August 23, 2007

3 Reasons Why This Credit Bubble is worse than 1929. Precursors to a Recession: Complicit Fed, Population Involved, and Greater Dependence on Credit

The market seems to have taken well to the liquidity injection by the Federal Reserve. Since the past two weeks of subprime debacles and stock market woes, the market is slowly gaining a foothold. Investors don’t seem to care that each day a few lending companies are collapsing and firing thousands of people. Growing foreclosure numbers, housing prices depreciating, and consumer spending cut backs don’t seem to matter. The sentiment is we will be back to good times in a matter of weeks. Just to give you some idea of how quickly the market is turning take a look at the number of foreclosure filings in California:


This is no small increase. We are up nearly 300 percent in one year. And since the data available does not have the current month of resets (which for California will be the largest) you can easily predict where the next data point will land. So why is the market rallying? There are multiple parallels to the false jump in stock market prices that occurred during March of 1929. At this time, we actually had a Fed that was concerned regarding the booming market. In fact, let us take a look at sentiment at the time:

“The tug-of-war between Washington and Wall Street reached its peak in late March of 1929. The Federal Reserve took steps to limit how much banks could lend for buying stocks. Interest rates doubled, which should have discouraged borrowing, “But people who dreamed of 100 percent profit in a week were not deterred by an interest rate of 20 percent a year,” President Hoover recalled. “When the public becomes mad with greed and is rubbing the Aladdin’s lamp of sudden fortune, no little matter of interest rates is effective.” Borrowing continued. “

This quote from a very brief booked called Six Days in October by Karen Blumenthal, which ironically is for “children over the age of 12” seems like it may provide some insight into the current credit crunch. Many books cover the Great Depression with opposing views and reasons for the decline. But this event happened sufficiently long ago that we can look at it and take lessons from it from an objective stand point. During the last few days in office, Calvin Coolidge was quoted as saying stocks were “cheap at current prices.” Keep in mind that all this speculation ramped up in the last three years of the decade specifically 1927, 1928, and 1929. Sort of like 2004, 2005, and 2006 with the subprime fiasco. Again, the rhetoric during these times was of continued prosperity with little consideration of the massive debt being used to support the current market.

As we hear about certain companies stepping in and the Fed offering support, we are reminded of the big players during the Great Depression that stepped in such as National City offering $25 million to brokers in March preventing a decline at the time. So the market had 7 more months of breathing room. The underlying fact still existed at the time as it does in 2007 that the underlying assets such as U.S. Steel, RCA, Westinghouse, and other companies were incredibly overpriced for what they were selling for. Fundamentals were living in Wonderland. Instead of stocks being over valued we now face massively overpriced houses in 2007. Before I punch my fist through the monitor, yes I do realize that stocks and housing are very different pieces of investments. How many times have we heard, “you can’t live in a stock” as if we were going to run off to the San Gabriel River and fabricate a makeshift home out of Google stock under the freeway overpass. Yet there is comparisons that we can make. Many people speculate through their homes. Need we point out the cadre of players: Flippers, Mortgage Brokers, Agents, Hedge Funds, Banks, Builders, Stock Investors, and pretty much everyone in this country. A stark contrast from 1929; it is estimated that out of 121 million people, just 1.5 million to 3 million of them owned stock during the latter years of the 1920s. How many Americans own their home in 2007? How about 70 percent. How many are living in an overpriced and inflated asset? Probably everyone in most metropolitan areas.

The issue occurs with the credit leverage of what has been going on. Let us highlight a brief example. Say Bill and Susie public decided to buy a starter home in Southern California for $400,000 in 2004. Bill and Susie figured that they would flip this house in 1 or 2 years so it didn’t make sense to take on a 30 year mortgage. They talk with their mortgage broker Jane, and she offers them a 2/28 mortgage with zero down. Bill and Susie seemed shocked that they can control a $400,000 piece of real estate for nothing. They purchase their home, live a comfortable life, and after 2 fantastic seasons of American Idol decide to sell their property. Amazingly, Joe and Cindy public want to buy this same home for $600,000 in 2006. After speaking with Jane the broker, Joe and Cindy plan on flipping the home in 1 or 2 years so they decide on going with a 2/28 mortgage as well. Bill and Susie leave with a nice chunk of change after selling fees and since this is sunny California, they will not pay any capital gains taxes because they lived in the home for two years. Sweet deal. Now Joe and Cindy are licking their chops and “know” they’ll be able to sell the home in 2 years for $1 million at the current rate of appreciation. However, they start hearing rumblings of a crashing market. They get an appraiser to their home in summer of 2007 and find out their home is only worth $550,000. They realize that they will not be able to make the payment once it resets since it will amortize over 28 years with a higher rate and will jump a whopping 75 percent. So who made money here?

Bill and Susie: Approximately $200,000 profit. Return on Investment? Over 100 percent since they didn’t put down one penny.

Joe and Cindy: They are down over $50,000. Return on Investment? Nothing and in fact, they will owe a lot more money than if they had rented.

Broker Jane: Nice kick backs on each loan.

Agents: Nice cuts from each sale (and purchase) of the home.

