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Why Housing Will Crash Again - But For Different Reasons Than Last Time

Tyler Durden's picture




 

Submitted by Chalres Hugh-Smith of OfTwoMinds blog,

Institutionalizing the speculative excesses that inflated the previous housing bubble has fed magical thinking and fostered illusions of phantom wealth and security.

The global housing market has been dominated by magical thinking for the past 15 years. The magical thinking can be boiled down to this:

A person who buys a house for $50,000 will be able to sell the same house for $150,000 a few years later without adding any real-world value. The buyer will be able to sell the house for $300,000 a few years later without adding any real-world value. The buyer will be able to sell the house for $600,000 a few years later without adding any real-world value.

And so on, decade after decade and generation after generation: a house should magically accumulate enormous capital (home equity) without the owner having to do anything but pay the mortgage for a few years.

The capital isn't created by magic, of course: it's created by a greater fool paying a fortune for the house on the speculative confidence that an even greater fool will magically appear to pay an even greater fortune for the same house a few years hence.

This is the result of housing transmogrifying from shelter purchased to slowly build equity over a lifetime of labor into a speculative bet that credit bubbles will never pop. This transmogrification is the final stage of the larger dynamic of financialization, which turns every asset into a speculative commodity that can leveraged via debt and derivatives and sold into global markets.

The magic of something for nothing is especially compelling to a populace whose earnings have stagnated for decades. The housing bubble fed the fantasy that a household could set aside next to nothing for retirement and then cash out their "winnings" in the housing casino when they reached retirement age.

What believers in the sustainability of the housing casino conveniently ignore is the enormous risk (and debt) being taken on by the last greater fool: if the buyer pays cash, they are gambling on rents continuing to skyrocket along with home valuations, though these two are not as correlated as many assume.

Younger buyers have less disposable income than their elders due to deteriorating wages, higher student loan debt and higher taxes on earned income. As a result, the risk of their defaulting or being impoverished by the collapse of housing valuations is much higher than the risks faced by the buyers who rode the first bubble up to (ephemeral/phantom) riches.

The only way a young household can buy a $150,000 house for $600,000 is if interest rates are low enough to enable a modest income to leverage a huge mortgage. This is the basis of the Federal Reserve's campaign to buy Treasury bonds and mortgages: by driving interest rates to unprecedented lows, the Fed enables marginal buyers to become the last greater fool.

The first housing bubble circa 2001-2008 inflated as a result of financialization. The second, current echo-bubble has inflated on the socialization of financialization: the FHA and other government agencies have essentially taken over the entire mortgage market, guaranteeing or backing 95% of all mortgages, while the Fed has pushed rates down to historic lows to enable marginal buyers to make bets in the housing casino.
The current echo-bubble has another speculative source: cash buyers of homes to rent. About a third of all home sales in many markets are cash buyers, speculators hoping to cash in on the bubble by selling to a greater fool, or investors seeking the safe returns of rental housing.

Unbeknownst to the majority of these investors, there is no guaranteed return in rental housing when you overpay for the property and a recession guts demand for rentals. This is another form of magical thinking: nothing ever goes down.

The stock market goes higher forever, housing goes higher forever, and the Fed has banished recessions forever. If this isn't magical thinking, then what is it? Faith in the New Normal? Based on what?

Let's quantify the magical thinking and the echo bubble with a few charts. Home prices are still 130% above pre-bubble valuations.

Declining mortgage rates (courtesy of the Fed) fueled the first housing bubble and the current echo-bubble.

Measured by houshold earned income, mortgage debt is more than double the historic average of wages-to-mortgage-debt.

Take a look at the Fed's purchases of mortgages: from zero to $1.2 trillion, and then another $800 billion for good measure. The Fed has intervened in the Treasury market to the tune of almost $2 trillion to suppress interest rates.

The Fed's pause in mortgage purchases caused the housing market "recovery" to nosedive. This should make us wonder what will happen when the Fed's mortgage purchases finally end.

Relying on greater fools and expecting the rental housing market to magically ignore the ravages of recession for the first time in history is not a formula for financial or speculative success. The current echo-bubble in housing will pop, just like every other leverage/credit-fueled speculative bubble in history.

