This page has been archived and commenting is disabled.

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.


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 03/24/2011 - 13:46 | 1096017 props2009
props2009's picture


This is what Israel wrote to Russia about Iran

Thu, 03/24/2011 - 13:51 | 1096032 TruthInSunshine
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?

Thu, 03/24/2011 - 15:01 | 1096295 Aquiloaster
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!

Thu, 03/24/2011 - 16:14 | 1096612 PuppetRepubl1c
PuppetRepubl1c's picture

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

Thu, 03/24/2011 - 16:34 | 1096752 SunBlaster
SunBlaster's picture

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

Thu, 03/24/2011 - 13:47 | 1096019 New Survivalist
New Survivalist's picture

Hyperstagflation, bitchez.

Thu, 03/24/2011 - 14:55 | 1096277 Thomas
Thomas's picture

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

Thu, 03/24/2011 - 15:02 | 1096304 Aquiloaster
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.

Fri, 03/25/2011 - 01:26 | 1097696 Xkwisetly Paneful
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.

Thu, 03/24/2011 - 13:50 | 1096033 alien-IQ
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.

Thu, 03/24/2011 - 20:51 | 1097705 Xkwisetly Paneful
Xkwisetly Paneful's picture

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


Thu, 03/24/2011 - 13:50 | 1096036 traderjoe
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

Thu, 03/24/2011 - 13:53 | 1096042 aint no fortuna...
aint no fortunate son's picture

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

Thu, 03/24/2011 - 13:52 | 1096044 tmosley
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.

Thu, 03/24/2011 - 14:06 | 1096101 long juan silver
long juan silver's picture

who cares?

Thu, 03/24/2011 - 14:19 | 1096167 tmosley
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.


Thu, 03/24/2011 - 18:45 | 1097204 rich_wicks
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"!

Thu, 03/24/2011 - 19:04 | 1097338 tmosley
tmosley's picture

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

Fri, 03/25/2011 - 00:46 | 1098466 rich_wicks
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?


Fri, 03/25/2011 - 07:30 | 1098762 YHC-FTSE
YHC-FTSE's picture

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

Thu, 03/24/2011 - 13:53 | 1096050 Oh regional Indian
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.


Thu, 03/24/2011 - 14:04 | 1096089 michigan independant
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.

Thu, 03/24/2011 - 14:12 | 1096128 Oh regional Indian
Oh regional Indian's picture

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



Thu, 03/24/2011 - 14:07 | 1096111 Republican Lackey
Republican Lackey's picture

Velocity of money. Now we're talking.

Thu, 03/24/2011 - 14:10 | 1096117 equity_momo
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. 

Thu, 03/24/2011 - 14:30 | 1096191 Oh regional Indian
Oh regional Indian's picture



Thu, 03/24/2011 - 14:13 | 1096147 alien-IQ
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.


Thu, 03/24/2011 - 14:31 | 1096197 Oh regional Indian
Oh regional Indian's picture

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


Thu, 03/24/2011 - 15:42 | 1096454 Kayman
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.


Fri, 03/25/2011 - 02:22 | 1098588 Oh regional Indian
Oh regional Indian's picture

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


Thu, 03/24/2011 - 13:55 | 1096062 Fortunes Favor
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 @

Thu, 03/24/2011 - 14:09 | 1096119 Republican Lackey
Republican Lackey's picture

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

Thu, 03/24/2011 - 14:52 | 1096273 Robert Neville
Robert Neville's picture

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

Thu, 03/24/2011 - 14:58 | 1096290 Republican Lackey
Republican Lackey's picture

And they all went along with it? OK.

Thu, 03/24/2011 - 14:13 | 1096146 packman
packman's picture

"need to fix"????

The MBS market has been fixed - for years now.

(couldn't resist)

Thu, 03/24/2011 - 13:56 | 1096065 Misean
Misean's picture

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

Thu, 03/24/2011 - 14:08 | 1096107 johnQpublic
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

Thu, 03/24/2011 - 21:41 | 1097864 FEDbuster
FEDbuster's picture

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

Thu, 03/24/2011 - 14:01 | 1096081 Very Long Term ...
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?

