The $3,200,000,000,000 Question: Why Housing Has Much More To Drop Before It Bottoms

Tyler Durden's picture

It is no secret that having failed repeatedly at the trickle down aspect of QE1, QE2, Op Twist 1, Op Twist 2 (and implicitly LTRO 1 and LTRO 2) as it pertains to the man in the street (if not the man in Wall Street, who was subject to 1-2 years of subpar bonuses which have since regained their upward trendline), the last effort the central planners of the world, and the administration, have is to furiously do everything in their power to reflate housing one more time, following what is already a triple dip in home prices ever since the December 2007 start of the Second Great Depression. Which is why month after month we get seasonally fudged, conflicted and outright manipulated data from various sources how housing has bottomed, for real this time, and things are finally looking up. Remember: with any con game, the key word is confidence, and the US consumers need to regain their confidence. Sadly, as the following very simple chart and accompanying explanation, the answer to the housing question is only one: there will be no housing recovery until much more debt is eliminated. $3.2 trillion to be precise. Everything else is merely fits and spurts of upward action predicated by easy money hitting the market either directly, or via the "REO-to-Rental" stimulus program du jour, which lasts for a few months then promptly evaporates.

The chart in question:

And what it means:

The standard wealth effect does not account for the role of credit availability, which can amplify the effect. When home prices are increasing and credit conditions are easy, households can more easily realize the appreciation in wealth. We saw this phenomenon during the boom when easy credit conditions allowed homeowners to use their homes as “ATMs.”


The reverse is true as well; if credit conditions are tight while home prices are falling, households are stuck in their home and are forced to accept the decline in wealth. In addition, once home prices start to turn higher in an environment of tight credit, the ability to realize that appreciation is limited. This is the case today. Home equity lines of credit and cash-out refinancing has been minimal, even for those borrowers who are already in positive equity.


This reflects the slow deleveraging process. Housing assets plunged 29% from the peak in mid-2006, but mortgage debt only edged down 8% from its peak in mid-2008. This has left the aggregate loan-to-value ratio at 60%. Prior to the crisis, the loan-to-value ratio averaged 40% (Chart 2). To restore a normal loan-to-value at the current level of housing wealth, households would need to pay down their mortgage debt by US$3.2tn.

That's $3,200,000,000,000 in excess debt before true price clearing can commence. That's also more in debt than QE1 and QE2 combined have monetized so far.

Good luck.

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BaBaBouy's picture

Run For Your GOLD...

SA: Gold Fields says 12,000 workers on wildcat strike


... Pretty soon, 5 ozs will buy you a very nice house ...

FiatGold's picture

I think 5 TOZ silver will buy you a house and you might even get some fiat in change

gold-is-not-dead's picture

in weimar and yugoslavia you could get a nice building for a TOZ :)

BaBaBouy's picture

Eventually, Ben Shalom will print all the fiats that you can handle...

This is the only way out for the US, EU etc.


Wheelbarrels of Hundies to buy your DREAM HOUSE...

Hello Merican Wiemar ...

Precious's picture

The hookers in the real estate industry have been defrauding Americans for the past 20 years.

No bankers in jail.  No realtors in jail.   

But sell an ounce of weed ...

redpill's picture

This scenario would never improve if it was predicated solely on debt retirement.  The realistic path to housing recovery will include little debt retirement by homeowners, instead it will be a combination of short-sales (lenders retiring debt) and price increases (values improving).  It is going to take awhile to pick up steam, but home prices across the country are improving quite a bit right now.  There are a number of things that help support that, but our shitty economy is certainly not one of them.  In the scheme of things I'm less worried about housing, which is real property that has inherent value and utility, and much more concerned about what the impact will be when the rest of the economic ponzi scheme collapses.  Housing prices won't go back down in non-inflation adjusted dollar terms any time soon, everything else is being inflated too much.

Hugh_Jorgan's picture

This is one of several guns pointed at the collective head of the global banking system. Therefore, only a collapse will allow the correction to take place.

donsluck's picture

Ah, debt "retirement" sounds so peaceful and sweet. Wrong. The banking system will not absorb the loss, the tax payer will through loss of retirement, healthcare and jobs (and maybe clean air, clean water, parks, fire protection, police protection, freedom...).

owensdrillin's picture

If the system collapses, nobody will absorb the loss. How can the taxpayer make reparations when they have nothing left. Unless there is hyperinflation, nothing will get paid back and whoever is holding these ridiculous amounts of fiat will be sitting with absolutley nothing.