Institutionalizing the speculative excesses that inflated the previous housing bubble has fed magical thinking and fostered illusions of phantom wealth and security. The damage that will be unleashed by the echo-bubble deflating will be substantial, and in line with the The Smith Uncertainty Principle, not as predictable as many imagine:

The Smith Uncertainty PrincipleEvery sustained action has more than one consequence. Some consequences will appear positive for a time before revealing their destructive nature. Some consequences will be intended, some will not. Some will be foreseeable, some will not. Some will be controllable, some will not. Those that are unforeseen and uncontrollable will trigger waves of other unforeseen and uncontrollable consequences.

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Wed, 07/09/2014 - 10:36 | 4939410 LawsofPhysics
LawsofPhysics's picture

Edit:  Real capital is the product of savings and real work. - fixed.

These morons still think "capital" can be created out of thin air.

Wed, 07/09/2014 - 10:43 | 4939437 bh2
bh2's picture

Exactly right. "Economists" think debt is benign as a factor affecting economic performance. They are wrong.

Wed, 07/09/2014 - 10:50 | 4939463 ArkansasAngie
ArkansasAngie's picture

Capital is wealth.  Debt is a liability.

Screw'em

Wed, 07/09/2014 - 11:18 | 4939571 ratso
ratso's picture

IN the abscence of inflation adjusted numbers this study is a complete was of reading time.

Wed, 07/09/2014 - 11:41 | 4939663 jbvtme
jbvtme's picture

thus the push to raise the minimum wage

Wed, 07/09/2014 - 11:42 | 4939666 jbvtme
jbvtme's picture

remove

Wed, 07/09/2014 - 11:23 | 4939583 Carl Spackler
Carl Spackler's picture

The author lost me at "The global housing market has been dominated by magical thinking for the past 15 years."

While capital may be "globally mobile," real property is not. 

All real estate is local and subject to the laws (or lack thereof) of the sovereign jurisdiction in which it is located. In the absence of law, real property value is based on the power of one's army to defend it or to acquire more. For example, an American with capital cannot buy land in China or land along the beach in Mexico. Local law prohibits such.

Wed, 07/09/2014 - 13:15 | 4940130 Kirk2NCC1701
Kirk2NCC1701's picture

"an American with capital cannot buy land in China or land along the beach in Mexico. Local law prohibits such."

Thank god for that!

Wed, 07/09/2014 - 15:55 | 4940754 fast and furious
fast and furious's picture

Not when it comes to financing.  You are confusing price elasticity, (local) with mortgage funding, ( national for the most part).  Since most mortgages have been forced into conforming configurations for several decades, the local influence is minimal, and concentrated in smaller, local banks and coops.  But many of them have been bought in recent years, so my point remains...funding is national.  funding controls pricing in the end, local valuations notwithstanding.

Wed, 07/09/2014 - 11:23 | 4939584 Carl Spackler
Carl Spackler's picture

The author lost me at "The global housing market has been dominated by magical thinking for the past 15 years."

While capital may be "globally mobile," real property is not. 

All real estate is local and subject to the laws (or lack thereof) of the sovereign jurisdiction in which it is located. In the absence of law, real property value is based on the power of one's army to defend it or to acquire more. For example, an American with capital cannot buy land in China or land along the beach in Mexico. Local law prohibits such.

Wed, 07/09/2014 - 11:23 | 4939585 Carl Spackler
Carl Spackler's picture

The author lost me at "The global housing market has been dominated by magical thinking for the past 15 years."

While capital may be "globally mobile," real property is not. 

All real estate is local and subject to the laws (or lack thereof) of the sovereign jurisdiction in which it is located. In the absence of law, real property value is based on the power of one's army to defend it or to acquire more. For example, an American with capital cannot buy land in China or land along the beach in Mexico. Local law prohibits such.

Wed, 07/09/2014 - 11:49 | 4939659 jbvtme
jbvtme's picture

delete

Wed, 07/09/2014 - 13:55 | 4940292 Clowns on Acid
Clowns on Acid's picture

If your Capital wealth is in USD (or any fiat curreny for that matter) the Int'l "bankers" will turn cash into a liability via inflation (printing of more fiat).

