Ode to the Housing Market: Learning to Love the Housing Bubble.
Well the week definitely ended on a sour note and appropriately so. A trio of CEOs made their case for insane compensation while their companies walked off the proverbial cliff. We also had the largest number of job losses in 5 years making it harder for certain people to deny that we really are in a recession. Curiously, the unemployment rate dipped and the market zigged and zagged in the early stages of the day until they realized that many folks simply stopped looking for work. Way back in July 2007 I made the case that housing had entered its Minsky Moment: Housing Minsky Moment: 3 Factors. Prime Contagion, Record Foreclosures, and Publicity. In fact, Countrywide was making the news at that time as well:
“Mozilo likened the housing market to a gigantic ship needing to turn in the ocean. It will take time was his underlying point. I like to think of the housing market more like a NASA mortgage rocket with no turning back. Have you ever tried turning back a rocket-propelled vessel? His statement seems to offer some hope that housing will return even though he unloaded millions in his company stock. Maybe he forgot to mention that the ship he was referencing was the Titanic. Either way, housing is passed the shaky ground stage. I’ve shown countless examples in our Real Homes of Genius series that clearly highlights an outrageous bubble housing psychology. We also discussed a few months back the subprime implosion as credit suddenly tightened and subprime lenders started dropping like moths heading toward the light. In fact, I felt this was the watershed event and would set the tone for the summer.”
The idea behind a Minsky moment is that long periods of economic stability usher in demand for leverage which slowly begins to build into the system. This stability provides grounds for credit growth. In the initial stages, credit is given out in moderate portions, starts to expand, and finally reaches Ponzi like characteristics. Finally the market implodes on itself. I’m surprised how many are saying this is the true Minsky moment. No, the moment at least in reference to subprime happened last year and we are now facing the afterglow of the bursting. I wanted to sum up my sentiment in a poem and creative writing piece. I call it, Ode to the Housing Market:
Ode to the Housing Market
Housing always goes up!
Real estate is the best investment ever!
They’re not making anymore land.
What do you mean housing is down?
Speculating in housing is risky?
The US has other states besides California and Florida?
I’m surprised as to what is occurring.
My realm of understanding is now shattered.
But surely I’ll be able to flip my home because of granite countertops.
Alas! Granite countertops will save me.
That shimmering rock that allows me to display my 20 credit card bills all in one spot.
Are you not the true rock of Gibraltar?
HGTV told me that you were so it is written in stone.
Up, up, up…crash.
Jobs, jobs, jobs…no jobs.
Surprised I am.
SIV, CDO, MBS, CMO, VIE, and all I really want is to gas up my SUV.
The alphabet soup of confusion swimming in a sea of $100 barrel oil!
What do you mean my rate just doubled?
What do you mean a margin call requires me to come up with capital?
My HELOC is disappearing quicker than Chris Angel.
Credit cards are really freaking my mind.
Who’s this Alan Greenspan and Ben Bernanke?
First, they tell me adjustable rate mortgages are good.
Now they are telling lenders to cut my mortgage.
Deep in the pit of my stomach I like lower mortgages.
They lower rates every six weeks.
Ergo, I like these people.
Can we also slash the balance on my credit cards?
Raise the roof! Raise the caps! Alleluia!
Bigger is always better.
Bigger cars.
Bigger sodas.
Bigger homes.
Bigger bellies.
So why not bigger mortgages?
Maybe it is I who should be the next presidential advisor.
Monster hybrid loans are next.
Whoops, I just resigned.
Angry are the people!
They didn’t see this coming they cry.
Minimum wage and no million dollar home?
Living in a 500 square foot home with a 100-inch flat screen TV.
Best Buy is happy.
That wasn’t a best buy when the bill comes in.
Talking heads make sense of this all!
You genetically altered cyborgs.
They call you talking heads because we never see your body.
Reveal your full torso to us!
Disclose your torso by April 15!
We’ll trust you more if we can see your Docker khakis.
You open your mouth and the ticker moves up.
Conflict of interest, not today.
The US Dollar goes down like an elevator descending into the basement.
We arrive at the basement and find a sea of debt.
Take me back up!
I cannot stand the horror!
What do you mean we need $2 billion a day from foreigners?
In comes, toys, electronics, clothes, and all the things we buy.
Out goes raw materials and jobs.
Fair trade it is.
Housing has now bottomed!
Best time to buy!
Who cares about the economy because they aren’t making anymore economy.
Get in before rates go lower and home prices go lower.
I see that Snoop Dogg is teaching us about fatherhood.
We have a former Goldman Sachs CEO as US Treasury Secretary.
A presidential candidate tells us he doesn’t know much about the economy.
Economy number one issue for voters.
Wins party nomination.
Get in right now that things make perfect sense.
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9 Responses to “Ode to the Housing Market: Learning to Love the Housing Bubble.”
Where is the poem? But after so many great posts we can forgive you this one.
