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Housing Bubble 2.0 Exposed (In 1 Simple Chart)
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Now the gap between real house prices and real earnings is even wider than it was in Housing Bubble 1.
We know two things about housing bubbles: they always pop, with devastating consequences, and apologists and pundits always deny housing is in a bubble. And so it is no surprise that here we are in Housing Bubble 2, the second housing bubble of the 21st century, and the usual suspects are denying housing is in a bubble.
Courtesy of longtime correspondent B.C., we have a chart that not only identifies housing bubbles but explains why they inevitably collapse.
I know this will come as a great shock to apologists and pundits who have never seen a bubble until it has imploded, but the income of buyers actually matters in housing.
We have become so accustomed to housing being propped up with 3% down-payment FHA loans, foreign buyers paying with cash and Fed-favored financiers buying 10,000 homes to rent to former homeowners that we tend to forget that in the longer term, housing sales depend on buyers with enough income to pay the mortgage, property taxes, repairs, etc.
This chart reveals the tight correlation between real (i.e. adjusted for inflation) new house sales prices and real wages/salaries. Every time house prices get ahead of earnings, house prices decline sharply. Since these are real prices/wages, they go down when prices/wages don't keep up with inflation. So while nominal house prices didn't sag much in the late 1960s as inflation took off, they fell sharply when adjusted for inflation.
House prices fell again in the late 1970s when they briefly exceeded the growth of earnings.
An extended period of housing prices soaring above earnings in the late 1980s was followed by a slump in housing in the early-to-mid 1990s.
Housing (black line) is relatively cheap when it is well below earnings (red line). Housing was an attractive buy in 1970, 1982 and the mid-1990s, when earnings rose in the dot-com era.
Housing Bubble 1 is clearly visible as house prices skyrocketed far above earnings in the 2004-2008 period. The gap between house prices and earnings widened to an unprecedented degree, and this extreme resulted in an equally unprecedented crash in housing valuations.

Now the gap between real house prices and real earnings is even wider than it was in Housing Bubble 1. History (and common sense) suggest that housing prices will once again fall sharply until the black line of house prices is well below the red line of real earnings.
To expect anything different is unrealistic and highly dangerous to one's financial well-being.
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We just need a few more Chinese buying over-priced tar paper shacks and we'll reach Nirvana.......
I think God is PISSED. We keep doing these false flags to blame Muslims and thereby create a genetral hatred for an entire group of people. So don't think there's no spiritual consequence for this demonization which is being manifested in our economy >> http://wp.me/p4OZ4v-tt
Tyler lets anybody post, these days.
BlueViolet, please return to your safespaces with the BLM groups at Yale, Missou and etc. The will enjoy your pointless comments.
So if the housing market sees a 20% downward adjustment, what will happen in California...and more specifically, SF. How about NY and Honoruru? There is one thing different right now that in previous collapses and that is the amount of money sitting in reserves for banks to by up their slop...will it make a difference? Only time will tell eh? My worry is that when the dominoes start to fall this time it could get ugly and turn into the big unwind.
1. Dump ALL of the shadow inventory on the market at once
2. Return to "bubble underwriting standards" Low FICO, $0 down, No Doc, Low Doc, IO's, ARM's linked to fictitious GOVT stats., 125% LTV - cash at close
Watch it take off like a rocket! That goes kaboom in 18 months.
https://www.youtube.com/watch?v=4eftoYRnBLI
Hey ignorant moron, Islam has been a bloodthirsty 'religion' bent on conquering everyone who does not agree since it was founded by a war mongering child rapist. You can go straight to fucking hell, only a clueless idiot or piece of shit muslim sympathizer would post such a s stupid comment.
i didn't realise how ignorant i was on this subject until recently - my education on the middle ages did not extend much beyond the movie "Kingdom of Heaven"
i found a youtube channel : 'Real Crusades History' - and have now watched most of the vids - amazing stuff.
during a violent time the muslims were certainly the 'gold standard'.
