August 27, 2006

The housing bubble in three act structure - Acts I and II are now over, what does Act III look like?

Act I - Euphoria and Riches

The glee and riches as the bubble started to inflate, money started falling from trees, society no longer needed to save for retirement, we could buy anything at the mall we wanted, and we bragged how smart we were to everyone who would listen. Bush said buy a home, the NAR said buy two, and Greenspan said use an ARM. Home prices would never go down, they never had, and you'd be a fool not to buy, no matter the price.

Act II - The Realization and Pop

Some chinks in the armor started to appear - silly little things at first like negative cash flow for investors who bought to rent, unaffordability climbing to record highs, the proliferation of the no-down, no-doc, interest-only, teaser-rate loans to get the last fools in. Some folks started selling at the peak and renting, then told others about it.

Bubble blogs started up, the media started saying "housing bubble" more and more. Hundreds of thousands of unqualified societal losers got their real estate licenses, mortgage ads were all over TV where used car and E.D. ads were before. And then the negative numbers started pouring in - construction down, sales down, prices down, confidence down, REIC stocks down, and perceptions changed - houses were now bad investments that would actually depreciate in value for years to come.

This act ended this week with the horrible numbers, and the NAR admitting (finally) that the bubble was over (and actually ended in August 2005).

Act III - The Crash, Aftermath and Redemption

The final act is now to be written. What does it look like? And what's the movie called?


Anonymous said...

I hate scary movies - can I go home now?

Anonymous said...

Act III: The blame game is starting.

Check out yesterday's comments from a West Coast RE broker named Sherry Stuckey on .

Her web site shows that she has a MBA. Umm... OK. Apparently she slept through the lecture on that supply/demand thingy.

Ms. Stuckey's comments follow:


Dear Mr. Roubini:

I am a Real Estate Broker in California, and I am concerned about the publication of your comments on your blog titled "The Biggest Slump..." that I read referring to your statements regarding a recession in 2007 due to a slowdown in the housing market. References to comments such as these by professional economists are permeating mainstream media, and hurting both Buyers and Sellers alike.

As a Macro Economist, I am curious as to why you would think there could ever be a recession in the US resulting from real estate depression. Rates are still at an all-time low, and people are making more money than ever. There are available channels that were non existent in even 1990 that enable innovation by our youth and boomers alike to support real estate acquisitions. Lay people now have the internet, cell phones, computers, etc. Believe me, I was 19 in 1990, and I had to learn how to use these gadgets. They have improved productivity, which is the backbone of a strong economy. Creativity reigns and innovation will save our economy.

In addition, the global marketplace is expanding more than ever. If the Yuan is pegged to the Dollar, shouldn't that guarantee inflation? Isn't it nearly impossible to see prices decline with the inflation that we are experiencing as a result of global expansion?

And what about our innovative capability which fuels productivity? Consider that we have more and more people flowing into the US than ever; that we are still a superpower; that we have educated people living in the US; that we are free, and will not go back; that we are, though spoiled, dedicated to our professions; that we will always change to meet new challenges; and, best of all, we are free to be innovative.

Severe price declines may be imminent for Builders in some areas, but Sellers will not take major losses to get out of making payments on extremely low interest rate loans with even lower tax bases. There will not be a huge depreciation in the real estate market where prime real estate is scarce. Banks will not sell foreclosures at a loss. Banks will not reduce their revenue outlooks. Demand will not decrease with population increase, because everyone needs a place to live. Rents are just as acceptable to Sellers with the flexible financing options available today.

Consider that California comprises roughly 15% (documented only, not counting the sub-economy) of the national GDP. Our average sale prices throughout the state are still up. Yes, up. I think 20-40% in my city, depending upon the neighborhood. Our economy is too great and variegated to fail on merely one count.

Comments such as these are scaring people, and that is why there is a slowdown. It is sad that you don't write that the availability of housing inventory combined with great interest rates is now enabling Buyers to buy after many years of being pushed out of the market. Builders may have overbuilt in ridiculous areas and cry that they didn't receive $1.6M, but had to accept $1.2M, but that is their problem. They were too optimistic about the future of development. That does not mean that people have stopped wanting to have a home of their own, a nice tax deduction, and no Landlord telling them what to do.


