Greatest Real Estate Bubble In Modern History Not Done Bursting


By Patrick   Follow   Sun, 18 Nov 2012, 1:16pm   3,936 views   29 comments
In Menlo Park CA 94025   Watch (0)   Share   Quote   Permalink   Like   Dislike  

http://www.forbes.com/sites/greatspeculations/2012/10/03/greatest-real-estate-bubble-in-modern-history-has-yet-to-really-burst/?source=Patrick.net

Foreclosure sign in Las Vegas, Nevada, November 8, 2010 Never in history have so many middle class households been able to borrow so much against real estate at such low mortgage rates. In the last great debt bubble in the U.S. that peaked in 1929, the average household could not afford a house and had to put down 50% and get a 5-year balloon mortgage. Hence, home prices did not bubble as much as stocks and then they only fell 26% in the worst depression in U.S. history. In emerging countries never have new middle and upper class households grown...

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  1. APOCALYPSEFUCKisShostikovitch


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    1   1:34pm Sun 18 Nov 2012   Share   Quote   Permalink   Like (7)   Dislike  

    Fifty per cent down is reasonable. Skin in the game. Let's get back to those conservative values!

  2. Patrick


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    2   2:10pm Sun 18 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Darrell In Phoenix says

    WTF? I tried posting this earlier.

    I send you a mail about it. When you first posted it, there was a quoting bug that prevented it from being accepted. So I re-submitted it.

  3. Bellingham Bill


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    3   2:23pm Sun 18 Nov 2012   Share   Quote   Permalink   Like (4)   Dislike  

    What I find immensely annoying is that nobody is apparently cognizant of the feedback-loop nature of the housing bubble, especially its endstages of 2004-2007.

    The story did not end with people taking out suicide loans and moving into their new, unaffordable houses.

    What was also happening was trillions of cash-out refinancing, hundreds of billions of transaction volume being skimmed at 6%+, home refurbishment employment and supply chains were booming too.

    We had a FIRE sector running totally out of control, sucking in trillions of dollars and powering a massive part of what was the "Bush Boom".

    http://www.nationalreview.com/corner/153626/bush-boom-continues/larry-kudlow

    The stupid thing is that beyond a certain point, housing moves from functional wealth to pure consumption. Nobody needs stainless appliances, granite countertops, or gift-wrapping rooms to be better wealth-producers out in the real world. We were borrowing trillions of dollars to just decorate our caves!

    http://research.stlouisfed.org/fred2/series/HHMSDODNS

    This flow was pretty damn good "redistribution" though, giving the middle classes spending power that they had been losing since the 2001 crash if not 1990 crash, allowing to shift their revolving debt onto their mortgaged debt.

    But not everyone can borrow their way to prosperity.

    The 1980s land boom in Japan was somewhat different, there wasn't so much direct cash-out shenanigans going on, though there was a real "wealth effect" of people spending more since they had more asset valuation, plus people could easily borrow against their properties to buy stocks and invest in business opportunities -- this drove both the stock market and land valuations ever upwards.

    Their finance ministry stepped in and just lowered the boom on much of the flim-flam credit sector stuff that was choking them. This just killed real estate dead and worsened the resulting recession as the tide went out and everyone who had waded in since 1985 was horribly exposed.

  4. bmwman91


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    4   7:17pm Sun 18 Nov 2012   Share   Quote   Permalink   Like (3)   Dislike  

    The Fed & Obummer found an old bike pump and some PCP in the central bank's closet. The bubble has holes in it, but they are managing to get hot air back in faster than it can leak out. It's anyone's guess how long this will keep up. At this point though, I only expect another house price correction when it comes hand-in-hand with the rest of the economy eviscerating itself. Housing is basically in every single pension fund and 401k now, like it or not, and it isn't going down until the rest of the economy does too. Baby boomers and their parents make up the largest voting group, and wall street has the government's balls in a vise.

