Bloggers Were Warning About A Coming Financial Crash

Atrios notes Greenspan saying “nobody could have predicted.” He was writing about it in 12.07. I’m sure he was writing about it earlier.
My Housing Bubble archives go back to April, 2005, but only because I switched over from the terrible Blogspot blogging system. I was already titling my posts “Today’s Housing Bubble Post” (sometimes several a day.)
This one in March, 2005, ends with, “How many of you remember the Savings and Loan crisis, and the root causes?”
September, 2004, “let’s see, massive trade deficits, massive budget deficits, housing price bubble, dollar overpriced, interest rates held unnaturally low… LOTS of rubber bands ready to snap back just after the election… Watch your backs!”
Here is one from July, 2002, the very first month of this blog. Not housing, but warning about another part of the current problem: The Pension Problem – “at least 50 WorldComs”

Today’s Housing Bubble Post – It Ain’t Over

Have you noticed signs of “bubble mentality” in the housing market in your area? In my area the bubble is reignited by cheap credit and government subsidies. Just this week a relative told me that “housing prices will come back” because “housing always goes up.” People are talking again about “snapping it up” and doing it “before you get priced out of the market.” Low-end houses are getting dozens of offers above the asking price.
People have been trained to think that the way to get ahead is to buy real estate. You buy a house, after a while you use the equity you build up in that house to buy another. Either “trade up” or buy investment property. In my area most of the home sales are at the low end, are bought with cash, and are bought by investors who plan to rent the house out. (Even though rents are falling.)
People still don’t get it that we were in a bubble. People don’t get it that prices have not yet reverted to the mean.
Here is the hard news: The tulips will never be worth more than gold again. The “path to wealth” isn’t real estate anymore.
And it isn’t working. The Wall Street Journal this morning:

Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home’s value.

The bubble won’t end until the bubble mentality ends. Until then a lot of people will only get hurt.
A house is a home, not an investment.

Demand Or Anticipation vs Real Demand

Quick question – are we seeing demand or anticipation of demand?
I am hearing the it is mostly speculators buying up the foreclosures, because they think they “see a bottom.” So they are anticipating that regular people will start buying again and “things will get back to normal.” And by normal they mean housing bubble, where you get rich buying real estate and sitting on it a few years.
This is anticipation of demand, not demand. It’s also why you see a “dead cat bounce” when prices drop in any bubble. People are used to the bubble, and when prices drop they think things will “get back to normal” and start up again.
I wrote about this psychology in April, in Today’s Housing Bubble Post — A New Wave Of Foreclosures and Price Drops Coming,

A story:
In 1999/2000 I had a bunch of stock in a dot com. It made its way up to $35 a share. When it fell to $30 then $25 then $20 I held on because it had just been $35. When it hit $12 I thought it was really cheap but when it hit $.50 I thought that was too high. It landed at $.05 but then the company went out of business.
Think about the psychology of this. When it fell to $12 I thought it was cheap because of how high it had been but when it hit 50 cents a share I thought it was too expensive because I had left the past behind and I could finally see where it was GOING. And that is where it went.

It seemed cheap at $12 but too expensive when it got down to $0.50. Think about the psychology of that. ‘Cause we all know how well the speculators have been doing, right?
By the way, prices have only gone down since I wrote that in April.
So, is there any reason to believe that regular people will start buying up real estate again, and prices will start back up?

Today’s Housing Bubble Post – A ‘Trade Down’ Environment

Real Estate ‘Trade-Down’ Environment | The Big Picture,

“We’re in a ‘trade-down’ environment for the first time since the 1930s.”