Sherry Stuckey

Anonymous said...

I think Sherry Stuckey is about to experience her 15 minutes of fame.

Anonymous said...

movie name: Devastation

Staring: as Tom Hanks as David Lereah, James Gandolfini as Bob Toll, and Gary Sinise as Robert Shiller

Anonymous said...

I think a recession is in the bag!...GDII if we start to see any bank failures and name brand companies tanking....pass the popcorn

Richard said...

"The Bone Crushing Thud"

Anonymous said...

"They Said it Couldn't Happen Here" or "It Never Is Different This Time"

Act 3 will bring the world to tears

Anonymous said...

Dear Sherry: Please see Mary Meeker on how a logical explantation can be totally wrong, and/or a falsehood. Sort of like "research" to explain PE ratios but not knowing that insiders are waiting for your gamble (I mean "investment"). So, if you were 19 in 1990, you do not remember the last housing recession. I was 23 in 1990 and remember it well, but I also remember (the 70's) Jimmy Carter, high gas prices, cars that were too big to gas up, high interest rates, houses that would not sell and recession. History does repeat itself so where were you. The strong economy that you are talking about is strong borrowing economy, which is drying up. My house is paid and I can not imagine anyone being so stupid as to use creative financing to buy my McMansion. If everything is so great, then why would you need creative financing at all. Sort of like borrowing money to gamble at the casino. The thing that should be scarring people is going into the new form of slavery which is called debt. Write this down, the borrower becomes the lenders SLAVE. Finally, understand that the Fed (our bankers) lower interest rates (punch bowl) and everyone gets drunk on debt, and then raise interest rates and everyone has a hangover.

Chris G said...

Sherry Stuckey makes people with MBA's look like idiots. I am offended because I also have an MBA.

But you don't need an MBA to see how ridiculous her argument is. Her argument about productivity is one of the worst arguments I have heard about keeping this Ponzi scheme going. Hey Sherry, everybody has the Internet, cell phones, and computers. We've all had them for 7-10 years. It doesn't make anybody want to buy a home any faster. In the end, the buy vs. rent equation still applies, honey.

Osman said...

How about some intelligent discourse on this article?

Osman said...


keith said...

os - good links. here's my take

1) housing will indeed crush the economy, suffering the double whammy of an incredible and swift reduction in consumer spending and confidence due to the disappearance (again) of the wealth effect, combined with massive layoffs in the REIC, including the illegals

2) The UK will suffer perhaps an even worse collapse, as housing rose to insane, not just rediculous, heights, propelled not by fundamentals but by the promise of future riches which would come about by jumping on (or stepping up) the infamous "housing ladder"

Any reports in the media to the contrary are to soothe a worried public, as well as the advertisers and house-owning staff of such periodicals.

Opened Eyes said...

Coming up: deflation, unemployment, bank failures, lost military adventures, resistance to increased taxation, assaults against government officials, random ethnic violence leading to organized conflicts, first black versus Hispanic, then other groups, the end of the nation-state.
Anarchy based on voluntary association.

Opened Eyes said...
This comment has been removed by a blog administrator.
Osman said...

I agree that the consumption driven by the housing ATM should shut down with a recession in housing. However, there won't be large increases in unemployment directly from housing. Real estate agents and mortgage brokers are usually independent contractors and when/if they quit and look for other work (a much needed thinning of the ranks), it won't show up in unemployment figures because they don't qualify for benefits. Most will search for other work even as they continue their day jobs trying to land deals in real estate.

Illegals - same story. If work dries up, they'll find other work but won't show up on unemployment figures because they exist in the margins.

borkafatty said...

I think Sherry Stuckey is about to experience her 15 minutes of fame.

That and an unemployment check sorry to say.

And the name of the next act:

"Hey Brother can you Spare A Dime"

Richard said...

I would only add to what Keith an openedeyes said...

The depletion of oil resources.

Were it not for this economies may have a slight chance of pulling out of this nose dive..however; much much higher energy costs will continue to pull the economies of the world down.

borkafatty said...

