Housing Bubble and Bust

This Boom-Bust Cycle in Home Ownership Should Give Home Shoppers Pause September 15, 2021
Here’s “what happens when a consumption item becomes an investment item”.

On a news / talk radio station in my local area, a commercial that frequently runs goes something like this:

“I buy all kinds of houses: big houses and small houses, condemned houses, foreclosed houses, ‘my tenant won’t pay the rent’ houses …” and on it goes. The speaker says he’s a real estate investor and provides his phone number.

Real estate speculation like this helps drive home prices up across the country.

Indeed, on August 27, a financial firm’s chief investment officer told CNBC:

“I feel bad for the people who bought homes over the past year because they’re the ones that paid the very elevated prices.”

The investment officer mentions that if a buyer puts down 5% and home prices correct 10%, the equity is “basically wiped out.”

So, what’s the likelihood that recent homebuyers will feel financial pain anytime soon?

Well, it’s possible that the homeownership boom could continue for a time longer. Then again, if history is a guide, the “bust” part of the equation may be just ahead.

Robert Prechter explains with this chart and commentary from his landmark book, The Socionomic Theory of Finance:

From 1995 to 2006, many speculators built or bought housing and other properties in anticipation of higher prices, thereby treating formerly economic items as financial items. Market participants’ shift in mental orientation from a producing or consuming mindset to a speculative mindset changed their behavior, resulting in a classic boom and bust.

So, this might not be the ideal time to buy a house. Even so, sales have ticked up despite skyrocketing prices (Reuters, August 24):

Sales of new U.S. single-family homes increased in July after three straight monthly declines … .

Of course, everyone needs a place to live, but if current home shoppers can wait, big bargains in real estate may be just around the corner.

Watch the stock market because its trend tends to correlate with housing prices.

The best way to analyze the stock market is by using the Elliott wave model.

Indeed, here’s a quote from Frost & Prechter’s book, Elliott Wave Principle: Key to Market Behavior:

After you have acquired an Elliott “touch,” it will be forever with you, just as a child who learns to ride a bicycle never forgets. Thereafter, catching a turn becomes a fairly common experience and not really too difficult. Furthermore, by giving you a feeling of confidence as to where you are in the progress of the market, a knowledge of Elliott can prepare you psychologically for the fluctuating nature of price movement and free you from sharing the widely practiced analytical error of forever projecting today’s trends linearly into the future. Most important, the Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress. Living in harmony with those trends can make the difference between success and failure in financial affairs.

You can access the online version of this Wall Street classic for free once you become a Club EWI member.

Club EWI is the world’s largest Elliott wave educational community and is free to join. Members enjoy free access to a treasure trove of Elliott wave resources on financial markets, investing and trading.

Get started by following this link: Elliott Wave Principle: Key to Market Behavior — free and unlimited access.

Is the Bubble About to Pop?

Record low interest rates have pushed home prices to new highs in many markets. But will the Housing Bubble pop again?

U.S. Housing Market: Not “a Bubble This Time Around”?
Here’s what usually coincides with a big decline in real estate prices.

You probably know that the U.S. housing market has been red hot.

A certified financial planner wrote a July 20 article for Kiplinger, mentioning the record price levels in many areas of the country, and then added a personal observation:

I witnessed the price rise first-hand. I recently returned from a family vacation in the North Carolina mountains, where many homes now sell for double or triple the price compared to just a couple of years ago.

Stories abound of buyers signing contracts on homes without even doing a walk through. Some real estate agents are advising buyers to forgo inspections, saying they will just slow the process.

Yes, it’s a maniacal residential real estate market.

Indeed, here’s what the recently published July Elliott Wave Theorist, a monthly publication which provides analysis of financial markets and cultural trends, had to say:

Two excerpts from an article posted last week on the property market in my local area sum up the prevailing view:

First,

“It’s the craziest market that I’ve seen in 25 years of experience,” [Mr. X] said.

But,

[Mr. X] said he believes there will not be a bubble this time around, unlike the situation that unfolded in 2008.

It is ever the same: “I remember a top yesterday, and there may be a top in some distant future tomorrow,” but there is never a top today!

The same type of psychology applies to stocks. Indeed, the trends of the real estate and stock markets tend to be strongly correlated.

This chart from Robert Prechter’s 2020 edition of Conquer the Crash has been shown before in these pages, and it’s a good time to show it again. Here’s the brief commentary:

Real estate prices have always fallen hard when stock prices have fallen hard. The chart displays this reliable relationship.

So, if you want to get a good idea of when home prices will likely tumble, keep an eye on the Elliott wave pattern of the stock market.

You can learn about the Elliott wave model for analyzing and forecasting financial markets by reading Frost & Prechter’s Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here’s a quote from the book:

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated five such patterns, or “waves,” that recur in market price data. He named, defined and illustrated these patterns and their variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle.

You can access the online version of the book for free once you become a member of Club EWI, which is the world’s largest Elliott wave educational community.

Club EWI membership is also free.

Here’s the link to get started: Elliott Wave Principle: Key to Market Behavior — free and instant access.

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. Keep in mind, if the FED is not aligned with the US government, they can adopt reverse policies to make the administration look bad.

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. When the home prices are came down in 2008-2011, instead of celebrating that home prices are affordable they adopted low interest rate policies 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 they offered cash for clunkers. So that you borrow and buy a car. That is why 8K first time home buyer credit was a in thing in the 2008 crash. This is why they allowed sub-prime. No 20% down.┬áLiar loans were OK as long as you were willing to be a home owner (aka good citizen).┬áSounds 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.

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