Trouble ahead for the housing market

CHRIS J RATCLIFFE/AFP/Getty Images

Our good friend John Rubino over at DollarCollapse.com just released an analysis titled US Housing Bubble Enters Stage Two: Suddenly Motivated Sellers.

He reminds us that housing bubbles follow a predictable progression:

  • Stage One: Mania -- Prices rise at an accelerating rate as factors like excess central bank liquidity/loose credit/hot foreign money drive a virtuous bidding cycle well above sustainably afforable levels.
  • Stage Two: Peak -- Increasingly jittery owners attempt to sell out before the party ends. Supply jumps as prices stagnate.
  • Stage Three: Bust -- As inventory builds, sellers start having to lower prices. This begins a vicious cycle: buyers go on strike not wanting to catch a falling knife, causing sellers to drop prices further.

Rubino cites recent statistics that may indicate the US national housing market is finally entering Stage Two after a rip-roaring decade of recovery since the bursting of the 2007 housing bubble:

  • The supply of homes for sale during the "all important" spring market rose at 3x last year's rate;
  • 30 of America's 100 largest cities now have more inventory than they did a year ago, and
  • Mortgage applications for new homes dropped 9% YoY.

Taken together, these suggest that residential housing supply is increasing as sales slow, exactly what you'd expect to see in the transition from Stage One to Stage Two.

If that's indeed what's happening, Rubino warns the following comes next:

Stage Two's deluge of supply sets the table for US housing bubble Stage Three by soaking up the remaining demand and changing the tenor of the market. Deals get done at the asking price instead of way above, then at a little below, then a lot below. Instead of being snapped up the day they're listed, houses begin to languish on the market for weeks, then months. Would-be sellers, who have already mentally cashed their monster peak-bubble-price checks, start to panic. They cut their asking prices preemptively, trying to get ahead of the decline, which causes “comps" to plunge, forcing subsequent sellers to cut even further.
Sales volumes contract, mortgage bankers and realtors get laid off. Then the last year's (in retrospect) really crappy mortgages start defaulting, the mortgage-backed bonds that contain their paper plunge in price, et voila, we're back in 2008.

Rubino's article is timely, as we've lately been seeing a proliferation of signs that the global boom in housing is suddenly cooling. I've also recently encountered similar evidence that the housing market in my own pocket of Northern California is weakening, and I'm curious to learn if other PeakProsperity.com readers are seeing the same in their hometowns.

The Global Housing Bubble

Housing, as they accurately say, is local. Conditions differ from region to region, making generalizations of the overall market difficult.

That said, the tsunami of $trillions printed by the world's central banking cartel since 2008 clearly found its way into the housing market.

The world real estate market is HUGE, over $200 trillion. That dwarfs the global debt and equity markets. So it's no surprise the central authorities did all they could to reverse the losses the GFC created for property owners.

As a result, many of the most popular locations to live are now clearly in bubble territory when it comes to home prices:

UBS map of global housing bubbles

The chart above displays the most bubblicious major cities around the world in red. But it's important to note that the merely 'overvalued' markets denoted in yellow, and even some of the green 'fair-valued' ones, are still wildly-unaffordable for the average resident.

For example, in "yellow" San Francisco, where the median home now costs $1.6 million, prices are well-above the excesses seen during the previous housing bubble:

And in 'fair-valued' New York City, the median household must spend 65% of its annual income on housing alone.

Is it any wonder that 70% of millennials who don't yet own a home fear they'll never be able to afford one?

Signs Galore Of Topping Markets

At the end of a speculative bubble, it's the assets that are most overvalued that correct first and correct hardest.

So we would expect that as the highest-priced real estate markets fare from here, the general real estate market will follow.

When we take a closer look at what's currently going on with the red-hot real estate markets noted in the chart above, we indeed see evidence supportive of Rubino's claim that the decade-long Stage One mania may now be ending.

Here's a spate of recent headlines about these cities:

Sure looks like Rubino's predicted Stage Two symptoms of rising supply and stagnating prices.