I agree that the consumption driven by the housing ATM should shut down with a recession in housing. However, there won't be large increases in unemployment directly from housing. Real estate agents and mortgage brokers are usually independent contractors and when/if they quit and look for other work (a much needed thinning of the ranks), it won't show up in unemployment figures because they don't qualify for benefits. Most will search for other work even as they continue their day jobs trying to land deals in real estate.

Illegals - same story. If work dries up, they'll find other work but won't show up on unemployment figures because they exist in the margins.

Hey OS,

Sure that is a great thing to say they can go or try to find other work, but the thing is the ones that are falling off the wagon now, are the ones snapping up the jobs that are avalible NOW!

Where are the ones holding out for the final sale going to find a job when there are non for the grabbing? in 07.

everyone says at one point "if i lost my job I would flip burgers to support my family"

Sorry the burger joint is filled Help Not Wanted. Besides that sales are way down I may have to let some people go...and thus the ball keeps rolling.

I have lived thru 2 reccessions in my time, this is truly uncharted waters.

Mark in San Diego said...

Sherry Stuckey is obviously writing a satire article . . .and you fools fell for it. . .unless of course she got her MBA from University of Phoenix. . .

borkafatty said...

That is 3 forgot the 70's hehe age thing

borkafatty said...


OT: The China DisInflation Bailout May Be Ending

For decades now, as the Federal Reserve has been printing piles of money, China has been absorbing those dollars as evidenced by its growing dollar reserves. It has resulted in disinflation in the United States and Europe, as cheap Chinese manufacturing supplied Europeans and Americans with low priced goods.

Anecdotal evidence and some data show that this jig is up. Chinese manufacturing prices are starting to rise. NYT reports:

During 20 years in the toy business, Anthony Temple has reveled in the bounty of cheap stuffed animals, coffee mugs and figurines on sale from China. But this year, his buying trip for his London-based company, Rainbow Designs, resulted in a rude awakening.

Traveling through the Pearl River delta north of Hong Kong, Mr. Temple found that cost increases — for raw materials, but above all for labor — dominated every discussion he had with suppliers.

Far from being keen to underbid each other, Chinese companies talked so consistently about marking up their prices 5 percent to 10 percent that Mr. Temple, whose company owns the British distribution rights to such cuddly creatures as Paddington Bear and Jemima Puddle-Duck, became convinced that these were not simply negotiating tactics.

“When I went over there, I was under the belief that China is a bottomless pit of cheap product,” Mr. Temple said. “When I left, I was not.”

As the Chinese economy races forward, signs are multiplying that the Asian giant is beginning to slow its export of something dear to the hearts of many consumers in developed countries: ever cheaper products.

For at least a decade, China has provided a boost to a welcome tailwind for inflation-fighting central banks in Europe and the United States by consistently cutting prices on a wide variety of goods, helping counterbalance the upward drift of overall consumer price levels...

In the United States, data shows that Chinese import prices, which have fallen since data collection began in 2003, are leveling off, as are prices from other low-cost emerging markets.

The price of Chinese goods at the factory gates has leapt upward in the last four months, according to the purchasing managers’ survey taken by the London-based NTC Research. Its index was a tad below 50 — a level indicating stable prices — in March but now stands at 56, a steep increase by the standards of a survey that usually moves in fractional increments...

“We may well be reaching a situation where prices of both commodities and manufactured goods will go up,” said Kenneth Rogoff, a former chief economist of the International Monetary Fund. “That’s not pleasant at all.”

keith said...

in regards to the official inflation or the official unemployment index rising:

Don't believe what the government tells you. They're lying, and for good reason.

Millions will go unemployed yet the unemployment index will remain constant. Prices will continue to rise yet the official inflation number will remain constant. Home prices will continue to free-fall, yet the government's median home price number will not collapse.

got it?

Anonymous said...

Got It!

Osman said...

Guess I'm not ready to sign off on the United States quite yet. Sure, we've got an awful administration but those come and go. Hopefully the next one will help us exit from these poorly planned, hastily executed military blunders we've gotten ourselves into.

We can argue about how government figures are calculated but that doesn't mean our entire financial system is a fraud or there's a conspiracy.

