Thursday, June 2, 2011

Dr. Housing Bubble on the Housing News Cycle

The official double dip in home prices is not significant in the sense that it is a surprising revelation but will carry more traction because of the way the news cycle works. The press reports on what happened especially when it comes to economics and feeds the beast especially with bubbles. Virtually every large news outlet missed the most obvious and biggest housing bubble ever witnessed by humankind. During the meteoric rise in housing prices the press fed into the feeding frenzy by drawing more and more buyers into the housing game either through cable shows erotically showing granite countertops or ordinary people making a mint by simply slapping on a coat of magenta paint to the living room wall. This is typically how manias work until they reach a tipping point. After the bubble burst the press reported on the “shocking” crash and fed into this part of the cycle. But for well over a year it has been stories about housing rebounding. The fact that we have now officially double dipped will create another news cycle reflecting the continued decline in home values. What you as a thoughtful reader and follower of the housing market should ask is why isn’t the press actually examining the connection between home values and actual household incomes? This is the absolutely most important item never examined. This is the most obvious item to explore from a big news story since mortgages are paid by W2 wages, not by some alchemy of finances or HD cameras.

I follow a variety of sources in regards to news and as the above picture highlights, the press is running full steam ahead with the double dip. We’ve been tracking the massive amount of shadow inventoryand large pipeline of troubled homes so the question of a double dip was never in doubt. The question was rather one of timing. It is now clear that the new bottom in housing prices, both in nominal and real levels is occurring fluidly today. This is now an active cycle low. The only question in doubt at this point is how much further will home prices fall before reaching an absolute bottom? I don’t think we can answer that question until we figure out how low household wages will go (or move up if the economy turns around). This is really the wild card in how deep this double dip goes.

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