Wall Street: Amazing returns in Real Estate and Mortgage Backed Securities.

Government: Great returns on higher assessed property taxes and sales receipts.

Consumer Outlets: Amazing sales with mortgage equity withdrawals and the wealth effect making every American spending happy.

So it seems we only have one loser when the game of musical chairs is over. And that is the current owner of the property. However, if what we are hearing from Fed and other central banks is true, this market has a little bit more steam in it because so many players are involved in making money from continually perpetuating this bubble. Forget fundamentals and true asset values. Who cares when everyone is making money. This is why from a policy perspective, this credit bubble is much more widespread than the time just before October of 1929.

Complicit Fed

The Fed has already cut the discount rate and has done a few symbolic injections of liquidity into the market. Yet they are still cautious. As I was watching Senator Dodd talk about the bail out, he constantly mentioned that he was “pleased” that the Fed is willing to use any tools necessary to help this market. However, he wasn’t "pleased" that the Treasury wasn’t so Pollyanna and didn’t want to lift certain caps for government secured mortgages. As we’ve talked about, the Fed in the year leading up to the Great Depression radically increased rates to put a stop on the market. In this case, we actually have a Fed that is willing to continue this market speculation. We also have symbolic buys from certain large banks stepping in trying to assure the market that everything will be okay. Seems familiar. Yet looking at the raw numbers and looking at the fundamentals, no one is talking about a housing bubble. Am I the only one wanting to drop kick the morning newscaster like Chuck Norris when they say, “the problem with this market is the subprime debacle.” At this moment I pull out my megaphone, turn it on high and scream, “IT IS THE RIDICULOUS HOUSING PRICES YOU MORON” while dogs and birds scurry off my property. Everyone suddenly wants to blame the mortgage company and lenders as the soul reason for this entire mess. Since 2000, we’ve had countless players [see above] that made out like bandits in this market. Why would they want to see a different market?

The Fed is an independent agency. At least that is what they would like us to believe. Senator Dodd kept emphasizing this while giving the public an implicit wink that the Fed will do whatever the politicians tell it to do. Can it be that someone wants to buoy this market up at least until the election is over in November of 2008? Sadly, I’m not sure what could be done. Thankfully the Treasury at the moment seems to be standing its ground. I wouldn’t be surprised if in a month or so we turn on the television and see printing presses hand delivered to each lending institution. This may seem far fetched but just a few months ago, you literally had an ATM machine attached to your home (if you owned it) and could create money out of thin air simply by writing a check to yourself. $50,000 made out to me. Yes!

Population Involved

The parallels are very different this time as well. A large part of the country is involved in this bubble. Consumer sales will be hit when the market turns south. If your business depends on people buying discretionary products from you, the oncoming recession will hurt you. Anyone that worked for a subprime outfit is definitely at risk (if not gone already). Construction and building is on the decline. After all, why would you buy a depreciating asset at least in the short-term? Financial institutions are having trouble. Borrowing has gotten more expensive. 70 percent of the U.S. population owns their home. When I say own, I mean that that many are on the deed or title as owner. Some estimates point out that 30+ percent of Americans own their home straight out. But for those that don’t, equity as a percentage of the value of the home has been on the decline. This is a sobering fact considering that in no time in our country's recorded history have housing prices risen so drastically. Can it be that many folks turned on the spigots and let the equity drain out of their homes? Maybe.

Even those in the public sector will be hurt since local governments and municipalities depend largely on sales and property tax receipts. The State Controller of California in August reported a projected short-fall of $787 million in total tax receipts; a big adjustment considering the projections were only issued in May of this year. These are things that haven’t hit the mainstream media but will in the near future.

Great Dependence on Credit

Think this country doesn’t have much mortgage debt outstanding? Take a look at this chart I put together showing the increase of debt over the last 15 years:


We’ve nearly tripled the mortgage debt in 15 years. Again this is as much a credit bubble as it is a housing bubble. At the peak of this mayhem, in August of 2005 over 70+ percent of all loans in California were adjustable rate mortgages. Of course this includes negative amortization, option ARMs, 2/28, interest only, and every other exotic mortgage product floating out in the market. Our dependence on credit is amazing. This partially comes from the fact that we as a nation have a negative savings rate. I imagine it is hard to spend something you do not have but many credit card companies during this massive boom were more than willing to lend you the credit. Where does this end? I think we are already seeing the end. I know we are in a bubble like no other when I get credit offers and refinancing offers from companies that no longer are in operation! Maybe they should contact their direct mailers and let them know that they are no longer offering 0 percent for 12 months or 5 percent Home Equity lines.

The parallels to the Great Depression are many. I’ve highlighted two letters one from a lawyer dealing with the fallout and another from a banker giving his opinion on the market. Yet it doesn’t seem like we are willing to learn from the past. In fact, it appears that from every branch of government we are more than willing to keep this thing going. Don’t you find it ironic that big banks can go to Fed and get a discount while you can’t? How does this liquidity help Joe and Cindy who are upside down by tens of thousands of dollars? I guess in the end, someone needs to carry out the garbage.

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Kevin said...