I agree that the direct employment impacts will not register completely on unemployment tallies. But I disagree about the impact of those unemployed or underemployed people. Most of the realtors, property inspectors, mortgage brokers, etc that I know tend to be very entrepreneurial and often have backup options.

Perhaps they'll take a paycut, spend six months looking for work, and struggle a bit. But that's hardly a picture of catastrophe. In my review of our economic history, it usually results in long term rewards to the individuals and society.

Anonymous said...

"Millions will go unemployed yet the unemployment index will remain constant. Prices will continue to rise yet the official inflation number will remain constant."

The unemployment number did go up and the jobs number went down during the last recession. The jobs number is showing stagnant growth currently as the economy cools down. The inflation number already has not stayed constant, it has already gone up recently.

Anonymous said...

She can make a great living in Juarez with her as.......

Anonymous said...

Take two Smart Pills and "Drive On" Sherry. Being Stupid is hard, hard work.

You're not the only one with a MBA working to become a Monument to sheer Stupidity, total Greed and Self-importance Arrogance !

Anonymous said...

very well written original post. I enjoy the original content more than just posting MSM articles. keep up the good work.

Anonymous said...

"and people are making more money than ever"

Can't stop, must stop... laughing.
She must move in a circle made up of only RE people. Come on Sherry do you really believe people,s pay has gone up? It has gone down when inflation is considered, all while RE skyrocketed. You and your RE buddies may have enjoyed a good rise in income over the past few years but the rest have not (& yours is headed south).

Joey said...

Yes Sherry, there is a Santa Claus.

Just close your eyes and dream, and it will be so.

Anonymous said...

Are they really now just getting it? I guess that means it is going to get worse. I really hope people don't think these incentives to buy are really free, it's just a ploy to hide the fact that the house prices are dropping but keeping numbers up on the technical side. Please don't be fooled.

Housing Bubble Fact or Fiction?

...But oddly, like the rest of America, most of the time I don't think about the housing bubble that's about to pop. We ignore the coming storm.

But when it gets up close and personal — like my family's home — well, suddenly I'm shocked out of my denial.

The shocker? I just learned we live in a metro area that could see a devastating 55.8% decline in home prices in the next five years. Worse yet, most of the real estate north and south of us — from San Francisco to San Diego — is predicted to decline 50% in the next five years. Ouch!

That dire prediction was made by former Goldman Sachs (GS) investment banker John Talbott in his new book, "Sell Now! The End of the Housing Bubble."

Next time you're in a bookstore check out his top 130 metro areas. The chapter's titled, "Are You in Trouble?"
Warning: Chances are you're in big trouble, or in denial.

And folks, this is not just an isolated West Coast phenomenon. Talbott points out that America's top 40 cities are facing a average 47.2% decline: Boston is 49.4%. Miami 44.8%. New York 44.6%. And Chicago is 27.3% overpriced. Yikes!

But "so what?" you say. You've heard it before. Right? Warnings reported month after month. For example, Talbott reminded me of an editorial in The Economist last summer: "Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000 ... This is the biggest bubble in history."

Yes, the irrational exuberance of our failed stock market simply shifted over into a new irrational exuberance in housing. In five short years an estimated $30 trillion was added to housing prices worldwide, an unsustainable 75% increase to $70 trillion, largely due to then Fed chairman Alan Greenspan's cheap money policies.

Greenspan dismissed the global bubble, telling Congress it was just a little "regional froth." Happy-talk, while our housing and mortgage industry has been taking advantage of naïve home buyers and sellers with loose underwriting practices: Low-interest home equity loans, and interest-only, low-equity loans feeding housing price inflation....

Read the whole story here...,2933,187831,00.html?

autofx in Phx said...

The final act is now to be written. What does it look like? And what's the movie called?
A sh*tstorm, I call it.

Anonymous said...

Beginning of the end

Anonymous said...

Call it "The AmmityVille Bubble" Revenge of the CRAP BOX. Houses are evil mann.

Anonymous said...

