Second Leg of the Housing Decline Set To Begin

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Link - Second Leg of the Housing Decline Set To Begin

Executive Summary

  • Housing data is weak and just took a turn for the worse
  • Stimulus efforts were essential to keep housing propped up
  • The stimulus has ended
  • QE and stock market prices are correlated
  • What’s coming next
  • What you should do

We bought our house in November of 2009.  This will turn out to have been a very bad financial decision.  We’ll be underwater on that purchase for a very long time; maybe forever (or until Bernanke’s great experiment takes the final turn towards massive currency destruction and inflation; whichever comes first).   

Of course, we bought it knowing that.  Our decision to buy centered on our valuing time more than money.  What I mean by this is that all of the changes that we are now fully engaged in around our house, ranging from insulating to installing solar panels to putting in a fruit orchard, all take time.  Time became more important to us than money, and so we bought.

But for every nation dealing with the after-effects of a housing bubble, what matters is that house prices start to climb again.  Of course, the housing bubble was just a symptom of the larger and far more damaging credit bubble, but housing is a useful indicator for where we are in the larger credit-bubble story.

Because of its importance to both the bubble’s bursting and its eventual repair, I track housing for signs of true recovery.

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This is a companion discussion topic for the original entry at

I think this applies to anyone who has bought a house in the past 10 years, and made the mistake
of refinance. Perhaps 1/2 of the homes are underwater, and many are just waiting to sell. I have a

work colleague who lost their rental home, went to trustee sale in 2/2010, and still gets mortgage

statements from one of the top 10 banks that he still owns it. Odd, perhaps the lender could not

sell the property. Anyone have such an experience???, the above took place in California.

So far I’ve opted to delay purchasing any land as of yet. I believe the housing market has a long way before it bottoms out. Its apparent that the only thing preventing the housing market from a rapid collapse is gov’t housing subsidized loans, either from the FHA or from the GSEs (Freddie and Fanny). Approximately 96% of all new loans issued in 2010 have been issued through the GSEs or the FHA.  Should the federal gov’t choose to abandon support for mortgages through the GSEs or FHA, its extremely likely that prices will fall significantly.
In addition, further tax burden on property owners that are already underwater loans will be much more likely to default on there loans. Its bad enough to be underwater, its absolutely dreadful when state and local gov’ts punish homeowners with a heavy tax burden in the form of property tax hikes in order to support their excessive and bloated budgets. Not only did consumers load up on debt during the bubble years many states and local gov’ts added new bonds in order to pay for unnecessary projects using cheap and easy credit.

Housing and real estate prices will continue to slide until the US faces a soveriegn debt crisis that forces the gov’t to pay its creditors with printed money. This will happen when either the world runs out of cash to buy US treasuries, or the global markets choose to invest money someplace else besides US dollars. However I doubt that homes and real estate will retain purchasing value in a high inflationhyper inflationary economy. This is because maintenance and operation costs of a home rise along with inflation. It will take more money to heat, cool, and repair a home. As these costs become a burden, home owners are likely to take in more occupants to reduce the burden. Those that are retired, unemployed or under-employed will be forced to move in with family or friends.

If you  haven’t already purchased a home, I would recommend opting for new construction that is much more energy efficient. Its far cheaper to build a new energy efficient home than it is to retrofit an existing home. For instance a energy efficient home should be constructed using 2x8 (pair of 2x4’s) studs to double the insulation that can be installed. Use of radiant heat floors coupled to a set of solar thermal panels. Ceiling mounted coil fans coupled to a ground loop cooling system. All wall studes and electricalplumbling feedthroghs should be calked to prevent airflow. PlumbingElectrical and other components should use quality materials to reduce the burden of maintance costs. Use of a metal roof instead of tar or wood shingles to avoid roof replacement every 15-20 years. Plain your home design for the possiblity of providing housing to friends and family members in the future, by making sure you have sufficent bathroom and kitchen space to accomidate more occupants. Provide space for a large pantry so you can store a large supply of staple foods. I suspect that in the years to come we will have wild price swings in food prices and rationing.  It would be to your benefit to have extra storage space. A large garden would also be extremely benifital. Nothing beats fresh picked fruits and vegitable that you’ve grown yourself,

Either pay now for a quality home, or pay a whole lot more when maintenance costs become a real burden.



I am also prepared to possibly go underwater on a home the wife and I got the keys to today. Just like Chris, I will now have time to work on all my preps and familiarize myself with some of the aspects of rural living that I dont fully understand. Deciding to jump into a declining market that is in actuality just the Government was a little tough to swallow but the price and timing felt right.
For the last two years I had been very concerned that the bond vigilanties I’d read about would pop out of the bushes and hike my interest rate. With that said, the Fed has those rates at all time lows as I write. My other main concern was waiting too long and not being able to get into anything because of lending restrictions and or lack of properties due to a desirable “Crash” locale. Trying to time the bottom to a tee is nearly impossible and I’m happy we jumped when we did.

With that said, I must confess I am now a bailout recipient. We bought an FHA foreclosure and “Home Steps” some subsidiary of Frannie or Freddie paid all the closing costs and some of the down without us even asking (not sure if this makes me a bad guy). So yes, the market is absolutely propped up by the Feds. While I’m confessing, I also had to buy a bigger mower until I can figure out how to properly tame the areas of hay, grass, and of course noxious weeds.

Looking at all the berries, the fruit trees and knowing I actually have a cellar, timber, and a wood shed more than makes up for any doubts though. I think if one finds the right deal and has a vision for the future, purchasing a home right now could be one of the best sacrifices to be made. Good luck to all wading through this mess.

