said housing bottomed last summer. If he said it, it must be true. /s

aint no fortunate son's picture

One wonders whether this phase shift model corellates to the RUT as well?

tmosley's picture

A while back, there was a handy dandy chart showing dates of mortgage resets that were coming up.  I used that to pick a time to start getting interested in Real Estate.  My timeline said not to even bother looking for anything other than bail out property until 2014.

I guess it depends on what the rates do.  I haven't even been keeping track of that crap.

tmosley's picture

Willy the Moron, drive by coward who was such a coward he had to change his name to long juan silver, cares so much that he registered a whole new account.

You care so much you can't stay away.  

You care so much you can't shut up.

The sad part is that that reply was not meant for you.  You are a loser, and will never be able to own land.  You will starve to death on the side of the road, just like all the other loser trolls.


rich_wicks's picture

You are a loser, and will never be able to own land.

Nobody owns land in the United States, except the government - whom you rent it from.  If you don't pay your rent you will be evicted from the land which the US government owns, and lose any posessions on said property.  Rent can change at any moment, depending on how much money the US government has squandered and determines it needs to continue wasting money.

Should you want to do anything with US land which you rent from the US government, you will need to get a permit from the government to get permission.  This includes placing a structure on it (rent will vary with what structure is placed upon it), or trying to remove anything from the ground, of the US government's land, which you rent, and do not own.  Rent is determined nearly arbitrarily by a government official called an "assessor" - if you kiss his ass or bribe him, you might get a discount on your rent.  If the "assesor" simply doesn't like you for whatever reason, the US government is sorry but you are fucked.

A good way to get a low rent on "your" land is to be a government official.  If you chose to build a structure on the land, a government "inspector" will find hundreds of violations which serve no reason other than to take money from you - to avoid this, have a government approved contractor to build the structure - he will give a kickback to the officials he bribed or paid off through campaign donations to keep the government off his back.  You will be charged for the money needed for the bribes although it will not appear on your itemized bill.  Government approved contractors are exempt from meeting actual safety standards, unlike you, if you build the structure yourself. Government safety standards are designed to protect contractor monopolies, not you, after all.


The US government reserves the right to deny you the ability to build anything upon the land you rent.  To rent land, you will have to place a large security deposit first - which is called a "sale" but only for illusive purposes so you can pretend you own the land.  You may take out a mortgage for this security deposity on the land if you wish, but the US government reserves the right to evict you from said land at any moment if they feel they can make more money off from it, by allowing Lowes or a Home Depot to be built there through the "right of emminent domain."  Your reimbursement for your security deposit in the case of "emminent domain" may or may not be fair market value - in fact, it probably won't be.

Other terms and restrictions may apply, since there is no lease agreement, and the laws lease can be changed at any time at the request of lobbyists and blindly signed into law by your "representatives" who don't even bother to read the fuckingn bills they sign into law anyhow.  After all, they are too busy getting high off from cocain, and sleeping with hookers.

Good luck land "owner"!

tmosley's picture

How cute.  You think the US is gonna make it.

rich_wicks's picture

How cute.  You think the US is gonna make it.

You don't know what a non sequitur is, do you?


YHC-FTSE's picture

+1 Inspired, and thoroughly enjoyable in a macabre kind of way. Thanks!

Oh regional Indian's picture

You know what, this is beginning to sound more and more like 1929. Inspite of the huge increase in money supply, the velocity and availability have both fallen off a cliff. This loosenign and tightening game has been played before. And while all eyes are being held to the market, housing is wehre IT is AT for most Americans (actually most people world over, here in India, huge credit financed housing bubble in  mid-bloat as I type).

As a former NINJA who had a Million Dollar loan approval, I saw the ugly side of it in 2006. Now the vultures are in the foreclosed sale market and the save your house with restructuring market.

This will end super ugly either way. 

Detroit is the poster child.


michigan independant's picture

I know many will take this the wrong way. The fact of the matter was when Michigan raised the monthy welfare we knew it was over then. Those old enough to remember this facet and the subsequent structural issues are another issue.

Oh regional Indian's picture

Well, MI, to your point, look at the current monthly welfare pop natiowide in the US, eh?



Republican Lackey's picture

Velocity of money. Now we're talking.

equity_momo's picture

Of course its 1929. Ive been sat here for the last year feeling quite dumb due to the extension of this counter trend rally but that was largely due to QE2 - without which we would be at S+P 800 and trending lower. however , every action has a reaction and we are rapidly approaching the tipping point where whatever the bernank does , we go lower.

He can literally kill the fed and the dollar overnight , or he succumbs to deflation.   The amount he is printing is miniscule compared to the contraction in credit.  the animal spirits has not spread beyond Wall st , and will not , and new lows on the s+p are baked in by 2015.  anyone dabbling long on stocks - it will be down to luck if you dont go BK during the next leg lower which will be longer and more brutal than your wildest imagination.