BTW the derivitives on Bonds is rocketing,265 trillion. The fed stopped publishing M3 money supply about a quarter back.WHY? Probably 2 reasons-Last time published they averaged 2Billion dollars printed every day,and increasing rapidly.2-they have admitted to not even knowing how many dollars are actually out in circulation.In other words-the fed does not even know what to do about any of this.

Anonymous said...

As prices go down, it pushes more people who succumbed to "refi madness" underwater, the bank needs to unload those distressed properties, pushing the price down more. Consumer spending, which was fueled by increasing debt slows down drastically, and the psychology of "save, don't spend" comes to the fore. With reduced spending, and prices taking a dive elsewhere, the economy implodes.

I really think this mess is going to push the stock markets down drastically once people start cashing out their stocks, regardless of what the PPT has up their sleve. We are in for some trying times.

Anonymous said...


In an MBA theory, you're right, but in reality, you're way off just like Mr. Lereah who has a Phd. degree. Sherry, denial can skew everything that you have learned in business or economics school. Denial is personal and not until you learn to accept the reality, there's no amount of MBA or Phds can distort the truth. In fact, we can end this debate now if you would just drive around the areas deemed to have the highest volume of 'for sale' signs. No more spinning Sherry.

All you have to do is accept it so that you can move to recovery. Come up with some creative and unique way to provide service to your clients (post bubble) and still retain your credibility. Take it from me - the guy with no MBA degree, just a simple common sense.

Anonymous said...

One thing that does not change in life is "Fear and Greed" and with it comes "Reflexivity" for a lack of a better word.

Reflexivity have six stages.

Stage 1: Optimism

Stage 2: Faith

Stage 3: Fanaticism

Stage 4: Sudden Shock - Cascade One

Stage 5: Last Chance - Cascade Two

Stage 6: Long Term Collapse - Cascade Three.

ACT III will be made up of the last three stages.

Currently housing market is going through the sudden shock - stage 4 whereby even in a low interest rate environment housing price can fall.

July 2006 is most likely the peak whereas housing inventory increased and price increased then housing price decreased and inventory decreased.

Hencefore what should take place next (Last Chance - Stage 5) when price fall between 3 to 9% there should be many first time buyers who do not under the fundamental of the housing cycle jumping in too early in the begining period of the slump phase.

uber_homeowner from craigslist makes a point "MANY first time buyers are stepping up to buy at these temporarily-reduced prices"

Hopefully at the least these first time buyers will at least consider this if nothing at all "LOCATION, LOCATION, LOCATION"

National housing prices (Inflation Adjusted) is about 45% too high based on Robert Shiller chart. That does not mean that housing price will fall 45%, because some of that will be absorbed by inflation (raise in salaries).

However with housing affordablity index in mind it could fall as much as 31% by the ending period of the housing slump phase.

Many of the housing investors should start jumping back in during the Long Term Collapse - Stage 6 when net cash flow make sense.

Cash flow = Net Operating Income - Captical Expenses - Mortgage Payment

Net Operating Income = Revenues - Operating Expenses.

smugbastard06 said...

Not everyone is financialy stupid. I just got my salary bumped up at work 20% this week...and 2 weeks ago I cut back my spending 20%. I plan to keep it that way.
signed... smug bastard

Anonymous said...

"Chris G said...
Sherry Stuckey makes people with MBA's look like idiots. I am offended because I also have an MBA."

You know what they say about people who have a college degree(MBA, Phd etc).............THEY HAVE A COLLEGE DEGREE. I have talked to too many incompetent Phds to say anymore about a particular degree than it's a nice thing for an intelligent person to have but an idiot is an idiot and sometimes a degree keeps the idiot from realizing that fact which is actually worse than the self aware idiot.(Grammar rules suspended)

Great site Keith!!!!

Anonymous said...

To: Sherry Stuckey

"If the Yuan is pegged to the Dollar, shouldn't that guarantee inflation?" Please Explain?

Isn't it a fact that when the Yuan is pegged to the Dollar it is keeping the price of imported goods from China down and not up?

Isn't it a fact that when the Yuan is pegged to the Dollar it is exporting more US manufacturing base jobs oversea due to the low operating cost of Chinese labor?

