HOUSING BUST

March 22, 2007

It is the dull man who is always sure, and the sure man who is always dull.

H. L. Mencken 1880-1956, American Editor, Author, Critic, Humorist

The chart above quite clearly illustrates how household debt has soared to a point where it accounts for huge portion of the GDP; this monstrous debt is now equivalent to 90% of the United States GDP. This also clearly illustrates how this economy has been financed by a mountain of debt; at the end of the day nothing new has been created other then a huge pile of debt. This sort of scenario cannot last indefinitely, eventually the assets that were over inflated must deflate and this is currently what’s happening in the housing sector. 

This is a rather extremely important eye opening chart; for once we can truly see how monstrous this real estate bubble is. This chart represents prices of homes in the United States going back to the 1880’s.   When one takes a look at the big picture one can quite clearly see that the current trend is simply unsustainable.  Another important fact is that we have over 3 trend lines on this very long term chart (only 3 have been drawn in) and  thus a correction is imminent and in this case it has already begun but one must remember it has only just begun. 

This chart provides a closer look at the housing market for the last 21 years and even when prices are adjusted for inflation the price move has been rather huge in the last 4 years.  Note to that in this case we have over 5 up trend lines in place; the trend line rule dictates that the more trend lines you have in place the more violent the eventual correction is going to be. 

Conclusion

The housing correction/bust has only just begun; there are a still a huge number of mortgages that are going to be reset in the upcoming months.  Right now only the sub prime sector has been affected but in the months to come individuals with very good credit scores are going to take the beating of their lives; they let stupidity and greed dictate their actions. These individuals made the fatal mistake of taking on debt that they cannot service with their present income. They are only surviving now because their mortgages have not reset, once these mortgages reset watch the next phase of the blood letting process begin.

When the real blood letting process begins fear will be rampant as the market will most likely start to pull back/crash in conjunction with the housing sector. Investors will start looking for a safe haven and precious metals and energy sector will provide this.. 

Bottom line stays far far away from the real estate market.