Tag Archives: housing bubble

The Most Splendid Housing Bubbles in America Get Pricked

San Francisco Bay Area & Seattle lead with biggest multi-month drops since 2012; San Diego, Denver, Portland, Los Angeles decline. Others have stalled. A few eke out records.

San Francisco and San Diego are catching the Seattle cold, and others are sniffling too, as the most splendid housing bubbles in America are starting to run into reality.

House prices in the Seattle metro dropped 0.6% in December from November, according to S&P CoreLogic Case-Shiller Home Price Index, released this morning, and have fallen 5.7% from the peak in June 2018, the biggest six-month drop since the six-month drop that ended in February 2012 as Housing Bust 1 was bottoming out. The index is now at the lowest level since February 2018. After the breath-taking spike into June, the index is still up 5.1% year-over-year, and is 27% higher than it had been at the peak of Seattle’s Housing Bubble 1 (July 2007):

https://wolfstreet.com/wp-content/uploads/2019/02/US-Housing-Case-Shiller-Seattle-2019-02-26.png

So Seattle’s Housing Bubble 2 is unwinding, but more slowly than it had inflated. Many real estate boosters simply point at the year-over-year gain to say that nothing has happened so far — which makes it a picture-perfect “orderly decline.”


San Francisco Bay Area:

The Case-Shiller index for “San Francisco” includes five counties: San Francisco, San Mateo (northern part of Silicon Valley), Alameda, Contra Costa (both part of the East Bay ), and Marin (part of the North Bay). In December, the index for single-family houses fell 1.4% from November, the steepest month-to-month drop since January 2012. The index is now down 3% from its peak in July, the biggest five-month drop since March 2012.

Given the surge in early 2018, the index is still up 3.6% from a year ago and remains 37% above the peak of Housing Bubble 1, fitting into the theme of a perfect orderly decline:

https://wolfstreet.com/wp-content/uploads/2019/02/US-Housing-Case-Shiller-San-Francisco-Bay-Area-2019-02-26.png

Case-Shiller also has separate data for condo prices in the five-county San Francisco Bay Area, and this index fell 0.9% in December from November, after an blistering 2.4% drop in the prior month. From the peak in June 2018, the index has now dropped 4.2%, the steepest six-month drop since February 2012:

https://wolfstreet.com/wp-content/uploads/2019/02/US-Housing-Case-Shiller-San-Francisco-Bay-Area-Condos-2019-02-26.png

The Case-Shiller Home Price Index is a rolling three-month average; this morning’s release tracks closings that were entered into public records in October, November, and December. By definition, this causes the index to lag more immediate data, such as median prices, by several months.

The index is based on “sales pairs,” comparing the sales price of a house in the current month to the prior transaction of the same house years earlier (methodology). This frees the index from the issues that plague median prices and average prices — but it does not indicate prices.

It was set at 100 for January 2000; a value of 200 means prices as tracked by the index have doubled since the year 2000. Every index on this list of the most splendid housing bubbles in America, except Dallas and Atlanta, has more than doubled since 2000.

The index is a measure of inflation — of house-price inflation. It tracks how fast the dollar is losing purchasing power with regards to buying the same house over time.

So here are the remaining metros on this list of the most splendid housing bubbles in America.

San Diego:

House prices in the San Diego metro declined 0.7% in December from November and are now down 2.6% from the peak in July, the biggest five-month drop since March 2012, leaving the index at the lowest level since February 2018, and just one hair above the peak of Housing Bubble 1:

https://wolfstreet.com/wp-content/uploads/2019/02/US-Housing-Case-Shiller-San-Diego-2019-02-26.png

Los Angeles:

The Case-Shiller index for the Los Angeles metro was about flat in December with November but down 0.5% from the peak in August — don’t laugh, the largest four-month decline since March 2012. What this shows is just how relentless Housing Bubble 2 has been. The index is up 3.7% year-over-year:

https://wolfstreet.com/wp-content/uploads/2019/02/US-Housing-Case-Shiller-Los-Angeles-2019-02-26-B.png

Portland:

The Case-Shiller Index for the Portland metro inched down in December from November for the fifth month in a row and is now down 1.4% from the peak in July 2018. And that was the steepest five-month drop since March 2012. Year-over-year, the index was up 3.9%:

https://wolfstreet.com/wp-content/uploads/2019/01/US-Housing-Case-Shiller-Portland-2019-01-29.png

Denver:

House prices in the Denver metro edged down in December from November for the fourth month in a row, after an uninterrupted 33-month run of monthly increases. The four-month drop amounted to 0.9%, which, you guessed it, was the steeped such drop since March 2012. The index is at the lowest level since May 2018 but is still up 5.5% year-over-year:

https://wolfstreet.com/wp-content/uploads/2019/02/US-Housing-Case-Shiller-Denver-2019-02-26.png

Dallas-Fort Worth:

The Case-Shiller Index for the Dallas-Fort Worth metro in December ticked up by less than a rounding error to a new record, leaving it essentially flat for the seventh month in a row. The index is up 4.0% year-over-year:

https://wolfstreet.com/wp-content/uploads/2019/02/US-Housing-Case-Shiller-dallas-2019-02-26.png

Boston:

In the Boston metro, house prices dipped 0.5% in December from a record in November and are now back where they’d been in June. The Case-Shiller Index is up 5.3% from a year ago:

https://wolfstreet.com/wp-content/uploads/2019/02/US-Housing-Case-Shiller-Boston-2019-02-26.png

Atlanta:

