March 28, 2006

We are living through the biggest financial bubble in history


Ponzi Scheme over. Financial collapse imminent. Bloom off the rose. Incompetence exposed.

You know what's coming, now what are you to do? How do you best protect yourself, your family, your financial well being and your future? Duck and cover?

Preparing for an Uncertain Future – Economy of Illusion

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years. Not only does this dwarf any previous house-price boom, it is larger than the global stock market bubble in the late 1990s or that of the late 1920s.

San Diego County resale house prices fell in December by the largest monthly amount in 18 years. The median resale price for existing single-family homes dropped $15,000 from November to December to stand at $550,000, the largest month-to-month decline since Data Quick began keeping records in 1988.

The 42% of recent buyers who put no money down when buying their homes have no equity. What will happen to them if the value of their real estate falls? If these homebuyers have been using interest-only loans, they will have no protection against any kind of adverse move. Many people in this situation will have no choice other than to walk away from their property and mail the unwanted keys back to the lender.

Speculation has been increasing along with home prices. The history of markets shows us that asset markets become ever more treacherous as the number of leveraged participants increases. Leveraged participants possess no capacity to withstand adverse trends. They become forced sellers into a falling market, which pressures prices even more. This forces more speculators to sell.

16 comments:

Tom DC/VA said...

"According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years. Not only does this dwarf any previous house-price boom, it is larger than the global stock market bubble in the late 1990s or that of the late 1920s."

How much of that $30T (!) will go up in smoke? And even if only $10T disappears, can the cascading defaults be handled?

Is it too early in the morning for a drink?

Robert Coté said...

The 42% of recent buyers who put no money down when buying their homes have no equity.

They wish. If they bought a used home they paid 7-11% in transaction costs. If they bought new they are facing new homes 60, 80, $120,000 cheaper. Taxes due in 2 weeks and their home is a year older. Upside down, underwater... pick your phrase. Personally I favor; Tango Uniform. [If you have to ask you don't want to know. If you already know you are laughing too hard to reply anyway.]

Bake McBride said...

From todays WSJ:
"The number of homes for sale has climbed about 30% over a 12-month period, reaching its highest level in nearly 10 years, according to the National Association of Realtors"

And to think....the slide has just started. What will inventory be like by the end of summer??

Moman said...

Robert,

what is tango uniform. enlighten me....we are seeing your 'silent spring'.

asdf said...

Tango Uniform

Toes Up

The position you assume right before taking your eternal celestial dirt nap.

Anonymous said...

We are not investors/ flippers. In 2004 we bought in a great beach town, a big home on the beach block. Then, we had to relocate within the past year. Unfortunately, we fell for the theory that "housing will only go up" and bought instead of renting.
We recently sold at quite a loss from what we paid, but are glad to be out of the market for the time being.
Even though we had a fixed mortgage, our property taxes doubled in one year (probably b/c we paid too freakin much for the house). I cannot imagine the burden to people with the ARM payments! The appraisal on our house also came down $100k from the previous year…) even though we added a custom kitchen and bath!). Lesson learned the hard way!
Anyway, we are renting a decent home in a nice area, and looking, but in no rush to buy again. Hopefully the market will come down enough so we can recoup some of our loss.
On this site, the truth is told. I hope no one honest gets stuck as we did, and I also hope the readers will take my situation into consideration and see that housing prices do indeed fall. I still have realtors who tell us our investment is good here; spring selling season is heating up. They are incapable of telling the truth.

Anonymous said...

The picture is awesome...Blue Horseshoe says go long plastic sheeting and ducktape companies.

Anonymous said...

Tangu Uniform = Tits up. An old pilot saying that stems from the old airplane instrument that gave the pilot an idea of the airplanes position relative to straight and level. When upside down, there were two little marks that were "up" instead of down. These marks were called "tits" by the male pilots and when the instrument failed and turned over (as they did) the instrument went "tits up".

Just like the finances of many flippers and overextended speculators will.

Robert Coté said...

Yes, indeed Anon 1:32. You even got the aviation history correct. You can say tits and get away with it. Excuse me while I go wipe the lube from the nipples on my equipment. ;-)

Anonymous said...

Tango Uniform
NATO phonetic alphabet for "Toes Up" also used by the FCC, FAA and DOD to mean killed or destroyed. (Alternative vulgar translation: "Tits Up")

* (US Army & USMC) Not in optimal condition. (e.g. The HUMVEE went Tango Uniform before we even arrived.)
* (US Air Force) Dead drunk.
* (ALL) Object Inverted. (Up-side Down) (e.g. 'I'm turning the plane Tango Uniform to get a better look.')

moman said...

Thanks...got a good laugh from the 'tits up' aviation explanation. heck I'm a private pilot and hadn't heard that one yet.

Anonymous said...

As blogger Maxed Out Mama put it, we either get our financial house in order or start reverently studying the Koran.

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Anonymous said...

Enjoyed reading some of your blog. Nice to take a break from my own real estate work. Selling homes is getting to be a challenging business right now. Good luck, and thanks for the read. Visit my site if you have a chance.

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