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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.


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


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


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
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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



Pierre-Joseph Proudhon....father of Mutualism


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.

Wed, 07/09/2014 - 10:41 | 4939429 yogibear
yogibear's picture

Property taxes are already desttroying value in the major cities, Local governments think of the taxpayers as umnlimited ATMs they can always hit for more money.

Wed, 07/09/2014 - 11:09 | 4939547 thamnosma
thamnosma's picture

Plus, you don't get improved streets or infrastructure.  The taxes go to welfare, free shit for illegals, public employee salaries and pensions, and housing the youthful masses in public "schools".   If you don't have kids going to those schools, you essentially get NOTHING for those taxes.

Wed, 07/09/2014 - 11:42 | 4939669 ThirteenthFloor
ThirteenthFloor's picture

Esp. When they are so dumbed down on Flouride, bad education, stupid propaganda or just illegal and they are idiot enough to VOTE for more taxes (aka) Californication.

Wed, 07/09/2014 - 10:42 | 4939432 Bernoulli
Bernoulli's picture

For info:

Real estate in Switzerland went up for 20 years straight until now.

Prices are starting to come down. Houses are on the market around 6-9 months now versus 0-3 months some years ago. Buyers start to be able to negotiate prices DOWN.

Let's see how they produce a "soft landing" for the first time EVER. I'm curious.

Wed, 07/09/2014 - 11:50 | 4939699 Welder
Welder's picture

Let's assume that a property was bought for 100k CHF "il y a 20 ans". Now the selling price is 300k CHF. How much food, gas, electricity, clothes would buy 300kCHF today compared to 100k CHF 20 years ago ? I can do without gold but I need to eat every day, electricity to run the AC and "frigo", buy clothes and put petrol in my car. This is how I compute the relative prices and intrinsic values of properties over the years.


Bien cordialement,

 Le Soudeur

Wed, 07/09/2014 - 10:42 | 4939433 dontgoforit
dontgoforit's picture

'Nothing ever goes down' forever.  Nothing ever goes up forever either; however, the general rule is over the long haul, things do tend to go up, not down.

Wed, 07/09/2014 - 10:57 | 4939490 nixy
nixy's picture

>>'Nothing ever goes down' forever.  Nothing ever goes up forever either; however, the general rule is over the long haul, >>things do tend to go up, not down.


Well yes, that's how the bankers like it. It'a all about anxiety management. Banking should be renamed 'anxiety management'.

Wed, 07/09/2014 - 11:38 | 4939654 oklaboy
oklaboy's picture

like the price of computers, telvisions, and wages?

Wed, 07/09/2014 - 11:53 | 4939677 ThirteenthFloor
ThirteenthFloor's picture

yes if you print unlimited money, hard assets go up in paper money.  Real Estate is flat to down in past 100 years pegged against real  I look at all prices now in gold terms.

Wed, 07/09/2014 - 11:58 | 4939749 lincolnsteffens
lincolnsteffens's picture

Without defining the type of measuring stick you are using I can only assume you are using fiat consistently inflating currency. As measured by the purchasing power or exchange value of something tangible, things can go up or down.

Wed, 07/09/2014 - 12:13 | 4939793 meizu
meizu's picture

It's just an effect of inflation.  Overtime, more and more money are printed, thus in the long run, asset price will track the rate of inflation.  However if you think about, the real value of all assets should depreciate over time.  A house will slowly decay over time, all businesses eventually go banrupt, if you have a rock, should the real value of the rock increase over time?

Wed, 07/09/2014 - 12:23 | 4939862 Professorlocknload
Professorlocknload's picture

Not much goes down in value, except the dollar.

Wed, 07/09/2014 - 10:42 | 4939435 Took Red Pill
Took Red Pill's picture

So what do you do? Cash out now on your home only to be sitting on a pile of soon-to-be worthless dollars and you still need a place to live. At least if you own a home & land, you have a hard asset. Maybe it will be worth less soon but you have something tangible.

