Home » Housing Bubble » The Housing Double Dip, QE3, and Gold

The Housing Double Dip, QE3, and Gold

by John Rubino on May 25, 2011 · 26 comments

Back during the previous bubble the “Real Estate Bust” breaking news section at DollarCollapse rocked: Tons of fresh links with apocalyptic titles and lots of fish-in-a-barrel ideas for shorting the banks and home builders.

Then the action fizzled. Home prices and sales stabilized, and housing seemed destined to bump along for a while, playing little or no role in the burgeoning government bond bubble.

Wrong. The housing bust is back. Where six months ago the headlines were a mixed bag of generally boring stories, today they’re all about plunging prices and anemic sales. Some representative headlines:

New home sales rise, but signal no recovery yet
Home sales slump is widespread
Illinois plans to blow $100 million in troubled mortgage relief program
Foreclosure flood may not have crested yet
As lenders hold homes in foreclosure, sales are hurt
Priciest homes languish in Greenwich, Connecticut
Stunning 360 degree images of abandoned property sites

Here’s why this matters: According to the census bureau, there are about 76 million owner-occupied dwellings in the US, with a median value of about $163,000. That’s about $12 trillion tied up in our homes. And after popping in 2010, the median price is falling again:

A drop of about $20,000 per home, times 76 million units, equals about $1.3 trillion of lost home equity in a little over a year. If the median price drops by this much again by the end of 2012 — pretty reasonable given the momentum of this chart and the facts that 1) state and local governments are just beginning the cuts everyone knows are coming, and 2) the federal government is trying to dial back its unprecedented levels of money creation — the result is a couple trillion sliced out of an economy that needs several trillion dollars of new credit each year just to keep going.

But the larger impact is psychological, because declining home prices push ever-more mortgages under water. One recent study put the number of US mortgage holders who owe more than the value of their house at 11 million, or 23% of the total. So both classes of homeowners have a problem. Those with paid-off homes are losing money on one of their biggest investments. And those with mortgages are seeing what little equity they had wiped out, and in a growing number of cases replaced with negative equity. They’re digging themselves into a hole just by living in their house.

This is uncomfortable, and in a society driven by consumer spending, homeowner discomfort translates to fewer people eating out, buying cars and taking vacations. The frivolity-based economy withers.

Recent macro statistics bear this out, with last quarter’s GDP growth rate down sequentially and most analysts predicting more weakness in the year ahead. And there’s absolutely nothing on the horizon to turn the ship around, since housing is slowing during the heyday of quantitative easing, with Washington running trillion-dollar deficits and the Fed buying up this debt with newly-created currency.

With housing falling and government stimulus shrinking, all the macro pressure would seem to be on the downside. Which means a weak economy going into a presidential election year, something that is virtually never tolerated by the folks with the printing press. So…yet another data point in favor of QE3 or some other big liquification event — and another reason to load up on gold and silver in the very near future.

{ 23 comments… read them below or add one }

sly1 May 25, 2011 at 9:12 pm

Banker foreclosure fraud, robo-signings, defective titles, MBS and CDO fraud… The future looks very bleak for housing and prices are going lower!

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sly1 May 25, 2011 at 9:26 pm

It is only logical that home prices fall to match the low wages and loss of purchasing power caused by the selling out of America by corporate criminals and the banksters!

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Tom May 25, 2011 at 10:59 pm

Your logic is as good as ever, John. They “killed” the born-again Osama so they could declare victory over al-qaeda and get out of Afghanistan. We have Defense Secretary Gates telling Republicans to prepare for big defense cuts. The Dems are actually talking about cutting Medicare. The St. Louis Fed chief says QE2 will end in June and there will be no QE3 and he’s usually a straight talker. But, if the government cuts spending, this economy will drop like a rock. The QE2 money is piled up at the banks. If they won’t print bonds with QE3, how will they continue to liquify the system? Maybe they will actually drop money from helicopters or at least start sending everyone a check each month. BenB that’s what he’d do as a last resort. What else if left?

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kennyg May 25, 2011 at 11:58 pm

My suggestion to everyone is to buy gold and silver, get a hold of god and learn chinese.

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John Phillips May 26, 2011 at 7:41 pm

Kennyg
God, if there is one, helps those who help themselve. Forget god, buy gold and look out for our own government….forget the chinese!