Fingers crossed for good neighbors…


Gotta live somewhere. I know when we built we rented a small home. Nothing fancy cost us 30,000 burned off in rent from the time we sold, found land, divided it, sold it, developed what we kept and then built.
I regret not flipping a house instead of renting it but though we could have timed it right what if I was sitting on a second property now? 

Anyway, owning a primary residence is different then investing - because if you don’t own you gotta rent. Rent costs.

Based on this chart we have a way to go. If it was me right now, I’d probably still buy instead of renting, we could snap into hyperinflation, higher interest rates.

My 2 cents.

PS I would try to make my money buying, not selling. Buying a foreclosure could make you a lot of cash when you do sell.

Based on this chart we have a way to go. If it was me right now, I'd probably still buy instead of renting, we could snap into hyperinflation, higher interest rates.

Hyper-inflation will likely to lead to lower home values (adjusted for inflation). Hyper-inflation creates poverty and would force people to move in together as smaller household will not be-able to maintain and operate a home alone. Consider that energy costs, higher taxes and rationing all become a part of hyper-inflation. I very much doubt that hyper-inflation will wipe out homeowner debt, as you be more likely to dig yourself deeper in debt to afford the increasing taxesenergy and maintaince costs that also come hand and hand with hyper-inflation. Before we hit hyper-inflation expect a period of deflationstagflation. Its unlikely that hyper-inflation will begin this year, or the next. It may take considerable time before it happens, but your risks becoming unemployeed or under-employeed will increase everyday.

For many renting is a better option:

  1. If you lose your job and forced to relocate homeownership is a problem since you need to sell your home in a economy without buyers. Renting provides flexiblity in a depressionary economy. You can quickly relocate to regions that have jobs without the baggage of a home that limits your job opportunities. Forget about renting out your home if you are forced to relocate, since as the landlord, you must still maintain the properly, and an eviction and be a long and expensive process. In some situations it can take up to two years before you can legally evict a tenant. The majority of people who rented out a property that they could not sell quickly that I’ve discussed with, informed me it was a bad idea.

  2. Not all states and countries offer mortagage recourse. If you default you may be on the hook to repay the loan amount. Since strategic default has become popular for many that are underwater, expect states or perhaps the federal gov’t from enacting new laws to stem the tide of strategic defaults creating the perverbal “albatross around the neck” for homeowners.

  3. Be prepared to pay much higher property taxes in the years to come. Not only did consumers load up in debt, so did most state and local gov’t. You can be guaranteed that state and local gov’t swill be hand you a bill for their folly.

  4. Be prepared to take in additional household members, since its very likely that few people will have the financial resources to sustain living in small number of household occupants. Consider your parents that may be living on a fixed income will be forced to move in with you, Or perhaps it will be your adult kids that are unable to find steady work or earn enough to live on their own. Perhaps it will you that will be forced to move in with family or friends if you are unable to find steady employment.

  5. Your neighborhood could become the next “neighborhood from hell” as you lose security and access to necessary services (such as water, electricity, sewage and trash pickup). You home may become unlivable, forcing you to abandon your home. What if the local gov’t or private service companies stop picking up trash, maintain the local electrical, sewage, and water infrasturture at your home? What if your neighbors are foreclosed and swatters move in next door, and the sqwatters start terriorizing the neighborhood, looting and stealing in order to buy foods or drugs?


I’d be interested to hear what the definitions for hyperinflation are on this site.
I’m a long-term member of iTulip and while they’ve definitely said there will be inflation, they do not expect more than 30% inflation/year in the US at the peak.  

It’s uncanny how similar this article is to John Mauldin’s article, A Closer Look at the 2nd Leg Down in Housing, also posted June 28th:

[quote=John Mauldin]

The net result was a massive national credit bubble, and a housing boom. (A true housing bubble only formed in a handful of regions). The credit bubble allowed tens of millions of Americans to become, however temporarily, home-owners.


Yes, government policies temporarily stopped prices from finding their natural levels. Now that the tax credit has ended, and most mortgage modifications are failing, the prior downtrend in price is likely to now resume.

Neither the Bush nor the Obama White House understood this. The assumption has been that if we can modify mortgages or voluntarily refrain from foreclosures, the  residential RE market will stabilize. Through a combination of mortgage mods and buyers tax credits, the government has managed to create artificial demand and keep more supply off of the markets for a short time. But as we have seen, that fix was at best temporary.

One of the things that Markets are best at is price discovery – the determination of a price for a specific item through basic supply and demand factors. Without the heavy hand of the government intervening, the residential real estate market is about to experience what price discovery is all about . . .[/quote]

Great minds must think alike :slight_smile:

Well, mine was off in the hands of my copy editor on June 26…just in case you were wondering.  But, yes, a little thinking and market experience will yield some obvious conclucions so it is not surprizing to me that analysts often end up in the same spot.

better to be lucky than good.

my wife and I purchased a home in 1999 in California.  We put 20% down and bought a small affordable home.  We sold in 2005 (we knew ahead of time we were going to be moving).  We made a lot of money off the sell.  At the time I didn’t even know what a bubble was although I did feel that the housing prices were unsustainable.  It was pure luck that we did so well.  If we had tried to time it , im sure we would have screwed it up.



I’m a little surprised that you went into debt (and, by the sounds of it, considerable debt) to buy your home. Was it not possible to buy it outright?
I’m not trying to imply anything and I’m not making any judgements but just wondering why you chose extensive debt and whether it was even possible to buy outright or at a much low level of financing.

I keep hearing that debt is bad (often, getting out of debt is number one on the list of to-dos). But is it bad, in regard to one’s home? I would guess that you are totally confident that you can repay, or service, that debt for as long as necessary?