November 20, 2006

HousingPanic Stupid Question of the Day

Will the late great American housing bubble (aka Ponzi Scheme) end up being a zero-sum game?

It was reported that US housing stock increased from $14 Trillion in 2001 to $25 Trillion in 2006 - that's $11,000,000,000,000 of new "equity" and inventory.

So now that the bubble has burst, will that $11 Trillion (and more) simply go poof?

My take is - of course it will, as it always does. There will be some winners - those that speculated, rode the lightening, and got out before the crash. And of course the bubblesitters, who saw the bubble, sold at the peak, and now rent.

But there will be a LOT more losers - those who did HELOCs and MEWs, and then went out and spent the fake equity they thought they had "earned". And baby boomers who stopped saving because they thought their house was their new 401k. And of course the entire soon-to-be-unemployed REIC.

So, no, it will not be a zero-sum game - it will end up being a net-negative for America and the world.

And it was never a game. Even though it seemed like one to so many.


borks my bitch said...

But it was so fun, selling houses within 6 months for double what I paid for them. Only to buy them back for what I originally paid for them. No fair, I want to sell to some more suckers. Oh well once i buy in 2008 I'm sure in 2010 I find a whole new bag of fresh suckers to buy from me again,
A fool is born every second!!!!

foxwoodlief said...

Just a reminder of the Economist magazine article in June 2005 that showed the world wide house bubble the largest in history. Also a reminder of how we fair against other countries since Keith is now in Europe and can actually see first hand what I and others have said over the past year that we are not alone or the worst.

Here is that list of home appreciation from 1997-2005, from highest to lowest,

South Africa up 244%, Ireland up 192%, Britain upp 154%, Spain up 145%, Australia up 114%, France up 87%, Swedon up 84%, Holland up 76%, the USA up 73%.

The article said something to the effect that the increased value of these markets was greater than the GDP of those countries. Bubble? I'd worry if I were in the top five listed above and fearful if I were in the other groups. If we collapse, who will fair the best in a depression? Opinions?

twib said...

What I hate about this bubble is that even if you made conservative choices, you will still pay for it. Good luck getting your real estate tax assesments reduced. Good luck selling your house for what you paid during the next five years. And since it will affect the macro economy, good luck holding your job.

This reminds me of the dot-com bubble in the same way. Even if you didn't go out and buy Amazon at $200, your companies 401k mutual fund managers did. It's hard to make yourself totally immune to these bubbles. But it is still my ideal to try.

Anonymous said...

What is the best way to make some money over the next 6-8 months (in publicly traded securities in the US) in this declining housing market?

kilobar said...

One point to take from this is that if it turns out to be a global, debt induced recession/depression, then ALL countries are going to have to inflate their way out of it.

Anonymous said...


My thoughts exactly. I build houses for a living and these speculators f'd things up again. I may be unemployed in the next few months and have them to thank for it.

Need to find a place to ride out the storm with the dollars I have saved. Gold seems to be a logical position or maybe treasury's.

My business is not speculating in these fields so I really don't know.

Wish everyone else would have stayed in theirs.

Anonymous said...


"If we collapse, who will fair the best in a depression? Opinions?"

Interestingly enough, in the 30's the US pretty much got the brunt of the hurt, while countries who were deep in debt to the US and running trade deficits to the US' trade surplus, like France and Great Britain, ended up faring much better (not great by any means, but better). If that were to hold true this time around, the countries that would bear the brunt of the depression would be those running a trade surplus and buying other countries' debt, like China, Japan, and Saudi Arabia, while many of the countries you list, like the US, Britain, and France would fare relatively well.

Anonymous said...

There will be carnage on a scale the world has never seen.

Please understand that the U.S. banking system is directly exposed to residential real estate loans to the tune of $6 trillion.

They also hold another $1 trillion in Fannie/Freddie MBS.

Fannie and Freddie between them hold/guarantee another $4 trillion or so in mortgages.

Oh, and let's not forget Ginne Mae, and the FHLB banks who sit on about a trillion more in mortgages.

Not to mention the several trillion dollars in derivatives positions written against the MBS.

Then there is the entire REIC industry: from real estate agents and brokers, to mortgage brokers, title companies, construction companies, all of their suppliers, furniture mfgs., on and on.

