Housing Bubble II: Euphoria And Other Shenanigans

Wolf Richter's picture

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

The good old days are back. Those days during the last housing bubble when money grew on trees: home prices jumped 10.9% year over year, according to the S&P Case-Shiller 20-city Home Price Index, based on data through March 2013. On a monthly basis, the index rose 1.2%. Prices are now back to 2003 levels. The usual suspects: Phoenix soared 22.5% year over year, San Francisco 22.2%, Las Vegas 20.6%. You can’t lose money in real estate. I’m already hearing it again.

Flipping houses is back in vogue. People are jabbering about it on their cellphones while crossing streets without looking. Entire articles have been written about it, backed with reasonable-looking numbers, such as RealtyTrac’s25 Markets Where Flipping Homes is Most Profitable.” The top three? Orlando, Las Vegas, and Phoenix. Visions of 2005!

The smart money is once again running national radio ads on how-to-flip-houses shenanigans. Pull out your credit card, call that 800-number, and get rich quick. On NPR, an “economist” said this morning that the housing market was “on fire.” That’s the sort of hard “data” that puts real gloss on NPR’s perspicacious coverage of the US economy. And everybody fingers the “tight” inventory – as hundreds of thousands of vacant and for-sale homes have evaporated, and as bidding wars are breaking out over what’s left. Or so it seems.

But vacant homes don’t evaporate. Private-equity funds have poured tens of billions into gobbling up vacant single-family homes in specific markets. And now some of them are planning IPOs as a way of dumping this stuff into funds that unsuspecting worker bees hold in their 401(k)s. It’s called an exit, and they have to do it before it blows up in their faces. Meanwhile, they’re hoping to rent out at least some of these vacant homes on their books, but vacancy rates of single-family homes are sky-high in these markets, with the stock of vacant homes having simply been moved from the for-sale list to the for-rent list where it languishes unnoticed by the gurus. That’s what free and unlimited money will do. I’ve hammered on this theme before.... Housing Bubble II: But This Time It’s Different.

Euphoria even shows up in the numbers. The Conference Board Consumer Confidence Index rose in May to 76.2 up from 69.0 in April, the highest level since February 2008. Not everyone was euphoric. Which was why the index hasn’t hit the stratosphere yet. But those among the respondents who benefitted from the Fed’s money-printing binge and the bubbles it engendered in corporate bonds, farmland, housing, the stock markets, even junk bonds... they felt flush; and just like in 2006 or 2007, when “Merger Monday” had become a day of the week, they felt wise for having made smart decisions. Forgotten were the fiscal cliff – whatever that had been – the payroll-tax hike, and the sequester. For the lucky ones, these inconveniences were drowned out by euphoria.

The Walmart crowd wasn’t so lucky, however, and if it hadn’t been for their presence, the index would have been soaring. So there were some hiccups: only 10.8% of the respondents thought that jobs were “plentiful”; while dismal, and a reminder of reality, it was up from an even more dismal 9.7% in April.

Everybody loves bubbles. People either don’t remember the wealth destruction and wealth transfers that took place when the last bubble blew up, or they think they, but not others, can get out in time, whether it’s through an IPO, a quick stock sale, or a real estate transaction. Governments love bubbles because they generate a flood of tax revenues – and even California is having illusions of a surplus. Central banks, and specifically the Fed, create bubbles and then deny their existence until afterwards when they bail out their cronies that hadn’t been able to get out in time – while others are left holding the bag. It’s an amazing show, with fireworks, suspense, dramatic plot twists, and a rousing score. And we get to watch it over and over again.

Since I write so much about financial fiascos, debacles, and nightmares, I’ve been asked about ways to protect assets in this environment. Thankfully, I don’t give financial advice. Even if I did, I wouldn’t have all the answers. But I just finished reading an excellent book on precisely that topic, so I decided to review it. Read....  Diplomatic Immunity For Your Assets In Interesting Times!

