Great Depression Online Archive Issue:

The Housing Bubble Burps

Great Depression Online
Long Beach, CA
November 30, 2007

Inside This Issue You Will Discover...

*** John Locke Quote
*** Housing Fraud Review
*** The Bubble Burps
*** And More

John Locke Quote

“This is that then, which makes land, as well as other things dear: plenty of buyers, and but few sellers: and so by the rule of contraries, plenty of sellers and few buyers makes land cheap.” -- John Locke, November 7, 1691, Consequences of the Lowering of Interest, and Raising the Value of Money

Today we look back to 1691, and to John Locke, for some perspective on the ongoing housing meltdown.

With all the headlines coming in from all directions, we needed a north star for guidance.

Housing Fraud Review

We’ll start by saying that we’ve expected housing prices to go down for some time.  Not because we’re all that smart.  In fact, we weren’t exactly sure why…  But figured that, if for no other reason, they had gone up too much for too long.

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~~~~~~~~~~~~~~~~~~~~~~~~~

We knew something was wrong several years ago when we saw 1940’s bungalow homes, just 1,200 sq. ft. in so so parts of Long Beach, selling for $650,000.

We thought: “What a rip-off?”  “Who’s buying these things?”  And, “Where is the money coming from?”

You know the answer to these questions as well as we do: It was all a fraud. 

To review: The Federal Reserve dropped interest rates to 1% in 2003 to soften the dot com bust – which it’d created.  Spurred by the artificially cheap lending rates, house prices bubbled up.  And creative financing products (i.e. ARMs, 80/20 Loans, NegAms) further fueled the mania.

The Bubble Burps

Last week we came across the following headline in a Bloomberg article: “U.S. Economy: Building Permits Slump to 14-Year Low”.

“Rising foreclosures and falling sales are adding to inventories and pushing down prices,” reported Bob Willis.

Yes, the world still goes round and round.   As Locke discerned 300 plus years ago, “…plenty of sellers and few buyers makes land cheap.”

How cheap?

We don’t know.

But on November 28th the biggest price drop on record was released.  Robert Showley, in the November 28th San Diego Union-Tribune, reports that…

“Robert J. Shiller, chief economist at MacroMarkets LLC, who helped develop the Standard & Poor's/Case-Shiller U.S. National Home Price Index, said the 1.7 percent price drop in 20 metro areas from the second to the third quarter was the largest in the index’s 21-year history….”

Shiller also added that “We're in the aftermath of the biggest housing boom in history, so how do we use historical data to judge the outcome?”

Good question.  Again, we don’t know the answer.

But we do know that the bubble has effectively burped.  And we surmise that how far prices drop is proportional to the vulgarity of its stench.

Gas masks are advised.

Sincerely,

M.N. Gordon

Great Depression Online

P.S.  Our friends at Elliot Wave International are offering a free report: How to Prepare Now for the Ultimate Real Estate Opportunity.  History tells us that property values can and Do go down significantly from time to time.  As real estate market woes are expected to continue, lessons from the past can be the key to preparing for your future.  Access this FREE Report here.

 

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