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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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Tue, 11/20/2012 - 22:50 | 3000907 Who is John Galt
Who is John Galt's picture

LOL. bravo!

And they say marijuina will make you stupid!

Tue, 11/20/2012 - 23:18 | 3000965 Tsar Pointless
Tsar Pointless's picture

The irony is, only stupid people believe that.

Wed, 11/21/2012 - 07:50 | 3001448 samcontrol
samcontrol's picture

doesn,t make me stupid, maybe slower ...sure doesn,t help in sports, unless you jump off cliffs like i do.

Tue, 11/20/2012 - 22:34 | 3000858 Enslavethechild...
EnslavethechildrenforBen's picture

Real Estate rebounding strongly in some areas, plummeting furiously in most areas.

Of 2 economies, only the rich have money in their economy ,it comes directly from Bernanke. 

 The rest of us have unemployment and insanely high prices for every fucking thing we pull our walets out for

Wed, 11/21/2012 - 00:41 | 3001175 Mark Noonan
Mark Noonan's picture

I think, though, that those few areas which are booming are only areas of heavy government (ie, the DC area) or select markets where foreign money is being parked to weather the global financial storm.  Its all artificial, and as soon as the government runs out of money (January 1st) and the foreigns have hidden sufficient assets over there then it will all fizzle.

Tue, 11/20/2012 - 22:44 | 3000890 monogratis
monogratis's picture

Eternally diminishing value of savings...  Can't seem to save enough money... most people have given up on savings.  Just spend that shit immediately on instant gratification.  There's always a career in fraud and extortion to fall back on...

Wed, 11/21/2012 - 11:28 | 3001964 Shevva
Shevva's picture

You don't need savings in the UK you just nick it from other peoples houses until you get cuahgt about 100 times then they bang you up in Butlins for 6 weeks with a free xBox.

Although I'm aware this option doesn't count in the US as you just get shot dead or lcoked up with a gang memebr that takes aliking to your poop-shute, you guys really are fucked.

Tue, 11/20/2012 - 23:02 | 3000927 Enslavethechild...
EnslavethechildrenforBen's picture

Let the beheadings begin!

Tue, 11/20/2012 - 22:22 | 3000832 GoingLoonie
GoingLoonie's picture

In houses close to down town Miami, or on Key Biscayne there are bidding wars for homes.  Prices have reached or exceeded those at the peak of the bubble.  I would suggest that this represents a massive amount of foreign money brought to the USA for investment.  Again, it will not end well unless Uncle Ben keeps those presses running.

Tue, 11/20/2012 - 22:33 | 3000859 monogratis
monogratis's picture

You lost me at "it will not end well unless..."

Tue, 11/20/2012 - 22:26 | 3000842 Enslavethechild...
EnslavethechildrenforBen's picture

So you're saying the problem is the solution?

Tue, 11/20/2012 - 22:20 | 3000822 Zero Govt
Zero Govt's picture

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

Isn't that the absolute truth.

And now the uber-chump is backing the biggest losers/wasters in society, Govt and Wall Street, with all the chips on the table to bring us a "recovery"

Another public-private scam (the Fed) delivers garbage

Tue, 11/20/2012 - 22:42 | 3000883 Radical Marijuana
Radical Marijuana's picture

I find it impossible to believe that people like Bernanke are THAT incompetent. However, I find it easy to believe that they are told what to do by people who are that evil, as to deliberately blow bubbles, and pop them, again and again, because they can.

Wed, 11/21/2012 - 11:15 | 3001910 Metalredneck
Metalredneck's picture

The time is coming...

http://youtu.be/ZC0z0G_zBAE

Wed, 11/21/2012 - 09:54 | 3001654 Imminent Crucible
Imminent Crucible's picture

Rad MJ: It's perfectly possible to be both incompetent and evil at the same time. Watch Bernanke lie to a Congressman's face, and then get caught in the lie:

http://www.youtube.com/watch?v=0AB_9m0eNso

At 4:20, "This particular authority has been used numerous times over the years."

Grayson: "Actually, the chart on page 28 says this type of lending never happened before 2007."  Oops.

Bernanke looks like he's constipated half to death.

Tue, 11/20/2012 - 23:11 | 3000945 willwork4food
willwork4food's picture

Yup. You win a chocolate Ding-dong, and a loaf of Wonder Bread

Tue, 11/20/2012 - 23:10 | 3000942 Enslavethechild...
EnslavethechildrenforBen's picture

It is our moral imperative to inprison our evil enslaving captors and let there be peace and abundance on earth instead

Tue, 11/20/2012 - 22:22 | 3000830 Enslavethechild...
EnslavethechildrenforBen's picture

Now you know why they invented the word "Evil"

Tue, 11/20/2012 - 22:19 | 3000819 FinalCollapse
FinalCollapse's picture

Cheap housing is in the nation's best interest. The Fed and DC morons that try to prop up the house values should be tried for treason.

Besides - where the demand supposed to come from? From printing money that fills up the thick wallets of Crimex (all Bernanki's friends)?