    The government is working, and will continue to work to serve these groups, and these groups are very dependent on housing going up in price. Given QE3/Infinity and the declaration that Op.Twist will continue until the end of 2015, I think that it should now be clear that the government and Fed will stop at literally NOTHING to ensure that prices increase. They can keep on doing things and doing things until...they can't. At that point, they will only have ceased because something "broke" and that happens to be our entire economy.

    Two quotes come to mind...

    Plan accordingly.

  5. bmwman91


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    5   9:18pm Sun 18 Nov 2012   Share   Quote   Permalink   Like (2)   Dislike  

    Oh and before the resident foaming-at-the-mouth libtards in here lose their shit because I mentioned The Messiah as part of the reason that housing is a mess, note that I am not a registered Republican, I didn't vote Republican this year or 4 years ago and I generally view the Republican party to be just as incompetent, crooked and generally bad-for-America as the Democratic party. Both are raping America. One uses a condom. You can argue over who is wearing it alllllll you want.

  6. Bellingham Bill


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    6   9:37pm Sun 18 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    bmwman91 says

    before the resident foaming-at-the-mouth libtards in here lose their shit because I mentioned The Messiah

    I am a "libtard" and I agree with your description.

    The first pump & dump was 2002-2007. I don't know the incompetent/evil divide on that worked, but the end result was simply massive overleveraging of most everyone's balance sheets.

    This is evident at the grossest scale here:

    http://research.stlouisfed.org/fred2/graph/?g=cWB

    but to say "both sides suck" is to not undertand where the great inflections upwards occurred in that graph.

    The Democrats -- and, let us not forget, Bush Sr -- raised taxes 1987-1993. That put this nation on a better fiscal course but in the end the electorate punished them for it in 1992 & 1994.

    http://research.stlouisfed.org/fred2/series/NETEXP

    is one example how Clinton didn't really do much good in his 2nd term, not that he could given the divided government we had then, too.

    The foundational imbalance in this economy is that the top 10% own ~90% of this country and the top 5% is clearing ONE THIRD of the national income. This is just killing velocity within the paycheck economy, and we used the housing bubble and now the government bubble to keep things from blowing up completely.

    The conservative Republican clownshow shows absolutely ZERO understanding of this.

    Us "libtards" like Krugman, Stiglitz, Reich, etc. tend to see this problem at least.

    I don't have any particular advice to give Obama. Things are just too fucked all around, really. People are just going to have to learn the hard way.

  7. bmwman91


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    7   10:14pm Sun 18 Nov 2012   Share   Quote   Permalink   Like (3)   Dislike  

    Bellingham Bill says

    I don't have any particular advice to give Obama. Things are just too fucked all around, really. People are just going to have to learn the hard way.

    Agreed.

    Also, I don't define the current crop of Republicans as "conservative", or at least not in the political sense. That does the word a disservice. Neo-conservative probably fits better. I don't see any way that a real fiscal conservative could ever align with the Republicans. They do seem to take the prize for pandering to the religious ultra-conservative fringe though.

    As a middle / upper-middle class guy, I can't really agree with either party. The Dems want to take my money and give it to hordes of people that didn't earn it. The Republicans want to take my money and give it to a bunch of crooked assholes that certainly don't need it. Gross simplification here, sure. I can see the appeal of the Dems from a utilitarian point of view, but 2 rights don't make a wrong, etc.

    I don't consider you a "libtard" since you seem to be capable of critical thought. "Libtard" is reserved for the left-leaning equivalent of the Neo-Con that defends their party at every chance because they either have a big ego in the way, or insufficient mental capacity to see that letting an arbitrary political label define how they think is a bad idea. Usually a mix of both.

  8. David9


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    8   10:32pm Sun 18 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Not to be negative, but driving around just now, gosh, the 98 cent store just closed, Yet housing prices are rising, go figure.

  9. Kevin


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    9   10:49pm Sun 18 Nov 2012   Share   Quote   Permalink   Like (2)   Dislike  

    This article was written by Harry Dent. The same guy who claimed that the Dow was going to be down to 3800 by 2012 back in 2009.

