Wednesday, July 20, 2011

Has Housing Bottomed? Here's How to Tell

Housing has been propped up by Central State intervention. As that ends, Phase II of the retrace to pre-bubble valuations is at hand.

Has housing bottomed? Here is the sure-fire way to tell:

Stories titled "Has housing bottomed? Here's how to tell" have vanished for lack of interest.

The absence of stories about the bottom in housing will mark the final nadir, because the real bottom can only be reached when everyone has abandoned housing as a pathway to easy money. Only when the public and investor class alike have completely lost interest in real estate as a "sure-fire" investment can the real trough be reached.

This destruction of long-held habits and beliefs takes a long time. The closest analogy might be the stock market in the last secular Bear market. Stocks topped out in 1966, though the economy lumbered on until 1969 before faltering. Stocks then meandered for 13 years of stagflation, losing 66% of their inflation adjusted value in 1966 by 1982.

People gave up on stocks.
I call this loss of faith "when belief in the system fades:" note how household participation in stocks topped out in 1969, three years after the peak in the market. Participants clung to their belief in stocks for about four years after 1969, at which point participation cratered as they finally abandoned their faith in a "permanent Bull market."

Household participation fell by two-thirds and remained low for years.

In August 2006, near the top of the housing bubble, I suggested a three-part scenario for the housing bust: it would take eight more years to play out, and the declines would occur in sharp downlegs following a phase-shift model.

Phase Transitions, Symmetry and Post-Bubble Declines (August 2, 2006)

Here is the chart I presented at that time as a possible time model:

Here we see the first phase shift decline and the Central State engineered "recovery," which has now rolled over.

Here is CoreLogic's snapshot of housing (via Calculated Risk). There is still a long way to go down before the market retraces the entire bubble.

The Federal Reserve has bet that housing valuations can be propped up by lowering the interest rate on mortgages. To the degree that a few fence-sitters might be tempted to take the plunge, lower rates have a modest follow-through--but the real determinant of housing is employment, which as we all know, has tanked.

Here's the civilian employment ratio, which reflects the percentage of the labor force that has a job:

Perhaps even more telling is the per capita rate of employment:

By this broad measure, employment has declined to levels last seen thirty years ago. We can also look for clues to housing's future by looking at wages, which have dropped steeply:

These charts pose a simple yet profound question: how can people buy a still-expensive house if they don't have a job, or their income is plummeting?

The proximate triggers for the next phase-shift down include a decline in Central State intervention in the housing market and a return to official "recession" as the "soft patch" turns into a quagmire.

In an era where "market sentiment" swings wildly from day to day and the nation awaits every quarterly report from Apple as the "definitive" bellwether not just on stocks but the entire Galactic Mood, then the notion that trends can take years to play out doesn't sit well with our impatient demands for a "bottom." But long-term trends take years to play out, whether we like it or not.

Readers forum:

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, Vincent G. ($80), for your outrageously generous contribution to this site -- I am greatly honored by your support and readership. Thank you, William H. ($50), for your marvelously generous contribution to this site-- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

Our Privacy Policy:
Correspondents' email is strictly confidential. The third-party advertising placed by Adsense, Investing Channel and/or other ad networks may collect information for ad targeting. Links for commercial sites are paid advertisements. Blog links on the site are posted at my discretion.

Our Commission Policy:
Though I earn a small commission on books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by 2008

Back to TOP