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Grantham: Biggest Housing Bubble Since 807 A.D. Has Burst

George Washington's picture





 

Preface: Many claim that housing is currently experiencing a rebound.  Whether or not that ends up being verified, the housing crash which started in 2007 was so massive that it is historic in its significance.

Top economists and economic agencies have recently verified that bubbles cause huge crashes, and are thus bad for the economy.  See this, this and this.

We’ve previously noted that the housing bubble which burst in 2007  was bigger than the Great Depression … and perhaps bigger than any housing bubble in 700 years:

The question is, given the boom we had between 2001-2007, how bad a bust might we have?

 

Well, in the greatest financial crash of all time – the crash of the 1340s in Italy, which brought on a new dark Age – real estate prices fell by 50 percent by 1349 in Florence when boom became bust.

 

How does that compare to 2001-2007? The price of Southern California homes is already down 41%, Southern California hasn’t fallen as fast as some other areas, and we’re nowhere near the bottom of the market.

 

Moreover, the bubble was not confined to the U.S. There was a worldwide bubble in real estate.

 

***

 

Housing bubbles are now bursting in China, France, Spain, Ireland, the United Kingdom, Eastern Europe, and many other regions.

 

And the bubble in commercial real estate is also bursting world-wide. See this.

Jeremy Grantham just said that our recent bubble was the largest in  1,200 years:

Investors should be wary of a Fed [who] is led by a guy [Bernanke] who couldn’t see a 1-in-1200-year housing bubble!

2007 – when the housing bubble popped – minus 1,200 years brings us to 807 A.D.

To give a sense of how long ago that was, Charlemagne had just  defeated the Saxons – one of the tribes forming the famed Anglo-Saxons – and forcibly converted them to Christianity. England didn’t become a country until hundreds of years later, during the Norman Conquest of 1066 .

But the housing bubble which burst in 2007 was arguably the largest in history … ever.

As we’ve noted:

In “What Goes Up”, I discussed the law of booms and busts. A big boom with easy credit leads to a big bust.

 

***

 

The Economist magazine wrote in 2005 that the worldwide boom in residential real estate prices in this decade was “the biggest bubble in history“. The Economist noted that – at that time – the total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – an increase equal to the combined GDPs of those nations.

 

***

 

The bigger the boom, the bigger the bust. Because we have likely just lived through the greatest boom in history, we may see the biggest bust in history. (No wonder the guys who predicted this crisis are gloomy about the future. Is this why the big players are selling everything that’s not nailed down to raise cash?)

 

If true, this is saying something dramatic. Because the bubble in 1340 Italy was so big that its bust helped precipitate a new dark age.

Too bad that the government helped to blow the bubble, and hasn’t done anything meaningful to help homeowners.

We also noted something that is now obvious to all:

The real estate bubble formed the base upon which a series of bubbles in derivatives were built. Specifically, mortgages were packaged in “collateralized debt obligations” (CDOs), which were sold in enormous volumes all over the world. Credit default swaps were then bet against the companies which bought and sold the CDOs.

 

Now, with housing prices crashing, the CDO bubble is crashing, as is the CDS bubble.

 

A series of other derivatives bubbles are also crashing. For example, the “collateralized fund obligations” – sort of like CDOs, but where the assets of a hedge fund are the asset being bet on – are getting creamed as hedge funds are forced to sell off many hundreds of billions in assets to cover margin calls.

 

As everyone knows, the size of the global derivatives bubble was almost 10 times the size of the world economy [Update: It was actually 20 times the world economy]. And many areas of derivatives are still hidden and murky.

 

So the bust of the derivatives bubble could even be bigger than the bust of the housing bubble.

Too bad the government helped to blow the derivatives bubble, and isn’t doing anything to rein in derivatives now.  See this, this, this and this.

 


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Wed, 11/21/2012 - 10:57 | Link to Comment TSA gropee
TSA gropee's picture

Over the past couple of years I've noticed a distinct change in just about everything, but what is especially noticeable is the amount of cars that are now in front of most of the homes on my street. Including my own. It seems as though more and more people who still own homes (I say own somewhat euphemistically) have taken in family and friends who have lost theirs. Both corner homes now have 5-7 cars at any given time. I also see more and more apartments being built and those who live there drive everything from beat up escorts to Beemers and Benz's, and from my conspiratorial perspective it would seem that people are being herded into more dense and smaller areas. Sad thing is, I see it only getting worse next year as nationalized healthcare takes its continued and perhaps accelerated toll on businesses and hyper inflation causes more people to lose their homes. Lately, I've taken a more half empty outlook on the future and gotten a greater sense of urgency in pre#paring. I lament for days gone by and will miss ZH and other sites when TPTB deem it necessary to sanitize dissenting voices or those who seek to present the truth whatever that may be...

