January 22, 2007

So now we know: How we got to the biggest housing bubble of all-time, how the system got gamed, and how the collapse begins


It should all be so clear now HP'ers, so crystal clear, how we got to this point:

  • It all started with Congress' big wet kiss to the REIC with the "no cap gains taxes on home sales" law
  • Then Greenspan panicked after 9/11 and took interest rates down way too far, for way too long, opening up the credit spigot and creating a flood of liquidity
  • Then mortgage loan risk and oversight was taken away from local bankers - packaged, commoditized and sold off by the corrupted Fannie and Freddie to hedge funds, China and others far far removed
  • Sprinkle in rampant collusion and corruption between realtors, mortgage brokers, home builders and appraisers, which allowed home prices to be recorded at unrealisticly high prices on the books
  • Millions of cheap illegal Mexican labor pours over the unprotected border to get REIC homebuilding jobs, allowing more homes to be pumped out cheaper and faster then ever before
  • Add in the "cash back at closing" scam, with spreading like wildfire in the underworld of con artists, get rich quick scamsters and down-on-their-luck life's losers (i.e. Phoenix call center employees)
  • Creating more and more unrealistic home price "comps", spiraling upward led by corrupted appraisers and foaming-at-the-mouth get-rich-quick investors and flippers
  • Then, as always, the general population and immigrant shoeshine guy get caught up in the mania, believing that "it really is different this time" and that their homes truly were worth 100% more than they were just a few years ago, cheered on by a clueless REIC-ad-supported MSM, the Greg Swann's and Harvard Joint Center for Housing Studies of the world, and the ethicless REIC themselves

And then the big game, the big con, got exposed. The MSM turned on their masters and started to finally do their jobs for a change, and report on the out of control ponzi scheme. Regular folks started a plethora of "housing bubble blogs" to fill the vacuum and report from the street.

And now, we're seeing the cracks. Inventory has exploded, sales have fallen off of the cliff, and the first of so many banks and lenders are going belly up, with the Subprime Implosion underway.

So how will it all end?

  • Millions of unwanted homes will continue to flood the market, sold by regular folks, people in foreclosure, investors, flippers, homebuilders and liquidating banks.
  • Sales volume will continue to plummet, as people know for certain a home will be worth less, significantly less, the longer they wait
  • Millions of REIC-connected individuals will lose their jobs - real estate clerks, appraisers, mortgage brokers, builders, Home Depot salesmen, etc.
  • The overvalued loan bag-holders (China, hedge funds, Fannie, Freddie, Countrywide, etc) will be devastated
  • The cash-back, cash-out-refi based US economy will suffer a great blow, with effects felt worldwide
  • The House and Senate will launch investigations in 2008 to soothe housing-crash-victim voters. Significant new regulations and oversight will be created, mistakes and fraud will be addressed, and the REIC will be brought to heel
  • And finally, years later, homes will again be places people live, not get-rich-quick schemes and lottery tickets.

It hath been foretold. Enjoy the ride.

18 comments:

Anonymous said...

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Could it be any clearer? Nice post Keith

Anonymous said...

Unlike the past, when debt collectors were Americans calling on the phone, now it will be the hard squeeze put on by Chinese and Indian debt collectors... just wait until folks start getting those calls...

Python said...

Excellent post Keith. I am convinced that there is no way out of this unfolding disaster and we're ALL going to be affected. Suicide is a personal decision. Homicide....

Anonymous said...

Damn, that lays it out as good as I've ever seen

sk said...

Excellent summary ! I'm really glad you started off at the Capital Gains tax exemption law passed by Congress.

-K

Anonymous said...

32 YEAR REALTOR.

I TOLD MY CLIENTS 5 YEARS AGO TO PAY OFF THEIR HOUSE, CREDIT CARDS, CARS ETC. THEY TOLD ME I WAS NEGATIVE, A SMUCK AND STUPID.
NOW THEY HAVE NEGATIVE CASH FLOW AIIGATORS EATING THEM ALIVE...

32 YEAR REALTOR said...

32 YEAR REALTOR
THE HOUSES FOR SALE HERE IN WEST LOS ANGELES FALL INTO TWO CATAGORIES;1) SOLD 2005 OWNER CANNOT MAKE PAYMENTS 2) OWNER WHO WANTS A MILLION MORE THAN BASIS.
MOST DEFAUTS/FORECLOSERS THAT ARE COMING THROUGH HAVE LOANS TWICE THE PURCHASE PRICE. I.E 350K HOUSE WITH A 700K LOAN.