Great Article!

Han said...

The thing that doesn't make sense to me, I guess, is that Bernanke has studied the Great Depression extensively. Check out his remarks in 2004. Being that we have a Fed Chief who doesn't pander to Wall St. and who has a vested interest in the health of the economy, I find it hard to believe that we would dip into a massive depression like that of 1929.

bearmaster said...

Why would the politicians running for election want the market to stay up right now?

Seems they would want it to crash now so they can come in and "fix things" and blame their predecessors.

Too risky to have it crash on their watch - a la Hoover.

To try answering my own question, if the market were to crash now, I guess it could potentially taint all politicians, not just the White House, but Congress too.

Anonymous said...

I'll stick to my guns in thinking that the risks are weighted more towards stagflation than to deflation. We're more likely to re-run the 70s than the 30s IMO.

Dems looking to unseat GWB have plenty of ammo already, thank you very much. No one wants to spend his or her two terms in office trying to dig out from under a big crash that happened in 2008. It's in their interest to appear to save the day while blaming GWB for creating the problem in the first place.

Bernanke and Paulson have some wiggle room and I suspect they'll use it. The Fed could lower the funds rate to 5% without significant damage to the dollar, which is gonna sink anyway no matter what they do. Arguably the rate is already too high. The fed's problem all along has been that they really needed long term rates to go up so that the yield curve is more reflective of inflation and currency risk, and yet they can only directly set short-term rates. They're like a guy trying to reposition a garden sprinker by wiggling the hose at the end connected to the tap. As for treasury, I don't see much harm in bumping the jumbo level to 600k to increase liquidity, as long as credit quality metrics don't change. If you're holding 1000s of mortgages what's the difference between 3x 400k mortgages and 2x 600k, if owner equity, DTI, FICO, etc. are the same.

As bad as things are, the majority of mortgages are eventually going to be repaid, and most of the rest will be harvested at some large fraction of their face value. I'll bet smart money players are going to snap these instruments up at cents on the dollar and then look like geniuses a few years from now, just like buyers of junk bonds did in the 80s.

Steve said...

The great disconnect.. You can't look at the stock market or any other macro economic indicators at this point. They reality plug has been pulled out, for now.

Joe and Susie are now the prime indicator. It's all on their backs.

We have folks in the bubble and those that are out of the bubble. For the last 10 years people have been drawn into the bubble, and now they are being thrown out, literally.

Become debt free and get a non-bubblicious job and you are out of the bubble. The majority of folks that are smart are already outside of the bubble. Those that are left on the inside are the rubes and those trying to squeeze the last few dollars from the rubes.

thamnosma said...

Amazing how stories I've considered "well, duh" for years now start to be published.

The full ramifications of the so-called housing boom have yet to really be discussed by the media experts or even here for that matter. The effects on our society are myriad, catastrophic and sad. There are plenty of hidden prices to be paid.

First, the huge change was from the days of private local builders, the sorts of small companies (by today's standards) that build early suburbs in my day or the inner historical parts of our cities, to publicly-traded mega companies whose primary duty was to return shareholders' equity and turn out more and more product, faster and faster.

Rather than build what was truly needed (higher density, low cost housing in central areas as Dr. HB has many times pointed out), these companies (Toll, Beazer (sleazer), etc) spent the last decade creating immense sprawl of cookie cutter condos and McMansions nationwide.

The construction quality on even the $1 million McMansions was so clearly shoddy compared to historical standards, these things would never make it to the next century. It was so OBVIOUS.
To keep shareholders happy, what do you think they did?

This massive sprawl has:
1) created gigantic infrastructure problems to maintain highways, sewers, utilities, etc, etc. in an ever-increasing dispersed manner. These are paid by us, the middle-class taxpayers, not Tony Mozilo or the Toll Brothers.

2) taken out of production, forever, valuable agricultural land, especially in places like the Central Valley and coastal California (where do you think your orange juice comes from)

3) destroyed huge swathes of wildland driving many plant and animal species closer to extinction (again, especially true in complex biological coastal zones of various states)

4) As these neighborhoods crash in value, provide little tax revenue, they will have to be maintained by more and more tax monies from productive sectors

5) Some of these suburban neighborhoods will rapidly turn into gang-infested Section 8 "new" slums, with shoddy construction feeding upon itself -- national blight.

If you think this all extreme, just travel to some of the already new ghost towns in the Inland Empire of southern California, or the high desert or Stockton or fill in the blank.

It's all very sad and was for nothing. So people could "flip" 3, 4, 6, 20 houses? That doesn't build neighborhoods, communities or societies.

cat said...

How about the real-estate markets of London and Tokyo for example? Didn't these markets go through a "bubble" even bigger that what's happening right now in the US? I hear almost no one can afford anything anymore in London (families are teaming up to buy properties), and that has gone on for years, and it doesn't seem like the prices are going down anytime soon there.

It would be interesting if someone could get factual info on these markets, because I don't think the US is the first to see such high growth in real estate... The US is actually quite late in the game there if I understood well.