Ergo, bubbles in hard assets real estate, land, stawks, etc... and those who cannot meet the debt payment , you are out of the greater fool game.

Wed, 07/09/2014 - 18:11 | 4941162 realWhiteNight123129
realWhiteNight123129's picture

YOu mean today´s economists. Before we had practioners of banking, talking about the currency principles. Those guys were  smart enough to survive banking crisis without bailouts and under the threat of unlimited personal liability against depositors, and also jail time in case they could not cover. So... those guys never ignored credit in relation to currency. The neo-classical ignoring money, credit, interest and banking are just RETARDED. Money or credit is on the other side of each transaction, while teh other side is good or services or financial assets. It is like talking about procreation without talking about sex.

Wed, 07/09/2014 - 10:37 | 4939414 stant
stant's picture

property taxes will destroy it. just like it did in rome

Wed, 07/09/2014 - 10:41 | 4939431 LawsofPhysics
LawsofPhysics's picture

Just like Rome, "taxes" that cannot be collected are fucking meaningless.

Wed, 07/09/2014 - 10:57 | 4939491 maskone909
maskone909's picture

This is correct. See laffer curve

Wed, 07/09/2014 - 13:51 | 4940266 Clowns on Acid
Clowns on Acid's picture

See Detroit....

Wed, 07/09/2014 - 11:09 | 4939543 Zirpedge
Zirpedge's picture

All taxation should be based on land taxes. Land is the commons from which all productive labor springs. A tax system derived solely from land encourages productive use of land. Tax derived from labor encourages non-productive land usage and speculation on holding land for ransom from a disenfranchised labor class. (Neo-Feudalism)

 

Wed, 07/09/2014 - 11:35 | 4939643 oklaboy
oklaboy's picture

except for the little fact that if you tax land, you never own it. you just rent it from the Gubmint. Don't pay your tax, off to tax sale it goes. What if I want not to produce anything on my land, just crickets and weeds?

Wed, 07/09/2014 - 12:15 | 4939826 Spastica Rex
Spastica Rex's picture

I'm sure you have a gun - just shoot anyone who trespasses.

That's real ownership, BTW.

Unfortunately, the gubmint has way more and way bigger guns than you, and all your friends combined. They own you and your property right now, sorry to say.

Wed, 07/09/2014 - 12:24 | 4939874 Zirpedge
Zirpedge's picture

@Spacista "Just shoot anyone who tresspasses"

You are obviosly a liberal troll who wants to make gun owners look unreasonable and dangerous. 

Anyone who supports gun rights would take a more reasoned approach to border violations on private property. 

Wed, 07/09/2014 - 12:52 | 4940052 Spastica Rex
Spastica Rex's picture

I'm known to be sardonic, but rarely trollish.

Wed, 07/09/2014 - 15:14 | 4940612 Zirpedge
Zirpedge's picture

You definitely make gun rights look bad. Congrats, go hi five Nancy Pelosi.

Wed, 07/09/2014 - 12:21 | 4939843 Zirpedge
Zirpedge's picture

Non-productive land use should be punished. Don't get me wrong, I like tumble weeds and crickets all the same, but why do you feel compelled to own them? Would they cease to exist if you didn't privately own that land?

Also, when I support a tax system solely based on land use, I am talking about a limited Fed Gov that supplies vital infrastructure..roads, power lines..etc. things that local communities would not be able to collaborate on a large scale across so many borders. Your concept of "Gumbint" is based upon the bohemoth we have before us..not the one I propose that would be supported solely on land taxes.

