Stage I: Hot to Cool: Active since Summer 2013*, Price growth is slides across the country as flippers lose money outright in the red-hot investor markets (NYC, San Francisco and Las Vegas); New home absorption rates – sales per community – are declining; investors slow their home purchases; total home sales decline year over year; developers lose pricing power, press outlets shift from positive to mixed about the health of the housing market.
Stage II: Demand to Supply: Small shocks convert demand pools into supply ripples. A first wave of investors begin trimming prices to get ahead of future declines; discounts increase to incentivize purchasers as purchasers increase their delays for better deals; developers reduce land budgets as cancellations tick up; major financial press outlets take a more negative tone toward housing lowering confidence overall.
Stage III: Deflation & Response: Falling home prices create a negative deflationary feedback loop that foreshadows a once-in-a-lifetime policy response. Deflationary economics take full hold; leveraged bets on real estate unwind in quarterly ripples due to the public reporting cycle & asset manager redemption schedules; willingness to lend shrinks; the broader consumer finally understands it is a bad time to buy a home, a shrinking housing market negatively impacts jobs causing recession; the estimated effects of never-before-seen public policy reactions determine when and where prices eventually trough.[/quote]
There is a lot of truth in the above that was particularly relevant to the previous housing bubble. I think what is different this time is the finger is very much on the pulse, or as some may argue, in the dike. 2012/2013 saw price increases reminiscent of 2004, but by 2014 it leveled off probably due to affordability issues. The point is it didn’t crash, or least it hasn’t yet. It is really anyone’s guess as to what happens from here on. There are too many variables to even take a stab at it. I personally would like to see a correction of the more recent gains, but in a civilized manner. If you look at everything that contributes to asset bubbles you need to ask two questions: What happens when they are removed, and when will they be removed? The logical answer is that the reverse happens—and possibly at a similar rate—when it is realized prices are neither sustainable, nor supported by fundamentals. For that to happen, things need to get heady. Since we just experienced the bubble of all bubbles, mini-me bubbles are met with complacency. So nailing down the inflection point, or turning tide, is much harder. Complacency, though, could be what continues to feed bubbles in other assets that then infects everything else. The writing is on the wall, but the script isn’t legible yet.