Instead of trading up, selling a house and using the proceeds as down payments on larger houses, people are trading down into smaller places.
But this was expected right about now, regardless of the housing bubble. The boomers are starting to retire, and need smaller houses. I have heard for decades that this will happen.
The other thing that happens now is they start selling stocks instead of buying them = also regardless of bubbles, etc. The great upward pressure on the market while the boomers invested for retirement (sadly, sold on stocks by Wall Street marketing) will from now be downward pressure as they sell to meet retirement expenses.
Everything at the worst possible time for regular people. Wall Streeters, however, are enjoying the largest bonuses ever. I wonder if there is a relationship?

Today’s Housing Bubble Post – Recovery Myth

Go read James Boyce: The Recovery Myth: Caveat America and take a look at the chart.
While you’re at it, look at this chart as well.
I think we need to go through a period of disappointment for the “always goes up” crowd before they realize that this isn’t a pendulum swinging, a natural part of the cycle, a temporary setback, etc. We went through fundamental changes in the economy in the early 1980s, and since then household debt has been increasing, wages have been stagnant, and predatory capitalism has sucked the consumer dry. The consumer is tapped out and until the nature of our economic system changes, and the people start to benefit from their own work again, things can only get worse. Top-down economics doesn’t work. Democracy is the only economics that works.

Today’s Housing Bubble Post – The Next Housing Bust

I came across this at the Wall Street Journal, of all places: The Next Housing Bust

The bill that passed last summer more than doubled the maximum loan amount that FHA can insure — to $719,000 from $362,500 in high-priced markets. Congress evidently believes that a moderate-income buyer can afford a $700,000 house.

Go read

Today’s Housing Bubble Post – Back To Issuing Warnings

Oddly enough I find myself back in the position of warning that the housing market may be heading to a terrible crash in the near-future. The bubble mentality has not changed at all and appears to be restarting in the very places where the bubbles were the worst. This is probably because people got used to unaffordable prices and think that a drop from unaffordable to just really, really expensive is a buying opportunity. Meanwhile government and the real estate industry are trying to “reignite” the market — hoping that starting another bubble will put off the reckoning.
People still think that what we are going through a temporary “correction” and that real estate prices are going to “go back up,” that houses are “cheap” now, that they should “snap them up” before they are “priced out.” They still think real estate is the path to wealth, instead of somewhat of a burden that should only be undertaken under certain circumstances. Namely, when you plan to live there for a long, long time, and you’ll pay less (including closing costs, taxes, insurance, maintenance, possible price depreciation, etc.) than rent.
Here’s what I am talking about. Combine this,

As of March 1, investors can now buy 10 homes (up from four) with Fannie Mae-backed mortgages. That’s also stimulating demand.

With this, Some of Us Still Think They Can Get Rich Quick from the Real Estate Bubble,

… the ad offered a mouthwatering menu of claims on “How to cash in on the biggest real estate liquidation sale in our entire United States history” and “how to maximize your profit with lucrative foreclosures.”

And this:

Option ARM rates are going to be recasting soon and in increasing numbers. That’s the magic moment when people can no longer make minimum payments, when they can longer make interest-only or neg-amortization payments.
When that magic moment comes, all of those people are going to look at how high their now unaffordable mortgage payments are. Then they’ll look at how much their house is actually worth relative to how much though owe. Then, maybe, they’ll try one of the various initiatives to modify their mortgage terms. And then, quite likely, they’ll jut walk away. [. . .] as the chart tells us, hasn’t even really started yet.


What that chart shows is that the foreclosure problem is about to get a lot worse. Two more huge waves of “resets” are coming. Many, many, many more homes are about to reach a point of unaffordability for a lot of their owners, one way or another those homes will also be for sale, on top of the huge inventory that already sits unsold, and this will drive prices down even further, which will trigger even more problems.
Here is what I am saying: As long as a house is considered an “investment” instead of a place to live for a long time we will continue to be in a world of hurt. Real estate does not always go up.
Here is why prices can’t go up any time soon: There is a huge inventory of unsold houses. The houses that were built in the last decade are too big for regular people to be able to afford to heat and cool — and energy prices are going up. The water for the lawns will cost more and more. The gas to get to the malls and any jobs that might exist (good luck) will cost more and more. The “boomers” are retiring and selling their houses. The median price in many areas is still way above affordability by a medium-income family. You won’t get sufficient “positive cash flow” over your payments from the rent you’ll receive if you are renting the house.
The psychology of this is just like the stock market bubble. Things won’t get better until the bubble mentality of “it always goes up” is shaken out of people. Like I said the other day