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Sam May 29, 2011 at 4:50 pm

Dear John,
Thanks for the quote “God helps those who help themselves” quote from Benjamin Franklin….perhaps it is a Biblical refrence to “You reap what you sow”.
Our founding fathers new that God is alive and built this country on that faith. If you fear the government perhaps it is because our current leaders no longer hold to the faith of our fathers but instead have sowed debt. And “debtors are the slave to the lender.” that is still true today. So if China owns our debt. Pay attention to the Chinese.
Yes buy gold: “I advise you: Buy gold purified in fire from me so that you may be rich. Buy white clothes from me. Wear them so that you may keep your shameful, naked body from showing. Buy ointment to put on your eyes so that you may see.” Revelation 3:18….maybe God is talking to us.

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Bruce C. May 26, 2011 at 1:03 am

Every one comes to his own understanding in his own time, but it does seem to me that this summer may be the beginning of a sea change in mass psychology.

I think that most people have been aware that there has been a massive media campaign to accentuate the positive and affirm that, once again, the US economy will be able to re-invent itself and triumph, despite all of the negativity and financial industry shenanigans of the recent past. And yet, on the other hand, they also know at various levels that the modern US economy – and all of the Western industrialized economies – are on an unsustainable path, and not just in terms of butting up against diminishing returns “on investment” in almost all areas from pharmaceuticals to consumer entertainment, but also in resource consumption, monetary policy, fiscal policy, and politics.

Until now there has been an existential stalemate between those who think the worst is yet to come and those who think the worst ended in June of ’09. In the meantime there has been unprecedented (and unConstitutional, if not illegal) actions taken by the Fed and Treasury and the Congress and the Obama administration to mitigate, postpone, prop up, ignore, and every other form of financial legerdemain to mask the real economy. Yet despite it all – and I think this is what will fuel the coming cattle call of awareness – downright terrible economic data continues to persist even viewed through the rosiest of glasses. Literally, the best arguments amount to rhetorical assertions along the lines of, “the US may have its problems but every other country is worse.” I predict that the interpretation of ideas like that are going to switch from feeling mildly optimistic to terrifying as waves of awareness course through the populace.

And to further confuse the situation, even if the current economic situation was purely economic there would still be a overall multi-decade deflationary/depressionary counter-trend to the previous consumption/debt binge since the 1990’s. The data referred to in JR’s article is a snap shot of what has begun and will continue for some time. There is a perfect storm brewing that is at once both fascinating and catastrophic. Excessive private debt, bad enough, has been not assumed but multiplied by the Federal government and Fed bank in ways and extents literally believed impossible (both practically and politically) in just a few short years. (So $1.3 T in private RE equity has been lost in the last year, how about an additional $8 T in public debt to compound that?)

No consciousness is forever ignorant, so the-big-banker-in-the-sky may finally let the whole system go (down), but, unfortunately (and this is my greatest personal regret for the TARP, et al boondoggles) those unwise but not stupid “elites” will have by then protected themselves with gold/silver and other definitively unique assets to escape and survive to fight another day in the onward and upward march of humanity.

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sesails July 18, 2011 at 3:34 pm

Well said. I hope that there’s a sea change in the way that Americans view the press. What was at one time a cornerstone of democracy has now become an endless litany of skewed summaries, unreported stories and outright lies.

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sly1 May 26, 2011 at 1:22 am

I am not a China expert but I can see they have a property bubble and serious demographic problems to contend with before they are crowned as an economic utopia?

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Chris May 26, 2011 at 3:16 am

The last crisis, bankers were dancing until the music stopped. This time, I see central bankers dancing. Keep the music going.

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Agent P May 26, 2011 at 7:46 pm

“Which means a weak economy going into a presidential election year, something that is virtually never tolerated by the folks with the printing press. So…yet another data point in favor of QE3 or some other big liquification event — and another reason to load up on gold and silver in the very near future.”

I think this train of thought – if it isn’t already priced in the minds of money/market movers, soon will be materially.

The lynchpin in all this is the public’s ability and willingness to withstand or tolerate economic hardship – i.e., a rapidly decreasing standard of living that may come about faster than anyone would anticipate.

Recent debates (Translation: Circle-Jerk) in Congress surrounding the various budgetary/debt ceiling/deficit concerns should serve as a bellwether of the future, brought about in no small part by a dependent, apathetic and soft citizenry.

