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Why the Housing Bubble Bust Is Baked In

June 29, 2022

Putting this all together, it's clear that the source of the current housing bubble is the explosion of financial speculation fueled by central bank policies.


Those benefiting from speculative bubbles have powerful incentives to deny the bubble can bust. Rationalizations abound as bubbles inflate, and the continued ascent of speculative bets seems to "prove" the rationalizations are correct.

But bubbles arise from speculative excesses, and once these reach extremes and reverse, bubbles burst and all the self-serving rationalizations are revealed as rationalizations.

Let's start with some caveats I've already covered in Is Housing a Bubble That's About to Crash? (May 2, 2022):

1. Housing is local, so there may be locales where prices are still rising due to unquenchable demand and low supply and other places where demand is low and supply ample where prices plummet.

2. The wealthiest 1% on a global scale is a very large number, and wealthy buyers seeking a safe haven in North America come with cash and don't care about mortgage rates. Desirable enclaves could see home prices climb even as the national bubble pops. (World population: 7.8 billion X 1% = 78,000.000 or roughly 30,000,000 households.)

3. Wealthy investors are holding a large number of dwellings off the market as investments. These empty units consequentially reduce the supply in desirable locales, and create an artificial scarcity that would not exist if central banks hadn't inflated the Everything Bubble.

4. The number of homes bought by corporations has soared. This has driven demand in many markets, but if rents dive due to recession, corporate buyers become corporate sellers.

With those caveats out of the way, let's look at the foundation of home ownership for the bottom 95%: income and mortgage rates. As mortgage rates rise, more income must be devoted to the monthly payment. If household income lags the increase in housing prices, price eventually exceed what the bottom 95% can afford once mortgage rates rise.

The first chart below is the national Case-Shiller Index. Note that housing prices have soared 63.6% since the previous housing bubble peak in 2007, outpacing inflation (up 41%) and median household income (up 34%), the second chart.

The third chart shows mortgage rates have broken out of a 37-year downtrend. It is noteworthy that mortgage rates were in the 7% to 8% range in previous economic booms (late 1960s, the 1990s) but now 6% mortgages are considered the end of the world. That suggests a dependence on cheap money / low rates is the primary support of the current bubble rather than an organic economic expansion such as we enjoyed in the 1990s.

Courtesy of my colleague CH at Econimica, the next three charts shed light on housing fundamentals. The first Econimica chart shows the rate of growth in population, employment and housing units. The U.S. population increased by a scant 1.5 million since 2019, the number of employed was flat and the number of housing units increased by 2.8 million.

The second Econimica chart shows the Fed Funds Rate (FFR), the staggering increase of mortgage-backed securities purchased by the Federal Reserve to keep mortgage rates low (from zero to $2.7 trillion), declining rate of population growth year-over-year and the remarkable rise in the number of housing units under construction.

The third Econimica chart shows housing units per capita (per person), which has reached the same level as the previous housing bubble peak in 2007-08.

As CH observed: "Housing units (per capita) against US population should suggest not a shortage of housing units but a surplus of dollars with which to buy them."

Putting this all together, it's clear that the source of the current housing bubble is the explosion of financial speculation fueled by central bank policies. Housing prices that far exceed the growth of household incomes are not sustainable, and neither are housing prices that rose solely on the basis of unprecedentedly low mortgage rates.

It's also clear that those with access to the (temporary) wealth created by central banks' trillions in new credit have poured many of these "free money" trillions into housing globally as a hedge against inflation, a safe-haven investment or for corporations, for rental income. All of these factors exacerbate an artificial demand and equally artificial scarcity.

As I've noted in the past, bubbles typically manifest a symmetry in their ascent and decline. All the gains are eventually reversed, and if the system is destabilized by the bubble bust, then prices drop far below previous lows.

Setting aside rationalizations in favor of fundamentals, the housing bubble's bust is already baked in.

The Most Splendid Housing Bubbles in America, June Update: 'Deceleration' and 'Tipping Point' of the Raging Mania

Cost of Living Is Really All About Housing: Places where the rent really is too damn high.














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Tectonic Shift of Mercantilism Revalued (Gordon Long, Macro-Analytics, 42 min)

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Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
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My new book is now available at a 10% discount this month: When You Can't Go On: Burnout, Reckoning and Renewal ( $18 print, $8.95 Kindle ebook)

When I burned out, what I wanted but could not find was a practical guide by someone who had experienced burnout themselves. None of the material I found spoke to what I was experiencing or to my sense that our economy is now optimized to burn people out.

I decided to write the guide I wanted but could not find. This is my experience of burnout, reckoning and renewal.

This book is my account of what helped me. The intended audience is other burnouts and those who want to better understand the experience of burnout.

Burnout is a life-changing experience in a good way, as absurd as that may sound to those in the depths of burnout. To paraphrase Samuel Beckett: I canít go on but I must go on. There is a way forward.