Wed, 07/09/2014 - 11:34 | 4939640 johnconnor
johnconnor's picture

Good point, but in Murika you don't own the land unless you have allodial title, that practically can only be optain in some areas of Texas. Remember that when you finally pay the mortgage, you only own the real state sitting on top of the land which is owned by the state, that's why they can Tax you rent (property taxes) on the land, because you don't own the land. Don't pay your property Taxes for a year or two and you will see how quickly the landlord will quick you out of the home you rent to the state

Wed, 07/09/2014 - 11:49 | 4939693 ThirteenthFloor
ThirteenthFloor's picture

During the German inflation...a man inherited his mothers house.  No loan.  He immediately got a loan in Deutsche Mark.  Immediately converted the DM proceeds into USD.  Paid off the loan in 5 years for one US DIME.

There is a lesson in that story.


Wed, 07/09/2014 - 10:42 | 4939439 buzzsaw99
buzzsaw99's picture

This should make us wonder what will happen when the Fed's mortgage purchases finally end...

when? finally?

Sorry but I can never take this guy seriously.

Wed, 07/09/2014 - 10:58 | 4939493 Winston Churchill
Winston Churchill's picture

Either they kill the USD as GRC by continuing to buy both MBS ,and UST's,or

they bankrupt Uncle Scam.

As their personal survival is on the line, its not a hard choice.

Tough shit Uncle Scam.

Wed, 07/09/2014 - 11:11 | 4939553 LawsofPhysics
LawsofPhysics's picture

Well, personally I am looking forward to putting all of Uncle Sam's tax collectors out of work.  But that's just me.

Wed, 07/09/2014 - 10:45 | 4939445 RiskyBidness
RiskyBidness's picture

Great charts Tyler!!  

Wed, 07/09/2014 - 10:53 | 4939474 Bioscale
Wed, 07/09/2014 - 10:47 | 4939452 ArkansasAngie
ArkansasAngie's picture

I own rental units.  I've also not bought one for over a year now because the prices no longer meet my cap rate requirements.

So ... yes ... those who are buying at current prices are over paying.

And ... by golly ... if a penny of my money is used to bail out these investors ... read Blackrock et al ... I will be extremely pissed.

We need the crash now ... before the elections.  

Leave no incumbent in office.

Wed, 07/09/2014 - 10:59 | 4939508 maskone909
maskone909's picture

Leave no office incumbent

Wed, 07/09/2014 - 11:30 | 4939614 LawsofPhysics
LawsofPhysics's picture

Two points;

1)  Voting them out so that they may retire to K-street or their own private island accomplishes nothing.

2) Replacing one corporate spokesperson with another accomplishes nothing.

Things only get better once all people face real consequences for their bad behavior.

Let me be clear, until we leave no incumbent alive nothing changes.

Wed, 07/09/2014 - 19:47 | 4941427 daveO
daveO's picture

Artificially low interest rates are subsidizing them, now. Forget about bailouts. That's just adding insult to injury.

Wed, 07/09/2014 - 10:51 | 4939466 disabledvet
disabledvet's picture

"Housing" is unique because of how capital intensive it is. This is true from the time of ownership through time of owning all the way to the point of sale...if we ever get to the point (where we just give it away.)

In short "abandonment." Keep it simple folks: "there is no such thing as a housing market." The accountants put that sucker on the wrong side of the ledger.

Wed, 07/09/2014 - 11:00 | 4939512 Itchy and Scratchy
Wed, 07/09/2014 - 11:07 | 4939533 pazmaker
pazmaker's picture

The only thing I can say to this is I looked at my purchase as a shelter purchase not an investment.  It provides shelter for my family and food because we raise a alot of our our own food...beyond that I am still beholding to the county for the taxes.

Wed, 07/09/2014 - 11:20 | 4939578 rosiescenario
rosiescenario's picture

Home prices and rental rates are regionally driven and more a function of the health of the regional economy....just compare Detroit to Palo Alto.