Thu, 03/24/2011 - 14:06 | 1096099 disabledvet
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."

Thu, 03/24/2011 - 14:08 | 1096115 alien-IQ
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.

Thu, 03/24/2011 - 14:12 | 1096142 equity_momo
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.

Thu, 03/24/2011 - 14:36 | 1096205 Very Long Term ...
Very Long Term Optimist's picture

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

Thu, 03/24/2011 - 14:51 | 1096267 equity_momo
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.

Thu, 03/24/2011 - 17:51 | 1097083 Calmyourself
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..

Thu, 03/24/2011 - 14:04 | 1096088 Atomizer
Atomizer's picture

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

Thu, 03/24/2011 - 14:05 | 1096095 long juan silver
long juan silver's picture

tthat was the mother of all bubbles

Thu, 03/24/2011 - 14:15 | 1096127 TruthInSunshine
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.





Thu, 03/24/2011 - 15:22 | 1096349 CrashisOptimistic
CrashisOptimistic's picture

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

Thu, 03/24/2011 - 15:25 | 1096360 Bastiat
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?

Thu, 03/24/2011 - 14:14 | 1096144 sunny
sunny's picture

Stored wealth in housing is down.

Markets grind up.

Portugal -- Ireland -- Greece

Markets grind up.

Inflation, radiation soaring.

Markets grind up.

New wars.

Markets grind up.

Thanks Ben.


Thu, 03/24/2011 - 14:45 | 1096245 Rogerwilco
Rogerwilco's picture

The Fed has found a stealthy way to implement QE3. They knew it would be politically impossible to announce more QE, so they are doing it secretly. Bernanke testified in 2009 that absent any specific law, he believed the Fed's scope of action was extremely broad. He dared Congress to stop him and they sat on their hands.

Thu, 03/24/2011 - 14:27 | 1096183 apeakunderthehood
apeakunderthehood's picture

Nice article......Thanks for sharing

Thu, 03/24/2011 - 14:28 | 1096184 eureka
eureka's picture

Critical mass leads, rules all - help housing bottom, tank Chase -

Thu, 03/24/2011 - 17:58 | 1097104 Henry Hub
Henry Hub's picture

Oh good, now we have someone to blame when "this sucker goes down". It will be those nasty, evil unions the destroyed everything. Who would have believed they had such power!

Thu, 03/24/2011 - 14:28 | 1096187 Rhone_Ranger
Rhone_Ranger's picture

The writer's knowledge of economics and selective statistics is somewhere south of my 10-year old nephews!

Thu, 03/24/2011 - 14:45 | 1096244 reading
reading's picture

Which part?


Thu, 03/24/2011 - 14:30 | 1096190 PulauHantu29
PulauHantu29's picture

Honestly, no one in their right miond would buy now.

Why buy anything that you know will be worth 20-30% or more less in a few years?

A house is like a lead weight tied to each leg holding you down like glue and it gets more expensive every day.

Maybe in 10 or 12 years I'll think about it.

Thu, 03/24/2011 - 14:39 | 1096228 In Fed We Trust
In Fed We Trust's picture

And way back in 2008, I suggested that this crash was conspired by Goldman Sachs.


I never understood why you don't focus your energy on where the conspiracy lies.

Then in 2009, I take it into micro detail. Word for word, right from "The Partnership."

Of course Goldman Re-releases "The partnership" in 2009 after they could see how all the chips fell.

Another 20% drop in home prices before 2012.

Thu, 03/24/2011 - 14:42 | 1096231 chunga
chunga's picture

This is hopefully going to settle it's self out peacefully. Maybe...maybe not. Fight Club's are popping up everywhere.

ZH is invaluable and this effort is in no way, shape, or form intended to dilute it's message.

I’ll try to be non-cynical and hope that Geither believes because his books tell him he should. My numbers — based on tens of millions of pieces of foreclosure and housing related data — tell me I shouldn’t, and that nobody else should either. Tink’s pixie dust only works if you believe in it, and when you stop believing you’ll fall rather than fly. In housing, in foreclosure-land, and in the overall economy it’s more important now than ever to do your research — to make sure that research is rooted in independent facts and figures — rather than jumping off that windowsill on blind faith.