Wed, 11/21/2012 - 11:26 | Link to Comment Stoploss
Stoploss's picture

Hey, now we're actually comparing apples!  Who knew?

There was a much bigger one before 807, but this is perfect, because it

puts into perspective how the Roman central planning experiment failed.

Only difference between us and them is time.

The rhymers are not going to like this one bit.

Wed, 11/21/2012 - 10:16 | Link to Comment ella
ella's picture

And what of private industry that gleefully demanded deregulation and then created derivatives.  Derivatives, many of which were based on hot air and sold around the world.  Innocent private industry?  Really, of course it is all the government’s fault.

Private industry is never to blame.  Never mind the shadow banking system creating money out of thin air.  No, not the perfect private industry.

Guess what they gov + private industry are both guilty.  Private industry reaped the benefits and we the people are stuck with the bill.

Wed, 11/21/2012 - 13:42 | Link to Comment Col_Sanders
Col_Sanders's picture

Giving government what you believe to be a tool to control something doesn't work.  It always becomes a tool that private industry uses to stifle competition and guarantee that any of their profits will remain private while losses are spread among the public.

This is why "moar regulation" fails every single time it's tried.

Wed, 11/21/2012 - 09:48 | Link to Comment grunk
grunk's picture

So we need to continue to prop up the housing market to prevent the plague and a second Dark Age.

Wed, 11/21/2012 - 08:41 | Link to Comment Never One Roach
Never One Roach's picture

Zero down loans to people who cannot afford the box and high unemployment for years to come force prices down for years to come.

Wed, 11/21/2012 - 07:03 | Link to Comment falak pema
falak pema's picture

the derivatives duck soup; the recipe for the demise of current crony capitalism.

GRoucho MArx's incredible satirical intuition that tickled our funny bones! 

Between Karl and Groucho, we now have the missing link; the CDS! 

the world financial system is going to hit the asymptote in Eurozone. What it NEEDS urgently is MASSIVE HAIR CUTS all round and obviously the massive fiat liquidity pump will continue, to avoid depression. 

Which means hyperinflation somewhere down the road; avoiding that means deep depression.

This serpent has swallowed its tail !

Wed, 11/21/2012 - 06:32 | Link to Comment Optimusprime
Optimusprime's picture

"England didn’t become a country until hundreds of years later, during the Norman Conquest of 1066 ."

 

 

 

History is not your strong suit. 

Wed, 11/21/2012 - 05:08 | Link to Comment unirealist
unirealist's picture

How can you talk about the housing bubble 2000-2006 without naming those who deliberately engineered it?

Greenspan trotted over to the Oval Office two or three times a week during the GWB administration.  Prior to Bush, he rarely showed up at the White House.

I don't know what they blackmailed him with--sex with prepubescent girls?--but it seems clear to me that Greenspan inflated the housing bubble to insane levels at the behest of Karl Rove and the Shrub.

Bush/Rove--the monster who destroyed Western Civilization.

 

Wed, 11/21/2012 - 02:07 | Link to Comment Bear
Bear's picture

Is it really a bust when preceded by such a short boom. House prices around me haven't even got back to 2003 levels. Reverting to prices of nine years ago is really quite normal in the long view. It is just since 1970, since we have come to expect a constant rising asset price and this is simply a reaction to an ever expanding debt load coupled with currency devaluation.

Wed, 11/21/2012 - 01:40 | Link to Comment Curt W
Curt W's picture

Boom and Bust cycles are caused by Economists who think they know what they are doing.

The central banks manipulation of interest and money supply has created a roller coaster ride for the last 50 years.

Wed, 11/21/2012 - 00:15 | Link to Comment mayhem_korner
mayhem_korner's picture

FWIW, the housing bubble burst in 2006, not 2007. Just took the MSM knuckleheads a year to catch on...

Wed, 11/21/2012 - 01:01 | Link to Comment TBT or not TBT
TBT or not TBT's picture

Same deal with the 807 A.D. bubble.   People forget so quickly.   