So, how did the Tokyo and London markets perform since 1980? How extravagant are the prices there? Was there any correction or recession? If there was, then it wasn't as dramatic as you seem to predict for the US... Why would the US be the first to crash so bad, while other markets are way out there for decades?

The North Coast said...

Just listened to Gross making his case for a government bailout?

How much would this expand the already titanic federal deficit?

How will we pay for this if we already don't want to pay for the war out of taxes?



We have a very nasty choice, but there is really only one choice we can make:

If we don't do anymore to "bail out" the homeowners and mortgages, we will see a collapse of the housing market, and some damage to the economy, as the action shifts to other sectors. The losses will be large.

However, if we attempt to "bail out" $5 trillion in mortgages, and add this bill to the national deficit, we will completely collapse this country.

First choice, severe damage.

Second choice, catastrophe.

mattmc95 said...

RE: Cat and Japan's Real Estate Bust

Go to this excellent site for enlightenment:

(Scroll a little over halfway down to find the charts and info--here's the text only)

Japan 14 year real estate decline:
Sparked by low interest rates, Japans average home value more than doubled from the early 1980's to 1990 (sound familiar?). Now, over 16 years after prices peaked, home values are still declining and are nearing the average price of 1980!!

On The Way Down: The chart below shows where the United States Crash is vs. the Japan housing bust.

An example of what a realtor would say to a home seeker:

Realtor: "So, you should submit an offer in on this home before prices get higher"

Home Seeker: "I think I'll wait. It is too expensive for me so I'm going to wait a while to see if prices will go lower."

Realtor: "Prices Will not fall because real estate prices never go down! After all, they are not making anymore land"

Keep in mind that Japan has less land to build on than USA does.

This chart totally disproves the realtor "land shortage" theory as a reason for ever-rising real estate prices.

Anonymous said...

Countrywide CEO sees recession ahead ... anyone want to throw up with me. I cant belief that anyone would still listen what this dirt bag has to say!

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Dr Housing Bubble said...

It seems like everyone is jumping on the bailout band wagon. Again, most of it is political posturing. BofA is going after preferred grade A stock. The rumor of Buffet looking at Countrywide was completely at their solvent units. Gross is looking for help to home owners.

Either way, I haven't found anyone proposing a bailout of subprime companies. Even though we are hearing "bail out" when I scour the data, it is symbolic bets in key areas of these big companies or trying to help out struggling home owners.

In my view, any bail out talk is dangerous because it implies that the government will bail out companies for irresponsible behavior.

The market is treading water until the next Fed meeting. The future markets are betting on a rate cut. I still think that late October of this year will be the major litmus test with Q3 results, fall selling season, and major resets in the face of housing depreciation.

What are your thoughts on all this bail out talk?

mrfnuts said...

This bail out talk is quite infuriating if you ask me.

More asinine is the language the pundits are using to help sell this bail out idea, here's Bill Gross for you:

"This rescue...would support millions of hard-working Americans whose recent hours have become ones of frantic desperation,"

Why is it that 'hard-working Americans' always seem to be in need of a 'bail out' ? Every time a politician or a some salesman utters the words 'Hard-working Americans' I cringe, as I KNOW this will be followed up with them advocating government coercive forces to into my wallet, to help said 'hard-working Americans'

What's worse about this, is, this bail out really doesn't help the homeowner who speculated in over priced real estate at all. This bail out, really helps out the banks and Wall st, who were even stupider for lending these 'hard-working Americans' the money in the first place.

I fail to see why the big speculators constantly require me and other tax payers who refrained from participating in these types of stupidity to always be used as some sort of insurance policy to take on their risk?

This real-estate was in a bubble mode ever since 2003, and the lending standards were a running joke for the past 4 years, why suddenly now do we want bail out? These financiers had YEARS to get their books in order.

A bail out just merely symbolizes yet again, you had better be politically connected in this country if you want to 'make it big'.

Oh... and for those who are so concerned about the 'hard working American' who's facing foreclosure, and loosing their 'home'.

Well, first, let's change 'hard working American' to 'cavalier real-estate speculator', and change the word 'home' to 'house' or 'rotting structure on a plot of land'.

That said, did these people ever even OWN their house?? If they put ZERO down, and financed using interest only loans, then exactly when did they ever own any part of their house? So, I only ask now, how can you loose something you never had to begin with?

If you ask me, these speculators are making out like bandits!

If you take your $14K per year strawberry picker who got a $750K home as an example, it seems to me, this guy put none of his money up, and the momment he started missing mortgage payments, he was effectively achieving FREE RENT! Damn good deal if you ask me.

Foreclosures can take months, I bet the guy scored over half a year of free rent after all was said and done. Sure his credit was ruined, but, I don't think he had any credit to begin with.

And in markets like NYC and LA, wouldn't half a year of free rent be a great deal at the cost of your non-existent credit score?

At any rate, this whole 'bail out' talk has gotten me ranting, and I'd better put a stop to this and get back to work....

Dr Housing Bubble said...


From one hot pan to another:

“It was pretty much a free for all in the office, people taking paper, stuff HomeBanc wouldn’t need,” he said. “I don’t feel like HomeBanc did anything. It was a perfect storm of a bad housing market.”