    In 2004 he was claiming that the dow was going to be at 40,000 by 2010.

    The mutual fund that he managed lost over 80% of its value in two years.

    He is currently still predicting that the DJIA is going down to 3500, though now he's saying 2013 or 2014.

    Anyone who takes investing advice from this guy is an idiot. He has been so consistently WRONG about everything that the best advice is to just do the opposite of whatever he recommends.

  10. Bellingham Bill


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    10   10:49pm Sun 18 Nov 2012   Share   Quote   Permalink   Like (2)   Dislike  

    bmwman91 says

    The Dems want to take my money and give it to hordes of people that didn't earn it.

    Thing is, not everyone in this nation can secure a six-figure income. Or even a five-figure income.

    Too many people and not enough opportunity.

    The nordic states + Germany do this economy thing a lot better than us, I think.

    http://research.stlouisfed.org/fred2/graph/?g=cWG

    shows PER-WORKER real gdp (2005) dollars is over $100,000 now, double that of the 1950s. Yet this nation is totally broke.

    How can that be?

    It's the rents that are sucking the masses dry. Land is the major rent-tap on the masses, just look at how Iwog's operation is working, he's got them coming and going, sucking their money via housing rents and then finishing them off profiting from rent-seeking in the artificial scarcity and ginned up bullshit of the legal sector.

    I'll tell you what -- the minimum wage schlubs in my city have created more wealth for this nation than a thousand Mitt Romneys.

    http://research.stlouisfed.org/fred2/series/CP/

    Now, if I were King I'd tax the rent-seeking directly before incomes per se, but people aren't really equipped to see the problem let alone such a solution.

  11. Bellingham Bill


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    11   10:54pm Sun 18 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    bmwman91 says

    I don't define the current crop of Republicans as "conservative"

    yeah, well, the Romney wing of the Republican party is repeating your moocher vs. maker sentiment.

    This is a fantastically wealthy country, problem is the top 10% own 90% of it.

  12. Bellingham Bill


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    12   11:27pm Sun 18 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    E-man says

    It's interesting that corporate profit went sideways in Bill Clinton's 2nd term. What changed?

    dunno, 1990s is a total mystery to me really.

    http://en.wikipedia.org/wiki/1997_Asian_financial_crisis

    had something to do with it I would assume.

    There was no hiccup in jobs or wages then:

    http://research.stlouisfed.org/fred2/graph/?g=cWI

  13. Kevin


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    13   1:02am Mon 19 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    E-man says

    Kevin says

    This article was written by Harry Dent. The same guy who claimed that the Dow was going to be down to 3800 by 2012 back in 2009.

    In 2004 he was claiming that the dow was going to be at 40,000 by 2010.

    The mutual fund that he managed lost over 80% of its value in two years.

    He is currently still predicting that the DJIA is going down to 3500, though now he's saying 2013 or 2014.

    Anyone who takes investing advice from this guy is an idiot. He has been so consistently WRONG about everything that the best advice is to just do the opposite of whatever he recommends.

    What amazing is that the guy still has a job. His unemployment checks should have expired years ago.

    He sells books to people who want to believe what he's selling. It's the same way that other people who are full of shit like Deepak Chopra, Eckhard Tolle, and Suze Orman sell books.

    (Yes, I'm just jealous that I'm not a good enough writer nor am I evil enough to write that kind of stuff)

  14. Bellingham Bill


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    14   12:46pm Mon 19 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    E-man says

    Something doesn't add up.

    http://research.stlouisfed.org/fred2/graph/?g=cXF

    red is GDP
    blue is federal tax revenue
    green is tax/GDP (right)

    On the spending side, the government gravy train was held in check in the 1990s:

    http://research.stlouisfed.org/fred2/graph/?id=FGEXPND

    As % GDP:

    http://research.stlouisfed.org/fred2/graph/?g=cXG

  15. thunderlips11


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    15   1:02pm Mon 19 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Despite exploding productivity (compare the education of the average worker today vs. 30 years ago) wages aren't increasing. Most of our problem is that too few are being ludicrously over-"rewarded" vs. what they contribute.