If you wish to study the U.S. housing market, you need to analyze it region by region and then add up the results....California itself is a good example of that since once one gets outside of a reasonable commute to the Bay Area, home prices and rents go down by 50% or more.


Looked at this way, home prices and rents are more a function of the health of the local economy. Looking again at the SF Bay Area, a major portion of our boom in home prices is being driven by silly valuations on Wall St. which results in wealth creation for option holders  in various high tech companies around this region. Take away that source of funding, and home prices along with rents would drop significaantly, but would still be far above other locales (such as Detroit) since the general underlying economy (even without the turbo charging of Wall Street stock and option prices) is far stronger.

Wed, 07/09/2014 - 12:58 | 4940083 Clowns on Acid
Clowns on Acid's picture

look at who runs the political environment in Palo Alto and then Detroit .. has little to do with actual, objective economics.

Wed, 07/09/2014 - 11:23 | 4939582 apberusdisvet
apberusdisvet's picture

The old metric of 2.5 times gross income for hosing affordability is even more true today.  At median household income of $47k, that means an average $117k home.  Unfortunately the median sales price currently is double that number.

Wed, 07/09/2014 - 11:25 | 4939594 I Write Code
I Write Code's picture

You sure talk a lot.  Let's see if I can simplify.

In "normal" times probably not seen since about 1980 real interest rates are positive, so inflation is 2% and mortgages are 4%, but Joe Blow can leverage this by buying a house, put 20% down on a $30,000 house, get the 2% appreciation on $24,000 while living in it at about break-even prices.

But when inflation is 5% and mortgages are 5% so money is free and you don't even need a down, every fool will borrow every penny and sign all the mortgages in town because you get 5% appreciation on the full $30,000 only now it's $600,000 and who even *cares*?

It is NOT a greater fool theory, it is a fool of a central banker theory.  The banksters have blown a bubble, it did not even depend on the madness of mobs, unless "mob" is the term for a herd of banksters.  When the money is free NOBODY cares about the nominal price. Until and unless the system hiccups and suddenly the carry breaks. 

In 2008 the system (sic) hiccuped.  The carry broke.  And it turned out it was a permanent hiccup, the real hiccup had happened twenty years earlier and only the Fed-mediated bubble had hidden the fact. In some books, that means what they did was right.  Or right-ish.  I'm not so sure either way, actually.  Since then the Fed has been trying to fix the carry, and they got that, and they too are somewhat undecided about trying to reinflate the bubble.  The issue is they think they *can* reinflate the bubble, they're just not sure they want to.  In fact they may be WRONG and they CANNOT reinflate the bubble.

And that brings us to the present.

Wed, 07/09/2014 - 14:32 | 4940453 novictim
novictim's picture

Now that had the right flavor.  Well done.  I write the below message to the others here on ZH:

To those of you who are not sure what the downside is to house-price inflation ("housing bubble") then let me spell it out.  Radically inflated home prices bring in high fees and increased interest income to the banks...the banks cannot lose.  And the rest of us become poorer.

Meanwhile, the home buyer/owner never had a spike in their salary/income.  These prices leave them house-poor.  This home-poverty leads to a decline in community spending.  Sp not only does the house deteriorate with postponed upkeep due to the home-owner being broke but the local restaurants and businesses see a decline in purchases as their customers lack spending money.

Again, the banks do well.  Wealth is transferred from the home owner and the local businesses to to the wealthiest fortunate few.  

This is some of what we should consider when we let our banks and FED policy jack up the housing market.

Wed, 07/09/2014 - 12:04 | 4939771 Sick
Sick's picture
Chinese Cash-Bearing Buyers Fuel $22 Billion in U.S. Home Sales

Lost our jobs now they will buy our country.  I hope to move soon.

Wed, 07/09/2014 - 12:05 | 4939777 Sick
Sick's picture

My pitchfork goes bang.

