Fearful, I’ve heard this theory referred to as the “Plankton Theory”. The basic idea is that plankton are the tiniest of creatures at the bottom of the ocean’s food chain. They are eaten by small fish. The small fish are eaten by bigger fish. These fish are eaten by even bigger fish, etc. The food chain continues all the way up to the great big sharks. If you kill off the plankton, the little fish are affected first since they have no food to eat. They start to die soon after. The bigger fish die next as the small fish population disappears, etc. The sharks may not notice any effects for a while. But eventually, the sharks will die too. So the health of the biggest creatures in the ocean ultimately depends on the health of the smallest of creatures … the plankton.
In the real estate market, the plankton are the money in starter homes/condo’s. Extremely loose lending standards allowed many more people to “qualify” for home loans. This increased the competition for the starter homes and drove the prices way up. Money poured into the starter homes (i.e. plankton population boom). This allowed owners of starter homes to sell their houses and use it as a down payment for a bigger house. This increased the demand for these bigger houses, driving the prices up (small fish population boom). Eventually, the process works its way up to the multi-million dollar mansions (shark population boom).
Now that lending standards have tightend (and the bubble has popped), the demand for starter homes has dropped off a cliff. The value of these homes are crashing hard. The money is disappearing. The plankton population is dying.
The effects are rippling up the food chain. The smaller homes felt it first, followed by bigger homes, etc. Its only now, years later, that the big mansions are beginning to notice a change.
So that’s basically how the plankton theory models the housing market. I don’t think you can apply this model to describe all housing bubbles. For example, the 90’s SoCal housing bubble didn’t seem to work this way. But I think the plankton theory does fit the current bubble we’re in.
I don’t have any hard evidence to back the plankton theory up. I’m not sure if anyone does. But the theory seems logical and does explain why the housing market is moving the way it is (lower tier houses dropping the first and fastest, with the middle tier following, and the higher tier lagging). If the theory is true, the sharks are going to die too. We shall see.