Anyone who doesn't understand that the collapse of this bubble over the next few years will lead to worldwide turmoil just doesn't get it.

Shakster said...

Hey ,Nikkei down 245pts today,that's godda hurt.Houses at 11trillion in eccess of GDP?Holy shit better open the borders ,or it's the banks go bankrupt this time(I wish)

Anonymous said...

Question for you, Butch:

If a debtor is borrowing from a creditor, and the debtor also happens to be able to manipulate the value of the asset that is being loaned, who would most likely end up getting the worse end of the deal? The debtor, or the creditor?

Paul E. Math said...

I'm very worried about helicopter ben throwing money out his chopper and inflating the hell out of what I've saved. So a mixed basket of precious metals and oil seem like a good hedge whether housing 'values' deflate via price declines or whether they deflate due to a decline in the value of the US dollar by which the house price is denominated.

All homeowners will notice if their houses sell for 50% less but there are many who will not notice if the fed tinkers with their CPI and Core inflation calculations and allow the dollar to lose 50% of it's value.

I'm with Keith on this gold thing. And peak oil is a compelling enough theory so that now that oil has declined a bit there could be some bargain oil or energy stocks out there.

No, this is not a null-sum equation. How much money just went right out the window in realtors commissions? Instead of donating money to cancer research we donated it to money-grubbing, dishonest, lazy, uneducated realtors.

Anonymous said...

Right now I don't care! The money still flows like honey here in Los Angeles. More money than goods and plenty of oportunity.

Anonymous said...

Tabasco Jenkins wrote:

"If a debtor is borrowing from a creditor, and the debtor also happens to be able to manipulate the value of the asset that is being loaned, who would most likely end up getting the worse end of the deal? The debtor, or the creditor?"

(Butch answers): I'm not sure I have enough information to answer cogently (or if this is a rhetorical question), but I will state that any manipulation of prices (or "value") if you prefer can only lead to market distortions and mis-pricing of risk.

In any event, I don't really discriminate on who is doing the mainpulating, anyway you look at this housing bubble, it's unwinding will be massively destabilizing.

Anonymous said...

Adding to twib's "no win" situation - not all bubble sitters are equally sanguine waiting around to finally be able to purchase that pile of bricks. I like renting well enough, but I like houses too, and there's a bit of "life on hold" feeling about this.
In the worst-case scenarios above, bubble sitters still won't be able to buy a house - they'll either be out of a job, or thing will be so nutzo it won't make sense/be possible.

Anonymous said...

correction: "things"

Anonymous said...


It's not really a rhetorical question, though I could see where one could take it that way since the answer seems readily obvious. My greater point is that the massive destablization you see happening might not happen the way you see it due to the debtor/creditor situation that right now exists in the world. Basically, if the US consumer stops spending, yes, that hurts our economy, but it will hurt other economies substantially more.

And because of that dependance on the American consumer, there won't be a lightning quick unwinding of US debt ala Argentina (foreign investors can't just liquidate all their US debt holdings and call it a day like they could with Argentina, unless they want their entire economy to collapse along with the US), nor will there be a deflationary spiral ala Japan (as long as we continue to send dollars overseas to buy products, those dollars will be repatriated in the form of US treasury purchases, unless our trading partners want to ruin their competitive currency advantage).

The dollar will depreciate, our debt will be devalued, our consumer will slow down, we'll probably see another recession, but there will be no depression, not in the US. China and Japan and emerging markets, though? That could be a different story.

Doomsday scenario it is not. The start of a long slide down for US economic dominance and a substantial but not lasting step back for the growing Asian tigers, though? That seems quite plausible.

Britain and the US were in much the same situation some 70 years ago, with the US running a huge trade surplus against the world's largest economy, Great Britain, and in turn buying a ton of British debt. The depression hit, it was awful on the trade dependant and debt owning US, and much less so on the double deficit British. But, in the long run, we see who ended up gaining dominance. It's just a really long run, much longer than most on this board can imagine. Will the US lose it's economic dominance to Asia? It's looking that way, but it could take 20 years. In the meantime, the countries running huge trade surpluses against the US while also buying US debt might be in for a world of hurt, while the US economy in turn feels some pain, but nothing remotely close to great depression-like pain.