Wed, 07/09/2014 - 12:12 | 4939802 novictim
novictim's picture

Nice article but all this could have been said 5 years ago too.

The question of "WHEN", and NOT "how" the housing bubble will burst needs to be answered.  We know that the market is rigged but can it go on like this for the next decade?  Maybe "yes"?

This "market" (what a wrong term!) is a house of cards.  Yet in the heated California markets we see today continued price stability.  

The Government is encouraging the criminals from the East to deposit their bags of stolen wealth into US real estate so as to out bid the US public.

The banks and investment companies are a factor, too, that needed addressing. This analysis left out the 5million homes still in foreclosure TODAY and the 26% increase in foreclosure fillings YOY just this May.  The Government is propping these investors up with hidden subsidies and preferential treatment in order to maintain the bubble.

Prices are rising yet applications by plain old Americans for a mortgage are at all time lows.  

Builders are not building and homes that should be open for sale are kept off the market.

This has been maintained for 5 years or more now.  How do we know it cannot go on and on forever?  Seriously, what is the immediate and long term prognosis?  No idea.



Wed, 07/09/2014 - 12:13 | 4939812 bobcromwell
bobcromwell's picture

it's time proven, follow ZH recommendations for 5 years and you're broke

Wed, 07/09/2014 - 14:09 | 4940354 syntaxterror
syntaxterror's picture

I haven't bought a $700,000 house yet so I guess I'm broke.

Wed, 07/09/2014 - 12:25 | 4939880 22winmag
22winmag's picture

FannieWatch was sounding the alarm back in 2001 when the debit:equity ratio for Fannie and Freddie was allowed to go vertical.


Nothing new under the sun.

Wed, 07/09/2014 - 12:38 | 4939962 novictim
novictim's picture

NOt everything is what it seems.

Recall that Fannie Mae did not lead but FOLLOWEd the private banking sector into tapping the seemingly  lucrative Sub Prime market.  Congress was influential in driving the otherwise conservative Fannie into this in order to boost home ownership rates.

Compounding this, Fannie was then directed to buy up the sour MBS to relieve the private banking sector.  Is this a element of Crony-Capitalism?  Yes it is.

If we fixed our political system by overcoming the SCOTUS and enacting constitutional changes to limit the power of money on our campaign finance system...then we might have a chance to right this ship.

Wed, 07/09/2014 - 12:48 | 4940031 fiboman
fiboman's picture

Everything is relative.US Real Estate WILL outperform SPX and possibly Gold until early 2016...

Wed, 07/09/2014 - 13:45 | 4940238 NihilistZero
NihilistZero's picture

So in other words you expect the stock market crash to front run the RE bubble pop?  THat's not much of an argument for being in what it a VERY illiquid asset.  I suspect the RE bust has already begun.  This year is mirroring 2007 financially in tenor and tone.

Looks like Obama gets stuck with 2 years of chaos, GWB got offf easy with one.

Wed, 07/09/2014 - 13:17 | 4940148 Be_Optimistic
Be_Optimistic's picture

At the end of the day you need a place to sleep

Wed, 07/09/2014 - 14:10 | 4940360 syntaxterror
syntaxterror's picture


Wed, 07/09/2014 - 19:41 | 4941409 daveO
daveO's picture

There's WMT's revival play. Selling more Chinese made tents!

Wed, 07/09/2014 - 16:52 | 4940916 honestann
honestann's picture

Nothing magic or obscure about this phenomenon.  When the predators-that-be drive the largest expense of 99% of the population to insane levels... those folks have nothing left over after mortgage or rent payments to spend on anything else.  Which means... the economy dies.

No way around this simple fact.

The fact is, super LOW home prices are what make the overall economy robust, not super HIGH prices.  All super HIGH home prices cause is... enormous, overwhelming, economy-killing debt (and very temporary boost in short term economic activity that is pulled forward from the future).

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