2010 was awful for many; for me, strangely, it was a really good year though I witnessed a lot of pain. What will happen in 2011? Guessing more of the same, at an accelerating rate.

"No, you're not losing your mind, they're stealing your money..."

You can't begin to imagine the bloody cut-throat fight for that domain name. It's gonna be loaded with goodies. You'll see.

Junk me, bash me, smash me...we're going to make a difference.

Thu, 03/24/2011 - 14:44 | 1096240 OutLookingIn
OutLookingIn's picture


 Fix? Fixing it? Theres NO fixing it! Theres only one thing that must change -


Thu, 03/24/2011 - 14:46 | 1096243 DoctoRx
DoctoRx's picture

May I differ mildly w the author?  IMHO if one looks at "real" home prices, I've got no beef w his thesis.

But measured by nominal fiatscos, so many new ones have been created, I'm not so sure that historical prices mean much anymore.  The trend of the house:gold ratio favors gold lately, but that ratio is already in the house underpriced relative to gold area.  Houses of course cost a lot more to maintain than gold does, but if you need to live somewhere and you earn zippo on your fiatscos, I'm not so sure that buying a house is such a bad deal.

Thu, 03/24/2011 - 14:47 | 1096252 smithcreek
smithcreek's picture

I would be very intersted to know the percent of people that took gubermint money to buy a house last year and are already underwater.  It's got to be getting pretty high by now and by the end of this year it should be approaching 100%.

Thu, 03/24/2011 - 14:51 | 1096268 Stochdoc
Stochdoc's picture

And what will this do to the still levered MBS holders?

Thu, 03/24/2011 - 15:07 | 1096317 AR15AU
AR15AU's picture

One of the best articles I've read in a very long time.

Thu, 03/24/2011 - 15:30 | 1096391 gridlocked
gridlocked's picture

This is actualy scary to me. My home was valued at

$700,000 at the peak pretty much like the graph and

now its valued about $425 not that far off. So it may be worth

$130k in three of years going by that.  My community has

a 3% unemployment rate too so thats's not even related. wow, just wow.

Thu, 03/24/2011 - 15:39 | 1096435 Snidley Whipsnae
Snidley Whipsnae's picture

As long as you don't have to move, why worry?

We bought this house in '87 for about $85K. It was appraised at $425K during the bubble. Now it would fetch about $140K in debased fiat.

Through all the ups and downs in 'appraisals' we have continued to live here and have not taken a second mtg.

Why should we move? Moving is expensive. We have put the money into PMs and are very glad we did.

Refuse to play the game. You don't need to move unless your job moves.

Thu, 03/24/2011 - 16:06 | 1096545 aerial view
aerial view's picture

nice article; perhaps this is why lenders are so reluctant to lend (they know this fall is likely) and now require much higher credit scores and larger downpayments than in the past.

Thu, 03/24/2011 - 16:04 | 1096546 jkruffin
jkruffin's picture

From Forex Desk:

The Treasury Auction Shell Game

By Peter Schiff,

24 March 2011 19:47 GMT

Very few people have either the time or patience to sift through the data released by the Treasury Department in the wake of its bond auctions. But the numbers do provide direct evidence of the country's current financial condition that in many ways mirror a financial shell game that typifies our entire economy.

Despite continued deterioration of America's fiscal health, the Treasury is still attracting adequate numbers of buyers of its debt, even with the ultra low coupon rates. Market watchers take these successful auctions as proof that our current monetary and fiscal stimulus efforts are prudent. But who's doing the buying, and what do they do with the bonds after they have been purchased?

Most people are aware that foreign central banks figure very prominently into the mix. They buy for political reasons and to suppress the value of their currencies relative to the dollar. And while we think their rationale is silly, we don't dispute that they will continue to buy as long as they believe the policy serves their own national interests. When that will change is harder to determine. But another very large chunk of Treasuries go to "primary dealers," the very large financial institutions that are designated middle men for Treasury bonds. In a late February auction, these dealers took down 46% of the entire $29 billion issue of seven year bonds. While this is hardly remarkable, it is shocking what happened next.