Wed, 07/09/2014 - 12:32 | 4939926 Jumbotron
Jumbotron's picture

Mutualism

https://en.wikipedia.org/wiki/Mutualism_%28economic_theory%29

 

Pierre-Joseph Proudhon....father of Mutualism

https://en.wikipedia.org/wiki/Pierre-Joseph_Proudhon

 

In the posthumously published Theory of Property, he argued that "property is the only power that can act as a counterweight to the State." Hence, "Proudhon could retain the idea of property as theft, and at the same time offer a new definition of it as liberty. There is the constant possibility of abuse, exploitation, which spells theft. At the same time property is a spontaneous creation of society and a bulwark against the ever-encroaching power of the State."[36]

He continued to oppose both capitalist and state property. In Theory of Property he maintains: "Now in 1840, I categorically rejected the notion of property...for both the group and the individual", but then states his new theory of property: "property is the greatest revolutionary force which exists, with an unequaled capacity for setting itself against authority..." and the "principal function of private property within the political system will be to act as a counterweight to the power of the State, and by so doing to insure the liberty of the individual." However, he continued to oppose concentrations of wealth and property, arguing for small-scale property ownership associated with peasants and artisans. He still opposed private property in land: "What I cannot accept, regarding land, is that the work put in gives a right to ownership of what has been worked on." In addition, he still believed that that "property" should be more equally distributed and limited in size to that actually used by individuals, families and workers associations.[37] He supported the right of inheritance, and defended "as one of the foundations of the family and society."[38] However, he refused to extend this beyond personal possessions arguing that "[u]nder the law of association, transmission of wealth does not apply to the instruments of labour."[39]

As a consequence of his opposition to profit, wage labour, worker exploitation, ownership of land and capital, as well as to state property, Proudhon rejected both capitalism and communism. He adopted the term mutualism for his brand of anarchism, which involved control of the means of production by the workers. In his vision, self-employed artisans, peasants, and cooperatives would trade their products on the market. For Proudhon, factories and other large workplaces would be run by "labor associations" operating on directly democratic principles. The state would be abolished; instead, society would be organized by a federation of "free communes" (a commune is a local municipality in French). In 1863 Proudhon said: "All my economic ideas as developed over twenty-five years can be summed up in the words: agricultural-industrial federation. All my political ideas boil down to a similar formula: political federation or decentralization."[40]

Proudhon opposed the charging of interest and rent, but did not seek to abolish them by law: "I protest that when I criticized... the complex of institutions of which property is the foundation stone, I never meant to forbid or suppress, by sovereign decree, ground rent and interest on capital. I think that all these manifestations of human activity should remain free and voluntary for all: I ask for them no modifications, restrictions or suppressions, other than those which result naturally and of necessity from the universalization of the principle of reciprocity which I propose."[41]

Wed, 07/09/2014 - 15:38 | 4940709 Zirpedge
Zirpedge's picture

Interesting, I was going for Geolibertarianism. John Payne, Henry George (Georgism), John Locke.

 

The "commons" has become such a Red Herring. The brian washing is so complete that people think you must be a socialist or communist to suggest that humans could equally lay claim to the earth and that they would be born with inalienable rights.

Wed, 07/09/2014 - 14:17 | 4940390 BlindMonkey
BlindMonkey's picture

You have a lot to learn about the concept of private property.  In your world, everyone rents their land from .gov and will pay or be shoved off at bayonet point.  

 

 

Wed, 07/09/2014 - 15:23 | 4940651 Zirpedge
Zirpedge's picture

BM. Rent is one thing and tax is another. I think your confused.

Re: force to remove people from land...the current system is an abomination. In Albequerqe NM police shot a homeless man in the back the other day (claimed he presented an imminent threat and then said it felt awesome to kill the man) because they were enforcing a claim of the federal governemnt to the land he wanted to camp on to get rest. That government felt it was more effective to kill the man than to relocate him to a shelter by force. If your defending that concept of private property, god help you.

The limited federal government I envision would not enforce such a land claim with violence. For example Yellowstone (Currently a national park paid for with tax dollars extracted from your labor) could be privately owned and run like a business, a business that understands it is selling the natural environment (product) to patrons for their enjoyment. Hence the motivation to protect it, it is their product.

 

Fri, 07/11/2014 - 09:01 | 4946737 BlindMonkey
BlindMonkey's picture

Your double red herrings won't work here my man. Stay on point: what you call a "tax" I call "rent". In your method there is no difference.

Wed, 07/09/2014 - 14:40 | 4940481 Turin Turambar
Turin Turambar's picture

"Non-productive land use should be punished."

Uh, how about you just mind your own damn business and leave me and my life, liberty, and just property alone?  Friggin authoritarians.  I could give a rats arse whether or not you think my use of my own property fits your subjective evaluation of "productive."

