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The Housing Bubble Is Back

Last week I ran into a friend whom I’d been worrying about. He’s a real estate appraiser and his work had been drying up as interest rates rose and homeowners stopped refinancing their mortgages.

But now he’s back to being happily swamped because instead of refinancing, everyone is buying — often, he says, for above the asking price.

A couple of days later my wife and I were at a slide show put on by friends just back from New Zealand. They’d heard that a neighbor was thinking about selling his house and on an impulse made him an offer. He accepted, and our friends became instant homeowners.

The very next day my wife’s father called to say that the company running a gas station next to his house wants to expand in his direction. They made him an unsolicited – and very generous — offer, which he accepted.

Then, I did an interview with Gordon T. Long’s Macro Analytics website in which Gordon told the following story:

My brother just sold one of his properties in Toronto [Ontario]. He had bidding war with 11 bidders so he demanded cash. Several of the Chinese buyers were on the phone overnight raising the money, which they got. My brother’s still partying after that sale.

It definitely feels like the housing bubble is back. Here’s part of a (factual rather than anecdotal) overview of the subject from Charles Hugh Smith:

Housing’s Echo Bubble Now Exceeds the 2006-07 Bubble Peak

If you need some evidence that the echo-bubble in housing is global, take a look at this chart of Sweden’s housing bubble.

A funny thing often occurs after a mania-fueled asset bubble pops: an echo-bubble inflates a few years later, as monetary authorities and all the institutions that depend on rising asset valuations go all-in to reflate the crushed asset class.

Take a quick look at the Case-Shiller Home Price Index charts for San Francisco, Seattle and Portland, OR. Each now exceeds its previous Housing Bubble #1 peak:

Is an asset bubble merely in the eye of the beholder? This is what the multitudes of monetary authorities (central banks, realty industry analysts, etc.) are claiming: there’s no bubble here, just a “normal market” in action.

This self-serving justification–a bubble isn’t a bubble because we need soaring asset prices–ignores the tell-tale characteristics of bubbles. Even a cursory glance at these charts reveals various characteristics of bubbles: a steep, sustained lift-off, a defined peak, a sharp decline that retraces much or all of the bubble’s rise, and a symmetrical duration of the time needed to inflate and deflate the bubble extremes.

It seems housing bubbles take about 5 to 6 years to reach their bubble peaks, and about half that time to retrace much or all of the gains.

Bubbles have a habit of overshooting on the downside when they finally burst. The Federal Reserve acted quickly in 2009-10 to re-inflate the housing bubble by lowering interest rates to near-zero and buying over $1 trillion of mortgage-backed securities.

When bubbles are followed by echo-bubbles, the bursting of the second bubble tends to signal the end of the speculative cycle in that asset class. There is no fundamental reason why housing could not round-trip to levels below the 2011 post-bubble #1 trough.

If you need some evidence that the echo-bubble in housing is global, take a look at this chart of Sweden’s housing bubble. Oops, did I say bubble? I meant “normal market in action.”

Who is prepared for the inevitable bursting of the echo bubble in housing? Certainly not those who cling to the fantasy that there is no bubble in housing.

Dozens of other stats and charts are out there to support this assertion. With one big departure from 2007: This time around housing is just part of a constellation of bubbles that includes government bonds around the world, equities (the Nasdaq just hit 6000) and all manner of trophy assets like fine art.

Predicting the imminent end of this mother of all financial manias is tiresome for both writers and readers, so let’s just assume it will end eventually, and that its demise will be spectacular.

11 thoughts on "The Housing Bubble Is Back"

  1. Alternative interpretation: it is not real estate bubble but is a, well, dollar collapse.
    Perhaps people are just anxiously getting rid of USD, changing them for anything looking like real asset even if at loss.
    Like major players of any Ponzi Scheme when learning about incoming collapse start to sell their chips off at any price, cause in few days they would cost zero

  2. The Seattle areas’ housing prices make a bit more sense when you see an area adding 275 people a day, 100k new residents a year, in an area that is already built out. There is no land to build new housing so supply and demand dictate prices go up when there is more demand than supply. New folks are moving to the Seattle area for high paying high tech jobs from Amazon, Google, Facebook, Microsoft, and others. High tech employment centers have a certain network effect about them that make it hard for lower priced areas to compete with.

  3. The difference this time is that the bubbles in other countries are way bigger.
    The price of a 1000 square feet flat outside of Tel Aviv is 1/2 a millions $ (in Tel Aviv it’s ~1million dollars), in far area, it’s 300K $.
    This money buys you a big house on half acre lot and the suburbs in America, that’s why many agents are marketing Americam homes.
    I beleive the same happens also in China.

  4. The crazy thing is since nothing monetary is really objective this insanity can continue for another 50+ years. Nothing is fundamentally different than circa 1915 when the the third “US bank” got chartered, despite the debt levels. In fact, it is the debt that keeps things going. When everybody has something to lose by “jumping ship”, no one jumps ship.

  5. In 2016 the US economy expanded at 1.6%. If the USA wasn’t in another housing bubble would we already be in a recession? My friend just refinanced his home and pulled out $30,000. Housing bubbles pump a lot of extra demand into an economy.

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