Two of Clark’s friends have already landed jobs with Countrywide. Another found work with an affiliate of First Magnus, and was almost immediately laid off again. Roach plans to open his own lending business, focusing on commercial business loans and originating home loans himself.

Full article here Mortgage industry job cuts surpass 40,000

This again shows reason to doubt rosy figures. These people get picked up again with a company that has more cash reserves but they are heading down the same path eventually.

The North Coast said...

Pity the poor "homeowner" who went nothing down on a 2/28 or some such nonsense for a house or condo that cost 4X or more his yearly income.

Pity the poor speculator who is up to her eyeballs in condos she took IO reverse-ammo loans because she just "knew" that the places would appreciate 30% overnight.

Forgive me for my joy in the misfortunes of others, but I have spent four years at the receiving end of the incredible smugness of people whose foolish borrowing drove the prices on local condos out of my reach, and who are now having those places flung in their teeth.

It totally enrages me that the very same people who screamed FREE ENTERPRISE!! on the way up, expect to be bailed out by the taxpayers on the way down.

A bailout will not only endorse and enable irresponsible lending, and help maintain prices of housing at artificially high levels and out the reach of honest buyers, it will also push the U.S. Treasury into total insolvancy.

There's a bailout for these people already. It's called BANKRUPTCY, and they should avail themselves of it. The low-income borrowers like the fruitpicker you wrote about should have no problem getting cleared, in spite of stricter BK laws.

As for the others, they will just lose their hot cars and their credit ratings, and if they are like Serkin the Baby Real Estate Tycoon, they might lose their freedom, especially if they lied on a loan app to get a $1MM loan on an income of $50K a year.

Why should responsible borrowers who've sat on the sidelines for the past 5 years be taxed to bail out the partyers who borrowed way beyond their means?

Go to
to sign the petition being circulated by Taxpayers Against a Wall Street and Mortgage Bailout. Your signature can be made public or kept private, your choice. I have signed publicly.

Anonymous said...

The North Coast....
It totally enrages me that the very same people who screamed FREE ENTERPRISE!! on the way up, expect to be bailed out by the taxpayers on the way down....
Thank you for this insight. It is an absolute shame and an insult to the real hardworking Americans trying to make a living, don't spend money like it is getting out of style and try to save a buck for later.
We have these hardworking zero down, interest only wannabe Home renters (they have no investment in anything) all over our neighborhood.
I expect that any honest person will start screaming when our idiotic politicians are talking to bail out these morons. Call your representative, dont let them get away with this on our back!!!

cuthbert1776 said...

There is one politician it will not taint.

Ron Paul has been warning of this since the '76.

Son of Brock Landers said...

@Dr HB

Politicans on the whole are pretty stupid, but you can bet that some key executive leaders or '08 prez candidates will be focus studying this and running opinion polls like mad to see what they can do that will get them the most votes.

Someone will be smart enough to examine...

how many people are at risk?
What are their demographics?
Is this group likely to vote?
Would they already lean to your party?
How many independent voters would you piss of?

That I think is the most important question to a Federal taxpayer funded bailout. Despite allt he talk of soccer moms, Reagan Democrats, etc., it still comes down to independents, and independents right now are leaning towards the Dems. I don't know if the Dems would be dumb enough to piss them off with a bailout.

mrfnuts said...


Agreed! All liberty and free market loving people should vote for Ron Paul.

Continue getting the word out.

Dr Housing Bubble said...

Free enterprise? Bail out? Corporate welfare? We are in whacky times. The Fed is now giving special privileges according to the amount in your bank account. Sort of like Lohan only getting 24 hours in jail:

"So, how serious is this rule-bending? Very. One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate. This move by the Fed eats away at the principle.

Sure, the temporary nature of the move makes it look slightly less serious, but the Fed didn't give a date in the letter for when this exemption will end. In addition, the sheer size of the potential lending capacity at Citigroup and Bank of America - $25 billion each - is a cause for unease.

Indeed, this move to exempt Citigroup casts a whole new light on the discount window borrowing that was revealed earlier this week. At the time, the gloss put on the discount window advances was that they were orderly and almost symbolic in nature. But if that were the case, why the need to use these exemptions to rush the funds to the brokerages?

Fed bends rules to help two big banks
If the Federal Reserve is waiving a fundamental principle
in banking regulation, the credit crunch must still be sapping the strength of America's biggest banks. Fortune's Peter Eavis documents an unusual Fed move.

jaye said...

What are your thoughts on all this bail out talk?

When I first heard the PTB say "bailout," I immediately became enraged! There's no way to bail anyone out of this mess. Who is going to take the hit? The banks? I don't think so! Why should someone keep a home that they obligated themselves to but can't afford to keep?

If there is some way and some how a bailout to the homeowner, then I expect the same for me. I'll simply quit making my payments and cash in on the bailout.

Now I'm on my way to:

to sign the petition

jomama said...

Now everyone will have a plan to fix
the unfixable.

More clowns to the rescue.


Mr.Mortgage said...

In the spirirt of democracy and a good saturday round table discussion, what is your view on the proposed bailout plans that the presidential candidates have been discussing?

