Wednesday, June 15, 2011

The Great Deflation in Housing

For the last several days, there has been talk in the media about the decline of the housing market and how it is now worse than the decline that took place during the Great Depression. The latest article from CNBC is here. Yet, for all the decline that has taken place since the bursting of the housing bubble in 2005, we are still seeing calls for a bottom and recovery.

We didn't have a double dip in the housing market with a temporary bounce that was mostly fueled by the home buyer tax credit that was passes by the Obama Administration in February 2009 as part of the $787 billion stimulus package. The bounce would actually be characterized as a bear market rally within a larger downtrend. The bounce has since been fully retraced and a resumption of the larger downtrend is unfolding.

The long bear market in housing is a strong argument against the idea of a "Great Recession" that ended in 2009. The bear market is unfolding not only in the form of falling home prices, but also in the form of rising foreclosure rates that continue unabated.

The reason why we still see calls for a bottom in housing is that the housing market is sliding down the "Slope of Hope", in other words, the bear market in housing is still in its early stages and is just getting started. The deflationary collapse in the housing market is part of a larger picture, that is, we are in a major depression.

Expect the housing market to continue collapsing as "The Great Deflation" begins to unfold in full force. The consequence of a collapsing housing market is that by the time the bottom is reached in 2021, virtually every home owner with a mortgage debt will be miles underwater on their mortgages. Expect at least a 90% decline in house prices during the course of "The Great Deflation", which would take house prices down to levels not seen since 1960.

By the time the deflationary collapse of the housing market is done in 2021, entire neighborhoods are going to look a lot like the abandoned city scenes from the movie I Am Legend with bushes, weeds, and trees reclaiming homes that fall into foreclosure.

For those who are able to make it through "The Great Deflation" without getting financially wiped out, there will be an unprecedented buying opportunity that will make it possible to buy a high-end house for cheap.

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