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Frank May 27, 2011 at 4:21 am

Tom, they used the “killed OBL” story to push the war deeper into Pakistan. The oil companies have wanted (since Bill Clinton up to today) to build an oil pipleline from central asia thru Afghanistan and down into Baluchistan (southwestern Pakistan) and to the port of Gwadar on the Arabia sea, in order to bypass the Iranian controlled straits of Hormuz. Wake up, buddy.

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Brad Thrasher May 28, 2011 at 1:43 pm

Vote Republican and lose your health care. Now there’s a winning campaign slogan, lol.

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Agent P May 29, 2011 at 8:37 pm

“Vote Republican and lose your health care”.

Actually, it should be more like: Vote your fellow citizen’s mindset (‘Libtard’ vs. ‘Republipuke’ dynamic) and follow the carnival barkers in the media all the way to more of the same/status quo – i.e., incremental dissolution of what remains of your Constitutional liberties…

Not only is the aforementioned sarcasm true, it has Been THE ‘Winning’ socio-political strategy for the past 35 years. And guess what? It’s still working like a charm! Dump the high-minded Right vs. Left dynamic nonsense that passes for political discourse today, and start thinking independently. Your life may and likely Will depend on it within 10 years.

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Brad Thrasher May 30, 2011 at 2:56 am

Agent P, while advocating a pox on all their houses is always a popular sentiment, it gives voice to quitting. This is a serious time for serious people, not quitters.

CNBC’s Rick Santelli made a great point Friday morning. He noted Uncle Sam borrows 42% of the budget. This means of course and is Santelli’s point, that 58% of federal government operations is funded from revenue.

In reality, we ‘re probably talking about reducing the federal government by a quarter to a third of its present size. This is very doable. Hopefully we do it and it isn’t forced upon us.

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kelly May 30, 2011 at 3:44 pm

But, but, how does rejecting both parties amount to quitting?
It seems to me that getting behind R or D is a way of copping out – just letting some behemoth control things instead of destroying these corrupt parties and putting something workable in place.

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Brad Thrasher May 30, 2011 at 5:47 pm

Agent P isn’t advocating for a multi-party system. Agent P is just whining. Absent a second American Revolution which really isn’t practical the only way to change the system is through one of the two major partys.

Working for change within the existing organizational structure isn’t as you suggest, “getting behind R or D is a way of copping out.”

The two party system is too powerful to be changed from without. It can only be changed from within.

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Bruce C. May 30, 2011 at 1:33 am

Some more random thoughts about RE, QE 3, gold, etc.:

As the dollar index weakens, other currencies become relatively more valuable than the US dollar which in itself makes US RE more attractive independent of any other contributing factors. The anecdotal feedback I get from RE agents in South Florida is that most of their sales are to foreigners with cash. But they’re not buying mid-priced homes in the midwest, they’re buying high-end homes and condos for investment and/or retirement living. The vast number of homes available and “in the shadows” are pretty ordinary, and aging and dilapidating by the day.

The conventional opinion developing seems to be that the stock market will either drift sideways or rise a bit more for a few weeks and then begin to roll over, triggering fears of a global economic slow down and another leg down in recession. They figure the Fed will allow this to happen to see if the economy is strong enough to be self-sustaining. But they suspect that it will not be, so expect the Fed to initiate another round of stimulus which will give another shot of adrenaline to the financial markets. Anything to keep interest rates low and to increase inflation, both of which are meant to bolster housing prices (I didn’t say value, just prices. It’s all a numbers game.) So important are RE prices to the Fed, because they affect the balance sheets of the big banks, that this time “QE 3” may not be in the form of direct Federal debt monetization, but perhaps State and municipal debt monetization (this is legal, even without more complicity from Congress, as long as the “munis” purchased are shorter than 1-year duration – which would effectively pay ongoing expenses. I think that’s right.) Another possibility would be fairly opaque behind-the-scenes finagling of the FHA, and Fannie/Freddie debts. Continued increases in the Fed’s balance sheet may be the only way that we’ll know if the Fed is still trying to bail out the Titanic with a bucket.