Dr Housing Bubble said...

Mr. Mortgage,

As you can see from the above online petition and the fact that many people are writing to their Congress person, people are not happy about bail out talks. Here in LA County someone was proposing a $5 million dollar fund that would give $10,000 to families facing foreclosure. Since homes here go for $500,000+ all over the county, that would buy a person 3 months of PITI. Then what? It is the sound of flushing money down the toilet.

What needs to be done is much more complicated. Debt restructuring from the lenders helping out the current buyers. It would be simple. You made the asinine loan therefore you should work with the current owner. Instead, these lenders are crying to the Fed and asking for handouts.

I'm thinking of buying a Ferrari and then when I can't make the payments, I'll go to my lender with my hands out and with puppy eyes ask, "can I please have more credit dear sir?"

George said...

I am Certified Financial Planner also know as an CFP(tm) for those of you reading this article be advised this nonsense is not only inaccurate its laudable my trusted friend a technologist and whom is highly intelligent & articulate turned me on to this I am also a real estate instructor and have a bank license. Its my opinion the major problem is the person who wrote this is clueless not is his analysis wrong its disjointed in a pecuniary sense meaning disconnected from economic reality. Asset cycles like business cycles are a fact of life - housing is no different. While you can expect more volatility in the stock market and more housing depressed pricing the economic pistons are missing in this blog which I won't get into here lets just say one can expect the maker to hurt pull back and the resume the moment of life trending upward While everyone should prepare for economic shocks time heals those wound don't buy into fearing monger ing pathetic sensational housing doomsday scenarios. So expect a serious pullback in the market at some point and invest from there with confidence with someone you trust. Forget about this nonsense and focus innovate your investment( forget diversifying thats not working as well according to recent correlation information. EOS

The North Coast said...

George, while I am not quite a CFP, I have taken all the bullshit courses for the license, and also possess all the little NASD licenses- S7, 24, 4, 55, and 27. I have worked as a broker and am now a salarid principal in a support function (do not practice as an advisor or broker) , and have 20 years experience in the idiotic financial industry.

I wish like hell I had never had the first thing to do with this industry, for I can clearly see that it is in for a massive and rapid downscaling, and finding a new livelihood in middle age is not fun.

Therefore, I'm not impressed with your credentials, and I'm certainly not impressed with your grammer, usage, or logic.

Dr. HB's logic, based on historical events, is impeccable. What applies to an individual applies to the entire economy, in that there is no way that an individual, a corporate entity, or an economy can carry a debt load many times its income and net worth and survive economically.

We have never in the history of the world seen such a credit bubble, that involved so many ordinary citizens and so much of the economy.

Additionally, there are many other factors operating that could make this debacle end much more disastrously and sink this country's economy for much longer. For while the Great Depression was a situation of "want amidst plenty", we will be confronting a totally unproductive economy with no real manufacturing capability, and rapidly depleting fuel resources. Those two things will block the road to recovery.

My hope is that the economic activity will shift to other areas. Dare I dream of rebuilding our railroads and manufacturing infrastructure?

However, the credibility of our financial system among other major global players will probably be too compromised for us to attract the investment we will need to do that.

We are no longer the world's wealthiest nation, only the world's largest client state, in hock to the Chinese.

My big fear is that one day, in not very long, the Chinese will let us know who really owns who.

qweqwe said...

Han said...The thing that doesn't make sense to me, I guess, is that Bernanke has studied the Great Depression extensively. Check out his remarks in 2004. Being that we have a Fed Chief who doesn't pander to Wall St. and who has a vested interest in the health of the economy, I find it hard to believe that we would dip into a massive depression like that of 1929.

“Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.” AC Doyle.

It is impossible that the Fed do not know what they are doing, because as you say, they have studied the Great Depression intensively. The only possible option is that they know exactly what they are doing, but do it anyway, for their own motives that remain a mystery. In other words, the Fed is trying to manufacture a second great depression.

qweqwe said...

Han said...The thing that doesn't make sense to me, I guess, is that Bernanke has studied the Great Depression extensively. Check out his remarks in 2004. Being that we have a Fed Chief who doesn't pander to Wall St. and who has a vested interest in the health of the economy, I find it hard to believe that we would dip into a massive depression like that of 1929.

“Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.” AC Doyle.

It is impossible that the Fed do not know what they are doing, because as you say, they have studied the Great Depression intensively. The only possible option is that they know exactly what they are doing, but do it anyway, for their own motives that remain a mystery. In other words, the Fed is trying to manufacture a second great depression.

Son of Brock Landers said...

@ northcoast - I enjoy your comments here (all of them except for the comment on Aug 25th) and please read after this initial sentence, but Kunstler called and he wants his opinions back. I know manufacturing has shrunk in the last 15 years, but it's not "gone". Economists like Krugman have written about how worker productivity factors into the manufacturing job equation, and this site will show you how exports have actually grown over the last several years. I sympathize with you (I'm worried about peak oil) and hope that the executives of American corporations choose to invest in manufacturing in our nation especially with the dollar worth less now. If not, foreign companies will like the billion dollar ThyssenKrupp steel plant investment in Alabama.

