Housing may not initiate the next financial crisis, like it did the last one, but it will certainly contribute to it. From Adam Taggert at peakprosperity.com:
Our good friend John Rubino over at DollarCollapse.com just released an analysis titled US Housing Bubble Enters Stage Two: Suddenly Motivated Sellers.
He reminds us that housing bubbles follow a predictable progression:
- Stage One: Mania — Prices rise at an accelerating rate as factors like excess central bank liquidity/loose credit/hot foreign money drive a virtuous bidding cycle well above sustainably afforable levels.
- Stage Two: Peak — Increasingly jittery owners attempt to sell out before the party ends. Supply jumps as prices stagnate.
- Stage Three: Bust — As inventory builds, sellers start having to lower prices. This begins a vicious cycle: buyers go on strike not wanting to catch a falling knife, causing sellers to drop prices further.
Rubino cites recent statistics that may indicate the US national housing market is finally entering Stage Two after a rip-roaring decade of recovery since the bursting of the 2007 housing bubble:
- the supply of homes for sale during the “all important” spring market rose at 3x last year’s rate
- 30 of America’s 100 largest cities now have more inventory than they did a year ago, and
- mortage applications for new homes dropped 9% YoY
Taken together, these suggest that residential housing supply is increasing as sales slow, exactly what you’d expect to see in the transition from Stage One to Stage Two.
If that’s indeed what’s happening, Rubino warns the following comes next:
Stage Two’s deluge of supply sets the table for US housing bubble Stage Three by soaking up the remaining demand and changing the tenor of the market. Deals get done at the asking price instead of way above, then at a little below, then a lot below. Instead of being snapped up the day they’re listed, houses begin to languish on the market for weeks, then months. Would-be sellers, who have already mentally cashed their monster peak-bubble-price checks, start to panic. They cut their asking prices preemptively, trying to get ahead of the decline, which causes “comps” to plunge, forcing subsequent sellers to cut even further.
Sales volumes contract, mortgage bankers and realtors get laid off. Then the last year’s (in retrospect) really crappy mortgages start defaulting, the mortgage-backed bonds that contain their paper plunge in price, et voila, we’re back in 2008.
Rubino’s article is timely, as we’ve lately been seeing a proliferation of signs that the global boom in housing is suddenly cooling. I’ve also recently encountered similar evidence that the housing market in my own pocket of northern California is weakening, and I’m curious to learn if other PeakProsperity.com are seeing the same in their hometowns.
To continue reading: Trouble Ahead For The Housing Market