Tue, 11/20/2012 - 22:21 | 3000825 Enslavethechild...
EnslavethechildrenforBen's picture

We can't afford a trial, burn them at the stake

Wed, 11/21/2012 - 09:26 | 3001596 LongSoupLine
LongSoupLine's picture

Corzine?

Tue, 11/20/2012 - 23:08 | 3000940 willwork4food
willwork4food's picture

...on pay-per-view.

Wed, 11/21/2012 - 08:14 | 3001485 Fred C Dobbs
Fred C Dobbs's picture

No, free for all to see.

Tue, 11/20/2012 - 22:13 | 3000805 SILVERGEDDON
SILVERGEDDON's picture

If you own paper, it's gonna burn.

My suggestion would be to invest in precious metals - copper, brass, and lead. Oh, and follow up with hedges in chemical / minerals groups - physical holdings only.

Charcoal, saltpeter, sulphur, fulminate of mercury, and nitroglycerin come to mind.

Oh, and silver is good - in water filters, bandages, and currency form.

And, get ready for fuel free back to the land grow it or starve reality.

Coming soon to a third world bankrupted state near you. 

Tue, 11/20/2012 - 23:33 | 3001010 lasvegaspersona
lasvegaspersona's picture

I agree with 'the burning' but...after a reasonable nymber of means of protection, why not stick with the one asset the central banks have all declared will be their reserve?   ie gold.?

Tue, 11/20/2012 - 22:19 | 3000820 Enslavethechild...
EnslavethechildrenforBen's picture

Any weak links that depend on the grid will be unavailable. Food, water and shelter will be the least of your problems. Taxes will kill you dead first, that you can take to the bank

Tue, 11/20/2012 - 22:39 | 3000876 monogratis
monogratis's picture

Correction: Taxis will kill you dead

http://www.zombietaxi.com/

Wed, 11/21/2012 - 02:17 | 3001288 Dr. Sandi
Dr. Sandi's picture

 

Correction: Taxis will kill you dead

Hey, I'm walkin' here!

Tue, 11/20/2012 - 22:46 | 3000897 monogratis
monogratis's picture

Only in February.. except for...

 

*edit* Cheater, you edited

Tue, 11/20/2012 - 22:47 | 3000899 Enslavethechild...
EnslavethechildrenforBen's picture

28 days, 28 weeks...

Tue, 11/20/2012 - 22:12 | 3000799 williambanzai7
williambanzai7's picture

Housing is experiencing a rebound? Do you really believe that?

Are we talking about something other than Chinese and European tycoons buying getaways and hedge funds buying up up distressed assets to rent?

Or are we drinking NAOR Kool Aid?

Wed, 11/21/2012 - 16:31 | 3003137 AGuy
AGuy's picture

Don't forget about the Fed buying $40 Billion in MBS per month! The Fed is probably going to use foreclosed properties to install additional printing presses.

 

 

Wed, 11/21/2012 - 00:53 | 3001199 DaveyJones
DaveyJones's picture

He said rebound when he meant bounce - like a ball experiencing gravity, progressively shorter leaps until it rests on the floor 

Tue, 11/20/2012 - 23:07 | 3000937 willwork4food
willwork4food's picture

Nope, just some cold Heinekens. But I'm thinking of investing in Twinkies.

Wed, 11/21/2012 - 09:24 | 3001593 Sudden Debt
Sudden Debt's picture

Buy everything everybody is selling ;)

 

Tue, 11/20/2012 - 22:15 | 3000812 George Washington
George Washington's picture

Thanks ... fixed ...

Tue, 11/20/2012 - 22:12 | 3000804 Enslavethechild...
EnslavethechildrenforBen's picture

Home prices will go back up soon, but in Zimbabwe Dollars

Tue, 11/20/2012 - 22:08 | 3000791 logicalman
logicalman's picture

This is why I drink

Tue, 11/20/2012 - 23:23 | 3000980 formadesika3
formadesika3's picture

 

Well, in the greatest real estate crash of all time - the crash of the 1340s in Italy, which brought on a new dark Age - real estate prices fell by 50 per cent 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.

 

And 1347 was the start of the Black Death in Europe, IIRC. That was the cause of that particular "bust". Holy Shit! How can humans make such a hash of things all by themselves?

Tue, 11/20/2012 - 23:04 | 3000931 willwork4food
willwork4food's picture

This is why I'm drinking right now.

Tue, 11/20/2012 - 22:10 | 3000801 Enslavethechild...
EnslavethechildrenforBen's picture

Gold to Home price chart starting to look good

Wed, 11/21/2012 - 02:16 | 3001287 Midas
Midas's picture

He's complaining that the government hasn't "done anything meaningful to help homeowners."  I've got an idea.  STOP HELPING ALTOGETHER!!!

Wed, 11/21/2012 - 09:07 | 3001565 Popo
Popo's picture

The Fed is doing everything they can to create inflation in housing.

Housing is the only area where price rises are communicated as a "good thing". Its pure banker propaganda.

Imagine if food prices or gas prices spiked, would the talking heads on CNBC be talking about a "food recovery" or a "gas recovery"? It's absurd.

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