According to analysis that appeared in Zero Hedge, nearly 53% of those bonds were then sold to the Federal Reserve on March 8, under the rubric of the Fed's quantitative easing plan. While it's certainly hard to determine the profits that were made on this two week trade, it's virtually impossible to imagine that the private banks lost money. What's more, knowing that the Fed was sure to make a bid, the profits were made essentially risk free. It's good to be on the government's short list.

Given that the Treasury is essentially selling its debt to the Fed, in a process that we would call debt monetization, some may wonder why it doesn't just cut out the middle man and sell directly. But the Treasury is prevented by law from doing this, so the private banks provide a vital fig leaf that disguises the underlying activity and makes it appear as if there is legitimate private demand for Treasury debt. But this is just an illusion, and a clumsy one to boot.

Thu, 03/24/2011 - 18:03 | 1097113 alexanderstollznow
alexanderstollznow's picture

conclusion: it is NOT a "vital fig leaf that disguises the underlying activity and makes it appear as if there is legitimate private demand for Treasury debt. But this is just an illusion, and a clumsy one to boot."  because the law prevents the sales being made any other way.

it may well not be ideal for the Treasury to sell to PDs, who then sell to the Fed, but if the sales were made directly, and the bonds not offered to the market first, how would the market signal a desire to buy the lot itself?  and how would the price discovery work?  even aside from all that, if that is the process demanded by law, you cant say it is a conspiratorial subterfuge.

Thu, 03/24/2011 - 16:08 | 1096570 Occams Aftershave
Occams Aftershave's picture

Agree generally, except for use of term "gravity".  Physical things subject to gravity, not prices.   This decline is a reversion to the mean, not gravity.

Thu, 03/24/2011 - 16:10 | 1096574 r101958
r101958's picture

Banks will have to mark to market before reality can be had.

Thu, 03/24/2011 - 16:33 | 1096754 perelmanfan
perelmanfan's picture

Technology is like four-wheel drive. It doesn't keep you from getting stuck. It allows you to get stuck in much more hopeless places.

Thu, 03/24/2011 - 16:40 | 1096782 Muir
Muir's picture


Yes, SP GLD and IEZ will rocket to the moon but Real Estate will tank to 1994 levels.



Thu, 03/24/2011 - 16:45 | 1096783 Muir
Muir's picture


I mean honestly, either gold goes to $4100 a loaf of bread to $14 and house prices rise also or

gold falls to $300 a house "costs" $1500 and bread goes for 50 cents (but people go hungry because they do not have the 2 bits.)

Thu, 03/24/2011 - 17:01 | 1096881 mkkby
mkkby's picture

Housing can't go lower than the prevailing rent in an given market, when you factor in taxes/insurance/maintenance.  That wouldn't make sense.  In many "flyover" areas that point has been reached. 

In the bubble cities that leaves about a 30% drop remaining. Not quite the apocalypse this author conjures up.

Thu, 03/24/2011 - 17:34 | 1097015 chunga
chunga's picture

Chill out...have a tuna sandwich...everything is gonna be just fine.

"Well I'm about to get up sick
From watchin my t.v.
Been checkin' out the news
Until my eyeballs fail to see
I mean to say that every day
Is just another rotten mess
And when it's gonna change, my friend
Is anybody's guess
So I'm watching and I'm waiting
Hopin' for the best
Even think I go to praying
Every time I hear them sayin'
That there's no way to delay
That trouble comin' everyday
No way to delay
That trouble comin' every day

Wednesday I watched the riot
I've seen the cops out on the street
Watch them throwing rocks and stuff and choking in the heat
Listen to reports
About the whiskey passin' round
Seen the smoke and fire
And the market burnin' down
Watched while everybody on his street would take a turn
They stomp and smash and bash and crash and slash and bust 'n burn
And I'm watching and I'm waitin hopin' for the best
Even think I go to prayin'
Every time I hear em sayin'
That there's no way to delay
That trouble comin' every day
No way to delay
That trouble comin' everyday"

Thu, 03/24/2011 - 22:08 | 1097969 chunga
chunga's picture

I hope the junk was at me and not Frank Zappa. There's music in those words coppertop. That's pure wrongess.

