Another brilliant piece from Charles Hugh Smith. I don’t know how he puts out such great stuff on a daily basis. He is much more pessimistic about the housing market than me. I see another 25% down. He sees another 50% down.
Submitted by Charles Hugh-Smith of Of Two Minds blog,
Peak Housing reflects not just a credit bubble but Peak Fraud and Peak Suburbia.
Once again pundits are claiming that housing is “finally recovering.” But they’re overlooking three peaks: Peak Housing, Peak Financial Fraud, and Peak Suburbia, all of which suggest years of stagnation and decline, not “recovery.”
Here is the latest Case-Shiller index, which has traced out a nearly textbook bubble and a return to the mean that has been artificially restrained by trillions of dollars of Federal subsidies and backstopping of the housing market:
Here is a classic bubble and pop. Note that the “recovery” to bubble heights never arrived:
12 years later, the NASDAQ is around 3,000. If we adjust that by the 33% inflation since 2000 calculated by the BLS (Bureau of Labor Statistics), then the NAZ is around 40% of the 2000 peak.
Note that there were several “recoveries” that fizzled before the index finally round-tripped to pre-bubble prices. On the Case-Shiller, that suggests an eventual drop from 130 to 75, the pre-bubble level.
Like all other systems that have run their course, housing follows an S-curve.
After the vaporization of assets and cash in the Great Depression, America had largely reverted to a nation of renters. The postwar boom of plentiful jobs, cheap, government-guaranteed VA mortgages and virgin flat land near cities combined to fuel a suburban housing boom.
By the 1960s, the belief that housing was the bedrock of middle class wealth was firmly established. This was the explanation and motivation for buying a home: “housing never declines,” and a rapid rate of household formation made it easy to sell a house to somebody else.
The high inflation of the 1970s and subsequent leap in housing prices embedded another key concept in the national psyche: housing wasn’t just a forced savings plan that doubled as shelter, it was the speculative road to riches.
The mini-bubble of the late 1980s popped, sending housing into a six-year slump, but Peak Financialization and Peak Financial Fraud arose to goose housing to a new and spectacular credit-fueled bubble of frenzied speculation.
That systemic fraud was a key dynamic of the housing bubble is undeniable: everyone from those buying houses with no-document loans to money-center banks selling fraudulent mortgage-backed securities was relying on fraud. Peak Fraud isn’t a necessary feature of financial bubbles, but it is often a causal factor among others.
If you have any doubt that the Crash of 1929 was accompanied by Peak Financial Fraud, I invite you to read John Kenneth Galbraith’s The Great Crash 1929.
Alas, all bubbles pop, and now the world has changed. The overt fraud has been driven underground, but the repercussions of the institutionalized fraud of MERS and mortgage-backed securities hasn’t been resolved; it remains in the market’s blood stream, slowly poisoning what’s left of the private mortgage market.
Peak Fraud will not be returning to the housing market, but its toxic consequences linger in the system. Does anyone seriously think the 4.4 million home equity lines of credit loans (HELOCs) on lenders’ books are priced at their true market value? Accounting fraud in the form of overstated mortgage valuations is still rampant, and everyone knows it.
The rapid household formation of the 1950s and 60s period has given way to a generational decline. When housing, credit and oil were all cheap and plentiful, single people could buy condos and homes themselves, even with modest incomes. Credit may be cheap but housing and oil are not, and inflation has ravaged incomes, as noted here many times.
The demographics simply don’t support rapid household formation; household formation is following an S-curve, too.
Then there’s Peak Suburbia and Peak Commuting to Distant Exurban McMansions.
Here is a chart that correlates GDP (gross domestic product), the broad measure of economic growth and prosperity, with the price of oil and wages. Note that rising oil costs and stagnant wages take the wind out of the economy’s sails.
Simply put, declining wages and high oil prices erode households’ ability and willingness to buy a surburban home and pay for the gasoline needed to commute hundreds of miles every week.
Declining gasoline consumption is not an outlier, it is also a generational shift.