Wed, 07/09/2014 - 15:33 | 4940695 Zirpedge
Zirpedge's picture

Land best represents the commons. People are born with rights, do you agree? The earth, all land, is shared collectively among all humanity. Could you agree that it is our responsibility to protect the Earth and all land. I could reference Genesis but this isn't about religion it's a matter of respecting humanity and human rights. Labor applied to the land brings a yield. If you choose to privately hold land (which I agree you can and should do productively) you are hopefully not parking junk cars on it and letting the weeds grow because you won't develop much yield. Are you following so far? You can both privatly own land and pay land taxes owed to the commons in such a system. Labor is a more corrupt way to tax a laboring class which benefits non-productive land holders. Hence holding land for ransom. There is great info out there about Geolibertarianism. Before you chest thump about me being an authoritarian, maybe you want to not jump to conclusions about me infringing upon your "life, liberty or property". I don't, I am simply asking you to evaluate a more just tax system for a limited federal government. Because a Fed Gov does do productive things, it's easy to with this current fed gov to miss that pont and focus on the negativity and squndered resources.

 

My proposed tax system does not apply a subjective interpretation, it's on you to figure out if your land use is productive enough to cover the tax costs. It's motivational and doesn't entitle a non-productive class to sqaunder resources.

 

Peace and god bless.

Wed, 07/09/2014 - 19:05 | 4941285 Turin Turambar
Turin Turambar's picture

Tragedy of the Commons, Einstein.  LOL

Wed, 07/09/2014 - 12:25 | 4939883 Jumbotron
Jumbotron's picture

And exactly where can you go now in America where you don't pay property tax now?

You also believe in the fallacy that there can be true ownership of ANYTHING.  That has never happened in history and it has never happened in America.  And it CERTAINLY is not happening now.

Wed, 07/09/2014 - 17:56 | 4941109 Zirpedge
Zirpedge's picture

I can't tell if your talking to me. I never said there weren't property taxes. I said a limited fed gov should derive their sole tax revenue from land taxes.

I never said you can own title to land without being responsilbe for your tax liabilities, or any asset for that matter. 

 

Wed, 07/09/2014 - 18:11 | 4941161 FredFlintstone
FredFlintstone's picture

On a sailboat in Key West?

Wed, 07/09/2014 - 15:01 | 4940553 zuuma
zuuma's picture

"A tax system derived solely from land encourages productive use of land. "

Except, of course, when you have:  EPA, DNR, BLM, Local Zoning, etc., etc. -- all of which exist to either forbid outright or at the least extract some sort of graft to use "your" property.

Using your land is contingent on favorable politics, nowadays.

Wed, 07/09/2014 - 18:03 | 4941140 Zirpedge
Zirpedge's picture

If building codes were in the interest of cost efficiency all our homes would be cast in place concrete, being strong enough to sustain hurricane force winds and tornadoes at 1/4 the cost. Such a building is classified as a "military bunker" and expressly forbidden. As for the EPA and BLM under a land use tax system, the federal government would need to relinquish it's claim to all "federal" lands. They are rightfully the peoples, and so it is with mineral rights under such a system, shared collectively and responsibly maintained in the peoples interest.   

Wed, 07/09/2014 - 18:10 | 4941160 FredFlintstone
FredFlintstone's picture

Cast-in-place would be a cost premium over a traditional wood frame house. I am not aware of a building code that forbids this type of construction.

Wed, 07/09/2014 - 19:01 | 4941269 Zirpedge
Zirpedge's picture

I'm sure that's why they are all the rage in the third world, because they cost more. You really think framing all those 2x6 is easier than pouring concrete into a form? Look at some photos of tornado damage and find the commercial buildings that are still there. Think the building code is there for your protection?

Wed, 07/09/2014 - 20:13 | 4941516 daveO
daveO's picture

Artificially low interest rates are allowing corporate landlords to snatch up the housing at a discount. That's my definition of serfdom. The property taxes are a side show in the big tent, IMO. Once corporations own enough property, the taxes will get lowered at their insistence and bribery(which will amount to nearly as much as the taxes that they were paying). The difference will come out of income taxes and inflation(savers). The Fed gov. survived mostly on import tariffs for a century. That protected US businesses and workers, at the same time.   

