"Reverse-Wealth-Effect" Looms As Global Housing Bubble Pops

Authored by John Rubino via DollarCollapse.com,

Just a few months ago, real estate was on fire. Prices were blowing past records set during the previous decade’s housing bubble as desperate buyers bought whatever was available at above the asking price while homeowners, confident that prices would keep rising, held out for the next big pop to sell. Notice on the following chart how the ascent steepens at the beginning of this year.

Then, as if someone flipped a switch, the trend shifted into reverse. Not just in the US but nearly everywhere. This list of recent headlines tells the tale:

Housing demand sees biggest drop in more than 2 years

Hamptons property sales slow as caution spreads to the wealthy

Home Prices Are Falling in One of America’s Richest Suburbs

First Time Ever, More Chinese sellers than buyers

Record Drop in Foreigners Buying U.S. Homes

Australian home prices take biggest dip since 2011

The End of the Global Housing Boom

Manhattan Real Estate: Prices Plummet, Sales Tank

What’s happening and why is it happening now?

Several things came together pretty much simultaneously to turn houses from must-have-at-any-price necessities into completely optional and maybe not even desirable:

First, prices rose beyond the reach of all but the seriously affluent. The gap between the price of the average home and the size of the mortgage the average local buyer can afford has been rising for years, but recently in the hottest markets it has become a chasm. Meanwhile, mortgage rates have started to rise, increasing the monthly payment on a given house dramatically.

If you live in San Francisco or Sydney or Vancouver, chances are you can’t afford to buy a decent house – not even close. And if you can’t you don’t.

Second, the eruption of trade wars between the US, China and Europe has made foreign houses less straightforward for Chinese and Russian millionaires. As a result, fewer of them are making all-cash, price-is-no-object offers on overseas trophy properties.

The reverse wealth effect should terrify holders of stocks and bonds

For the past several decades it’s been the explicit policy of governments and central banks to use low interest rates and more recently direct purchases of stocks and bonds to push up the price of financial assets. The goal was to make holders of those assets feel rich and smart and therefore more inclined to borrow and spend on frivolous stuff that would boost GDP. This is called the wealth effect and it’s been firing on all cylinders in the age of QE and ZIRP. But all that borrowing – by individuals to buy houses (and SUVs and 70-inch flat-screens), corporations to buy back their stock – and buy out each other – at record high prices, and governments to build unnecessary roads and bridges and invade each other – has left a lot of debt lying around that has to be paid off with future cash flow.

Let a huge sector like housing turn down and the wealth effect shifts into reverse, as every homeowner in the world watches their biggest asset shed the leveraged profits that had made them feel rich and smart. Now they feel poor and dumb, and suddenly risk-sensitive. So they pull up their stock portfolios and find a bunch of price charts with a disturbing resemblance to that of their house. Armed with the sudden revelation that trends can reverse, they decide to lock in some of their Apple and Google profits. Millions of others make the same decision, and high-flying tech stocks start behaving like wounded ducks.

And just like that the markets’ emotional tone shifts from carefree buy-the-dip to terrified sell-the-rip. Capital gains tax revenues dry up, government deficits soar, and the river of cash flow that was earmarked for servicing a mountain of debt slows to a trickle. And it’s hello, 2008.

Comments

TeethVillage88s Arrowflinger Sat, 08/04/2018 - 15:35 Permalink

Australians found out about Model used by banks to figure mortgage against poverty level decades... maybe 3 decades old... in effect banks were giving mortgages based on income levels that put home owners into poverty, saving money to feed themselves... pretty good scam... I think it was ZH who published the info...  Bankers & Predators of the CFR/Globalists... always pull shit... even after a 2008 Global Financial Crisis.

In reply to by Arrowflinger

brushhog MoreSun Sat, 08/04/2018 - 13:49 Permalink

And when all that happens you buy, buy, buy. Because in the next turn they will slash interest rates, pump up the stock market, and push the fly-ridden carcass of our once free market economy up even higher.

Up down up down up down, its so absurdly transparent. So easy to time. The only way to screw up is to start believing its real.

