Housing Bust

When it comes to the housing market there is SO much information and its consequences carry dire results for the U.S. economy. In the coming weeks I will have a number of posts regarding the topic. I will try and keep this post and all the posts that follow regarding the housing market specific on a point or two. I apologize if I stray a little bit, I promise it will happen, but I will try to keep things concise.

I would like to keep this post focused on the recent history of the housing market and its future outlook as well.

from 2000-2005 the housing market saw unprecedented growth. A record growth at that. From 2002-2005 the housing market had a 100% increase in overall home values. That is a mind boggling increase. Too good to be true? You bet. After the stock market crash in 2000, the feds felt that they needed to do something, because after all, the only thing the feds are good at is printing money and shifting liquidity. What was their answer? Lets shift the liquidity that was in the stock market to another sector, housing. Their tool for doing this came in the form of low interest rates making it easy for the consumer to get a cheap loan in order to buy a house.

This created a large artificial demand in the housing market. Sure enough, it took off. Like I said the result of the "easy money" offered by the feds resulted in the largest real estate bubble in the history of the world. Just like the stock market bubble the housing bubble has now popped. There is a large difference between the two bubbles. The stock market affected people's savings and investments. These people at least had savings. The largest asset for most Americans is their home. Not all of these people are responsible and have savings. In fact, a lot of U.S. citizens weren't saving, but they were doing the opposite, using the equity on their house as a credit card. I know I'm straying off topic but I don't care, this is important stuff. With home owners taking out equity (spending it on cars and boats) and owing a large mortgage on the house this makes them vulnerable. Vulnerable for what? Negative equity. The housing bubble has popped and home values are dropping at an alarming rate. People are being left with more debt on their house than it is worth. Uh oh. They are then forced to sell. That bring us into the next discussion.

The housing market today. Home median prices are dropping like crazy every month. This is a simple micro theory, with more and more people selling their homes because they can't afford them, the market is being over supplied. Supply and demand tells us, the more supply there is, the lower the price is. That's exactly what we are seeing today. The census bureau tell us that 2.5% of homes in America are now sitting empty. The bureau started keeping track of this stat in 1956. Since that time, this stat has never been higher. That means at least a 50 year high in percent of homes sitting vacant.

So, the irresponsible, out of control deficit spender. No I'm not talking about the U.S. government, but the naive home owner who wants that 40' boat. I guess like father like son. Anyways, the homeowner with a negative equity on his house is forced to sell into an absolutely volatile market. They aren't going to get what they want for the house because it's not worth what it once was. They can't afford to stay they can't afford to go. Don't worry, I'm getting to a point here...bankruptcies and lots of 'em.

How about the future outlook for the housing market. Expect a WHOLE lot more of the above mentioned bankruptcies. For the market itself. It still needs to regress back to the mean. I said earlier that in 3 years the average price of homes in the U.S. grew 100%. Houses, historically, have grown 1-2 points above inflation. So a conservative estimate would mean that the housing market has to drop at least another 50% in value before it can turn up again.

Like I said, there will be many posts coming regarding the housing and its effects on the U.S. economy. Stay tuned.