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Seasmoke's picture

At the time I didn't live the idea. But now I am very pleased my house was built in 1981. These houses of the past 15 years are junk.

Pondmaster's picture

Houses ? - bah ! A huge point in the linked article. 

“The only way to achieve complete protection for your wealth is to let someone else own it for you!” the authors write.


I gave Corzine a call , he said he would be more than happy to help .

Sequitur's picture

"I simply do not know where the money is, or why the accounts have not been reconciled to date."

John Corzine, Congressional Testimony, December 8, 2011

ebworthen's picture

Housing Bubble Part II!

Coming to a theater near you!

WTFUD's picture

I'll huff and i'll puff and i'll blow your house down. . .
This little banky went to market. . .

leftcoastfool's picture

"Housing Bubble II: Euphoria And Other Shenanigans"

"The smart money is once again running national radio ads on how-to-flip-houses shenanigans."


Never One Roach's picture
House Built on North Carolina Landfill Has Sinking Feeling






"There's never been a better time then now..."...oh, well, you know the rest....

Stuck on Zero's picture

I'm starting to get those notes in the mailbox: "We have a buyer for your house."


PiltdownMan's picture

Low inventory, low rates, lots of corporate money, lots of foreign money, tons of flippers.


RottenAlpha's picture
moneybots's picture

"Everybody loves bubbles."


So why do they get so upset when they burst?


Winston Churchill's picture

Because it always involves a prick(Ben).

the grateful unemployed's picture

at similiar historical moments, a new technology arises which renders all the old product obsolete, and while home building tech is somewhat slower to come up with innovations than Iphone tech, the possibility that new homes at much lower prices are just around the corner. those holding the deeds to older less ergonomic and more expensive buildings puts them in a precarious position. like the guy who bought up livery stables when henry ford was building his factory. (suggestion: some of the new housing techniques, like steel frames, enable the home owner to bolt together his own frame, from there the rest comes together)

Imminent Crucible's picture

"the home owner bolts together his own frame, from there the rest comes together"

As a framer and contractor for decades, I can tell you that framing the house ain't the hard part; I can't wait to see the sheathing throw itself on, the HVAC jump into place with ductwork all properly sized and balanced, the shingles nail themselves on properly with all valleys platted correctly, then the service entrance and meter socket snake themselves together, the home runs magically appear and every cable and receptacle pop itself in at the correct ampacity, windows & doors leap into place plumb and square, all the pex and DWV spring into place with all vents and stacks to code. The house insulates itself, sheetrock hangs and finishes itself.....

Oh, wait. You meant a do-it-yourself trailer.

Stuck on Zero's picture

You are so right.  Framing amounts to about 10% of the cost of the house and all the fabulous new housing inventions are to save 30% of that. In the end you end up with a non-standard house that no-one wants to buy.

It reminds me of the people who built their own sailboats from ferro-cement.  1000 hours of their labor would save them 30% over the price of a $30,000 fiberglass hull.  They would then go on to put in $200K worth of engines, electronics, wordwork, rigging, etc.   In the end they were left wth a very ugly, stinking heavy concrete sailboat that could barely make 3 knots in a gale. What savings.


Lost My Shorts's picture

Wood dry-rots.  Termites eat it.  Way over-rated.  Most of the world uses steel-reinforced concrete and wouldn't dream of building from wood.  In the old days in Florida, they used to build with cinder blocks, which look downscale, but don't suffer the mold wipeout that afflicts so many newer homes.  Standard can be stupid.

machineh's picture

Presumably North America is different, because it has huge forests and lumber is cheap.

But wood is an inferior material: over time, it settles and warps. Nail pops develop in the sheetrock. Rot and termites attack it.

My next house is going to be steel-reinforced concrete. Build it and forget it.

Imminent Crucible's picture

I'm a big fan of reinforced concrete/masonry housing. Most of the houses in Baja Cal, where I go each winter, are concrete and block. But then, they have two big problems down there: Lots of termites and lots of earthquakes.