In 1999/2000 I had a bunch of stock in a dot com. It made its way up to $35 a share. When it fell to $30 then $25 then $20 I held on because it had just been $35. When it hit $12 I thought it was really cheap but when it hit $.50 I thought that was too high. It landed at $.05 but then the company went out of business.
Think about the psychology of this. When it fell to $12 I thought it was cheap because of how high it had been but when it hit 50 cents a share I thought it was too expensive because I had left the past behind and I could finally see where it was GOING. And that is where it went.

Unemployment in my area is 11.2% and people are “snapping up” houses that are “cheap” at $580,000 because they were at $850,000 a year or two ago. But the median income here can’t support that. It couldn’t even support $350,000 before unemployment went up.
Here’s the thing. After the stock market crash the Fed intentionally created the housing bubble to prop up the economy for a few more years. Now the consequences have arrived. If you are thinking of buying a house as an “investment” ask yourself who is going to buy it from you at a higher price, and how they are going to get that money. Will that housing demand come from a healthy job market in which people are getting raises?
Don’t bet on it.

Today’s Housing Bubble Post — A New Wave Of Foreclosures and Price Drops Coming

This is my prediction: there is a new wave of housing price drops and foreclosures coming as holdouts stop holding out. Only when reality intrudes on people’s belief that owning a home is supposed to be an “investment” will things be able to start to stabilize. You are supposed to buy a house to live in.
The current “green shoots” euphoria will subside, and then people who have been holding out because “real estate always goes up” will stop holding out. Only then will expectations and behavior start to change in ways that begin to make a difference for the long term.
1) Unemployment is still rising, and rising fast. Unemployed people can’t pay mortgages forever.
2) Houses still cost more to buy than to rent in most areas so it is still a bubble. House prices have not fallen to the level they were before the bubble, so it is still a bubble. And the average house price in most areas is still higher than the average-wage person can buy so this is still a bubble. Meanwhile there has been an increase in the number of houses (supply is up), while the boomers are starting to retire and want to sell their large house (demand is down). And unemployment is also reducing the demand side. The increase sales and price drops we are seeing is from people who are being forced to sell, not from people realizing house prices are too high.
3) Distressed people have been holding out since the recession started, but can’t hold on forever and savings are running out. This includes renters so rents will have to start dropping as they run out of money for rent (feedback to #2 above) and some of the houses that aren’t selling become rentals. Compare California to Michigan, and you’ll understand what I am saying. Michigan stopped holding out a while back and rents and house prices have adjusted accordingly and are affordable. California still thinks things are temporary and will get back to “normal” and people are “snapping up” houses that are as “low” as $400,000 for a 3br/2ba.
4) I’m including everyone whose house is “under water” in #2, and this is an increasing number of people. Everyone thinks “housing will go back up” so they aren’t walking away yet. But if it turns out that housing doesn’t “always go up” they will stop holding out and go buy something based on what they can afford with no expectation that it will go up.
5) There is a HUGE inventory of houses being held off the market. Banks are holding houses off the market. People who would have sold are waiting to sell (holding out), and there are still just a record number of houses on the market now that haven’t sold yet. This inventory is going to overwhelm any current increase in sales that is based on people believing we are “at a bottom.” There just are many many more houses for sale or waiting to be sold than there are buyers. This is not a “crisis of confidence” where people just aren’t buying because they are scared, it is a crisis of too many people not having money, just debt.
6) People buying now (those who aren’t yet broke from buying real estate) will lose their shirts, too, because they are expecting that “this is a bottom” and it isn’t.
What it comes down to is that expectations and behavior haven’t changed yet. Real estate doesn’t “always go up.” Real estate is not the path to wealth, except as a bubble is developing. Real estate is not a sure thing otherwise. You would think that so many people being wiped out by thinking these things right in front of everyone’s eyes would be a clue, but not yet. This is because the bubble developed over a long period, and people got used to real estate “always” going up. When people start to come down to earth and see reality and realize that owning a house can be a costly burden, then things will get to the point where stabilization is possible. As long as owning a house is seen as a path to riches things cannot stabilize.
A story:
In 1999/2000 I had a bunch of stock in a dot com. It made its way up to $35 a share. When it fell to $30 then $25 then $20 I held on because it had just been $35. When it hit $12 I thought it was really cheap but when it hit $.50 I thought that was too high. It landed at $.05 but then the company went out of business.
Think about the psychology of this. When it fell to $12 I thought it was cheap because of how high it had been but when it hit 50 cents a share I thought it was too expensive because I had left the past behind and I could finally see where it was GOING. And that is where it went.