Isn't it a fact that as USA enter electric day on November 7, 2006 more and more politicians will demand that China float the Yuan so that it give the voters the image that the politicians are trying to protect the voters' jobs.

Isn't it a fact that if the Yuan were to float freely then the US dollar will become weaker, because the Yuan has been kept artificially low?

Isn't it a fact that the US Administration talks about floating the Yuan but truly wants the Yuan to be pegged to the dollar to keep inflation down?

Isn't it a fact that the US dollar is the reserve currency of the world and at least 65% of all world commodities are traded in term of US dollars?

Isn't it a fact that when the US dollar becomes weaker then it will bring the price of imported commodities like crude oil up, because Oil rich foreigners like the Middle Easterners who accept a weaker US dollar for their crude oil won’t be able to buy the same European goods when they exchange the weaker US dollar for Euro. Thus oil rich foreigners will have to raise the price of their crude oil to compensate for the weaker dollar.

Isn’t it a fact that when crude oil price increase it will increases inflation from a wholesale level?

Isn't it a fact that the Federal Reserve has been raising Fed Fund rate in the past 18 months to strengthen the US dollar to bring down inflation.

Isn't it a fact that when foreign bond investors buy US treasury they must change their currency to US dollar first?

Isn’t it a fact that if a foreign currency like the Yuan were trading eight Yuan to one US dollar during the purchase of the US bond then the Yuan were trading seven Yuan to one US dollar when US bond maturity then that bond investors will lose more money then what the yield of the US treasury is worth? Case Study: During the purchase time of the US treasury the Yuan was trading eight to one exchange rate. Thus 8000-Yuan convert to $1000 US dollar to buy $1000 US Treasury bond at 4.76% will get $1047.6 US dollar end of one year. At maturity if the exchange rate is seven to one then $1047.6 US dollar will equal 7322-yuan.
Isn’t it a fact that foreign bond investors lose money when dollar gets weaker relative to their currency; therefore, their risk should come with a higher reward of higher yields during time of inflation?

Isn't it a fact that when bond investors sell US treasury then the price of US treasury will fall?

Isn't it a fact that when US treasury price fall then yield on US treasury will move up?

Isn't it a fact that if the US dollar were to weaken quickly then more and more bond investors will pull out of US treasury bonds?

Isn't it a fact that the job of the US Federal reserve is to protect the US bond market and ultimately protect the US dollar as the reserve currency of the world?

Isn't it a fact that the US treasury bond are rated AAA because it is backed by the fact that the US dollar is the reserve currency of the world?

Isn't it a fact that when the yields on the US treasury bond moves up more bond investors will move money into US treasury bond instead of Mortgage Back Security when the spread on the yields between the two are low? In other words bond investors can lower their risk?

Isn't it a fact that Mortgage Back Security is competing for the same pool of investors as US treasury? Then therefore in that situation the yields on Mortgage Back Security will have to more up.

Isn't it a fact that the yield on Mortgage Back Security is directly related to the yield of mortgage loan?

Isn’t it a fact that as Fed fund rate increase Lenders will try to keep yield on mortgage loan down to gets more qualified buyers? In other words, Lenders can make up lost profit on the lower yield of a loan through increase volume of homebuyers. Don’t that statement sounds like 2003 to 2005.

Isn’t it a fact that currently Lenders ability to make a profit on the money Lenders have borrowed and what Lenders are loaning it for is no longer as profitable?

Isn’t it a fact that as the Lenders profitability decreases the Lender willingness’ to take risk decrease?

Isn’t it a fact that as profitability decrease lending standard becomes higher also?

Isn't it a fact that when lending standard become higher it becomes harder and harder for homebuyers to get a loan.

Isn't it a fact that house demand is based on the availabilities qualifies homebuyers and not by people who want to buy a home but do not qualified?

Isn't it a fact that when the availability of qualified homebuyers decrease then the inventory of house increases if the same amounts of home sellers are available?

Isn't it a fact that as inventory of house for sell increase then the supply will eventually outnumber the demands from available qualified homebuyers?

Isn’t it a fact that when the supply of houses outnumbers the demand of qualified homebuyers then prices of house will fall?

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