Pretty important to call it in 2006 because the new Dem majority in both houses of Congress hadn't yet sat down to make things even worse.  

Wed, 11/21/2012 - 00:45 | Link to Comment George Washington
George Washington's picture

Yup, true ...

Wed, 11/21/2012 - 00:08 | Link to Comment Kasperfx
Kasperfx's picture

"Whoever controls the volume of money in any country is absolute master of all industry and commerce...And when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate."

James A. Garfield

Wed, 11/21/2012 - 00:05 | Link to Comment Kasperfx
Kasperfx's picture

"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance."

James Madison

Wed, 11/21/2012 - 07:08 | Link to Comment Who is John Galt
Who is John Galt's picture

James Madison minces words.

"the money changers" = JEWS

 

 

Wed, 11/21/2012 - 10:50 | Link to Comment CH1
CH1's picture

Alexander Hamilton was Jewish?

Who knew!

Wed, 11/21/2012 - 10:59 | Link to Comment TSA gropee
TSA gropee's picture

Bigotry and intellectual honesty aren't necessarily mutually inclusive...

Wed, 11/21/2012 - 00:39 | Link to Comment Mark Noonan
Mark Noonan's picture

There is less difference than many suppose between the ideal Socialist system, in which the big businesses are run by the State, and the present Capitalist system, in which the State is run by the big businesses.

G. K. Chesterton

And always worthwhile to read The History of Hudge and Gudge.

Its not like we haven't been amply warned...

Wed, 11/21/2012 - 06:46 | Link to Comment falak pema
falak pema's picture

inverted totalitarianism, oligarchy capitalism meme; that ZH likes to call "socialism", "communism", "keynesianism". And true state socialism and monopoly government owned capitalism...

The dividing line is thinner than the width of Circe's silken hair! 

Remember I said it! 

Wed, 11/21/2012 - 02:09 | Link to Comment OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

"I'm not wearing any underwear!"

Me, 2012

Wed, 11/21/2012 - 11:23 | Link to Comment Metalredneck
Metalredneck's picture

"Film at 11:00."

Wed, 11/21/2012 - 00:47 | Link to Comment George Washington
Wed, 11/21/2012 - 02:06 | Link to Comment RockyRacoon
RockyRacoon's picture

YUP, indeed.  It appears that the patient has a brain tumor and is being treated for a headache.  I wish this raggedy-assed bus would plunge over the cliff already.

Wed, 11/21/2012 - 02:22 | Link to Comment Dr. Sandi
Dr. Sandi's picture

It has already plunged. It's just that we silly humans really don't understand the gravity of our situation.

 

"Meep, meep!"

Wed, 11/21/2012 - 00:04 | Link to Comment Anne Ominous
Anne Ominous's picture

The Australian Housing Bubble is still being denied yet supported by official stimulus - that's going to end well.

Wed, 11/21/2012 - 05:33 | Link to Comment slackrabbit
slackrabbit's picture

As is New Zealand.

The only people who can afford houses in NZ now are the Chinese officials getting their money out of China.

All the X's and Y's are leaving because Boomers control the parliament and low wages and high student loans are killing them.

Wed, 11/21/2012 - 15:29 | Link to Comment AGuy
AGuy's picture

"The only people who can afford houses in NZ now are the Chinese officials getting their money out of China."

Same in Canada too!

Tue, 11/20/2012 - 23:41 | Link to Comment Stud Duck
Stud Duck's picture

The points made with this article have been made over and over by James Howard Kunstler, especially the CDO CDS issue and how most of the Unions, State retirement funds, Teacher retirement funds, ect have been loaded on the asset side with these fake securities. 

If anybody is interested, his weekly blog is quite good reading, ClusterfuckNation.com, or just type in Kunstler. I was first blew away by his basic theory that this fossil fuel based world economy may be looked at historically as the greatest misallocation of resources in human history.

Just logged on tonight, have been to my monthly water board meeting, doing my civic duties.

Good read, going points made with by the author.

Wed, 11/21/2012 - 08:33 | Link to Comment booboo
booboo's picture

Knustler is a hate filled north suburbia "do as I say, not as I do" lonely old man who thinks that there is a political solution to the problem. Nutslur is so stupid that he voted not once, but twice for Oblahblah. All the while deriding everything that he does. The wonderful ironey is he and his cult like followers will be driven off the cliff by a full blown progressive whispering sweet nothings into their melons.