    The place to start is with hedge fund management commissions being taxed at cap gains. By current logic, Realtors should also be paying cap gains instead of having their commissions taxed as Salary/Wages.

  16. uomo_senza_nome


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    16   8:11pm Mon 19 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Patrick,

    There's an interesting debate between this guy and Jim Rickards on Youtube.

    Rickards tears him apart IMO.

    Dent has made so many bad calls over the years, it's not a joke.

    Sure real estate bubble has not burst yet, but the Fed and the USG will not allow it to the burst. That is the point.

    As BMW will say, THE SPICE MUST FLOW!

  17. bmwman91


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    17   11:42pm Mon 19 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Make sure to say it in a raspy voice, as if parched by the desiccated desert sands. "The spiceeee must flowwwww!"

    I have to wonder...how many people in here are nerdy enough to get the reference?

  18. Kevin


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    18   1:13am Tue 20 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    uomo_senza_nome says

    Patrick,

    There's an interesting debate between this guy and Jim Rickards on Youtube.

    Rickards tears him apart IMO.

    Dent has made so many bad calls over the years, it's not a joke.

    Sure real estate bubble has not burst yet, but the Fed and the USG will not allow it to the burst. That is the point.

    As BMW will say, THE SPICE MUST FLOW!

    The whole video consists of this guy peddling old white man rage to a room full of old white men.

    Want to sell angry old white men books? Just tell them about how much worse things are than they used to be, and how it's all the fault of the government.

  19. scott777


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    19   4:56am Tue 20 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Was looking at homes in Costa Mesa, CA last weekend. I chickened out from buying a home there about a year and a half ago. Now the same piece of $hit is 15% more. Should I have listened to the Mortgage broker then who said that there is only one way out of this mess: INFLATION? All I wanted was to be able to see enough appreciation to get out if needed. Opportunity missed.

    The solution is INFLATION. It is the best solution for defaulting on debt that cant be paid back.

    Think about it. The government could have and should have let the housing market crash and should have gotten rid of FHA, VA and other programs. Have normal interest rates. That would have created affordable housing and promoted savings for people who dont have 20% down.

    The MACHINE of housing opted for INFLATION. Too many people are under water and inflation will bring them back afloat.

    Idiots are living in nice homes by gambling with other peoples money at all levels and the downside for them is bad credit for a couple years if they time the market wrong. But if I see how I live and how they are living I realize they are smart and I am dumb.

  20. upisdown


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    20   6:11am Tue 20 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    sky is falling........................

  21. uomo_senza_nome


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    21   7:07am Tue 20 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Kevin says

    Just tell them about how much worse things are than they used to be, and how it's all the fault of the government.

    very true. I don't agree with Rickards, but he's pretty good at complexity theory and its application to capital markets. He doesn't talk about it in this video, but does in his book -- Currency Wars.

  22. maxweber21


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    22   7:31am Tue 20 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    But you have to realize the RISK to the loan institutions IS much less than 1920's. Today there is a huge safety net for these loan institutions. Housing CANNOT go down drastically because the ruling money controllers will not let it. So, you could even pay people to take loans if you know you will always be refunded for any losses (Japan!). (and those FDA rural loans!)

    1900's. Loaning money might mean you don't get paid back. You might get stuck with a worth much less house.
    2000's. Loaning money means no risk or just some risk of administrative headache as Uncle Sam or Uncle FrED will always cut you a check. Or your favorite uncle depending on your country.

    When the risk was there, the person had to bear more of the risk. Put down more. Now that the risk has been absorbed/transferred to a governing/ruling authority, the person can put down much less. The loaner will not in either case be able to absorb more risk. The loaner has to have that risk underwritten by the government/rulling authority to agree to it/pass it through.

