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Monday, February 14, 2011

Housing Bubbles Crash... ALWAYS...

Tiny bubbles (tiny bubbles)
In the wine (in the wine)
Make me happy (make me happy)
Make me feel fine (make me feel fine)
DON HO—Tiny Bubbles
Tiny Bubbles Popping Everywhere
Seattle’s cancerous housing market is finally showing its true colors—now down 30% from the peak.  Seattle was predicted to have a 11% drop, or a soft landing, being the only housing bubble in history to obey with homeowners needs.  Now the reality is here—and the prediction is for another 5-7% drop in price.  If this prediction in additional drop is anywhere close to the initial estimates, 5-7% will become a 15-20% additional drop in price.  This would be just about right—40-50% from the peak. 
Seattle was somewhat different on the way up because there were more high-earners than many other cities that crashed, but eventually buyers dry up, and the downfall will eat all sweet, crack-like wealth-effect equity up VERY quickly on the way down.  There is no such thing as a soft landing for housing-- not in Seattle.  Not anywhere in the world.
The only part of the story attached at the bottom of this paragraph I disagree with is how rising mortgage rates will get ‘people off the fence.’  These people should hold their fence position.  This is NOT 2006—when rates go up, buying ability is crushed.  In 2006, all the buyer did was state a higher income, or take a loan where the payments didn’t cover the interest due—there were ways to manipulate qualifications in 2006.  Today there are no programs for buyers to s-t-r-e-t-c-h income truths.  Rates at 5.15% today mean that a person with a principle and interest budget of $1200 can afford $30,000 less house that when rates were at 4.00%.  Rates at 5.50% will equal buyer deterioration of over $40,000.  Where does this vanishing money come from?  It comes off the vanishing equity in the sale price.  Read more about Seattle here:

Seattle Is Crashing
I bought my first home in 2005—therefore I am a sucker, right?  I also got the loan for $0 down.  Why?  It wasn’t because I didn’t have the down-payment (I would have gone with an FHA loan with 5% down vs. a conventional loan at 20% down).  It was because I COULD do a loan with 0% down.  Anyone who tells you they put money down during the housing boom because they HAD TO is lying.  Call their bluff or hook them up to a lie detector.  After the results, make them eat soap—dirty liar.
People tend to be on the right side of the fence when it is convenient.  Many of the same people that didn’t buy homes in 2005 because they ‘couldn’t afford’ the house are now saying they ‘knew the crash was coming.”  Funny how when we look at the past we can easily manipulate our non-actions of the current day to make us more superior than anyone who took the big dive on housing (or stocks, or tulips, or beanie babies…)

Enter into play: Red Dragon, the Down Under Croc and The Maple Leaf.
I have been watching global housing for some time and I can honestly say I am scared.  Many worldwide housing bubbles are in the 1st stage of grief—DENIAL.  While there are many countries in the world that have already had housing crashes (USA, Spain, Ireland, Costa Rica…) there are many large players, through massive credit manipulation and expansion, that are just now reaching their peaking points.  Maybe, just maybe, this will be the 1st time in history when we have a massive worldwide housing bubble that has a soft landing and everything is happy and cheery with pastel colors and smiling faces.  Maybe there will be a parade to celebrate it and people will bask in the sunshine and eat cookies and tell stories of how the great bubble never burst and that everything is hunky-dory.  Maybe?  If you have forgotten, that scenario is what it was like to live in Palmdale CA in 2005, or Seattle WA 18 months ago.  That is what the mood is like today in China, Australia and Canada… just another BBQ of ever rising housing prices for the Red Dragon, the Down Under Croc and the Maple Leaf.     
How Long Can China Keep the Game Going?CHINA.  China knows they have a problem and they are trying to slowly raising rates like the sorcerer Alan Greenspan to create a ‘soft landing.’  There is no such thing as a soft landing for an asset bubble.  China’s answer is the same as the Field of Dream’s theory:  Build it and they will come.  They hope by simply building beyond supply that people will buy and the game will play on forever.  Basic economics 101:  Supply vs Demand.  What happens when there is no demand?  Prices may not have peaked in China this Monday, but there are not too many Mondays left before China’s market melts down.   
Australia is Running out of Buyers in the Ponzi Scheme AUSTRALIA.  Australia may be the closest to being in a pure bubble crash.  There is little support left for this housing market and credit is starting to tighten.  Of all the world housing bubbles, Australia will be the one that gets the press first.  While the article above is an opinion piece, I like how he calls the housing market a Ponzi scheme, requiring more and more buyers to buy into the belief that prices will never stop going higher.  Down Under they are running out of buyers…
Canada ... Oh Canada... CANADA.  Poor northern neighbors—they are in the worst state of denial!  Canada is following almost exactly in the USA’s footsteps.  They are raising rates and restricting credit in hopes to control the 9000 LB pink moose in the room.  Canada is trying to wean its way out of the complete housing collapse by getting rid of the funky longer amortization loans, and raise down-payments.  All this will keep prices stable right?  Feel free to visit any bubble town in California in 2007 when they got rid of 100% financing loans, interest-only loans and raised interest rates.  Heck—look at almost anywhere in the United States in 2007 and compare it to today. 
Don’t believe the mania is happening in Canada?  Watch this video and tell me this is NOT 2006 California:  Canada is in a Bubble