Welcome to the Greatest Depression.  Dont fight the fed? how about dont fight the math. 

alien-IQ's picture

The one thing that differentiates today from 1929: Binary Code.


This time it's different. (and not for the better)


Welcome to the Layer Cake.


Oh regional Indian's picture

Technology, our saviour, our saviour. More like an accelerator of bust in this case.


Kayman's picture

Technology- How to make dumb mistakes faster.

It's bread and circuses; diversions for the masses.

When Alaric arrives at the gate, we can't say we missed the signs.


Oh regional Indian's picture

Kayman, thanks for the Alaric reference, learn something new everyday.


Fortunes Favor's picture

The govt will need to fix the MBS mkt before any recovery in real estate can occur.

Understanding the Government Manipulated Credit Market Evolution @

Republican Lackey's picture

Fixing it will depress prices even more. That is why the Dodd-Frank bill was so watered down.

Robert Neville's picture

The Dodd-Frank bill was watered down because it was written by Dodd and Frank, poster children for government corruption 

Republican Lackey's picture

And they all went along with it? OK.

packman's picture

"need to fix"????

The MBS market has been fixed - for years now.

(couldn't resist)

Misean's picture

Houses? Pffftttt! I'm going long refrigerator boxes and overpass side walks.

johnQpublic's picture

i'm taking the low road and bidding on the underpasses...out of the rain

that and the las vegas sewer system...lotsa good underground housing down there, and protected from fallout at that

FEDbuster's picture

Unless they get a good radioactive rainstorm while you are sleeping in the LV storm sewers.

Very Long Term Optimist's picture

with QE3 getting so much bad press, I'm sure Bernank working on some other means of POMO. Any Ideas, what it could be, gentlemen?

disabledvet's picture

good old fashioned "inflate away the debt bomb" comes to mind.  just speaking off the top of my head of course.  call it "jazz."

alien-IQ's picture

You are assuming that bad press, the will of the people or the good of the nation matter to the criminals in power.

In this would be incorrect.

equity_momo's picture

Negative interest rates on deposit accounts? it was done in Sweden.

He still has an array of BS up his sleeve to screw the productive element of society. You have no idea how bad capital controls can and will get.

Very Long Term Optimist's picture

since only Fed mandate is assets prices, I meant, Other Means (after QE2) of propping Stocks up

equity_momo's picture

It will get to the stage where capital controls are the last resort to prop asset prices up. Juicing them higher will give way to just preventing them collapsing.    ie bank holidays , stock market closures , new regs to prevent selling (will happen to short selling first)

Theres plenty they can and will do to try to fight the inevitable meat grinder of deflation.

It wont work though. Just prolongs the agony - which is the path chosen. Drawn out lingering pain over a short sharp excrutiating reset.

Calmyourself's picture

You are correct this will last a long time and be quite painful.  You are only describing the financial changes that will happen to prolong the agony.  The societal changes jammed down our throat will be worse.  Keep in mind those changes only made possible by the dumbing down and sheepification of the populace who will never fight back in any meaningful way or numbers.. 

Congratulations and welcome to the neverending bistaghypflation..

Atomizer's picture

I need a pair of binoculars to see the chart peak.

long juan silver's picture

tthat was the mother of all bubbles

TruthInSunshine's picture

Bernank wants to launch "McMansions for the Homeless," which would be taxpayers subsidized program whereby Maiden Lane would sell residential properties (bought for 3x what they were worth from the JP Morgans and Bank of Americas of the world by the Bernanklecide) to the Federal Government and then quit claimed to homeless people.

It's a win-win-win. The Homeless get a house, the Fed unloads more toxic assets from its nuclear waste dump of a ledger, and taxpayers get reamed in the ass again.

These are just two of the trial balloon pilot programs:  

Vivian, 42, who wouldn't give her last name, said the building's large bathrooms, separate bedrooms, hardwood floors and walk-in closets are a far cry from conditions at the East New York, Brooklyn, shelter where she has lived for more than a year.

"I live in a single room with bunk beds with my boyfriend," Vivian said.

The Daily News reported Thursday the 67-unit building was slated to be a condo development where apartments would fetch up to $350,000.

After the housing market tanked last year, the developer and a local nonprofit group agreed to turn it into a shelter.

The city pays the nonprofit its standard rate of $90 a night per homeless family - about $2,700 a month - which includes services such as job counseling. It is not known how much Bushwick Economic Development Corp. pays the building's owner.





CrashisOptimistic's picture

Wait, who pays that $90/night?  Who?  Who?

Bastiat's picture

Oh cool!  Do they get their own free riding vacuum cleaner too?

Funny 10yrs ago I was living in Colorado and said to my wife while passing a spread of new McMansions:  I wonder how many families will live in one of those in 15yrs?