I guess the public will absorb the loss if they are holding treasuries or muni's. Their bank deposits will be worthless and the only real value will be in any kind of hard asset.

Popo's picture

The simplest answer is demographics.  Something like 80% of the value of all real estate is owned by boomers.  They need to sell that real estate because it's their nest egg.

And even if they die with it and pass it on -- statistically more than 90% of inherited property is liquidated because there are multiple heirs, or they have moved far away.  (Very little inherited real estate is actually lived in by the inheritors).   So one way or another 80% of all real estate (value) is going to return to the market in a giant wave over the next 30 years.

The current valuations are predicated on the belief that there will be buyers.  But since (1) Younger generations are smaller, (2) Younger generations are already endebted,  (3) Loan standards need to improve,  (4) The supply of new homes is increasing and (5) Unemployment is rising -- there simply aren't anywhere near enough buyers to make the boomers "whole" on their investments.

Prices will, and must continue to plunge.

Add to that the coming urban crime wave that will sweep cities nationwide, and the coming tax regime that treats land and home owners like serfs -- and you have a recipe for a real estate bloodbath around the corner.

The trick to survival in the 21st century is simple:  MOBILITY.

Being "bound to the land (or house)" is the last thing you want.   Stay mobile.  Stay liquid.  And let the bagholders go down with their shit-box houses.



Jim in MN's picture

You forgot (6) no one has any money.  See my post below on down payments.

Popo's picture

Very true!  (Although one could lump that in with "loan standards need to improve") ;)

Midas's picture

Well said popo, but one wrinkle:  I think it is possible to end up with a bifurcated housing market.   Because of the crime wave you mentioned some neighborhoods may go to zero and anyone left with money will be desperate to get out of Detroit, (cough), excuse me, get out of the rough areas and pay extra to get on the other side of the gated community's wall.  And not to mention the possibility of higher interest rates....

TrumpXVI's picture

Points well taken and noted, Popo.  Mobility is valuable.

You realize, however, that real estate markets vary.  It is difficult to generalize advantages vs disadvantages.

Also, renters pay rent that covers; property taxes, maintenance, PLUS a profit to the owners/managers of the property.  No one is escaping the costs of keeping a roof over one's head.

Paul E. Math's picture

"renters pay rent that covers; property taxes, maintenance, PLUS a profit to the owners/managers of the property."

Not true.  And that's the whole point, the reason I rent.

My realtor landlord bought this condo pre-construction thinking she could flip it and is now renting it to me for less than PITI.

My landlord is waiting for that day when the price comes back up above what she paid for it.  That day will not arrive in her lifetime.

In Toronto, mine is a commonplace situation, as it is in all those bubble cities across the US.


Papasmurf's picture

Your renter is losing some on each tenent and making it up with volume.  Do you think that is sustainable before your landlord cuts his losses and runs?

Dungeness's picture

Mobility and Liquidity. I totally agree.

Even when housing does hit a bottom, there are still many negatives to purchasing property in the US. Once purchased, do you really own it, I.e. MERS? High property taxes. Confiscation by local authorities on suspicion of anything in order to finance those local authorities. Baby boomer retirement downsizing. Employment is tied to housing prices, and it is not improving and don't think it will. Too many downward forces.

But, I do think there will be pockets where real estate will do OK. Location, location, location. Perhaps cities like Houston, Miam Beachi, and only in key areas.

dirtbagger's picture

If the US had the same demographics as Japan I would agree with you.   The US population is still increasing which also increases the aggregate demand for shelter.   Estimates over the longer term are that about 1.2 million new housing units will be required each year to accomodate population growth and to replenish old housing inventory.  

Granted housing went crazy for 4-5 years and the housing stock was way overbuilt and over priced, but the market is beginning to return to some semblance of balance.   Those communities that have experienced a 40% -50% devaluation of prices have markets that are showing positive signs of recovery.  Housing in those communities present an arbitrage opportunity where existing houses are priced significantly less than replacement cost.  The recent price/demand increasees may reflect investors and individual buyers taking advantage of the arbitrage opportunity.

Absent the economy going off the cliff, in aggregate, it is unlikely there will be much more downward direction in prices.  This does not imply that there will be a large reflation of house prices.  In the long run, expect house prices to follow inflation. 

not fat not stupid's picture

Agree with ZH 90% of the time but, in the real word, tyler is dead wrong and missed the housing bottom.

Tyler Durden's picture

The one in 2009, 2010, 2011 or 2012?

BaBaBouy's picture

It's like an Empty Beer Can thrown out of a moving car...

Bouncing down the road ...

Crisismode's picture

Bouncing down a road that slopes ever downward.