There are mixed opinions and data concerning the health of the global economy. Some say that it is growing steadily and constitutes the mega-trend of our time as about 3.8 B people in the world seek the lifestyles of the West. That’s about 10 times as many consumers as are in the US, so perhaps the decline of US consumption is not all that important any more. If the equity markets continue to climb despite decreasing US employment, wages, spending, and credit growth, that may be why. On the other hand, some say that there are growing problems in the developing nations. China is losing control of its inflation and is slowing down, Japan is in a recession and slowing down, India is lacking the infrastructure it needs to handle its growth, and other developing economies are having to slow their growth rates to stem their inflation especially in food, among many other examples. None of those problems are permanent however, and could even be considered opportunities, but another and more fundamental problem is that there are not enough resources, particularly oil, to develop and sustain the rest of the world like the West has enjoyed for so long. Cheap energy seems to be an essential ingredient in widespread industrialization and the growth of a middle class.

The main issue concerning gold and silver prices at this point is whether or not the US, Japan, Europe and the UK can manage their fiscal problems. That is usually cast in political terms though, that it is simply a matter of the political will to do so. But I see it as more intractable than even that, even if an unlikely political sea change does occur. I think the Western debt problems are beyond the point of no return on a purely mathematical and fundamental basis. The Greece debt situation may foreshadow the US’s. If Greece wasn’t able to meet it’s debt payments at 2% rates (and hence “the crisis”) what 8-year old can’t see that Greece won’t be able to meet even greater debt expenses at 24% rates, especially with lower GDP caused by decreased government subsidies to its economy in the name of “austerity”. Ditto for the US. Even if Federal deficit spending were reduced by, say, 10% of GDP across the board every year for the next ten years (that’s only about $370 B per year), I think the US economy would implode, and yet anything less than that would not solve the problem. If, instead, the spending rates continue as scheduled to buy enough time for economic growth to finally pick up enough to balance the spending, then GDP would have to grow about 10% per year for at least the next ten years. Nothing close to that has ever happened before, and certainly not for more than a year or two. The US doesn’t have the infrastructure or capital base to do that. That leaves the third option, which is ongoing as we speak – the engineering of negative real interest rates for the foreseeable future. Just as M3 was the best guide to gold’s investment value, negative interest rates are a mirror image of gold prices, but that bit of government-supplied data will (also) no longer be provided due to recent budget cuts. Stay tuned.

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Brad Thrasher May 30, 2011 at 6:39 pm

Hey Bruce, Just some random responses;

- The anecdotal evidence you’re getting from South Florida Realtors is also reflected in the uptick of high end retailers and RE stocks like Toll Bros.

- That the Fed will now induce a controlled decline in GDP following QE 1 & 2 is exactly what Bernanke outlined to the nation in March ’09. JR’s point seems to be that mid and low income consumers still aren’t spending as their just surviving. Toss in political pressure to cut government spending and all that is left to spur economic growth is capital spending.

- Rising energy and food prices have sucked out the modest .04 income gains. Expect even more food inflation as a result of bad weather worldwide. Unrest in the ME had nothing to do with totalitarian regimes and everything to do with food and jobs.

- Greece is 1.9% of Euro GDP and its debt crisis is blown out of proportion. Collectively, the PIIGS represent nearly 26% of Eurozone GDP. Obviously PIIGS are a significant debt/fiscal issue

- Absolutely agree that we are headed for a fiscal crises. It would seem our choice is to follow the PIIGS or Japan. I might be missing something but I don’t see a third option.

All the best.

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JR June 3, 2011 at 4:37 am

Well, golly… If I go broke, I”m just going to go out my front door and chant “Yes we can” (or, alternatively and equally usefully, “Yes we have no bananas”) and wait for Obama’s people to show up in their white coats with my daily free chicken.

Those who actually voted for this utterly feckless “president” should be forced to live in a separate country with him as dictator for the rest of their lives.

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jaspertwo June 24, 2011 at 4:33 am

amen…I love your humour…God help us!!

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John June 5, 2011 at 2:44 pm

What we’re seeing is the culmination of a 30 year of real estate bubble now deflating and widespread mortgage and banking fraud, all perpetrated on the American public to inflate the currency and steal wealth from the middle class.

In any event, a house is a place to live, not an ATM machine.

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Gold Bull August 12, 2011 at 2:58 am

Im definitely bullish on gold. First downgrade of US credit in history, record low housing, global economic problems, fiscal problems. I have converted a lot of my dollars into gold. I believe it will be over $2000 an ounce by the end of the year.

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