USA does the Dip… Double Dip…
Please remember that the USA is in the BARGAINING stage of grief for the housing bubble.  We have tried giving money to people to buy homes and massive interest rate manipulation.  This last week the Feds announced they would wind down Fannie Mae and Freddie Mac.  They want more private money in housing… why?  Because the housing market was (perceived to be) stronger with private money.  Ben The Wizard Bernanke hopes private money will come back the same way it did during the bubble and fill in the void for loans that the GSE’s won’t write—high loan to value trash, stated or no doc garbage, and negative amortizing junk. 

The problem with all of this is that wizards are not real—they are fictional, as is The Wizard Bernanke’s last ditch effort to re-inflate the US housing bubble.  The next stage of grief is Depression—fitting really.  Housing will decline far worse than the great depression.  The final stage is acceptance.  We are far, far away from acceptance… my belief is that people still believe in wizards for the time being and will hang their hat on bargaining while the market double-dips rapidly. 
Please take the time to read one of my favorite bubble pieces that ran in 2005 in Time Magazine about the AMAZING US Housing market: http://www.time.com/time/magazine/article/0,9171,1069097-1,00.html
Feel free to also scour the web and relate this article to many sunshine and cookies articles in China, Canada, Australia, New Zealand, South Africa, Great Brittan, Singapore, India… all in Denial. 
Denial leads to Anger.
R and R Feb 14th    


  1. I was one of those who wanted to buy but prices were too high and interest-only-zero-down-payment-Adjustable-rate-mortgages did not sound right to me. When I did some research I found that it is bound to crash. Anyhow at that time I thought I am sensible and I should not buy a house but now I think I was a fool I should have bought a house at zero down payment and should have foreclosed it now in 2010. That is what people did recently and they did it on purpose. Living FREE for about an year. Banks were so slow to start the foreclosure process that it made sense to stop making payments and live free for 1 year or more.. Save money.
    Then Obama changed rules so your damaged credit does not matter after 3 years and you can buy another house! Great.

  2. Sure is GREAT. I'm in a house now 18 months with no payments. Lovin' it. Just like the guy who started the revolution in Egypt thanked the government for being so stupid and shutting down facebook and taking other restrictive actions, homeowners like me can thank the banks for being greedy fools.

    We will be victorious!
    MUSE - Uprising

  3. Ha ha-- So true! Obama must think he is a wizard as well... Thanks for reading!

  4. Wondering if you have any links to what's going on in New Zealand. Will prices fall there, too?

  5. Patagonia--

    It looks like it is denial in New Zealand as well-- http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10714895

    When governments have to 'manipulate' via LTV or credit restrictions that means something is out of whack! Thanks for reading.