(PS. i am not trying to sow religious hate - history is what it is - the muslims i have interacted with in my life all seem to me to be very decent non-violent people)
Dont forget how 0% interest masks the true reality of the disconnect.
The historical average is 0% , right?
RIPS
Correct. People buy based on the munt-leez, not the total price of the house.
Run a 250K principal balance @ 4% for 30 years vs. a 180K principal balance @ 7% for 30 years.
Since nobody is actually going to do this, I'll just tell you it's the same monthy payment (about $1,200/mo.)
But math is hard!!!
Figuring out how to use those little PV, FV, PMT and INT buttons on my fancy-schmancy financial calculator could be one of the few skills I learned in college that I haven't forgotten yet.
You have to go to collage for that. Maybe just read the manual.
Good luck making that monthly payment with $10 an hour jobs.
Housing is way way way overdue for a huge correction. When monthly payments get down to $600, then we might actually have consumer confidence again. This is the most overlooked aspect from all the Wall Street finance gurus in their ivory towers. When the ENTIRE paycheck goes to the landlord or the mortgage company, there is no spending money!!! No spending money equals no job creation equals no small business creation. Instead housing is a giant sucking sound for real estate gurus fleecing the masses.
Outrageous housing costs is the #1 financial issue for the so-called 99%. There is no economy if the landlord gets everything.
I find it funny that the housing bubble on a finance blog has hardly any comments on it, meanwhile a mass shooting with a bunch of speculation and various political groups labeling and playing blame games on the actions of the mentally ill get 1,000s of replies.
It's sad that most of the commenters on here have zero financial literacy, and they don't even have interest in being a student of finance. I'm no finance expert myself, but I learn new things everyday with the help of mentors. I worked dead end blue-collar type jobs for decades out of ignorance and lack of opportunity, but I am crawling out of that mess by educating myself on finance and business.
The commentors on here rather repost reactionary facebook meme slop and point fingers. Meanwhile they drag their asses into their dead end jobs (if they are "lucky" to have a job) to make their rent/mortgage payments on their overpriced houses. It just shows the priorities.
You are absolutely correct, Doctor. Which is why the Fed doesn't want to go to 7% too quickly. I am convinced that they believe they can keep them lower for longer and that wages will eventually rise to the point that your hypothetical homebuyer can still afford to pay $280,000 in a 7% market. Of course, this means that your median wage would need to increase by about 40% which, in turn, means that general prices would need to increase by 40% or productivity would need to increase by over 150% (since less than a third of productivity gains are now shared with workers). In a world of excess capacity and global wage arbitrage, this just ain't gonna happen, but don't tell those young'uns buying houses today.
except that as wages rise, so does the house price. i'm assuming that they never, ever raise the rate above 2%.
We're japan now. Zombie bank nation. The FED, which is made up of the big banks, is using low interest rates to support their insolvent selves.
Shoot the FED.
The eight refugees living in my house sharing one Obamacare card can cover the payment.
And math doesn't lie.
You've obviously never done it the way I do it.
Or the government...or the Fed.....
This is true, but misleading. Suppose your goal was to get rid of your mortgage in 15 years. To do this, you make a voluntary extra payment every month.
The $180,000 loan is paid off in 15 years with an extra $420 monthly payment (saving you $140,000 in interest).
The $250,000 loan is paid off in 15 years with an extra $665 monthly payment (saving you $97,000 in interest).
You are better off with the small loan principal and higher interest rate, especially with interest being tax-deductible.
especially with interest being tax-deductible.
Assuming you pay taxes. Most folks under 50K with a family and two children dont pay fed taxes.
"My new book is in the top 10 of Amazon's category of international economics: A Radically Beneficial World: Automation, Technology and Creating Jobs for All. The Kindle edition is $8.45, a 15% discount from its list price of $9.95."
Screw you. I will be able to buy a duplex for that in a few months!
I'm just getting my bug out bag ready for the rate raise....if they do this it will be something.
