A Blast from the Past

Interesting.

 

My bet, and this is based solely on gut and voodoo, is that we will have a soft landing now, a brief rise in which everyone thinks its bottomed out and its safe to get back in the water, and then the collapse (around 2008/9).  Isn’t this what is referred to as a “bear trap”?

 

The only other reason I think this is the pattern (briefly alluded to in your note) is that bubbles tend to ease up mid-decade and don’t collapse until near the end of the decade or beginning of the next.  This feels very much like high-tech in the 90s and S&L/Finance in the 80s.  Every decade has an investment bubble and I think everyone expected it to be high-tech again so they don’t think that real-estate is it.  The thing is there is no “hot tech” right now. 

 

The mechanics of it will be a combination of financial tightening (too much easy money right now just like VC in the 90s) and broken ARMs.  After all the most interest only arms were done in the same period and thus will all come “due” at the same time leading to too many houses going on the market simultaneously ending up in a downward pricing spiral.  Everyone else who bought too late will be stuck because they will be underwater as they watch prices fall.  This results in the triple threat of increased supply, decreased demand and tight financing (banks will have to get more conservative as their bankruptcies go up).

 

One more spurious argument that needs to be shot down about the “new housing economy.”  People say that housing prices can’t fall dramatically like stocks because its harder and more time consuming to sell a house than a stock and you can always live in your house (except as per the argument above).  What seems to be forgotten is that houses are basically priced on “comps” so you just need 3 houses in your neighborhood to sell at a low price to change the value of your house (and every other one in the neighborhood) even if you decide to live in it.  Tough news for when you have to refi your ARM because you can’t meet the principle payments and the appraiser won’t give you the backing you need to do so.