Thu, 03/24/2011 - 17:54 | 1097091 docui mihi
docui mihi's picture

Anyone have any thoughts on Canadian real estate values going forward, specifically British Columbia. I am expecting a sharp downturn in Vancouver due to something like 70% of income being spent on housing. There is a lot of Chinese money flowing through the city which is temporarily propping up prices but how long will that last?

Thu, 03/24/2011 - 18:05 | 1097117 Silver Surfer 1985
Silver Surfer 1985's picture

I am in the RE industry as a broker/appraiser, I believe as is Rocky Raccoon. Its difficult to look anyone in the eye and tell them that they can expect that their largest investment (in most cases) will not appreciate in the near future. Many homeowners have lost (not are losing) hope in the 'American Dream'. Meanwhile the esteemed president of the NAR is on a bus tour across the nation to promote the Homeownership matters bus Tour:

What a putz!

Thu, 03/24/2011 - 18:15 | 1097139 chunga
chunga's picture

Oh gosh...NOW is the time to buy, buy, buy! Hurry while they last!

On a semi-related note:

David Stern strikes back, sues banks

His Pine Island office possessions will be auctioned soon related to the BAC forebearance deal. I'll be there with my video recorder.

I want to bid on one of the shredders (deeply discounted due to heavy use). Not sure how to get it home yet...they're powered by big diesels.

Thu, 03/24/2011 - 18:05 | 1097121 superman07
superman07's picture

sorry, home prices wont drop much more in most markets. banks own too many notes, sellers are levered up and under water, they cant sell for less. Banks dont have to accept short sales. They can forclose at thier leasure. They dont have to properly mark the asset.


If you think banks are going to liquidate, or sell lower and take loses when they can keep the paper at full value almost indefinetly you have not been watching the last two years.

Thu, 03/24/2011 - 18:51 | 1097270 Muir
Muir's picture


You are too logical to be living in this planet as a humanoid.

Thu, 03/24/2011 - 18:18 | 1097151 Silver Surfer 1985
Silver Surfer 1985's picture

Good post Superman! That's sums it all up. The Bankstas changed the rules of the game in April 2009 (not coincidentally when the stock market reversed btw) when they changed the mark-to-market accounting regs to mark-to-model, which means they can value the foreclosures at loan value (a farce if there ever was one). When in doubt, just do what most Americans do, fake it baby.......... Long live the new, centrally planned USSA!

Thu, 03/24/2011 - 18:33 | 1097201 chunga
chunga's picture

Still have to deal with "put backs" from investors. A lot of titles got "smudged" in this fiasco (read fatally flawed). Title companies who hold the paper/policies on "smudged" titles have some exposure for sure.

Thu, 03/24/2011 - 18:52 | 1097273 Silver Surfer 1985
Silver Surfer 1985's picture

Ah yes, the poor ole title companies. They were making dollars hand-over-fist last decade. Alas, they are closing many offices now <sigh>. Times they do a change.............

Thu, 03/24/2011 - 19:00 | 1097317 chunga
chunga's picture

Might be better to "settle" rather than attempt to prove chain of custody. Start talking NPV and call it a day. Sign this boilerplate 50,000 page non-disclosure agreement and have a nice day. Haha..remic, etc. What a mine field. I looked at a maiden lane deal just yesterday that was made while the Bear was actually in rapid free-fall. Never too late for one last fraud.

Thu, 03/24/2011 - 19:24 | 1097409 chunga
chunga's picture

I looked at an original note consumated 3/27/07 referencing this particular ABS. How the hell is this possible??? I tried valiantly to post the neat little chart but only contributors can do that.

Salient quote for those who love reading SEC docs.

"The certificates represent obligations of the issuing entity only and do not represent an interest in or obligation of Bear Stearns Asset Backed Securities I LLC, EMC Mortgage Corporation, LaSalle Bank National Association or any of their affiliates."

Thu, 03/24/2011 - 18:47 | 1097256 monopoly
monopoly's picture

I do think home prices, and commercial RE can decline further. Do not forget the costs involved for a bank to hold onto a foreclosed property. Property taxes, maintenance, Association dues, mowing the lawn. And what if the house is destroyed or at least made un saleable. Then they have to fix it up, again. Then try to sell it.