LawsofPhysics's picture

"Beating expectations" - all the way down...

Lord Blankcheck's picture

Will the prices go down when interests rate eventially go up?

donsluck's picture

Interest rates are not going up any time soon.

Dr. Engali's picture

Are you kidding me? Do you talk to any realtors? I can tell you for a fact that they are still declining in our area, and more of them are hitting the markets regularly. The selling season has peaked and there are still a lot of house to move. It's a fairly simple proccess to check the listed properties on a weekly basis. Throw on top of that the kids coming out of college already have  a mortgage on their back in the form of student loans with no job prospect. The housing market is going much lower.

thewhitelion's picture

As someone brighter than me pointed out, real estate never bottoms when interest rates are low.

qussl3's picture

What about student debt?

Crisismode's picture

What about it?

Simple solution . . . don't be a student, and don't go into debt.

Education is a racket, just like the markets.

Jam Akin's picture

This shit has gone far enough.  Hasten the crisis:  Corzine for President!

Abraxas's picture

BO does pretty slick job for them, so why switch now? Corzine doesn't throw $100000 campaign dinner parties just because he's a nice guy. Practically, he is the president.

Comay Mierda's picture

there will be a lot more shadow inventory when the middle class is squeezed by more taxes from all levels of the broke government, skyrocketing interest rates on their mortgages/helocs/credit cards, and the higher prices of essentials like food and fuel.

housing is nowhere near bottom. even though many houses are selling for less than construction cost

wait til the dollar collapses, then there will be unbelievable deals in real estate

assuming the USA does not become the USSA of course

donsluck's picture

We are collectively blind to the long term. Short and medium term however looks like no rise in interest rates for the forseeable future. Between the Fed forcing them down and the flight to safety generated by the collapse of the Euro, money is headed to the US. What we may have medium term is low interest rates AND inflation.

Comay Mierda's picture

i disagree. the fed policy is to keep interest rates low til 2014.  but the world is cutting off the dollar in trade agreements.  Germany and China just expanded their euro/yuan trade agreement to further move away from the dollar.

When the dollar loses its reserve currency status who in the hell will want to hold dollars?  the dollar will plunge and the fed will be forced to tighten credit and increase rates

TheSilverJournal's picture

Housing is set to drop at least another 75% from here in real terms. The entire market is supported by credit and pretty soon, credit will be a thing of the past.

malikai's picture

It is every american's god given right to have a subprime mortgage and default paid for by the other guy!

Cognitive Dissonance's picture

I'll take Debt Jubilee for $3.2 trillion Alex.

LawsofPhysics's picture

He will get back to you as soon as he hears from the four familys on the other side of that debt.

Spastica Rex's picture

They'll never get it back anyway. Sorry.

yogibear's picture

No reason to deleverage. Just get the government/Fed to give you bailout money, cook the books and transfer funds overseas and default.

Brokerage houses like Moragn Stanley can raid their clients accounts and leave people high and dry.

Nobody BIG goes to jail for fraud anymore. So the bigger the financial heist the more the government and it's agencies cover it up.

Keep looting banksters because the rules don't apply to you.


tallen's picture

Silver and Gold getting raided prior to Jackson Hole. Couldn't see that one coming..

malikai's picture

Not just PMs, it's across the board. We're either seeing a stop hunt right now, or the rug is being pulled out.

fonzannoon's picture

gold knockdown just started

orangedrinkandchips's picture

Very few people can really walk a mile, or a step, in another's shoes.....




but most kids and people don't realise how much it COSTS to have a home....


You dont think jack shit about kids in your teens or 20s (for most who dont start giving up the boody in Jr. High) you have no idea bout kids....ONLY WHEN YOU HAVE KIDS OR A HOUSE DO YOU KNOW HOW UNPLESANT IT IS!!!

Now.....A house CAN be beneficial IF YOU GET THE RIGHT PRICE.....





KidHorn's picture

True. If you have a big mortgage. But if you own your house outright, it's a lot better than renting.

Hugh_Jorgan's picture

Most Americans DO have a big mortgage (relative to their income). The vast majority stressed their budget to the breaking point to get the most house they could, that was real estate 101 in 2006. All you have to do is keep your jobs...

KidHorn's picture

The problem is a lot more complex than homeowners drowning in debt. You have baby boomers retiring. You have new college grads with a lot of debt and low job prospects. I can't see anything that will drive housing prices up in real terms. Maybe a few bounces here and there on the way down, but nothing sustainable. Maybe if they allow 100 million highly skilled immigrants in. Everyone needs to live somewhere.