Local Signs, Too

As mentioned, I live in Northern California, quite close to Santa Rosa.

Things here aren't as nuts as they are in San Franscico; but it's still a moderately-affluent region with lots of second homes. It's one of the semi-frothy areas I'd expect to see cooling off in first should there be a downwards turn in macroeconomic conditions.

Located less than an hour north of San Francisco, residential housing prices here have roughly increased 2x over the past six years as the Bay Area has boomed. Supply has been in chronic shortage, exacerbated by the loss of thousands of structures burned during last October's destructive Tubbs fire.

But recently, for the first time in many years, realtors here are beginning to talk of a softening they're seeing in the local housing market.

Median sale prices dropped from May to June, which is counter to previous years. And several towns are seeing year-over-year declines in median price -- something unheard of over the past 7 years.

Meanwhile, the days-on-market ratio for properties is beginning to creep up.

Of the greatest concern to the realtors in my area: bidding wars are no longer happening. Houses are selling either at or below asking prices now. That's a *big* development in a market where houses have routinely sold for $50-100K+ above the listing price.

In a similar vein, I'm hearing evidence of the softening rents down in San Franscico and the East Bay (Oakland/Berkeley). Wolf Richter has done a good job chronicalling the substantial volume of newly-constructed units that have recently hit the market threatening to depress rents, and I've heard from a multi-family unit owner down there how landlords in the area are now finding their rents ~$500 too high for the market to bear.

This is all early and anecdotal data. It's too little at this point to claim definitively that my local housing market has entered Stage Two.

But I'm curious to hear from other PeakProsperity.com readers. What are you observing in your local markets? Are you seeing similar signs of concern?

Please share any insights you have in the Comments section below. Collectively, we may be able to add clarity, in one direction or another, to Rubino's hypothesis.

Prepping For Stage Two

Whatever the timing, Stage Two is an inevitability for today's ridiculously-overpriced real estate markets. It's not a matter of if it (as well as Stage Three) arrives, but when.

Given the data above, I think Rubino is correct in his assessment. Or at least, correct enough that prudent action is warranted today.

This makes even greater sense when considered along with the current trends of rising interest rates and quantitative tightening. Remember, home prices and interest rates have a mathematically inverse relationship: as rates go up, home prices must go down (all else being equal). And as central banks start withdrawing in earnest the excess liquidity that inflated property values to their current nose-bleed heights, expect further downward pressure on prices.

To drive the urgeny home even harder, we haven't even yet talked about the damage an economic recession and/or a painful correction in the financial markets would wreak on the real estate market. With the current expansion cycle the second-longest on record and our all-time-high markets looking increasingly vulnerable, it seems very unlikely we'll avoid at least one of those crises in the near to mid-future.

Here are worthwhile steps we recommend at this point:

  • Consider selling: If you're a homeowner and are not committed to remaining in your property for the next decade+, do some scenario planning. If prices fell 20%, how much of a financial and emotional impact would that have on you? If you have substantial equity gains in your home, Stage Two is the time to protect them. If you have little equity right now, make sure you're fully aware of the repercussions you'll face should you find yourself underwater on your property. What will your options be should you lose your job in the next recession? Whether to hold, or sell now and rent, is a weighty decision; and the rationale differs for each household -- so we strongly recommend making it with the guidance of your professional financial advisor.
  • Raise cash: The vicious cycle that begins as Stage Two transitions into Stage Three is deflationary. Lower prices beget lower prices. During this period, cash is king. By sitting on it, your purchasing power increases the farther home prices drop. And when the dust settles, you'll be positioned to take advantage of the resulting values in the real estate market. We've written at length about the wisdom of this strategy given current market conditions, as well as how, while waiting for lower prices, you can get 30x the return on your cash savings than your bank is willing to pay you, with lower risk. Our recent report on the topic is a must-read.
  • Educate yourself: Yes, real estate is overpriced in a number of markets. But it has been and will remain one of the best ways available to the non-elites to amass income and tangible wealth. And as mentioned, when the next Stage 3 brings prices down, there will be value to be had -- potentially extreme value. If you aren't already an experienced real estate investor, now is the time to educate yourself; so that you'll be positioned to take informed action when the time to buy arises. Our recent podcast interview on Real Estate Investing 101 is a good place to start.