Anonymous said...

You've convinced me. I'm heading underground for the winter!

Mark in San Diego said...

Phoenix is already back up to over 51,000 MLS listings - last year at this time - 36,000!!! This is going to be the Mother of ALL inventories. . .Years from now when they talk about this, and they WILL talk about this, Phoenix will be mentioned with Tulips, Internet stocks, and Ponzi schemes. . ."Phoenix madness?" "Phoenix Collapse?". . .a name will be given to this mess. . .

Anonymous said...

Here's Arizona historical price appreciation numbers - anyone see the bubble?!!

http://www.ofheo.gov/HPIState.asp?FormMode=Process


Annual Percent Change in OFHEO State-Level House Price Indexes through 2006 Q3

Year Qtr Arizona
1975 1 0
1975 2 0
1975 3 0
1975 4 0
1976 1 -1.2
1976 2 2.36
1976 3 3.9
1976 4 7.67
1977 1 8.08
1977 2 0.67
1977 3 8.48
1977 4 14.7
1978 1 14.7
1978 2 16.59
1978 3 19.51
1978 4 20.6
1979 1 23.02
1979 2 23.83
1979 3 20.29
1979 4 18.1
1980 1 14.39
1980 2 6.54
1980 3 11.7
1980 4 7.07
1981 1 6.48
1981 2 12.27
1981 3 9.65
1981 4 3.36
1982 1 -1.14
1982 2 1.15
1982 3 -7
1982 4 1.49
1983 1 12.01
1983 2 7.77
1983 3 6.33
1983 4 2.37
1984 1 -0.07
1984 2 0.81
1984 3 6.54
1984 4 7.44
1985 1 6.33
1985 2 4.43
1985 3 4.48
1985 4 5.7
1986 1 4.88
1986 2 7.27
1986 3 5.72
1986 4 3.78
1987 1 4.67
1987 2 1.22
1987 3 0.67
1987 4 -0.39
1988 1 -2.51
1988 2 -0.52
1988 3 -1.31
1988 4 0.36
1989 1 -1.05
1989 2 -2.3
1989 3 0.13
1989 4 -0.34
1990 1 0.45
1990 2 -0.32
1990 3 -0.97
1990 4 -1.12
1991 1 1.08
1991 2 2.17
1991 3 1.18
1991 4 4.85
1992 1 3.57
1992 2 2.77
1992 3 4.11
1992 4 1.68
1993 1 1.06
1993 2 2.59
1993 3 2.62
1993 4 3.63
1994 1 4.93
1994 2 5.21
1994 3 5.66
1994 4 5.55
1995 1 5.03
1995 2 5.34
1995 3 6.1
1995 4 5.88
1996 1 6.9
1996 2 4.97
1996 3 3.89
1996 4 3.76
1997 1 2.92
1997 2 3.61
1997 3 4.45
1997 4 4.94
1998 1 5.21
1998 2 5.56
1998 3 5.06
1998 4 4.88
1999 1 4.72
1999 2 4.95
1999 3 4.98
1999 4 4.67
2000 1 5.88
2000 2 5.68
2000 3 5.59
2000 4 6.41
2001 1 6.39
2001 2 7.02
2001 3 7.28
2001 4 6.31
2002 1 5.51
2002 2 5.11
2002 3 5.44
2002 4 5.87
2003 1 5.61
2003 2 5.42
2003 3 5.08
2003 4 7.43

and now the bubble starts:

2004 1 7.9
2004 2 10.62
2004 3 15.7
2004 4 16.16
2005 1 21
2005 2 29.28
2005 3 31.32
2005 4 35.66
2006 1 33.36
2006 2 24.18
2006 3 16.37

2008 1 -40.00%?

LauraVella said...

This is exactly what happened.

Thank you Keith for listing the RE downfall detail by detail from begining to end.

I really do believe we will never again see house prices this high in our lifetimes.

LauraVella said...

I was checking out Craig's list for Sacramento and all the houses listed there for sale no longer say things like-"free 50K equity!", or "automatic 50K equity!" and other statements such as these trying to convince buyers they are purchasing a home loaded with "equity".

All the ads I see now read: "reduced", "recent reductions", "owner desperate to sell","must sell!",or - "upgrades galore-below market price!".

