Housing Bubble Symmetry: Look Out Below

Tyler Durden's picture

Authored by Charles Hugh Smith via OfTwoMinds blog,

Housing markets are one itsy-bitsy recession away from a collapse in domestic and foreign demand by marginal buyers.

There are two attractive delusions that are ever-present in financial markets: One is this time it's different, because of unique conditions that have never ever manifested before in the history of the world, and the second is there are no cycles, they are illusions created by cherry-picked data; furthermore, markets are now completely controlled by central banks so cycles have vanished.

While it's easy to see why these delusions are attractive, let's take a look at a widely used measure of the U.S. housing market, the Case-Shiller Index:

If we look at this chart with fresh eyes, a few things pop out:

1. The U.S. housing market had a this time it's different experience in the 2000s, as an unprecedented housing bubble inflated, pushing housing far above the trendline of the Case-Shiller National Home Price Index.

2. It turned out this time wasn't different as this extreme of over-valuation collapsed.

3. For a variety of reasons (massive central bank and state intervention, the socialization of the mortgage market via federally guaranteed mortgages, historically low mortgage rates, massive purchases of mortgage backed securities by the Federal Reserve, etc.), the collapse in prices did not return to the trendline.

4. There is a remarkable time symmetry in each phase of expansion and collapse; each phase took roughly the same period of time to travel from trough to peak and peak to trough.

5. The Index has now exceeded the previous bubble peak, suggesting this time it's different once again dominates the zeitgeist.

6. Those denying the existence of cycles have difficulty adequately explain away the classic cyclical nature of the 2000-2008 bubble rise and its collapse, and the subsequent expansion of housing prices in a near-perfect mirror-image of the first housing bubble's steep ascent.

Claiming that this painfully obvious time symmetry is mere randomness/coincidence is not an explanation.

7. This time symmetry suggests that the current housing bubble is close to its zenith and will likely collapse over a time frame similar to Housing Bubble #1.

The basic arguments for ever-higher housing prices forever and ever are:

A. central banks completely control all markets, including housing, and they will never let the housing market decline ever again.

B. Foreign buyers paying cash (even if the "cash" was borrowed in Asia) will continue flooding into North America, elevating markets for the the foreseeable future.

The omnipotence of central banks is a matter of near-religious certainty among the faithful, but skeptics note that central banks have played major roles in markets for decades, yet every asset bubble eventually pops despite central bank/state management of markets.

True believers note that the central state/bank interventions have greatly expanded, and that there are no limits on future interventions; central banks can create trillions of dollars, yuan, yen, euros, etc., and use this "free money" to buy assets, propping up markets indefinitely.

In this line of thinking, central banks/states "learned their lesson" in the first housing bubble and will never let the housing market collapse again.

As for foreign demand: the number of buyers from China who are desperate to turn their cash into North American real estate holdings is practically limitless.

The counter-arguments are:

1. Despite the federal guarantees on mortgages, the housing market is still dominated by private-sector borrowers and lenders. As my colleague Mish has often pointed out, central banks/agencies cannot force people to borrow money to buy homes, vehicles, etc.

If everyone who is qualified to buy a house and wants to buy a house has bought a house, then demand is limited to new households and foreign buyers.

New household formation has recovered a bit but is still at historically low levels. New households burdened by student loan debt, high rents and stagnant wages are not qualified to borrow hundreds of thousands of dollars to buy homes at current nose-bleed valuations.

While the number of foreign buyers may appear to be limitless in specific markets, counting on marginal buyers with cash to prop up markets across the board is an iffy proposition, given the potential for conditions to reverse due to global recession, capital controls, higher taxes imposed on foreign owners of vacant homes, etc.

I would argue that this time is different, but not in a healthy way. Central bank/state interventions in the market have drawn in marginal borrowers who are a few paychecks away from default, and speculators who are leveraged to the hilt to buy homes to "flip for quick profits--a strategy that collapses if qualified buyers become scarce.

Globally, housing has become a flight-to-safety asset for the global elites, a development with disastrous consequences for residents. Housing owned for investment often sits empty, effectively withdrawing much-needed housing units from the market for shelter. This investment buying reduces the pool of available housing, driving up rents and home prices, pushing shelter out of reach of the bottom 95% of wage earners in desirable urban areas.

In response, municipalities are aggressively imposing fees on investment ownership of empty dwellings. At some point, these fees reduce demand for housing in "hot" markets. Once marginal cash purchases evaporate, markets fall back to what domestic demand can support.

Housing markets are one itsy-bitsy recession away from a collapse in domestic and foreign demand by marginal buyers. This time is different isn't always bullish.

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Deathrips's picture

30% drop....considering stagnant wages for the pleebs..70% would be a better target.



francis_the_wonder_hamster's picture

A client of mine moved to L.A. about 15 months ago.  He bought a new house in Beverly Hills for $3.5 million while waiting for his home in La Jolla to sell for $4.1 million.  The La Jolla home, which is a very nice property, closed just yesterday, after 15 months on the market, for $3.2 million.  That's a 22% drop in about a year, for a property in a prime location listed at a pretty fair "market price".

yrad's picture

My home value is down 6k in the past 30 days in Dallas. Looks like we may be in the start of a correction. 

mmanvil74's picture

I've been saying for years, there is only one metric that matters in terms of real estate - interest rates. This time IS different in that we've experienced the lowest mortgage rates EVER, but, as we've seen in Europe, that doesn't mean they can't go lower (or even negative). 