Markets Can Recover Downward, Too

Brad DeLong defends the current Geithner plan, in Grasping Reality with Both Hands: The Geithner Plan FAQ,

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn’t make back its money?
A: Then we have worse things to worry about than government losses on TARP-program money–for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

I hear a lot about how the markets need to “recover” and how they are trying to “stabilize” the housing and stock markets.
I submit that they are recovering. The markets are recovering from huge bubbles, and they are stabilizing to pre-bubble trend lines.
This means they have a ways to go – down – and then they will be “recovered” and “stabilized.”
For example, the other day I had a post, A Long Way To Go Still,

Stocks have fallen to where they were in 1996/7. Here is a chart that shows where stocks were in 1996/7.


Does anyone else see the problem?

Specifically, that chart shows where the market was in 1996/7. It was in a bubble, and it still needs to recover to the trendline that preceded that bubble.

Bankers Will Say It Is Bankers

The people in charge of the economy are basically bankers. Not too many plumbers are involved in running the Federal Reserve or Treasury Department.
Bankers will say the economic crisis is a banking problem. Bankers think banks are very, very important to the economy — the most important component. They say things like “Our economy runs on credit.” And they say the way to fix this mess is to prop up the banks — give them trillions and trillions of dollars until the economy is fixed.
And because bankers think bankers are so smart and important to the economy we can’t fire them or put them in jail, or even ask for all that bonus money back.
So they are putting all the money in the world into the banks. For some reason it isn’t working.
Of course, a plumber would say that the problem with the economy is that all the pipes are clogged. Keeping the pipes working is the most important component of our economy.
And a historian will tell you that the problem is a return of the Great Depression. Not repeating the Great Depression is the most important thing to the economy.
I’m a regular person. I think regular people are the most important component of the economy. I think the problem with the economy is that regular people stopped being able to share in the benefits of the economy. I think too many jobs were shipped overseas — without the people getting those jobs being paid enough to participate in the economy themselves. I think that not providing health care caused too many bankruptcies. I think the people who still had jobs were asked to work harder and work longer hours and accept less, so that a few greedy executives could get more and more money. I think not providing sufficient vacations and day care and pensions and empowerment used everyone up. I think regular people used up their savings and then went into debt and then finally couldn’t do it anymore.
I think we should fix THAT. I think our economy might work if regular people around the world received some of the benefits from that economy. I think that the economy might work better if people did not have to get into deeper and deeper debt just to get by. I think our government (which is us, isn’t it?) should make sure businesses are engaging in honest and safe and sustainable practices, provide us with human rights like health care, and make sure everyone gets good wages, and sufficient vacations, and safe & empowering workplaces and some choices and some say in things. Then maybe people would be able to participate in that economy and it would start working again.
But I’m just a regular person. What do I know?