I even read an ad posted by a family who were interviewd on Jan. 19th 20/20 tv show, who said they are broke, living on credit cards and need to sell their home in El Dorado Hills, CA.

Let the games begin.

Anonymous said...

Thanks so much for listing Sec. 121 as one of the primary (and original) causes of the bubble. This aspect doesn't get NEARLY enough "air time".

Many thanks!

Anonymous said...

I live in PHX and started doing a little research when this whole thing got totally nuts in 05. That's when I found HP. I know Keith has posted this before . I thought it would be worth posting again. It amazes me how many people on the dating personals at Yahoo claim they make over 150K in Phoenix. Here's the data.

May 2005 Metropolitan Area Occupational Employment and Wage Estimates for Greater Phoenix (Maricopa and Pinal Counties)

Management
Median Hourly: $33.82
Average Hourly: $38.85
Average Annual: $80,810
How Many Employed In This Field: 84,480

Business and Financial Operations
Median Hourly: $22.90
Average Hourly: $25.80
Average Annual: $53,670
How Many Employed In This Field: 79,090

Computer and Mathematical
Median Hourly: $27.49
Average Hourly: $28.86
Average Annual: $60,020
How Many Employed In This Field: 37,730

Architecture and Engineering
Median Hourly: $28.33
Average Hourly: $30.21
Average Annual: $62,830
How Many Employed In This Field: 40,530

Life, Physical and Social Science
Median Hourly: $22.55
Average Hourly: $25.06
Average Annual: $52,120
How Many Employed In This Field: 9,990

Community and Social Services
Median Hourly: $16.38
Average Hourly: $17.31
Average Annual: $36,010
How Many Employed In This Field: 15,360

Legal
Median Hourly: $29.30
Average Hourly: $35.80
Average Annual: $74,460
How Many Employed In This Field: 11,820

Education, Training and Library
Median Hourly: $15.21
Average Hourly: $16.38
Average Annual: $34,070
How Many Employed In This Field: 80,840

Arts, Design, Entertainment, Sports, Media
Median Hourly: $15.78
Average Hourly: $18.79
Average Annual: $39,070
How Many Employed In This Field: 18,950

Healthcare Practitioners and Technical
Median Hourly: $24.21
Average Hourly: $28.93
Average Annual: $60,170
How Many Employed In This Field: 68,560

Anonymous said...

Bravo!

a.creampuff said...

WaPo has a two-part article on a local REIC political corruption scandal:

http://tinyurl.com/2x9x4y

Above link is part one, part two appeared today. Do HPers have any clue as to how much tax money goes to sweetheart deals like this? I'm guessing we could house all the homeless and fix up all substandard housing if you add up all the pocket lining deals that go down.

Anonymous said...

Nice quote: "As a boom begins to peter out from an injection of credit expansion, the banks inject a further dose. In short, the only way to avert the onset of the depression adjustment process is to continue inflating money and credit. For only continual doses of new money on the credit market will keep the boom going and the new stages profitable. Furthermore, only ever increasing doses can step up the boom, can lower interest rates further, and expand the production structure, for as prices rise, more money and more money will be needed to perform the same amount of work… But it is clear that prolonging the boom by ever larger doses of credit expansion will have only one result: to make the inevitably ensuing depression longer and more grueling. The larger the scope of malinvestment and error in the boom, the greater and longer the task of readjustment in the depression. The way to prevent a depression, then, is simple: avoid starting a boom."

--- Murray Rothbard (1970)

Anonymous said...

Your PHX employment data is meaningless without some context. Compare it to LA income. And also take into account the differnce in state income tax 4.7% in AZ and 9.3% in CA.

Management Occupation:
PHX: $80,810 ($77,011 after AZ tax)
LA: $98,120 ($88,994 after CA tax)
LA pays 15% more after tax.

Business Operations:
PHX: $53,670 ($51,147 after AZ tax)
LA: $62,090 ($56,316 after CA tax)
LA pays 10% more after tax

Now compare median home prices PHX vs LA

PHX: $330,000
LA: $580,000

So LA pays 10-15% more after taking into account the differnce in state income tax yet housing there is 75% more expensive than PHX.

Seems to be relative to LA, PHX is still very cheap.

As for your yahoor personals comment...that is truly sad. Not that people lie on those things, but that you actually go there to see it for yourself.