Mish recently addressed this dynamic: Demographics and Changing Social Trends Behind Gasoline Sales Plunge, and I covered the long-term trends in Why Is Gasoline Consumption Tanking? (February 10, 2012)
Once the belief that housing is the bedrock of middle class wealth fades, so too will the motivation to risk homeownership in an economy that puts a premium on mobility and frequent changes of careers and jobs. We can discern a sea-change in this chart of housing activity: despite trillions of dollars in subsidies, guaranteed mortgages and other types of Federal support, the housing market has not recovered, it has only stopped plummeting:
Only one aspect of housing hasn’t yet peaked: property taxes. If the risks of homeownership weren’t apparent before, they certainly are now as local governments jack up property taxes to indenture homeowners into tax donkeys.
Note that property taxes declined significantly in the previous recession (2000-2002), but they rose steeply in the 2008-9 recession, and continued climbing. The recent modest slippage may have several factors: lower valuations in states that set property taxes on assessed values, tax revenues declining as homes in foreclosure languish with unpaid property taxes, and so on.
Anyone claiming that property taxes have peaked will have to support that claim with evidence that local governments have found other sources of tax revenues to replace property taxes. Until that dynamic changes, then local government will have every incentive to jack up property taxes by any and all means available.
Goldorack says:
the fun will start when people will have to pay to sell their house…
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26th April 2012 at 10:51 am
GRGY says:
@Golderack
You mean when they have to pay even more. People pay real estate fees and perhaps mortgage penalties when they sell their house today.
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26th April 2012 at 11:44 am
Bob says:
As you digest the above essay, I hope you appreciate its profound deflationary implications. Please stop and consider why I believe hyperinflation is the least likely future scenario! On the debtor side of the ledger, it simply is too good to be true! In a runaway inflation:
1) You could pay off your house with a day’s pay
2) Liquidate your credit cards with lunch money
3) Totally zero out other debts with pocket change
And consider what all that would do to the banks, and the 1% who own the vast majority of bonds.
Do you think these people will let the middle class escape its debt bondage? NO WAY. We are already seeing the notion of debtor’s prisons staging a comeback.
Pre-existing debt would be meaningless in a hyperinflation — TPTB will fight tooth and nail to prevent it from happening. Their wealth advantage only means something as long as the currency in which it is denominated means something. Yes, they will have the means to shift to alternate resources to preserve their wealth, but such an effort would be fraught with risk. They will work to make the debts they own pay off. After all, they are the creditors. When you keep that in mind, you get a clear understanding of what is going on in Europe right now — and it isn’t the least bit inflationary.
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26th April 2012 at 11:46 am
platoplubius says:
@ Bob,
Yes it does look like a deflationary spiral will continue to happen…however, some have argued that price inflation along with a deflation in credit supply and wages is and will be what we have to look forward to in the years ahead.
I pose a question in response to your logical thinking when you said, “And consider what all that would do to the banks, and the 1% who own the vast majority of bonds.
Do you think these people will let the middle class escape its debt bondage? NO WAY”
I wouldn’t argue with this line of thinking…other than instances in the past where currencies have been revalued…why wouldn’t the U.S. as a corporate entity not want hyperinflation considering its current debt level of $15 trillion. The elite are making money during this deflationary environment…and they could make even more money in an inflationary environment if they set themselves up correctly before it began…Wouldn’t this profit be greater than some of the losses incurred from the effects that a revaluation of the dollar would have on the debts they hold?
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26th April 2012 at 12:05 pm
randy says:
It\s a tale of two worlds…
Deflation in real estate.
Inflation everywhere else…Food, electricity, gas, oil, jet fuel, cable, internet service, insurance premiums, water and sewage rates, gold, silver…etc…
It isn’t an argument of either or, its both.
And it should continue until a new currency is announced. In Canada, we\ve gotten rid of pennies…
anyway…
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26th April 2012 at 12:52 pm
sensetti says:
The Federal reserve has been printing money out of thin air, keeping the whole system afloat, when the day comes and the printing stops the house of fraud comes crashing to the ground and prices will collapse.
How can prices continue up when the consumer is tapped out.Unless the government expands the handouts. You can put any price you want to on an item if people don’t have the money there is no sale. Will wages go up to fuel this inflation will credit expand? Can the consumer take on more debt.