All the sheetrockers I know use screws. Great invention; came out sometime before the RotoZip.

The_Dude's picture

Modular Homes are one way with constantly improving technology.  Plus the benefit is that they are built in a factory instead of with day laborers from the local 7-11.

LawsofPhysics's picture

"(suggestion: some of the new housing techniques, like steel frames, enable the home owner to bolt together his own frame, from there the rest comes together)" - right, because mining iron ore and steel fabrication isn't an energy intensive process.  Please...

New technologies can save us, but only if capital and resources have not been mis-allocated or mal-invested and are available to make the technology a reality.  Look around, you tell me, is humanity mis-allocating resources and capital?  Looks like a resonding yes to me, if only we had real markets that reflected true valuations (not mark to fantasy) and allowed for true price discovery.  

orez65's picture

"... if capital and resources have not been mis-allocated or mal-invested ..."

Is worse because much of the "capital" is fiat fraud.

g speed's picture

Most housing built in the last 10 yrs is in the berbs-- that in and of itself will be a major cause for the downfall of housing-- location----location-  

When the "american dream" is unworkable because of demographics, economics and access to the neccessities of life it will fold forever--

And when there are no more two stall garages to store that useless stuff bought on credit the whole house of cards will fall down--

With 70% of the American economy based on "stuff"--(consummer spending) you can guess whats left --   

Son of Loki's picture
It Has Begun: Suburbs Are Turning Into Slums


The New York Times has a front-page report today about the ballooning poverty rate in suburbs, which has surged 53% since 2000. That's compared with a 26% rise in cities. According to a new report from the Brookings Institution, 55% of the nation's poor who live in metropolitan areas now reside in suburbs.





Article is from 2011 but I see it all over now...2011 was just the beginning. These Mozillo-zero-down quick-built tract houses in the Burbs are turning into slums faster now since when they hit the 5-year mark when deterioration sets in quicker for these crappily built boxes. Rottsa Ruck with living in most suburbs...once nice places to live, now prime slums with subprime owners.

disabledvet's picture

ooops. do we even know another way at this point? i know i'm looking forward to an alternative. didn't have these problems after World War II as i recall...going on straight to Nixon actually. "then we discovered we didn't need to actually pay for things" (wink, wink, nod, nod.) "we're all market operators now."

mumbo_jumbo's picture

well, RE in southern california it is a no lose proposition, if price go up you get the equity, when they fall you just stop making payments and live rent free till the bottom is in, then take you your tint 3% down payment and try again....i've seen too many do this

LawsofPhysics's picture

Fuck california, New York, and Illinois, pretty clear that these states have benefitted tremendously from the ongoin corruption/fraud.  Moral hazard and unintended consequences...

Going to get interesting when the rocky mountain states shut off the power and water.

NihilistZero's picture

Well as a Kalifornian I can only say that most of it's citizens have NOT benefited from the Credit Bubble economy of the Greenspan/Bernanke era.  And there is little we can do to fix our political situation as the local GOP front runs the National Party in stupidity...  This has left us in the hands of the Socialist Democrats.  Luckily the CA GOP's suicide is almost complete so big business will have to find some willing Democrats to take their bribes.  At some point it will be the biz funded fiscal conservative/social liberal Dem versus the Union backed socialist Dem in every race.  Sadly this will be an improvement...

NotApplicable's picture

What's truly sad is that you act as if any of this matters, when in reality, if all of those type of people were gone, there would be any number of new and improved criminals/idiots to replace them.

Perhaps you should stop empowering this criminal enterprise with your support?

NihilistZero's picture

I'm a realist.  All politicians are whores and liars.  Burt the Socialist Dems DIRECTLY make my life harder by taking more of my money and fucking up neighborhoods with their welfare state shenanigans.  I have no love for either party but will continue to try and aleviate my suffering when I feel I can.  If that means voting for the slightly less socialist candidate, well, it is what it is.