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Humpty Dumpty And the Army of DoomJul 25 '06 Write an essay on this topic.
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The Bottom Line The Bubble has broken, and the egg (houses) are starting to rot.
What A Difference a Year Makes Last year, about this time, I wrote a short piece on the Housing Bubble. Here is a link to that article: http://www.epinions.com/content_4423065732 - July 02 2005 The 2005 writing was titled “Real, but Not Over” – with the crux of the message being that we ARE in a real estate bubble, and that while it could go on for another two years, the last line was “Dont buy houses for the next 2-3 years.” That was actually a follow up to this article: http://www.epinions.com/content_3104284804 - Feb 07 2003 This 2003 writing was titled “Housing Bubble; Real or Not?” With the basic message being that we were entering a property bubble. Humpty Dumpty and the “ARM”y of Doom Humpty Dumpty may or may not be the best metaphor, but certainly it illustrates the point – once it has fallen, housing markets tend to go into very long term declines. These things DO NOT TURN AROUND! They may vacillate a bit from house to house, state to state, region to region; but overall, once the “breaking point” happens, once Humpty has fallen off the wall, things tend to get sticky and hard to put back together. In fact, as the egg rots, the smell gets worse and worse, until the natural effect of time and scavengers break everything down into its components. Worse Than Ever On the way up, all we heard was that real estate has never had a national decline in prices. This is true – but we also never had such a steep rise in real estate prices like we had, nation wide. Here’s a link to a blog post (not mine) that outlines how long some past bubble’s took to reset themselves: http://calculatedrisk.blogspot.com/2006/05/housing-busts-looking-back.html Now. These were in: 1. Well defined regions. 2. Decently good economic recoveries on the way within a few years and 3. Generally in an era of falling interest rates. So. You can clearly see how this would be better than ever! Debt Debt Debt This bubble has probably left a very large amount of toxic, future non-performing loans in “the market” someplace. In fact, given the amount of extremely exotic mortgage debt that was forced fed down an eager public; I would say that this is going to make the Japanese bad debt crisis look like a molehill. There is AT LEAST 2 Trillion dollars of bad debt in the system at the moment. When the “F” word gets thrown around (foreclosure) – we’ll see this materialize, to great horror. And, let’s not forget the “D” word – “Default”. We’ll see a lot of that too, aside from Foreclosures. And let us not forget that these things tend to be self-reinforcing, especially true in a world where: 1. Wages are stagnant 2. Gas prices are increasing 3. Natural gas prices increase rapidly 4. or, the Dollar falls strongly Okay – so none of those are possible. Oh. And I love how the Middle East is so peaceful and democratic now. And those millions of barrels flowing from Iraq. Great! No dark clouds there! Only platinum linings. Housing Values As for houses - in "real" terms you're better off getting something else much more hedged against inflation and much less appreciated already. In fact, in the near term future, before the "end game," you may in fact see significant price declines in houses. We can very easily get a situation in which asset prices decline while consumer prices increase; this reverse of the past 20-30 years of reality would be a big shock to everyone. End Game I would say that the end game for all of this is going to be hyperinflation. Certainly within 20 years, and probably within 10, and potentially within 5 we’ll likely see a “new” US Dollar emerge, with a bunch of zeros taken off the end of it.  |
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