In Part 2: The Case For Starting To Build A (Small) Short Position, we conduct a similar analysis into the overvaluation and growing vulnerability of the financial markets (which are highly likely to correct much faster, sooner and more violently than the housing market), including the details on a recent short position we've started building.

The tranquil "free ride" the financial and housing markets have had for nearly a decade are ending. The string of easy gains with little effort are over now that the central bank money spigots are turning off at the same time the "greater fools" pocketbooks are tapping out.

For a brief time, prices will waiver, as investors remain in denial and refuse to sell at lower prices. But soon that denial will turn to panic, and prices will plummet.

Make sure you're positioned prudently before then.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

We've finally heard some news on the migrant caravan. Some of the migrants have given up and gone back home, but some are still there waiting at the border. A leader representing the group has decided to step forward, and he's made out a list of... demands. Remember when I said back in October that this caravan was originally formed as a Leftist act against the Honduran government by people with ties to Venezuela and Cuba? Well what do you know… wait until you hear who this guy is.

RELATED: BOMBSHELL: Filmmaker Ami Horowitz blows the lid off media's deceit about the migrant caravan

Alfonso Guerrero personally walked into the U.S. Consulate in Tijuana, Mexico with a list of demands from the caravan. Get a load of this. The caravan is demanding that if they're not granted immediate asylum they want the following:

  1. Fifty thousand dollars in cash for every caravan member (which would be a total of tens of millions).
  2. The immediate removal of all U.S. economic and military assets in Honduras.

Failure to comply to these demands will result in the caravan continuing to try and penetrate the U.S. border.

I mean, if you're trying to appear like some grassroots movement for migrants that are just escaping the dangers of their own country, you might want to - oh I don't know - tone down the crazy Leftist freedom fighter schtick. I'm just saying. Demanding millions of dollars AND the removal of the U.S. military from Honduras kinda just screams, "Hey check me out. I'm a Marxist terrorist." It would have been basically the same thing if he just charged up to the embassy wearing a beret and shouted "Viva la Revolution!!" while firing off an RPG.

Well, it turns out this isn't the first time Mr Guerrero has tried to claim asylum. Back in 1987 he claimed asylum in Mexico after being suspected by the Honduran and U.S. government for - wait for it - left wing terrorism… Jeez, you know you really can't make this stuff up. This is INSANE. Here's the story…

This is ridiculous. Can we all now agree that this entire charade is a fraudulent scam?

In 1987 Honduras was ground zero for U.S. and Soviet proxy forces fighting the Cold War. The Contra rebels were actually based there, and leftists terrorists would sometimes carry out operations in the country in response. On August 8th a bomb was thrown into the China Palace restaurant, just a few miles from the U.S. military base in Honduras. Six American soldiers were injured in the blast. Alfonso Guerrero was the primary suspect. He escaped to Mexico and claimed asylum. The Reagan Administration charged the Mexican government for quote "harboring a terrorist" for granting Guerrero protection.

But all the caravan wants is a better life in the United States… oh and millions of dollars AND a list of political demands for their home country. This is ridiculous. Can we all now agree that this entire charade is a fraudulent scam? This is a Leftist political stunt. It has been since the very beginning.

TRANS-INSANITY: Not everyone is bowing down to the PC culture

DOMINIQUE FAGET/AFP/Getty Images

Here's an incident that you won't hear about anywhere else. It doesn't fit the mainstream media's transgender narrative, their fairy tale of infinite genders, where any criticism is viewed as transphobic and taboo and certainly not something that the majority of Americans think or feel.

Last week, in West Point, Virginia, a high school French teacher named Peter Vlaming was fired after a five-and-a-half hour hearing that centered on his refusal to use a transgender student's specific gender pronouns. Vlaming said that doing so violated his religious beliefs.