Love "The Road" Avatar.
If you haven't yet, read the book..it's phenomenal.
Oh, I read it alright...in one sitting.
Higher home prices for garbage means higher tax revenues for public owrkers.
so how can earnings afi be at 2008 levels if all weve added are bartender/waitress jobs
I sold my house Feb 27th 2015 in anticipation of the crash. Renting now....better a year early than......
Shh. Dip buyers are out looking for bargains. Do not disturb them. They're already disturbed.
they are a well trained cadre. they KNOW that btd WORKS everytime b/c the Fed likes it and dont fight the fed. (please disregard efforts in 2007/8 by the fed to control stock prices, all the rest of the time they really can do it!)
they are so well trained, they are now able to endure 12% market declines and flash crashes, yet are resilient enough to buy moar everytime.
"To expect anything different is unrealistic and highly dangerous to one's financial well-being."
A friend of mine owns 14 houses in Clark County, NV..
I tried to tell him to sell, sell, sell, NOW!; but he won't listen.
Holding RE too long in Vegas through the last crash is how my friend lost his retirement and had to go back to work. I was looking at some half-price condos at the bottom, but taxes were not lowered with the lower price. Seems they adjust RE taxes every 3 years or so. Monthly condo fees and taxes were obscene.
i did the same thing before the crash. Said you can have this same nice gated condo and a hundo grand in a bank. I nailed it and she no longer has the condo. And man i beat the drum... actually looked at apts to rent during the collapse. It was a done deal, all in agreement. She balked.
Friggin headshake. Problem is i had to help house her after the dust settled... mother in law.
Price per foot was an amazing bubble then, easy call They were getting, getting! $350/ft
Who is holding the bag this time around? Last time it was the banks, with their MBS and HELOCs. They have been conspicuously absent from the mortgage market this cycle, and the MBS market is way smaller today. In 2008, there was $1.5 trillion of bad mortgages outstanding. Much, much less today, even if house prices fall 20%. Who gets hurt today?
the general public. specifically the upper middle class who buy 1-3million dollar houses and second homes. they are leveraged via portfolio loan and will see values go down in real estate (but not like 2008 b/c there arent as much mortgages/ninja/sisa as before) while the stock mkt drops 50%. they will see their net worth decline by some 40% in all and may have to sell most of the stocks (more liquid than RE, while being margin called).
the middle and lower middle got robbed last time; upper middle wasnt washed out and learned to only buy more with leverage...this time its everyone--which might be good as we need the bourgeosie to lead rebellions, the poor dont have the resources/connections.
wages? who needs wages to buy a home...er house....er real estate investment i mean.
most and ALL marginal buying is done with cash....cash from lines of credit attached to investment portfolios known as Securities Based Loans. it will take about a 33% mkt decline to trigger margin calls on these products, not too dissimilar to normal margin.
this is the black swan. NO ONE but me, even here, mentions this. when combined with normal margin, leverage in the stock mkt is about double the last peak.
'earnings only went down 15%....how could the stock market crash so much? whocuddonode??'
Are real wages the same as EBITDA? I ask because remember boys and girls, the MIC tax the inflation they create.
The tax brackets don't get updated for increased cost of living - SO, those rising wages over the last 30 years are all going into higher tax brackets, maybe making the gap even wider than shown (depending on how 'real wages' are calculated).
"The tax brackets don't get updated for increased cost of living " That's a fallacy BiPolarFrenchman, that changed way back in the 80s. IRS updates all the brackets and deductions annually for inflation. You could argue that the inflation rate is bogus, but they do update the brackets. To your larger point undoubtedly inflation is taxed through other mechanisms as well.
I thought real wages had been declining for some time now as shown in other graphs. This graph shows it recovered?
Call me puzzled...
looks like they use the number less food/energy which could provide a smaller discount rate, giving a larger gain in wages etc., rather than the full CPI.....but both compared to 2007 top--wages are less. and if you want to take out dividends, or just include non-supervisory....its much much worse
Carbonated economy.