    What is hugely missing in housing price analysis is an understanding of this. The market of 2000-2007 can NOT be compared to the market of today. The two are an apple and an orange. The market of today has an enormous safety net for loaners. Its a whole new system. The prices of housing today are priced in that system. These are not the same houses in terms of a financial investment as they were 10 years ago or 100 years ago.

  23. maxweber21


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    23   7:40am Tue 20 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    BTW, Mumbai was probably heavily underpriced. With India wages about the same as USA wages for the same skilll level, the housing there should be about the same prices as other cities in the world.

  24. Kevin


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    24   8:09am Tue 20 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    maxweber21 says

    BTW, Mumbai was probably heavily underpriced. With India wages about the same as USA wages for the same skilll level, the housing there should be about the same prices as other cities in the world.

    Mumbai has a per capita income of less than $10000. Even the poorest cities in the us are 3 to 4 times that.

  25. VestedInterests


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    25   10:49am Tue 20 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Las Vegas -> 3 X median income($53,000) is more than enough for a vacancy rate of 15% .

  26. maxweber21


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    26   12:14pm Tue 20 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Kevin says

    maxweber21 says



    BTW, Mumbai was probably heavily underpriced. With India wages about the same as USA wages for the same skilll level, the housing there should be about the same prices as other cities in the world.


    Mumbai has a per capita income of less than $10000. Even the poorest cities in the us are 3 to 4 times that.

    You can't compare Per Capita agrarian societies to urban societies. E.g. Congo is like $250 per capita. Clearly cash is not a major part of their everyday living. The challenge for India is it really is a third world country with a first world country inside of it. The housing prices in 1st world areas are comparable to the 1st world elsewhere in teh world. So are the pay. E.g. company I worked for before this one was paying $31/hr for India workers with no experience and also $29.99 or less/hr for American workers with 3-5 years experience. Computer programmers. All degreed. Americans typically also had a Masters degree, albeit IS or such.

  27. david1


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    27   1:21pm Tue 20 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    maxweber21 says

    company I worked for before this one was paying $31/hr for India workers with no experience

    Is this a typo? If this is true your old company was paying 2-2.5 times market.

    Did they go bankrupt or something?

  28. thomaswong.1986


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    28   1:24pm Tue 20 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    E-man says

    It's interesting that corporate profit went sideways in Bill Clinton's 2nd term. What changed?

    dunno, 1990s is a total mystery to me really.

    http://en.wikipedia.org/wiki/1997_Asian_financial_crisis

    had something to do with it I would assume.

    There was no hiccup in jobs or wages then:

    http://research.stlouisfed.org/fred2/graph/?g=cWI

    The facts would surprise you of the "hiccups" we had in places like SoCal and SFBA..

  29. Kevin


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    29   3:53am Wed 21 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    maxweber21 says

    You can't compare Per Capita agrarian societies to urban societies. E.g. Congo is like $250 per capita. Clearly cash is not a major part of their everyday living. The challenge for India is it really is a third world country with a first world country inside of it. The housing prices in 1st world areas are comparable to the 1st world elsewhere in teh world. So are the pay. E.g. company I worked for before this one was paying $31/hr for India workers with no experience and also $29.99 or less/hr for American workers with 3-5 years experience. Computer programmers. All degreed. Americans typically also had a Masters degree, albeit IS or such.

    First of all, $31/hr. isn't anywhere close to what a degreed "programmer" in a big US city makes. Interns make more than that.

    Second of all, $31 an hour isn't anywhere remotely close to enough to be buying all of those $million+ apartments.

    But the fact of the matter is that just because some people make a lot more money than other people doesn't mean much. Averages matter. Housing costs can only be as high as people can possibly afford. You can pack a multi-generational family into a one room hovel, but they still have to be able to pay for that hovel somehow.

    Mumbai has a huge unsustainable bubble that makes silicon valley prices look downright rational. Neither incomes nor population growth align with the increase in costs over the last decade. All of those guys working in the US who think that they're "investing" in apartments back home are going to lose their asses.

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