In reply to by MoreSun

Endgame Napoleon PrintCash Sat, 08/04/2018 - 18:17 Permalink

Here is another dollar for you: The future is not home equity. It is printing your own coins on these nifty 3-D printers: https://www.financialsense.com/conversation/trade-wars-will-boost-digit…

Never mind, I just wanted you to make another fast buck, but not by printing your own money, which is illegal unless you are a bonafide Fedster. 

Wonder if those 3-D printers are programmed to prevent humans from making that stupid mistake? 

 

In reply to by PrintCash

mosfet james diamond squid Sat, 08/04/2018 - 15:16 Permalink

USD is the biggest bubble.  Stocks & RE are simply an 'unmanipulated' inverse representation of it's honest value.  Venezuela IBVC up 11,000% YTD vs Bolivar.  Has their stock market bubble popped yet?

Oh and Gold in Bolivars YTD?  DOWN 4%!  Sure, that's the manipulated gov value but would you rather be risking your life to sell a 1oz Silver Eagle on the black market, or living off the dividends from your stocks that are up 110X.  Stackers, down vote me at your leisure but see for yourself at GoldPrice.org.

  • First bottom in DOW will be when Fed 'pauses' at 20K
  • Final bottom in DOW will be when Fed prints at 17.5K

In reply to by james diamond squid

implicitsimplicit mosfet Sun, 08/05/2018 - 10:16 Permalink

Interesting analogy. Do you think the contributing variables and incidentals will  play out in the US the same as there, before the petro dollar reaches hyperinflation Comparing the size of the economy compared to theirs, don't you think their will be other inflection points that get us there along the way. Doesn't Apple have a bigger economy than.Venezuela? just guessing, I have no idea, and I'm too lazy to check right now .

In reply to by mosfet

Calvertsbio MoreSun Sat, 08/04/2018 - 19:46 Permalink

All True, now what ? Nothing, nothing ever changes except to posts here, the amount of money going up and more poor people. Americans are stupid.. They keep voting in same type, keep supporting the FED who is raping us.

Read Gordon Longs newest : https://matasii.com/the-forgotten-mark-to-market-rule-change-is-keeping…

Gives you the corruption direct ! This is just another loophole that will allow this bubble to grow into 2019, 2020, 2021 ? Boom ! There is no one thing to make it pop, each one is a small thing, but all of the problems together are HUGE !

Then what, I guess everyone is going to guess something...Not going to be good, whatever it is... 

In reply to by MoreSun

Endgame Napoleon Arrowflinger Sat, 08/04/2018 - 18:24 Permalink

Paid-for homes offer a comfortable retirement for the few who have them in this era. They have no rent expense, just taxes and insurance. They can sell it or rent it out, moving into something smaller. They can stay in it, doing any necessary maintenance if able until they get really old and “spend down,” which is what most elderly people end up doing when they get too old to live alone and without nursing care. That is how the system works in the USA for anyone except a few truly wealthy people. 

In reply to by Arrowflinger

Endgame Napoleon CorporateCongress Sat, 08/04/2018 - 18:37 Permalink

She’ll soon be a pyramid-scheme millionaire, and her problem will not be how do I spend all my time after I earn my $975 per hour for a few hours work. Her problem will be how do I protect my riches? Where do I put all the money I earned posting these ads?

How much is $975  X 1,000,000,000,000, math people of ZH? Shhhh, don’t tell anyone that you have all of that money, making yourself vulnerable, Google-ad girl.

Ever worked in a place that serves an old-money clientele, with only addresses and a few famous names giving you any indication of the customers’ wealth level? They tell you they don’t want you to know how much money they have...obviously.

No one with that much money would drive that car or wear those old togs....The best indication that she really is not making $975 per hour is all of that boasting about it. 

Or maybe, she is really a billionaire in disguise, hiding her identity by posting these ads. What a great disguise! Calling all rock stars, athletes and new college grads! You, too, can make six figures.............SIX FIGURES!!!!

In reply to by CorporateCongress

lock-stick Adolfsteinbergovitch Sat, 08/04/2018 - 15:47 Permalink

ONE DEEPLY DISTURBED INDIVIDUAL, alone in his leaky moldy single wide, playing with little action figures and his own microdick, answering his own posts.  GOOD TIMES!!! 

