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:
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.
Why does the government subsidize housing?
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:
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:
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:
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.
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.
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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.
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.