Wed, 07/09/2014 - 13:19 | 4940156 Kirk2NCC1701
Kirk2NCC1701's picture

"Collection Problem"?  No problem.  When you can't pay the ever-rising property taxes (property rent) to your Neo-Feudal Lords, their henchmen (courts and LEAs) will take it from you.  As was intended and planned, per intro of Central Banking (The Fed) and fiat currency and Neo-Slavery to fiat debt.

Same as it ever was.  Until you start hanging said Lords. 

Wed, 07/09/2014 - 10:37 | 4939416 stant
stant's picture

property taxes will destroy it. just like it did in rome

Wed, 07/09/2014 - 10:39 | 4939423 Millivanilli
Millivanilli's picture

Repeat after me.

 

Home owners are sophisticated renters.  Your landlords are the bankers who demand property taxes meaning that you NEVER WILL HAVE SECURE SHELTER.  They like to have us always stressed.

 

By driving up real estate it keeps the 2nd tier renters paying more and thus increasing their stress levels. They like people stressed and unfocused BECAUSE...  

 

IT ALLOWS THEM TO CONTINUE FUCKING US WITH MONETARY POLICY.  Can't make rent... argue with your wife, girlfriend, partner etc.   Using credit to buy food andpay electricity bills repeat step 1.     Whatever you do, DO NOT FOCUS ON THE PARASITIC CENTRAL BANKERS AND THEIR PROGENY!!!

 

 

Wed, 07/09/2014 - 10:55 | 4939479 maskone909
maskone909's picture

I will add that they want us to have a drug habit (legal or not) and a criminal record too. This of course, is a consequence to the above mentioned stress factor.

Wed, 07/09/2014 - 11:44 | 4939673 ParkAveFlasher
ParkAveFlasher's picture

1) The drug habit is analogous to the usage of fiat currency, which is mandated by the collection of property taxes.  Taxes payable only in Fed-issued notes ensure demand of said Fed-issued notes.

2) Taxes paid annually amount to huge sums over the life of a mortgage, probably balancing the calculation of financing the mortgage in the first place.  Thus having a mortgage which rolls in taxes is encouraged, another insurance policy for currency demand.

Wed, 07/09/2014 - 11:00 | 4939515 chunga
chunga's picture

Inflating the price of homes to falsely create home equity works great for the black hats.

A lot of people are broke so they are encouraged to borrow against that home equity. Remember, the easiest way to steal money from people who dont have any is...

Just give it to them!

Presto! Debt slaves! Why the fuck not? The money the black hats give out is printed out of thin air anyways. And then? Rehypothecate the living shit out of that debt until they're blue in the face and call it an awesome "financial innovation".

Wed, 07/09/2014 - 19:59 | 4941472 daveO
daveO's picture

Bankers are now discriminating against their student loan 'debt slaves'. I heard, today, about a couple where the guy had $20K+ in SL's. He and his wife couldn't get a home loan, but his wife could without him on the title! That bankruptcy law change is now biting them in the ass. Hah! 

Wed, 07/09/2014 - 11:38 | 4939653 ThirteenthFloor
ThirteenthFloor's picture

To add...."Investors find Value in Slum-Housing as Best US Investment".

Lowest risk - highest return.  Profiting from economic degeneration built in by the bankster tax system.

Depreciated construction value + depreciated improvement + multiple return on rental (withdrawn from maintenance cycle).

By squeezing higher rental and lower maintenance cycle, slumlords yield highest return on investment as housing decays.

Meanwhile while trying to stay afloat RENTERS forget there is someone pulling down on their ankles.

Wed, 07/09/2014 - 13:36 | 4940213 NihilistZero
NihilistZero's picture

...slumlords yield highest return on investment as housing decays.

And this is why i get such great schadenfreude from Donald Sterling's public humiliation.  Karma got his old decrepit ass.   And all his rentier class wealth and power can't bring back his dead drug addict son.

Fuck the rentiers and all they represent.  They could not survive anarchy.

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