RELATED: There is no truth anymore

Vlaming's lawyer Shawn Voyles told reporters:

Tolerance is a two-way street. Unfortunately, tolerance on the part of the school division has been noticeably absent. It chose to impose its own orthodoxy on Mr. Vlaming and fired him because he didn't relinquish his rights protected by the First Amendment.

School administrators fired Vlaming "due to this insubordination and repeated refusal to comply with directives made to him by multiple WPPS administrators."

The school justified the firing by pointing to a set of policies aimed at curbing misgendering of transgender students.

Vlaming's lawyer disputed this, saying that the policies include no such mention of transgenderism, adding that:

My client respects the rights of all students, including this student's rights; he simply asked that his rights be respected as well. Unfortunately, the school division refused to consider any solutions that would respect the freedoms of everyone involved.

There is a ray of hope in all of this, though. The students. A group of students from the school immediately staged a walkout in protest of Vlaming's firing.

One student told reporters:

I feel like everyone should have the freedom of speech and the freedom of religion as well.

Students lined up outside the school with signs that said, "Free Vlam." Another included a quote from Ben Shapiro: "Facts don't care about your feelings." Another read "You can't impose delusion onto us."

You can sigh a sigh of relief. There's hope for the future yet.

Whether it's a 'War on Christmas' or just progressivism run amok, the song 'Baby It's Cold Outside' has been firmly in the crosshairs this holiday season. Here are just a few of the headlines making the rounds:

Should radio stations stop playing 'Baby, It's Cold Outside'?

They range from the previous as questioning and then roll right into the following and assume facts not in evidence.

'Baby, It's Cold Outside,' Seen As Sexist, Frozen Out by Radio Stations

It may be seen as sexist but according to one radio stations polling, only about 5% do. Then they go from saying it's sexist to straight up claiming it as a rape song.

Radio Bans 'Baby It's Cold Outside' Over Claims It's A Rape Song, English Teacher Explains Its Real Meaning

And then they just flat out call for its retirement.

Is it time to retire 'Baby, It's Cold Outside'?

The left might think they are woke and on the right side of history in the wake of the #MeToo movement — but how shocked do you think they'd be if they knew Glenn beat them to the punch over a decade ago? Don't believe me? Take a listen to this clip from our audio vault from 2008.

Christmas has arrived early for mainstream media. They have their first sentencing of a major player in President Trump's inner circle. Yesterday, Trump's former lawyer Michael Cohen was sentenced by a federal judge in Manhattan. How did it come to this and how did Cohen explain himself to the judge? We start there next…

President Trump's former attorney, 52-year-old Michael Cohen, is going to jail. Well, it will probably be one of those federal prison camps with a dorm that's more like a college campus. But he's going to be locked up. A federal judge sentenced him to three years in prison for financial crimes, and two months for lying to Congress. He also ordered Cohen to pay $2 million in financial penalties. The judge called Cohen's misdeeds a "veritable smorgasbord of criminal conduct."

RELATED: Michael Cohen's plea deal won't lessen Trump's support. Here's why.

The judge said:

As a lawyer, Mr. Cohen should have known better. While Mr. Cohen is taking steps to mitigate his criminal conduct by pleading guilty and volunteering useful information to prosecutors, that does not wipe the slate clean.

Cohen pled guilty in August to eight criminal charges in two different cases. One brought by special counsel Robert Muller for Cohen's lying to Congress about a potential Trump Tower project in Moscow. The second was for bank-fraud, tax, and campaign finance violations brought by federal prosecutors in New York.

President Trump said recently that Cohen has simply been lying to get a reduced sentence for crimes that have nothing to do with him. Cohen was very emotional as he apologized to the judge, saying:

It was my own weakness and a blind loyalty to this man that led me to choose a path of darkness over light. Time and time again I felt it was my duty to cover up his dirty deeds rather than to listen to my own inner voice and my moral compass.

The left thinks that Cohen's sentencing marks the beginning of the end for Trump's presidency. They may be ultimately disappointed in that regard. But this does intensify the long national nightmare of the Muller investigation that seems to have no end in sight.