Does this mean my shorts/puts will start working soon?
only briefly and probably from 11pm to 4am.....
Blackstone and Buffet will just sweep in to buy 100% of America's existing housing supply and we'll repeat the cycle all over again.
Shit-for-fucking-brainses developers
This time is different. We have artificially low mortgage interest rates so it's hard to tightly correlate the red and black lines. But, yeah, something's gotta give at some point.
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Has the MERS mess ever been fully decided regarding title? I read assorted tidbits here and there about various states allowing MERS foreclosures to continue but have the courts just abrogated 500 years of real estate law for expeditious resale of housing--basically the easiest way out? Do title policies exempt themselves for MERS defects in any chain of title? What type of deed is provided by the seller in these resales?
I had thought there was a serious Arizona challenge that if successful would toss out foreclosures in Arizona in which MERS had sliced and diced title.
remove the Chinese cash buyers from that chart and the bubble goes pop
Ok, so the bubble bursting seems to be the most likely outcome here. But, what could some other outcomes possibly be here? I know ZH and it's community are certainly more aware of this bubble than most. However, this time around there seems to be a greater degree of acknowledgment of a bubble than there was prior to 2009. So, what I'm getting at is-- yeah we're in a bubble, but last time very few people/institutions saw it coming (at least publicly), this time, a considerable amount of people/institutions see and acknowledge it happening. Won't this certainly result in a different outcome than 2009?
Here are some signs of a coming recession.
1. Factory orders continue to drop
http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row
2. Default risk spikes
http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high
3. M&A set record
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/
4. Fed sees 2 bubbles
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
o Commercial Property higher than pre-2007 level.
http://nreionline.com/finance-investment/cre-prices-are-now-officially-above-pre-recession-peak
o Global Corporate Debt Market hits $5 trillion.
http://fn.dealogic.com/fn/DCMRank.htm
5. Iron ore prices tumble
http://www.marketwatch.com/story/iron-ore-prices-keep-crashing-adding-to-global-growth-fears-2015-11-30
6. Baltic dry shipping index tumbles
http://www.marketwatch.com/story/shipping-index-falls-to-all-time-low-stoking-fears-about-global-growth-2015-11-19
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
I own a farm north of my primary location in an area of FL known as Jupiter. The old Burt Reynold's property is developing 1.5 acre properties in an area filled with hillbillies and dirt roads (without municipal sewer or water) starting at 900K (see Hovnanian's site if interested). Then there's the old, still not built out after a decade, Jupiter Country Club where a townhome (carriage home) can be had next to the turnpike and I-95 for 350K and most of the homes start over 1M (see Toll Bros). Now a new Divosta development Sonoma Isles is underway with pre-construction pricing starting at 650K for a 1500 sq ft next to the turnpike and I-95. Oh, and then you really want to see what the Lennar and other properties have gone for on the NE side of I-95 just to the east of these developments (on average 3000+ sq ft boxes backing up to the highway in the middle of a white and black ghetto area which started at 800K when they were built, reselling for more, with zero lot line properties). Now, if this were an area with high paying employment, the best shopping and restaurants, and world class entertainment (ala being within a 5 mile distance for a City akin to Miami or Manhattan) I could understand these prices, but this is an area of strip malls with Chipolte and Dunkin Doughnuts being the average restaurant fare, 1 movie theater, a local "playhouse" with the usual fare being a 30 year old production with an off off off broadway cast, and high end shopping consisting of Chicos, Walmart, and Payless. As for high paying jobs - unless you are a doctor, lawyer, or accountant you are in the low paying trades or some medical tech/nurse in this area, and the "non-tradespeople" I've come in contact with are struggling to keep their practices profitable. Er um, do you think that there is a housing bubble?
Maybe wages will rise. (Although with increasing automation, prices should fall towards marginal cost, something the FED doesn´t like...)