Happy motoring to Jim Nutslur and his merry band of sycophants.

Wed, 11/21/2012 - 07:16 | Link to Comment petolo
petolo's picture

What a coincidence, i also went to my watering hole meeting tonight.Accomplished a lot.

Tue, 11/20/2012 - 23:37 | Link to Comment lasvegaspersona
lasvegaspersona's picture

hyperinflation will make the black plague look like fun...at least we can treat Yersinia pestis now...

Wed, 11/21/2012 - 04:05 | Link to Comment Parrotile
Parrotile's picture

Depends on which particular variant "gets you" http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1610074/

"Since the beginning of the 1990s, the number of human cases of plague has been rising, and outbreaks are reappearing in various countries after decades of quiescence. Plague is therefore categorized as a reemerging disease. Until recently, Yersinia pestis was considered as uniformly susceptible to agents that are active against gram-negative bacteria. The isolation in Madagascar of two multidrug-resistant strains of Y. pestis, one resistant to all of the antimicrobial agents recommended for treatment and prophylaxis of plague and the other resistant to a smaller array of drugs, is worrisome. The demonstration that horizontal gene transfer in the flea midgut may be the source of antibiotic-resistant Y. pestis strains is of great concern and indicates that such a clinically ominous event may occur again."

And this article was publised in 2006 too!

Tue, 11/20/2012 - 23:14 | Link to Comment Dead Canary
Dead Canary's picture

Well, in the greatest financial crash of all time – the crash of the 1340s in Italy, which brought on a new dark Age – real estate prices fell by 50 percent by 1349 in Florence when boom became bust.

 

Come on people. The black plague ravaged Europe in the 1340's. Not a fair comparison.

Wed, 11/21/2012 - 03:38 | Link to Comment vato poco
vato poco's picture

Thank you, Dead Canary. As much as I appreciate what Grantham's trying to do here - and I agree with him, FWIW - in this hard old world, the little things count. Especially if you're trying to sell others on your econ theories/predicitions. NO, the Italian crash of the 1340's is *not* what "brought on a new dark age", nor did that crash just kinda....you know....happen. Maybe, just maybe what crashed those RE markets - and every other market there was - *maybe* it was the plague that wiped out roughly a third of Europe. You remember: the one that started in Italy in, oh, 1340 or so. Those folks, just like us, *literally* thought the world was ending, and with much better reason than we have to think so. So 'snapping up real estate' was probably pretty damn low on their list of priorities, I'd guess.

Again, I agree with the guy. But if he gets something small but important like The Black Plague wrong, I gotta wonder what other errors in assumptions/analysis/judgement might there be?

Wed, 11/21/2012 - 10:00 | Link to Comment Imminent Crucible
Imminent Crucible's picture

Nothing says he "got the Black Plague wrong". Have you considered this sequence:

Giant credit boom leads to giant credit bust.

Giant credit bust leads to widespread poverty.

Widespread poverty leads to crowded, unsanitary living conditions, hunger and starvation.

Crowded, filthy living conditions lead to disease pandemics.

Sometimes, when a bunch of disasters all hit about the same time, it's hard to identify the trigger. It also doesn't matter much, especially if you don't survive.

Wed, 11/21/2012 - 01:31 | Link to Comment RockyRacoon
RockyRacoon's picture

Well, there ya have it.  Falling house prices cause disease.  QED

Tue, 11/20/2012 - 22:41 | Link to Comment woggie
woggie's picture

the beast is on the gobble and all that matters is we're all headed for it's belly
http://youtu.be/ntmthFyaYzY

Tue, 11/20/2012 - 23:05 | Link to Comment Enslavethechild...
EnslavethechildrenforBen's picture

Stab the beast in the eyeball with an ice pick and light it on fire

Tue, 11/20/2012 - 22:39 | Link to Comment max2205
max2205's picture

MozilloYellow told me to avg down

Tue, 11/20/2012 - 23:12 | Link to Comment Enslavethechild...
EnslavethechildrenforBen's picture

Up until 4 Billion years ago, there was no Gold on earth. It came from an asteroid or meteorite or something. Mine is not for sale

Wed, 11/21/2012 - 01:14 | Link to Comment TBT or not TBT
TBT or not TBT's picture