NetComrade said...

So what people doing with their 401Ks?


I am seriously considering moving my 401k from all stock funds to all money market fund.

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cat said...

To: drhousing; george; North Coast; and Son of Brock Landers:

This posting is not specific but does set forth general concerns with requests for replys.

Is it not true that the Corporations, Individuals and powers that may be who survived and made a fortune in 1929 and 1980 are the same who will strive from the current situation? If so, who are they and how did they make it happen- I believe foreign investments European Countries, then Middle Eastern Countries was the situation- I could be wrong, very wrong.
What is a person with some savings and a mortgage on a house which would sell for approximately a 20% discount and a +30 to 25% return after subtracting costs associated with the sell to do, keeping in mind he has several children in grade school and wife who takes care of the home?

Does he continue in operating his business- which has declined or does he look for a different field or business to start, if so, what type of business or field?

I believe that my savings have over the last two years have lost (based on a true inflationary basis) 30 to 40%; that is a huge hit- what to do?

We will pay the price for the speculators just as we did in 29 and 80; the question is how to best position oneself- Do you any of you have a concrete, independent and unbiased answer?

Son of Brock Landers said...

wow, you asked the million $ question that few if any sites have bothered to answer. I ask the same thing myself. All the bearish sites say markets are going to hell, but rarely do they say how to position one's hard earned assets. i think all answers are customer specific since everyone's situation is different. the good Dr HB has this great site that has explained why the bubble will revert to the mean. I enjoy Dr HB a lot because he is witty and injects a sense of realism in bubble areas, of which I formerly lived in.

just glancing at your comment, you have an incredibly interesting situation that some other business owners are probably in with a slowing economy and saving for college education(s). in all the turmoil of the markets, we're still within 7% of the recent highs. Is that a reason to totally dump out of stocks? I also question the "savings has lost 30-40% of value" statement. Has inflation in your area really been that horrible? Even using shadow govt stats of 'true cpi', inflation has not been that severe.

I have a stake in a travel agency where I act as a mostly silent partner. I recently vetoed an idea to buy a new building to move our location. We rent right now in a great location, do most our business through the internet and phone, and most importantly, have not dealt with a recession for 5+ years. I argued that as discretionary spending goes down, we're going to take a hit, and I do not want to make a large purchase (of what I believe is an inflated commercial real estate property) in the face of a slowdown. I'm faced with the extra pressure of my partners wanting to buy me out as I am now 1000 miles away. Still, it was my capital & subsequent infusions that got the business running. If you believe your company can generate positive cash flow and return a profit, albeit a lower profit, what is the reason for selling it? You would need to find a buyer who will have the opposite thinking of you: someone who feels it can be a growing business and improve.

As far as savings and investments (non-home), it never hurts to think of diversification into non-dollar denominated assets, commodities and/or precious metals for a portion of your portfolio. Dommsday folks will say to go entirely into precious metals and foreign assets. Others are perma-bulls. You can't time the market, but at least you can hedge for protection. As for your house, if you have equity built in, have a comfortable payment, and enjoy your home, what is the driving force to sell? I am not a lawyer, financial advisor, or real estate pro. This is not advice in any shape or form, just answering from my noggin. I am a douche who blogs & comments on blogs.

Once again, thank you Dr HB for providing great posts that educate and entertain and for offering a forum of discussion.

If you, cat, truly are a dr, man, my back has been killing a business trip and I could use some painkillers. Joking.

cat said...

To Son of Brock Landers:

It is nice to see a reply to my Blog on 8/27/07; why it had taken so long to get a response from an apparently wise individual I do not know.

First, I agree with your statement regarding Dr. HB, thank you for your reply, no I am not an M.D., however,I am a holder of a Doctorate of high degree (sorry no pain medication- ha ha ha).

As to inflation, do you really believe what the information sector is telling you a simple comparison of charts indicate that within the last two weeks we have lost approx. 10 cents on the dollar, combine this with the last two years and you see that basic goods have increased by at least 25 to 30% (take milk, eggs, meat, and the like and compare the prices of 2 years ago to this date); additionally, asian, china/pacific rim countries some 18 days ago sold off gold to drop spot 24.00 below the day they sold, then they sold dollars (small amount), I believe, bought euros, and various commodities.

Gold has since increased as I presume that they are buying same back at a discount and purchasing foreign funds, copper, forest products(why did Buffet buy BNI?), silver, concrete and the like; most likely it is the emerging markets, not USA, who will be purchasing in the future as we really are no more than a service industry which will fail when the remaining non-service industries collapse and can't afford to pay for our services unless they ared governmentally funded, I could be very wrong.

I love my country and wish to help correct it; the "trillion" dollar question is how do we as a whole achieve this.

My million $ question, I believe, is really much more complicated and should be looked at deeply with the following indexes, if not more: DOW, GLD, SLV and emerging market history since 1895 to present. I could be wrong but maybe your own homework will prove me wrong- you might want to check out fed gov sight bls and the CA economic sights referenced therein- it would appear that we are and will continue to be a 3rd world country.