The bigger story few are discussing is the recent and rapid drop in the USD and creeping (real) inflation across developed economies. Are we in the early stages of global hyperinflation, which might in some bizarre way justify "bubble prices" for stocks and real estate, while the bond market panics into commodities and crypto?

HRH Feant2's picture

I refi'd my house last year down to a 2.89% 30-year fixed rate. I am starting to think if rates keep dropping I may be able to refi down to 2.5%!! When I bought this place, three years ago, my first loan was for 4.25%.

I agree, it is all about interest rates. I think it is insane as to how low interest rates have gone.

Crazy times.

chubbar's picture

Exacerbating this whole problem is that of builders. They continue to build regardless of the economic climate. Just about every builder I know has spec houses going. The custom builders are experiencing quite a slow down but the rest are just plugging along like nothing unusual is going on. Every year more and more builders are going into business as well and if they aren't building, well, they aren't builders. I just don't see how the inventory can just be added onto like this without issue, but so far its worked. I'm not thinking it will for much longer though.

Paul Kersey's picture

Although financing is National, real estate is local, so, chubbar, while where you live there may be overbuilding, where I live there is a serious shortage of infill lots, subcontract labor and, consequently, new house inventory. As far a real estate prices crashing, just let me know when prices crash in Aspen, Jackson Hole, Jupiter Island, and St. Simons Island, Singer Island and the Kahala area on Oahu, because I'd be a ready, willing and able buyer for distressed priced property in any of those places. The author of this article used to be in the real estate business, and he, of all people, should know that real estate is local.

yellensNIRPles's picture

Look at land and homes on Zillow. Prices are dropping, despite what they want you to believe. There are no more buyers and the rich can only own and support so many homes. Look at the price histories, many of them are dropping massively. The game is almost up the news just hasn't hit yet.

shizzledizzle's picture

Been watching the number of forclosures go up and the prices fall... Not rapidly but they are coming down a few thousand at a time. 

Ben A Drill's picture

The smart people are all on handouts, food stamps, disability, or retired.

Ben A Drill's picture

All the while holding a under the table job driving a brand new $50K+ car or SUV. Edit: Fixed.

Deep Snorkeler's picture

Cheap/easy mortgage money fuels the market.

Collapse will come when real estate taxes achieve

x10 reality.  No one will be able to afford to live

in their homes even though they can pay the mortgage

and utilities.

Chipped ham's picture

CHS is very good at simplifying complex topics. I like his contributions to my brain power. 

taketheredpill's picture


One final counter argument is that the Central Bank End Game will involve an "ALL IN" monetization that will damage faith in fiat currencies.

If this happens then Real Assets (Gold, Commodities, Houses) may get bid up.

GunnerySgtHartman's picture

Government needs to get out of the housing market.  There is no right to own a house, dirt-cheap rates or not.  Fannie and Freddie should have been LIQUIDATED when we had the chance.  The next Fannie and Freddie collapse is going to dwarf the previous one.

LittlePinkTaco's picture

Interests rates chronicly low for forseeable future, "cash" coming from Asia, baby boomers reluctant to sell (reverse mortgages), low inventory in market. Regretfully, I don't see prices coming down until a worse recession hits and people are forced to sell (taxes killer catalyst?).

pitz's picture

Even that trendline is awfully steep.  Housing shouldn't grow any faster than inflation.  That trendline grows faster than inflation.

Gorgeous's picture

I dare say it's not any sort of regression.  Just another hand drawn line using a red crayon somewhere around the bottom of the data to "show" people just how low it could go.  And the "minimal target" circle in bright green. Glad I know where that is.

Chryoprase the Troll's picture

>That trendline grows faster than inflation.

Increasing house prices and rentals are inflation....  They're just not included in the official figures yet.

ElTerco's picture

Asians are compulsive buyers of housing in my area. I don't think they can control themselves. Psychology trumps reason.

William Dorritt's picture

Chinese manufacturing millionaires,

and anyone else with money inc Commie party elite are desperate to get out fast and buying into the US and Canada, even at 2x inflated prices we currently have.


gregga777's picture

The Zionistas who own the Goldman Sachs Feral Reserve System buy low. Then their wholly-owned Goldman Sachs Feral Reserve System creates massive asset bubbles and they sell high. Their Goldman Sachs Feral Reserve System pops the bubble and asset prices plunge and they buy low again. The process repeats over and over again. It's the sole role of the Goldman Sachs Feral Reserve System.

Gorgeous's picture

sole role?  They take your money more ways than just that one.

assistedliving's picture

Spot lumber pretty damn high.  

Rapunzal's picture

It's hard to tell when they will crash the system. They control all central banks the Rockefeller/Rothschilds cabal.
2 reasons to crash the system, it doesn't create any profits anymore or it's a good time for culling the sheeple/useless eaters. To avoid an uncontrollable revolution.

Let it Go's picture

The definition of relativity is based solidly on the relationships or values determined by the laws of nature. Often we find the qualities of relativity extend to other parts of our lives and the universe as well such as the markets and economics.

It is impossible to deny the unrestrained growth of intangible assets over the last few decades. The article below warns of how a failure of faith in these intangible "promises" could cause wealth to suddenly shift into tangible goods seeking a safe haven causing inflation to soar.


journal's picture

As long as they lend, they will build.