ONE whackjob obsessed SPAMMER -- with numerous log-ons!!!

•• kr86096  ("I suck dick on the Internet!!!)

•• Adolfsteinbergovitch  (another imaginary friend)

•• Free This  (same WHACK JOB -- used to be "Mr Hankey" -- also banned)

•• sanctificado  (DON'T CLICK THE LINKS!!! --  Biblicism SPAMMER -- banned as powow/Wadolt/ravolla/lloll/pier/etc.)

•• More Sun (it's the JOOS!! -- whack job extraordinaire)

•• Annanuki  (another imaginary friend)

•• Jumanji1959 (another imaginary friend)

•• PrivetHedge (another imaginary friend)

•• Cryptopithicus Homme  (another "imaginary friend")

 

spamming ZH for seven years --- dozens and dozens of banned log-ons

 

Write to the Tylers ::  abuse@zerohedge.com

In reply to by Adolfsteinbergovitch

Endgame Napoleon PitBullsRule Sat, 08/04/2018 - 18:47 Permalink

What’s the point of the capital gains tax cut proposal then? Is it to ease the pain for the housing-market speculators or the house-“rich” few among the ruins of the US middle class? 

Timeline:

  • Blue-state housing markets get hit with higher state & local taxes after the Trump tax cut; 
  • Germone, the Fed king, raises interest rates; 
  • The housing market collapses;
  • Trump proposes capital gains tax cuts.

In reply to by PitBullsRule

ebworthen DennisR Sat, 08/04/2018 - 13:32 Permalink

Electric sign of local mortgage lender 6 months ago, 3.5%

Same sign yesterday, 4.5%.  1% more on a $300K+ home = dropping sales and prices.

Housing bubble 2.0, engineered by banksters, for banksters.  They make cash coming and going.

Anyone seen the interest paid on savings/checking accounts go up 1% this year? 

Go on Powell, raise them rates!  Normalization would be at least 6%. 

Is this a Ponziconomy or not?  Proof is in the pudding.

In reply to by DennisR

Kayman ebworthen Sat, 08/04/2018 - 15:02 Permalink

House prices have been rising because of financialization. Costs, aside from land, are market driven, and heading down. Lumber and OSB are in free fall, the only thing stopping the slide is short covering. 

In fact, the basic necessities to build a house are dirt cheap. It is government, banks and extras that make housing expensive.

In reply to by ebworthen

Endgame Napoleon ebworthen Sat, 08/04/2018 - 18:52 Permalink

I have always heard that higher interest rates are better for average people, but some say the price of everything will go up, as businesses are forced to pay higher interest for what they borrow, too, just to stay in operation. It is not just families, buying houses that are too big for their budgets. It is everything you buy going up, while wages and hours continue to go down.

In reply to by ebworthen

Mewa DennisR Sat, 08/04/2018 - 14:52 Permalink

really Bad news is the currency goes to zero like Zimbabwe or Venezuela. At the height of the hyperinflation in Zimbabwe the stock market had the highest gains in the world - but if you cashed all the stocks in you could buy the equivalent of 3 eggs.

Be careful what you wish for - you just might get it

In reply to by DennisR

Endgame Napoleon Mewa Sat, 08/04/2018 - 18:57 Permalink

That is when you anti-Bitcoin traders will wish you had stuffed some crypto into your clients’ Santa Bags. They could, at least, buy a cup of jo at $16,000 BTC, and you would be regarded as Wall Street geniuses, called onto the MSM chat shows to school the financially sluggish public.  

Winning! 

 

In reply to by Mewa

Superlat Endgame Napoleon Sat, 08/04/2018 - 19:35 Permalink

Gold is going down with everything else just like last time. BTC will vaporize.

Eventually, though we should get hyperinflation again, although there is so much more wire money than actual cash, paper still holds value.

Hyperinflation will start when we must pay the world money, but what's going to happen then is the NEW dollar, just like the NEW Lira, and the NEW euro, etc etc etc

In reply to by Endgame Napoleon