The Next Bubble to Burst: Will It Be Housing Again?

The modern world of bubbles (source; click to enlarge)

by Gaius Publius

I'm following a number of stories at the moment, including the possible further collapse in carbon (oil and gas) prices; the likely and casual ubiquity of election-stealing by both parties (which has interesting implications for the general election); and the next installment in our "Look Ahead" series, a peer into the future of American political life and governance from the conventions into the reign of the next administration.

But this one-off story deserves your attention. I want to put the existence of a new housing bubble on your radar. It certainly exists. Will it burst soon? There's no telling, but it's as big a bubble as the last one. In my locale (one of those illustrated below) the amount of construction is shocking, given the fact that nothing has structurally changed since the 2007-08 crash.

From Zero Hedge, with charts (emphasis in the original):

Housing Bubble 2.0 - Are You Ready For This?

The mind-numbing Case-Shiller regional charts below are presented without too much comment. As MHanson.com's Mark Hanson adds, the visual says it all.

Bottom line:

Q: If 2006/07 was the peak of the largest housing bubble in history with affordability never better vis a’ vis exotic loans; easy availability of credit; unemployment in the 4%’s; the total workforce at record highs; and growing wages, then what do you call “now” with house prices at or above 2006 levels; worse affordability; tighter credit; higher unemployment; a weakening total workforce; and shrinking wages?

A: Whatever you call it, it’s a greater thing than the Bubble 1.0 peak.

... If these key housing markets hit a wall they will take the rest of the nation with them; bubbles and busts don’t happen in “isolation”.

And now those charts:

Price charts from selected housing markets (click to enlarge).

A few comments from the site (my emphasis here):

• The bubblicious regions above all have one thing in common…STEM [the science-technology-engineering-math sector]. As such, if the tech and biotech sectors hit a wall, which some believe has already begun, so will these housing regions.

• If these key housing markets hit a wall they will take the rest of the nation with them; Bubbles and busts don’t happen in “isolation”.

• House prices have retaken Bubble 1.0 levels on the exact same drivers: easy/cheap/deep credit & liquidity that found its way to real estate. The only difference between both era’s [sic] is which cohorts controlled the credit and liquidity. In Bubble 1.0, end-users were in control. In this bubble, “professional”/private investors and foreigners are. But, they both drove demand and prices in the exact same manner. That is, as incremental buyers with easy/cheap/deep credit & liquidity, able to hit whatever the ask price was, and consequently — due to the US comparable sales appraisal process — pushed all house prices to levels far beyond what typical end-user, shelter-buyers can afford. Thus, the persistent, anemic demand.

• Bubble 2.0 has occurred without a corresponding demand surge just like peak Bubble 1.0. As such, it means something other than fundamental, end-user demand and economics is driving prices this time too.

• The end result of Bubble 2.0 will be the same as 1.0; a demand “mix-shift” and price “reset” back towards end-user fundamentals once the speculators finish up, or events force them to the “sidelines”. ...

And:

• Lastly, I am betting 2016 marks the high for house prices, as mortgage rates can’t go meaningfully lower, the unorthodox demand cohort is exhausted, and real affordability to end-user shelter-buyers has rarely been worse. In fact, I believe this is the year house prices go red yy [year-over-year].

The zero interest rate economy (ZIRP; the "P" stands for "policy"), which is so good for bankers since they "borrow" from the Fed for free, is terrible for us little people. (The central banks are also propping up the stock market, by the way, one of the places the CEO class parks their corporate "take.") All of which creates an economy that is, as Zero Hedge says, "bubblicious." The fact that we're in an economy buoyed by serial bubbles is structural, built-in. The economy will be this unstable until we reregulate and aggressively tax those with too much money and no productive place to invest it.

This is not good for the rest of us, not good at all. Pay attention, and if you can, protect yourself. At some point soon, the next housing crash will occur. And when the banks do need bailing out, watch what happens. The public, left and right, won't tolerate more flat gifts to bankers. So the Europeans are experimenting with something quite different:

According to The Economist, the magazine that coined the term "bail-in", a bail-in occurs when the borrower's creditors are forced to bear some of the burden by having a portion of their debt written off. For example, bondholders in Cyprus banks and depositors with more than 100,000 euros in their accounts were forced to write-off a portion of their holdings. This approach eliminates some of the risk for taxpayers by forcing other creditors to share in the pain and suffering.

While both bail-ins and bail-outs are designed to keep the borrowing institution afloat, the two different methods of accomplishing the goal vary greatly. Bail-outs are designed to keep creditors happy and interest rates low, while bail-ins are ideal in situations where bail-outs are politically difficult or impossible, and creditors aren't keen on the idea of a liquidation event. The new approach became especially popular during the European Sovereign Debt crisis.

Otherwise known as asset confiscation, that is, preserving taxpayer money and helping a firm's bondholders not take the whole hit themselves by putting some of the cost of keeping an institution afloat ... on depositors. Wonder how that will make depositors feel as they're feeling the pinch of the next crisis.

Of course, the government could just let the profligate banks fail; but then, where would the next Treasury Secretary come from? It is a puzzlement.

GP