Anonymous said...

The thing that is so interesting is how much of their time and money that housing owners (slaves) are spending on their houses now.

It's making them really surly it seems like. Like they want your $$$ and they want it now and if they don't get it they get really p*ssy.

Anonymous said...

To the person saying that banks are so exposed -- no, they are not. They have securitized the risk, so those people holding the risk are the ones who are totally exposed.

And that risk is hugely leveraged. Should be interesting who it wipes out. A lot of funds and things have bought it.

Anonymous said...

Re: protecting against price decline in houses.

For stocks, a way to protect against declines is to buy put options ( I'm doing it right now to protect the gains in a employee-share-purchase-scheme stock that need to be held to Jan-1st 2007 to minimize the taxes).

For houses, the best I can find so far is buying put options on CME Housing futures:

Anybody looked at these - and want to share ideas ? The downsides so far for me are:
1. The index they are based on is S&P/Case-Shiller Metro Area Home Price Index. This is only updated once every 2 months. I'm much more used to betting on assets that are priced in near real time. I can't grok this every two month stuff.
2. There are no options on Denver metro area futures - little demand I guess - so I'll have to use the composite or other as the correlated class.
3. The options can't be electronically traded only open outcry , so its only via a broker for me and I don't know how to do that. The futures themselves are tradeable electronically but I'm verr much a naif in trading futures.

Ideas ?


Anonymous said...

There isn't much liquidity in those futures right now, so you're going to pay a premium because you'll likely get a pretty bad deal with the market maker.

But just trade them like any other future. Open outcry vs. electronic just means there are different hours.

Anonymous said...

Trading hours, that is.

Paige Turner said...

So now that the bubble has burst, will that $11 Trillion (and more) simply go poof?

This has always puzzled me. A lot of money changed hands inside the real estate bubble. The only problem is that all of the profits were created out of debt and a lot of this debt is backed up with phony collateral, or equity.

Those who escaped with easy profits will need to act wisely, or their money be inflated into nothingness. They could very well go down with the bankrupt debtors who originally paid them far more than their houses were worth.

Bill said...

Housing Bubble Smack-down

Give me 5 minutes and I’ll convince you that you should sell your house immediately and invest your life-savings in gold or a Swiss bank-account.

Bill said...

also those Mcmansions with the 8 bedrooms are going to be very empty if the Dems get their way, we said it was yourself a favor dont run for the headlights.

Selective Service: Ready for a draft

Anonymous said...

Britain and the US were in much the same situation some 70 years ago, with the US running a huge trade surplus against the world's largest economy,

Ya'all acting like there will be a United States of America in 10, 20, 50 years.

Anyone notice all the Mexican nationals that the Power Elite are permitting to enter this country illegally?

Imagine if the US bordered China. Walmart would save a lot of $$ not sending their crap on container ships to here.

This county is FUBAR. You guys and your "what do I invest in now" BS slay me. How about invest in a RIFLE and lots of AMMO??!! How about a small tropical island?? That would be good to have.

The Boomer locust are hungry and ready for the feast. Who knew they had children just to eat them.....

Anonymous said...

"Ya'all acting like there will be a United States of America in 10, 20, 50 years. "

It could be better to try something new, like Independent States of America. Smaller is better. It is awfully hard to have a functioning democracy, administration with 300 million people than with 50 times 6 million.

China will not be a superpower. It will be one big environmental disaster zone 20 years from now.

Metroplexual said...

I used to work at a place that made twister mats. we used them as table cloths.

Anonymous said...

"China will not be a superpower. It will be one big environmental disaster zone 20 years from now. "

You mean like Great Britain was 100 years ago, or the US was 40 years ago? Remember the chimney sweeps of Mary Poppins or the Cuyahoga river catching on fire in Cleveland?

Anonymous said...

One thing I want to point out/remind everyone: Not everyone bought last year August 2005, the peak. I purchased pre-bubble in CA with a 30yr fixed below 6. Never refied AT ALL. Have almost tripled my investment. Even if this thing drops 50 percent, shit 100%, who cares. I dont depend on my home. I have a helathy career and bank account that I focus one, not my house. There are many like me out there.

Anonymous said...

Keith, Your description sounds about right to me.