Multiply that by hundreds of thousands for each of the squid banks and the numbers are staggering. If I owned a bank I would try to get rid of what I can before prices fall further. Which they will.

Thu, 03/24/2011 - 19:40 | 1097468 tony bonn
tony bonn's picture

excellent artice - the takeaway gold from the article is watching the retrace - just as with the dow until it plunges to 5000 and / or reaches parity with gold, the correction aint over....1987 price level is a good target...

fuck the fed and their whore puppet master bankster rockefeller / rothschild axis of evil cohorts...

Thu, 03/24/2011 - 21:18 | 1097790 sullymandias
sullymandias's picture

All the bogus "housing is now affordable again" charts floating around all base their rosy conclusions on median income, neatly avoiding the reality that thetop 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%.

Oops! It does not matter in the slightest to the median how well the top 10% are doing. The median income is the income of the guy in the middle. If the poorest are 1000x poorer, or the richest are 1000x richer, the median stays the same. So if real incomes have declined for the lower 90%, then the median will have also declined.

Thu, 03/24/2011 - 21:26 | 1097811 sullymandias
sullymandias's picture

Every time I read one of these articles on housing prices gonna go down, they mention rising interest rates as one of the reasons. But for buyers on margin, this is actually a wash. The size of my (fixed rate) mortgage payment that matters more than the size of the loan. By the time my (30 year) loan term is up, the dollar will have long ago become worthless.

Thu, 03/24/2011 - 22:49 | 1098133 neutrinoman
neutrinoman's picture

Has the Case/Shiller index chart been adjusted for inflation?  I don't think it has.

That changes the conclusions quite a bit.  Doesn't mean house prices can't drop further.  But it does mean we probably won't drop below late 90s levels.  That was definitely before the housing bubble.  We were in another bubble then ....

Fri, 03/25/2011 - 00:11 | 1098374 No More Bubbles
No More Bubbles's picture

Never been a better time to buy.  Real Estate only goes up. LMAO!

Fri, 03/25/2011 - 00:49 | 1098472 whoflungdung
whoflungdung's picture

Check this out, Peter Schiff's Mortgage Bankers Speech.

And this was in 2006 !!


Peter hits the nail right on the head

Fri, 03/25/2011 - 04:24 | 1098666 jmc8888
jmc8888's picture

Fannie and Freddie in their current form, weren't pushed that way 'for the people', they were pushed to become what they are, for the benefit of wall street banksters.

It isn't socialist, it's FASCIST.  Because it was done with the benefit of THEM in mind, while they would 'claim' it was for the benefit of low income people. (and how did it benefit them? they don't have the houses anymore, that is if the courts processed them, of course with a blind eye to the pure fraud inherent in these MERS, chopped and screwed loans).  Fannie and Freddie was just one of the wall street bogus mortgage conduit, and it wanted it to be that way, badly.  Some of the most effective way to screw 'the people', is to do it in a way that they think they are benefiting.  Low income people thought they were getting into homes. Wall Street banksters knew they were getting loans they could make money off of by selling them all around as AAA, and that the people would eventually not be able to pay them.  It was right in your face and in the open, and yet people still think the focus of Freddie and Fannie, were on poor people.  It's focus, it's real reason to exist, was for the banksters. 



Fri, 03/25/2011 - 07:58 | 1098798 YHC-FTSE
YHC-FTSE's picture

It's not just the US, similar subsidised housing trials have been proposed in the new budget for the UK for "First time buyers", ostensibly to help young people get on the housing ladder since deposits are so high in proportion to income.

Not a single politician in the entire world wants prices to drop to affordable levels so that real people can actually be able to live in affordable homes and have enough left over to eat. Politicians are land owners and real estate is the vehicle of choice for investments with minimum effort. Woe betide anyone or for that matter anything which diminishes their own wealth. So the tricks will go on - there will continue to be efforts to "kick start" the real estate market, even though the donkey that carried the edifice has long since expired and kicking it will merely pop the bloated belly of the beast to cover us all in the stench of its vile rot. The green stinking corruption that we call the dollar. 


Anyway, thanks for the informed analysis, Charles. +1

Do NOT follow this link or you will be banned from the site!