Read the first section for free (PDF).         The Introduction

The Epidemic Nobody Talks About: Burnout



Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States ( $22.50 print, $9.95 Kindle ebook, audiobook)

Nations that embrace Degrowth and social cohesion will survive. Those that cling to "waste is growth" economies and destabilizing extremes of inequality will perish.

The threats to the republic are unprecedented, and conventional responses are an accelerant of collapse: the status quo is now the problem rather than the solution.

We have an opportunity to redraw Americaís Grand Strategy from the ground up. Should we fail to do so, the United States will fail, along with all the other nation-states that are incapable of grasping degrowth and social unity as solutions.

This revolutionary Grand Strategy will be the deciding factor between nation-states that fail and the few (if any) that will not just survive but actually thrive.

Read Chapter One for free (PDF).         Read the Introduction

Podcast discussing the book: A Grand Strategy to Address the Global Crisis (54 min., with Richard Bonugli)



Recent entries:

Why the Housing Bubble Bust Is Baked In June 29, 2022

The Age of Discord June 27, 2022

The Global Power Shift Isn't West to East--It's Not That Simple June 24, 2022

Our No-Win "Kobayashi Maru" Economy June 22, 2022

The Difference Between a Forecast and a Guess June 20, 2022

Our Economy In a Nutshell June 17, 2022

Could Retail "Bagholders" Spark a Rally "Smart Money" Will Be Forced to Chase? June 15, 2022

What Happens When the Workforce No Longer Wants to Work? June 13, 2022

Hunter's Hooker: A Teachable Insight into American Capitalism June 10, 2022

There's No Stopping a Recessionary Reckoning June 8, 2022

New Prosperity Magazine: Goldilocks and the Crack-Up Boom June 6, 2022

"Pay-to-Play" for the Rest of Us June 3, 2022

Who's Going to Fix What's Broken? June 1, 2022


January 2022 entries         February 2022 entries         March 2022 entries         April 2022 entries         May 2022 entries        

2021 archives         Archives 2005-2021







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"There is no security on this earth; there is only opportunity."
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"We are what we repeatedly do." (Aristotle)

"Do the thing and you shall have the power." (Ralph Waldo Emerson)

"Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius and a lot of courage to move in the opposite direction." (E.F. Schumacher, via Tom R.)

"He who will not risk cannot win." (John Paul Jones)

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"Progress is not possible without deviation." (Frank Zappa, via Richard Metzger)

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"Success consists of going from failure to failure without loss of enthusiasm." (Winston Churchill)

"Where there is ruin, there is hope for treasures." (Rumi)

"The realm of gratitude is boundless." (CHS, 11/25/15)

"History doesn't have a reverse gear." (CHS, 12/22/15)

Smith's Law of Conservation of Risk: Every sustained action has more than one consequence. Some consequences will appear positive for a time before revealing their destructive nature. Some consequences will be intended, some will not. Some will be foreseeable, some will not. Some will be controllable, some will not. Those that are unforeseen and uncontrollable will trigger waves of other unforeseen and uncontrollable consequences. (July 8, 2014)(thanks to Lew G. for retitling the idea.)

Smith's Neofeudalism Principle #1: If the citizenry cannot replace a kleptocratic authoritarian government and/or limit the power of the financial Aristocracy at the ballot box, the nation is a democracy in name only.

The Smith Corollary to Metcalfe's Law (The Network Effect): the value of the network is created not just by the number of connected devices/users but by the value of the information and knowledge shared by users in sub-networks and in the entire network. (CHS, 4/6/16)

My Credo of Liberation: I no longer care if the power centers of our society--the distant, fortified castles of our financial feudal system--are changed by my actions, for I am liberated by the act of resistance. I am no longer complicit in perpetuating fraudulent feudalism and the pathology of concentrated power. I no longer covet signifiers of membership in the Upper Caste that serves the plutocracy. I am liberated from self-destructive consumerist-State financialization and the delusion that debt servitude and obedience to sociopathological Elites serve my self-interests. (Thank you, Klaus-Peter L., for reminding me)

"We've become a culture of excuses rather than solutions: solutions always require sustained effort and discipline." (CHS 4/9/16)

"Fraud as a way of life caters an extravagant banquet of consequences." (CHS 4/14/16)

"Creativity = problem solving = value creation." (CHS 6/4/16)

"Truth is powerful because it is the core dynamic of solving problems." (CHS 7/21/17)

"We live in a system of human emotions that masquerades as a science (economics)." (CHS 1/1/18)

"Always remember, your focus determines your reality." (George Lucas)

"Diversity is for poor people. Sameness is for the successful." (GFB)

"When power dissipates suddenly, it dissipates completely." (CHS 7/14/19)

"Disobedience is the true foundation of liberty. The obedient must be slaves." (Henry David Thoreau)

"Markets cannot price in the value of non-monetized natural assets such as diverse ecosystems." (CHS 7/14/19)

"Magical thinking isn't optimism, it is folly." CHS 1/3/22)

"Tune in (to degrowth), drop out (of hyper-consumerism and debt-serfdom) and turn on (relocalizing capital and agency)." (CHS 1/5/22)

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