Housing Bubble and Bust

Housing bubble has burst and prices have come down quite a bit and then started to rise again. Some are calling for the housing bottom. But a long term home price chart shows that we are still at bubble prices. Inflation adjusted home prices throughout 20th century have been much lower compared to today’s bubble prices we are trying to sustain via various government subsidies:

Inflation Adjusted Home Prices

Inflation Adjusted Home Prices

Real Estate Mania Is Back!

Home bidding wars in Washington D.C. - February 22, 2013

Home-bidding wars have erupted in Washington D.C., a reminder of the days of the real estate frenzy.

While much of the nation is still struggling to emerge from a historic housing-market meltdown, the District is reliving its boom days. High rents, low interest rates, low inventory, and a flood of new residents in their 20s and 30s are making parts of the city feel like it’s 2005 again.

Washington Post, Dec. 20

The article mentions a run-down home within walking distance of Union Station. The list price was $337,000 –but 168 bids later it sold for $760,951.

Prospective home buyers have bid up other Washington D.C. homes; a resurgence of the old real estate mania is also evident in Seattle, Boston and Palo Alto, Calif.

Will these new, highest-bidder home buyers have the price rug pulled out from under them in the same way buyers did in the mid-2000s?

In March 2005, The Elliott Wave Financial Forecast plainly said the real estate market was a bubble about to burst. That issue presented a special section titled “The Real Estate Bust Begins.” With the accompanying two charts below, the issue noted:

As shown in Figure 1, the transference of focus from stocks to property began four days after the NASDAQ’s March 10, 2000 peak, when the S&P 500 Homebuilding Index bottomed. Since then, the index has soared to more than a 700% gain, which resembles the NASDAQ’s October 1998-March 2000 ascent. … The five-wave pattern from 1990 in Figure 2 says that the January drop in home sales is the beginning of a much steeper long-term decline.

Remember, this analysis was published before the historic crash in real estate values.

Indeed, in most parts of the country, residential real estate prices remain well below their peak highs. Yet the resurgent bidding wars in some markets suggest that the lesson about bubbles remains unlearned.

Keep in mind what Robert Prechter wrote in the second edition of his book, Conquer the Crash:

“Real estate prices have always fallen hard when stock prices have fallen hard.” (p. 152)

“At the bottom, buy the home…of your dreams for ten cents or less per dollar of its peak value.” (p. 157)

Is it safe again to speculate in U.S. real estate? How should you handle loans and other debt? Should you rely on the government agencies to protect your finances? You can get answers to these and many more questions in Robert Prechter’s Conquer the Crash. And you can get 8 chapters of this landmark book – free. See below for details.


8 Chapters of Robert Prechter’s Conquer the Crash — FREE

This free, 42-page report can help you prepare for your financial future. You’ll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more.

Get Your FREE 8-Lesson “Conquer the Crash Collection” Now >>

Why does the government subsidize housing?

Uncle Sam wants YOU to buy a house! And an expensive one! Seriously. That is the only game in town. Let me explain why.
When we borrow money, banks create brand new money. They do not lend existing money. Here is how banks create money:
This is called credit inflation. FED has been inflating credit for the last 50 years faster than GDP growth. This extra money in the economy makes it easier to earn it. People feel good. They forget that entire money supply is borrowed bank credit that needs to be paid back someday with interest!
This flood of money makes the current administration look good. Remember all the talk about “Affordable Housing”? And right after the government promised American dream come true, they made mortgage easy, and propelled the home prices. That is not really affordable housing. Now finally the home prices are coming down, and instead of celebrating that home prices are affordable they are trying to propel them up again. This is because uncle sam wants you to borrow money so that banks create money! As simple as that. The more you borrow, the better it is. This is the only tool that the government has to make it look like they are doing good.
This is why government subsidizes mortgages with interest deduction from income. That is a direct wealth transfer from renters / owners to the banks and makes it more attractive to buy expensive homes so that people borrow big, banks create money and inject it into the economy. That is why cash for clunkers. So that you borrow and buy a car. That is why 8K first time home buyer credit. This is why they allowed sub-prime. No 20% down. Liar loans were OK as long as you were willing to be a home owner (aka good citizen). Sounds like a good plan, right? Well, there is a limit to how much people can borrow. When the entire population reaches it’s natural limit, the bust arrives and the same process reverses itself, and it is called deflation.

Click here for a free report on how to survive deflation and another one about the deflationary pressures we are facing.

The Japanese Home Prices

Deflation hit Japan had and they have been struggling with it for more than 2 decades now. Here is a chart that summarizes the Japanese experience:

Japanese Home Prices

Japanese Home Prices

US Housing Crash

Since the real estate bubble popped in the US, housing market crash followed a very similar path in America. Home prices and credit expansion topped and then declined steadily under deflationary pressure:

US Housing Bubble

US Housing Bubble

China Housing Bubble

It seems it is now China’s turn to fly off the cliff and bear the burden of deflating credit and declining home prices:

Chinese Housing Bubble

Chinese Housing Bubble

Slope of Hope in Housing Market

July 16, 2010
By Elliott Wave International

Almost everybody who follows financial markets has heard about climbing the “wall of worry”: the time when prices head up bullishly, but no one quite believes in the rally, so there’s more worry about a fall than a rise.

What’s the opposite condition in the market?

Bob Prechter named it the “slope of hope,” meaning that as prices head down, no one wants to believe the market really has turned bearish, so there’s more hope for a rise than fear of a fall.

Want to Know How to Prosper in a Deflationary Depression?If you haven’t yet given Robert Prechter’s deflation argument your full attention, you should know now that yesterday was the best time to do so. Download Prechter’s 60-Page Guide to Understanding Deflation here.

The market has been rising recently, following a bearish decline from late April through the end of June, which makes now the perfect time to learn more about the slope of hope.

- - - - - - - - -

Excerpted from The Elliott Wave Theorist by Robert Prechter, published June 18, 2010

According to polls, economists are virtually unanimous in the view that the “Great Recession” is over and a recovery is in progress, even though “full employment will take time,” etc. Yet mortgage writing has just plunged to a new low for the cycle (see Figure 1), and housing starts and permits just had their biggest percentage monthly drop since January 1991, which was at the end of a Primary-degree recession. But the latest “recession” supposedly ended a year ago. How can housing activity make new lows this far into a recovery? The answer is in the subtitle to Conquer the Crash, which includes the word depression. The subtleties in economic performance continue to suggest that it “was” not a “recession.” It is a depression, moving forward, in punctuated fashion, slowly but inexorably.

Number of New Mortgages Plunges Again

Despite this outlook, keep in mind what The Elliott Wave Theorist said last month: “Even though the market is about to begin its greatest decline ever, the era of hope is not quite finished.” For as long as another year and a half, there will be rallies, fixes, hopes and reasons to believe in recovery. Our name for this phase of a bear market is the Slope of Hope. This portion of the decline lasts until the center of the wave, where investors stop estimating upside potential and start being concerned with downside potential. Economists in the aggregate will probably not recognize that a depression is in force until 2012 or perhaps beyond. That’s the year the 7.5-year cycle is due to roll over (see April 2010 issue). Stock prices should be much lower by then, but optimism will still dominate, and it will show up in the form of big rallies and repeated calls of a bottom.

Learn How to Prosper in a Deflationary Depression If you haven’t yet given Robert Prechter’s deflation argument your full attention, you should know now that yesterday was the best time to do so. Download 60-Page Guide to Understanding Deflation here.