I appreciate your response and maybe we could further discuss and educate ourselves on the current and to come economic conditions. For myself, I have been advised to buy in local commercial buildings and have declined to do so- are we both wrong?

The above is only my insight- take it for what it is and do not rely on it in any matter.

Again, thank you for your response. I look forward to hearing from you again.

p.s. forgive any grammatical or spelling erros as I am sort of tired.

Dr Housing Bubble said...


Your question is on the minds of millions of Americans. Son of Brock Landers gave a good response to your first question. In terms of inflation, the government vastly underreports the true cost of things. Why? Because they use hedonics that make no sense. For example, they use a thing called “owner’s equivalent of rent” as opposed to principle, interest, taxes, and insurance if you were to own a home. And since housing is the largest payment and 70 percent of Americans own their home, obviously this skews the numbers downward. In addition, they under report health care, education, and other important sectors that many Americans need and use. All these sectors have steadily gone up in the last decade. If you go to the Bureau and Labor Statistics website ( take a look at how they calculate the CPI and you might as well say we have zero inflation. Unfortunately, it does not reflect reality.

It seems from your response that you have a family and I’m not sure where you are located. Here in California the only advice I can give to people is do not buy. Save up and gear up for the coming downturn. This is not a buyers market as many in the housing industry would like you to believe. A buyers market is where you can run the numbers and it’ll make sense in relation to the income of the local area. This is all relative to where you are. Obviously, the ratios will be different for Miami, Tulsa, SLC, or Los Angeles because each area has a differing cost of living and housing market. I’d be careful about jumping into another commodity since there is a prospect of springing another bubble. Keep in mind this bubble is global; from Sydney, New York, Miami, London, and Los Angeles we are all in this credit game. In regards to your career and business, I would be vigilant about the future prospect of your industry. You can find some good job reports at the Department of Labor ( in terms of growth industries for the future.

Son of Brock Landers said...

i was gone on a business trip to Texas. Dr HB pointed out a key to all of this: it's a global housing/credit bubble. Thanks to globalization, no country is really "safe". Some US companies are just going south and west w/in our nation. Part of the reason I was in Texas is that my 9-5 job is doing business with an export competing firm that is moving it's ops from Jersey to Texas. They needed to expand headcount & production, but found the cost of "business" in NJ is much much higher than Texas. Texas also sweetened the pot with incentives. NJ will lose 60 jobs, but Texas will gain 60, and another 120 after their expansion (fading US dollar is helping their product compete). This is on top of the construction jobs created by building their new plant. I hope more US firms consider these type sof moves rather than export the job & pollution to Asia.

@Dr HB - You are correct about OER and the werird way CPI accounts for medical costs. OER is a very poor measure of housing costs. Tim Iacono at "mess that greenspan made" noted that using the case shiller index instead of OER would not have caused the deflationary alarm around 2001, and would signal a true deflationary alarm right now. How would you account for the cost of housing in the CPI?

Thanks for your blog. I am glad the 'real homes of genius' posts have made a comeback and expansion.

cat said...

Dr. HB and Son of Brock Landers:

I posted a blog to the two of you as I thought, and continue to believe, that you have insight beyond the average masses- we all know that the massess are .....(pearl of wisdom quote and why the non-masses and independent, intellectual thinkers are doing some real soul searching).

I thank you both for your blogs, however, the answers to my original blog have yet to be answered to my satisfaction and quite possibly will never be answered- perhaps I am naive and not understanding your responses eventhough, I do appreciate your responses.

True inflation, cost of living and the ultimate reality of the current market I believe, will come to pass in the near future; exactly when who knows- the question remains however, how does one best position themselves or their families.

Normally, I would not spend so much time writing and responding to any blog or intellict dialect- in fact, 8/27 was the first time I have done so on a blog. I did so only because of what the two of you had written and my interest as how the two of you would respond.

To Son: I appreciate your response and only wish that you had set forth more insight; that is not to say that I do not appreciate your response and information provided therein, just that I desired more theories and input- perhaps a blog is not the best way to accomplish that which I seek.

Dr. HB: That which I wrote above also applies to you. Both of you seem to be much smarter than you portray within these blogs; that is why I wrote to both of you to attempt to ascertain and discuss what is really going on. I have an idea of what is going on and what needs to be done, but after reading the blogs the two of you wrote, I thought that contacting the two of you would be better than working within my sheltered beliefs.

I truly appreciate all of your comments, suggestions and input. However, more digestion and discussion of information must be performed.

I have read DOL, BLS, and all the sights referenced within those sites with a grain of salt. I believe we are only at the tip of the iceberg in discovering the real truth and what is to come.

Again, thanks to the both of you for responding. These are only my opinions and I believe that in my original blog I incorrectly stated where the powers to be purchased at certain times.

We still must determine with our skills and information what to do to protect ourselves, families and country in the apparent bad times to come ahead, if any.

Sorry if this blog seems endless and of no useful information. Hopefully, something will be achieved from this dialogue at a future date.

Son of Brock Landers said...

Hopefully you check this out one more time. Thanks for the kind words. If you would like to dicsuss further I suggest email,