This Charles Hugh Smith fellow seems to have a pretty good eye on the strikingly similar trajectories of the 2 Housing Bubbles we've had foisted upon us this past decade plus.
I present his article closing statement without comment...
Now the gap between real house prices and real earnings is even wider than it was in Housing Bubble 1. History
(and common sense) suggest that housing prices will once again fall
sharply until the black line of house prices is well below the red line
of real earnings.
To expect anything different is unrealistic and highly dangerous to one's financial well-being.
Whether this is due to lack of demand, or far stricter mortgage
supply remains a topic debate, but one thing is undisputed: after a
terrible 2014, mortgage applications in early 2015 saw a modest rebound.
Alas, it has since proven to be merely the latest headfake in a long
series of false starts. The evidence: earlier today the largest U.S. mortgage lender Wells
Fargo reported results that beat expectations by the smallest possible
increment. What caught our attention, however, was the fuel that keeps
Wells Fargo's engine humming: mortgage applications. Unfortunately for
the housing bulls, there was no good news here because after rushing
higher in early 2015 on the latest false hope of an economic recovery or
due to fears rates are rising, Wells' mortgage applications and the
associated pipeline have declined ever since. ...It also means that far from rising rates - a gambit which was meant to
spoof potential home buyers into rushing out to get a mortgage ahead of
rising mortgage rates, a gambit which has since failed - the Fed will
have to come up with a way to lower interest rates even further just in
time for the US to finally decouple with the Emerging Market debt crisis
and the Quantitative Tightening courtesy of the collapse in commodity
prices. Referencing the picture above, Housing Bubble 2.0 has long since run out of the guys on the left. Unless you're trying to move a truly "prime" property in Irvine or Arcadia. What little action that Johnny-come-lately extreme home debtors were providing seems to have petered out as well. And the recession hasn't even started yet... International Valuation Standards
defines market value as "the estimated amount for which a property
should exchange on the date of valuation between a willing buyer and a
willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion." Compulsion and a lack of prudence have been the norm during Housing Bubble 2.0 as have a dearth of willing sellers vis-a-vis willing buyers. This is no longer the case. The market value of residential RE in the Bubble areas is being adjusted as we speak. Asking and closing prices are down in all but the most exclusive enclaves and they have been trending down for almost a year. As every single other bust has shown downward price momentum tends to over correct. Sure the timing is difficult, but it is the point of maximum financial opportunity. Be patient true believers of math and market economics. The end of Bubble 2.0 is nigh...
Is the FED malicious or incompetent? I've always assumed it's both. The failure to raise rates at the September meeting and the ensuing market turmoil it unleashed seems to support that theory. The Federal Reserve NEEDS the next recession to begin soon so the inevitable downturn can be managed. Conversely it can't be seen as causing the recession. Blind them with bullshit seems to be the plan. After the "dovish-hold" that no one saw coming, the FED then walked backwards and then forwards and then backwards again the forward guidance language. I don't think the FED has a problem with the crash happening with rates at zero, they've still got more QE and NIRP in their chamber. They likely have a BIG problem with it happening 2 or 3 years from now with the DOW, S&P and PE ratios further into full retard territory. Can FED obfuscation tip some domino that causes the recession without the FED seeming to have caused it? I have no idea.
How does this relate to housing you say???
I would argue that ultimately the FED will be seen as irrelevant to what we unfortunately still call "markets". When the momentum turns this time no amount of QE will move market participants back into assets at anything close to these evaluations. 2011-201X will be looked upon as one big dead cat bounce. The FED will have gone full Japan with ZIRP 4evah. There won't be enough money seeking the US Real Estate Laundromat to keep prices anywhere near current valuations. The Credit Mega Bubble ends not with a bang but with a whimper. Deflation will prove unavoidable as no combination of policy tools and political will can put enough money into working peoples pockets to maintain anything near current prices even with rock bottom mortgage rates. And don't forget baby-boomers will be selling in droves to fund retirements...
Sit tight true believers. If you are wise with your money and can keep liquid and employed, you might be looking at fast dropping RE prices AND rock bottom interest rates. If so you can thank Grandma Yellin and crew for blinking.
Low documentation loans have actually been back for a while now if you have the credit score. How many buyers in the past few years have used semi-exotic loan products? How many of those have incomes directly related to the worldwide credit bubble ponzi? I'd bet a sizable portion of the upper-middle and low-upper have done yoga contortions to squeeze into loans. It's not a matter of these loans resetting and the monthly nut increasing as much as the global economic slowdown bringing the upper income earners back into the recession most never left. Interesting times ahead...
For “subprime”, read “non-prime”. Yield-hungry investors are ready to endorse a revival of bonds backed by riskier US residential mortgages, as lenders warm to housebuyers who do not meet strict borrowing guidelines introduced after the financial crisis. But the now toxic label of subprime mortgages has been dropped. Instead, Angel Oak Capital is in the process of pricing a deal for a bond offering of so-called “non-prime mortgages” — a term funds are using to describe mortgages that do not meet government standards. Lone Star Funds completed a deal worth $72m in August.