In mainstream cosmological theory it was all produced in at least one, but probably a few supernova explosions.      Fusions of atomic nuclei heavier than iron actually eat energy rather than releasing it.   During the fairly sudden gravitational collapse of a star that has reached this state where fusions eat rather than liberate more energy, the kinetic energy of the inevitiable implosion of the star into its monster gravity well gets used up in part to overcome the energy barrier to the creation of nuclei heavier than iron, such as gold, but also a hell of a lot of other atomic nuclei too, of course.   Pb.  U.   A big swath of the periodic table.    The heat produced in the gravitational collapse generates a rebound explosion that can outshine an entire galaxy, briefly, and this explosion sends a lot of heavy elements outward.    Our solar system then included a lot of such cosmological thermonuclear fallout together with the hydrogen essential to our little star's respectable energy output.

Wed, 11/21/2012 - 15:43 | Link to Comment AGuy
AGuy's picture

I will also add. Mosth of the gold on Earth is below the crust. since gold is very dense it sank when the earth was molten. The gold deposits found on earth are found because of meteor strikes, Not because the meters contain abundant amounts of gold, but because they puncture the Earths crusts lifting the gold into the crust. The only other instance where gold is found is cause by volcanism. where lava flows bring it up to the surface. Thats why there are only a few regions in the world that have minable concentrations of heavy metals

"A big swath of the periodic table"

All elements heavier than iron.

Wed, 11/21/2012 - 07:15 | Link to Comment Go Tribe
Go Tribe's picture

Supernova bubbles, eh? I guess not all bubbles are bad.

Tue, 11/20/2012 - 22:43 | Link to Comment Radical Marijuana
Radical Marijuana's picture

Of course, it is all way, way worse than merely that!

We are talking about a global empire based on fraud, built by the banksters, into which everyone was forced to be integrated, where the private banks get to make money out of nothing, and by controlling governments, force everyone else to accept that. So, it used to be that, if you wanted to buy a house, you had to pay for three, in order to have one. The other two were given to the banksters and friends, who only had to legally counterfeit the money out of nothing, as a debt, that you could agree to "borrow" in order to buy that house. That automatically got worse and worse. Assholes like the debt ring cheerleaders at Countrywide, got to pep talk that debt bubble, and blow it bigger and bigger, with more and more obvious fraudulence. Those who mentioned that was insane, before the bubble popped, had to quit, or get fired. After Countrywide thereby destroyed itself, those who did that got to keep the money they made, and walk away scott free. Then the pieces of Countrywide were absorbed into bigger banks, which transactions were greased by screwing the American taxpayers generally more than ever!

However, the housing aspect was only one part, albeit a big part. The river of money made out of nothing as debts is so wide that it looks more like an ocean! This bubblenomics is simply runaway organized crime, controlliing governments, going MAD, and finally destroying itself, and almost everyone else too! The REAL system is global electronic fraud, backed by atomic weapons. When that bubble pops, most probably the only way to balance the books will be with a blood bath. The most probable outcome of this biggest of all bubbles popping will be genocidal world war, with matching democidal martial law.

Most people do not want to know anything about that, and probably could not do anything to change it, even if they did, since the double bind paradox is that almost everybody does not want to know, because almost everybody else does not want to know.

Wed, 11/21/2012 - 10:17 | Link to Comment TSA gropee
TSA gropee's picture

"The REAL system is global electronic fraud, backed by atomic weapons"

+1 Great statement.

Wed, 11/21/2012 - 02:40 | Link to Comment bunnyswanson
bunnyswanson's picture

http://www.youtube.com/watch?v=Z1i3vNVcu44

 

Ron Paul explains in under a 2 minutes what is happening - Transfer of Wealth due to monetary policy.

Wed, 11/21/2012 - 04:21 | Link to Comment Radical Marijuana
Radical Marijuana's picture

For sure! Ron Paul has done more to educate Americans about their monetary system than any other living individual that I can think of! He is particularly popular among the young at colleges and universities because his message is more important to them than anyone else.

Wed, 11/21/2012 - 00:29 | Link to Comment epwpixieq-1
epwpixieq-1's picture

A small addition "global empire based on fraud" and arms, because without arms, fraud, in one way or another can be dealt with.

Regrettably, fraud backed by arms is the worst situation for anyone knowingly (and unknowingly) LENDING money, and, of course, the best option for the one borrowing, pardon, knowingly stealing it.

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