Any angle I view the problem from looks like a devastating crash is coming at us.
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26th April 2012 at 1:27 pm
platoplubius says:
to continue my line of thinking from above…
And wouldn’t many of the elite just stick their hands out and receive another TARP like bailout at the taxpayers expense…maybe even after the currency has been revalued?
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26th April 2012 at 1:27 pm
AWD says:
How is the housing market EVER going to “recover”? Kids can’t get jobs, and are tens of thousands in debt (can’t buy house). The FSA is getting section 8 or free housing (don’t buy houses). Boomers are working to survive (can’t buy houses). Those with jobs can’t get loans (can’t buy houses). Unemployed, can’t find a job (can’t buy houses). Until jobs come back, there will be no housing recovery. As our economy is gutted, as manufacturing and jobs go overseas at a blistering pace, as the trade deficit depletes our economy, and as the rich get richer and the middle class slips into poverty (selling or losing their homes), what is going to stimulate housing? More commercials by delusional realtors? There is nothing that will stimulate housing, and when the financial collapse happens, all bets are off. How can housing recover with the present levels of debt outstanding already? As the guidos say, FORGETABOUTIT.
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26th April 2012 at 1:53 pm
sensetti says:
How many companies are handing out raises, all I see are lay offs and cut backs. I guess the question is can the 1% circulate enough cash between themselves to keep prices heading north or is there a limit to what the 99% can pay for?
I may have to change teams and sign up for the free shit army
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26th April 2012 at 2:16 pm
Bob says:
Platoplubius, you ask an excellent question: “The elite are making money during this deflationary environment…and they could make even more money in an inflationary environment if they set themselves up correctly before it began…Wouldn’t this profit be greater than some of the losses incurred from the effects that a revaluation of the dollar would have on the debts they hold?”
I don’t have a complete answer — here are my thoughts. Perhaps this is why we have all the efforts underway to prop things up, kick the can down the road, and delay the inevitible. It seems like TPTB are having trouble finding acceptable wealth subsitutes. I believe the only reason the elites are making money in the current environment is that sovereign governments are borrowing it and giving it to them. There seems to be a scramble taking place as that game is coming to a close (see Europe).
A bigger issue is the risk of setting themselves up correctly versus incorrectly — there would be a high likelihood that such a process could yield a different set of winners and losers. People who had it made under the old circumstances might make some wrong moves and find themselves poor. Working hard to preserve the current setup would be very appealing, considering the alternative (again, see Europe).
In dealing with my house and my mortgage, the bank wants either a steady stream of money that is worth as much as possible, or it wants control of the house itself. The last thing the bank wants is to be paid off with inflated, worthless dollars and see me walk away with a free and clear title. From the banks point of view in such a situation. there is no power to be exercised, there is no income stream coming from me, and the bank is left holding a bag of paper. As I said before, I view this as the least likely scenario.
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26th April 2012 at 2:33 pm
Ich rede von beiden Seiten des my ass says:
AWD says:
90% of people on disability could answer phones and use a computer, and/or occupy a cubicle someplace. Many could do manual labor.
AWD says:
Unemployed, can’t find a job (can’t buy houses). Until jobs come back, there will be no housing recovery.
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26th April 2012 at 3:09 pm
TeresaE says:
@Sensetti-
Couple notes on the not giving raises…
1. According to the BLS, we sure as hell have! Every increase in company-provided insurance is added to the hourly wage figure (used by multiple other stats too).
2. Because of #1 running in excess of 35% increases the past three years, and running between 18-25% from 2002 forward, we can’t afford to give $$$$ raises. We would love to give more raises than we have, we know our workers should be making 10-30% more than they are. Our customers use importers pricing to keep our margins razor thin. And the government continues to increase our regulatory filings and rules and fines and fees, and, and, and.
See, according to the government, everything is fine. Just because you can’t eat on your insurance proceeds, nor can you pay your debts, shouldn’t matter, you are worth “more!”
Just like the swapping of hamburger for steak in the inflation stats, the government has swapped take home pay with health insurance.
Nothing to see here, we are fine.
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26th April 2012 at 7:52 am