Stick to what you do best and keep up the good work.
America? I read of it once.
An old encyclopedia spoke of a country who knew it was the best.
They lived on credit, military might, and hubris.
Where is it? I think parts of it make up North Mexico.
Botany. That ancient science. But why, father, do we call these diminuitive arbicoles “little trees”? Why is the old word now taboo?
As always Doc you write very interesting articles! The housing crash here in California has just started and prices has just started to come down. They have a long way to go to come down to normal prices where salaries control the housing prices instead of greed, speculation and creative mortgages. The American dream has become the American nightmare. Why do people still have it in their mind that a they must purchase a home. The good doctor posted the first realistic calculation about housing cost the other day. People do not realize how expensive a house is. They do not see the whole picture. My wife and I make 160000usd/year and have not bought a house yet here in the Inland Empire because of one reason, simply cannot afford it. The question is: how much are other people making on average in the inland empire! Either my math skills are not that great or there are a lot of morans out there. Curious to find out!
Thanks,
Wow – Leaves of Grass? That approximate 50% / 70% reader to ‘owner’ ration is likely to appear in the comments…
Calculated Risk outlined the new “Temporary Jumbo Conforming” guidelines – the so-called ‘TJC’. No cash out refi’s allowed are a key point, and 60% max LTV for 2nd home and non-owner. Think of that – investors need 40% down. Horse is gone, barn door is open – great time to close it.
Irvine Housing Blog has a great term for the refurb kitchen – pergraniteel.
Maybe we can get some Poe in here – ‘quoth the Raven – Nevermore’.
Wow….Tom. It’s nice to know there are other couples in the same situation as my husband and I find ourselves. Only we live in Los Angeles. Around 1999 we looked at houses in our neighborhood, little 2 or 3 bedrooms build in 1930. Those homes were going for between 270,000-350,000 then. Now those same homes ask for 1.4 million. We definitely cannot afford those prices. Are that many people making that much money?
I read this post regularly and find it very valuable. It provides much needed information in a comprehensive way that is not covered by the main stream
media. This particular post however highlights one aspect of this blog that I am the least comfortable with. That is a tendency for self indulging, self righteous “I told you so” and an underlying critical / negative mindset that does not add to the debate. Yes the average group think is immature and self destructive, how many times do we need to say it. There is a saying I like that goes “we are not changed by what we turn from but what we turn to”. Blessings and keep up the good work.
Not everyone in California is house poor and that has driven a lot of the housing inflation. I ‘Zillowed’ the house I lived in with my parents in San Francisco. They paid $68,000 for it in 1969. Zillow values it at almost $3.5 million today. OK they finished off the basement but a 50 fold price increase in 39 years is rather excessive even for California. By way of comparison had a Ford Mustang gone up at the same rate as San Francisco real estate a basic model would set you back over $200,000! A modest Eichler starter home in San Rafael or Palo Alto that sold new for $30,000 are million dollar homes today. That gives the 18 million people who lived in California in 1970 and had already bought a house a rather different economic perspective than the 18 million who arrived since. They rode the long housing boom up and they or their heirs have no problem buying a million dollar home. In fact for many that would be ‘downsizing’.
You have the same questions I have Gael! I am stunned by people and their spending habits. I have been here for almost 3 years now, Moved here 2005 at the top of the housing insanity. Realtards and new home sales people told me this”if you don’t buy now you will be priced out of the market”. That statement deserves a moran award! Priced out of the market, what exactly did they mean by that?
Well, they have their answer now! It’s interesting listening to people at New Home models when they talk to the sale people. They just don’t get it. A lot of people have no clue there is a housing crash! I always said upfront to the sales people in their face that I cannot afford those prices. I always got that same look from them, kind of a empty look. I got judged by them at that moment. I was not worth anything in their minds! I still love to argue with them. Anyway, how much are people making. Dying to find out!
@Scott
Unfortunately part of your argument is specious.
There are significant tax consequences for ‘trading in’ an existing property, for those 18 million residents who have lived here since 1969.
Only a fraction of those residents (1) owned then, (2) kept, (3) didn’t over-encumber. Those who meet the criteria can take a one time Prop 60/90 exemption, however not all counties subscribe, further limiting those who might want to move and keep their tax basis. In turn this limits demand for the remainder properties on the market.
The heirs looking to buy only will obtain funds in the event they encumber or sell the (grand)parents house, which incurs sales costs, stepped up basis and resultant cap gains or inheritance tax issues, and of course new loan qualification requirements. If there is more than 1 heir, the ‘housing riches’ get diluted upon inheritance.
And the point you make – ‘they would be downsizing’ – argues against them moving – so again, a component of demand is removed from the market.
So, the large and increasing housing supply cannot rely on being relieved by increased demand from long time owners, even those who own free and clear, until such time that a basket of factors balances the costs of sale with the value of acquisition.
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