Has Housing Bottomed? Here's How to Tell   (dJuly 20, 2011)

Housing has been propped up by Central State intervention. As that ends, Phase II of the retrace to pre-bubble valuations is at hand.

Has housing bottomed? Here is the sure-fire way to tell:

Stories titled "Has housing bottomed? Here's how to tell" have vanished for lack of interest.

The absence of stories about the bottom in housing will mark the final nadir, because the real bottom can only be reached when everyone has abandoned housing as a pathway to easy money. Only when the public and investor class alike have completely lost interest in real estate as a "sure-fire" investment can the real trough be reached.

This destruction of long-held habits and beliefs takes a long time. The closest analogy might be the stock market in the last secular Bear market. Stocks topped out in 1966, though the economy lumbered on until 1969 before faltering. Stocks then meandered for 13 years of stagflation, losing 66% of their inflation adjusted value in 1966 by 1982.

People gave up on stocks. I call this loss of faith "when belief in the system fades:" note how household participation in stocks topped out in 1969, three years after the peak in the market. Participants clung to their belief in stocks for about four years after 1969, at which point participation cratered as they finally abandoned their faith in a "permanent Bull market."

Household participation fell by two-thirds and remained low for years.

In August 2006, near the top of the housing bubble, I suggested a three-part scenario for the housing bust: it would take eight more years to play out, and the declines would occur in sharp downlegs following a phase-shift model.

Phase Transitions, Symmetry and Post-Bubble Declines (August 2, 2006)

Here is the chart I presented at that time as a possible time model:

Here we see the first phase shift decline and the Central State engineered "recovery," which has now rolled over.

Here is CoreLogic's snapshot of housing (via Calculated Risk). There is still a long way to go down before the market retraces the entire bubble.

The Federal Reserve has bet that housing valuations can be propped up by lowering the interest rate on mortgages. To the degree that a few fence-sitters might be tempted to take the plunge, lower rates have a modest follow-through--but the real determinant of housing is employment, which as we all know, has tanked.

Here's the civilian employment ratio, which reflects the percentage of the labor force that has a job:

Perhaps even more telling is the per capita rate of employment:

By this broad measure, employment has declined to levels last seen thirty years ago. We can also look for clues to housing's future by looking at wages, which have dropped steeply:

These charts pose a simple yet profound question: how can people buy a still-expensive house if they don't have a job, or their income is plummeting?

The proximate triggers for the next phase-shift down include a decline in Central State intervention in the housing market and a return to official "recession" as the "soft patch" turns into a quagmire.

In an era where "market sentiment" swings wildly from day to day and the nation awaits every quarterly report from Apple as the "definitive" bellwether not just on stocks but the entire Galactic Mood, then the notion that trends can take years to play out doesn't sit well with our impatient demands for a "bottom." But long-term trends take years to play out, whether we like it or not.

Readers forum: DailyJava.net.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--Walt Howard, commenting about CHS on another blog.

NOTE: contributions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Vincent G. ($80), for your outrageously generous contribution to this site -- I am greatly honored by your support and readership.   Thank you, William H. ($50), for your marvelously generous contribution to this site-- I am greatly honored by your support and readership.

Or send him coins, stamps or quatloos via mail--please request P.O. Box address.

Subscribers ($5/mo) and contributors of $50 or more this year will receive a weekly email of exclusive (though not necessarily coherent) musings and amusings, and an offer of a small token of my appreciation: a signed copy of a novel or Survival+ (either work admirably as doorstops).

At readers' request, there is also a $10/month option.

The "unsubscribe" link is for when you find the usual drivel here insufferable.

Your readership is greatly appreciated with or without a donation.
For more on this subject and a wide array of other topics, please visit my weblog.


All content, HTML coding, format design, design elements and images copyright © 2011 Charles Hugh Smith, All rights reserved in all media, unless otherwise credited or noted.

I would be honored if you linked this essay to your site, or printed a copy for your own use.



Making your Amazon purchases
through this Search Box helps
support oftwominds.com
at no cost to you:

Add oftwominds.com to your reader:

Survival+   blog  fiction/novels   articles  my hidden history   books/films   what's for dinner   home   email me