The Case-Shiller Home Price Index for the Atlanta metro inched up a smidgen in December, to a new record, and is up 5.9% from a year ago:

https://wolfstreet.com/wp-content/uploads/2019/02/US-Housing-Case-Shiller-Atlanta-2019-02-26.png

New York City Condos:

The Case-Shiller index for condo prices in the New York City metro ticked down in December for the second month in a row after a mighty bounce in September and an uptick in October. This index can be volatile, but after all these bounces and declines, the index was up just 1.5% from a year ago, the smallest year-over-year price gain on this list of the most splendid housing bubbles in America:

https://wolfstreet.com/wp-content/uploads/2019/02/US-Housing-Case-Shiller-New-York-condos-2019-02-26.png

On a national basis, these individual markets get averaged out with other markets that didn’t quite qualify for this list since their housing bubble status has not reached the ultimate splendidness yet. Some of those markets, such as the huge metro of Chicago, remain quite a bit below their Housing Bubble 1 peaks and are now declining, while others are shooting higher.

So the Case-Shiller National Home Price Index has been about flat since July, but is still up 4.7% year-over-year and is 11% higher than it had been at its prior peak in July 2006 during Housing Bubble 1:

https://wolfstreet.com/wp-content/uploads/2019/02/US-Housing-Case-Shiller-National-Index-2019-02-26.png

It always boils down to this: Regardless of how thin you cut a slice of bologna, there are always two sides to it. When home prices drop after a housing bubble, there are many losers. But here are the winners – including a whole generation. Listen to my latest podcast, an 11-minute walk on the other side…

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How Low Will Housing Prices Go?

Now that Housing Bubble #2 Is Bursting… How Low Will It Go?

Unless the Fed is going to start buying millions of homes outright, prices are going to fall to what buyers can afford.

There are two generalities that can be applied to all asset bubbles:

1. Bubbles inflate for longer and reach higher levels than most pre-bubble analysts expected

2. All bubbles burst, despite mantra-like claims that “this time it’s different”

The bubble burst tends to follow a symmetrical reversal of very similar time durations and magnitudes as the initial rise. If the bubble took four years to inflate and rose by X, the retrace tends to take about the same length of time and tends to retrace much or all of X.

If we look at the chart of the Case-Shiller Housing Index below, this symmetry is visible in Housing Bubble #1 which skyrocketed from 2003-2007 and burst from 2008-2012.

Housing Bubble #1 wasn’t allowed to fully retrace the bubble, as the Federal Reserve lowered interest rates to near-zero in 2009 and bought $1+ trillion in sketchy mortgage-backed securities (MBS), essentially turning America’s mortgage market into a branch of the central bank and federal agency guarantors of mortgages (Fannie and Freddie, VA, FHA).

These unprecedented measures stopped the bubble decline by instantly making millions of people who previously could not qualify for a privately originated mortgage qualified buyers. This vast expansion of the pool of buyers (expanded by a flood of buyers from China and other hot-money locales) drove sales and prices higher for six years (2012-2018).

As noted on the chart below, this suggests the bubble burst will likely run from 2019-2025, give or take a few quarters.

The question is: what’s the likely magnitude of the decline? Scenario 1 (blue line) is a symmetrical repeat of Housing Bubble #2: a retrace of the majority of the bubble’s rise but not 100%, which reverses off this somewhat higher base to start Housing Bubble #3.

Since the mainstream consensus denies the possibility that Housing Bubble #2 even exists (perish the thought that real estate prices could ever–gasp–drop), they most certainly deny the possibility that prices could retrace much of the gains since 2012.

More realistic analysts would probably agree that if the current slowdown (never say recession, it might cost you your job) gathers momentum, some decline in housing prices is possible. They would likely agree with Scenario 1 that any such decline would be modest and would simply set the stage for an even grander housing bubble #3.

But there is a good case for Scenario 2, in which price plummets below the 2012 lows and keeps on going, ultimately retracing the entire housing bubble gains from 2003.

Why is Scenario 2 not just possible but likely? There are no more “saves” in the Fed’s locker. Dropping interest rates to zero and buying another trillion in MBS won’t have the same positive effects they had in 2009-2018. Those policies have run their course.

https://www.oftwominds.com/photos2019/Case-Shiller2-19a.png

Among independent analysts, Chris Hamilton is a must-read for his integration of demographics and economics. Please read (via Zero Hedge) Demographics, Debt, & Debasement: A Picture Of American Insolvency if you want to understand why near-zero interest rates and buying mortgage-backed securities isn’t going to spark Housing Bubble #3.

Millennials are burdened with $1 trillion in student loans and most don’t earn enough to afford a home at today’s nosebleed prices. When the Fed drops the Fed Funds Rate to zero, it doesn’t follow that mortgage rates drop to zero. They drop a bit, but not enough to transform an unaffordable house into an affordable one.

Buying up $1 trillion in sketchy mortgages worked in 2009 because it bailed out everyone who was at risk of absorbing huge losses as a percentage of those mortgages defaulted. The problem now isn’t one of liquidity or iffy mortgages: it’s the generation that would like to buy homes finds they don’t earn enough, and their incomes are not secure enough, to gamble everything on an overpriced house that chains them to a local economy they might want to leave if opportunities arise elsewhere.

In other words, the economy has changed, and the sacrifices required to buy a house in hot markets at today’s prices make no sense. The picture changes, of course, in areas where 2X or 3X a typical income will buy a house, and 1X a pretty good income will buy a house.

Unless the Fed is going to start buying millions of homes outright, prices are going to fall to what buyers can afford. As China’s debt bubble implodes, the Chinese buyers with cash (probably not even cash, just money borrowed in China’s vast unregulated Shadow Banking System) who have propped up dozens of markets from France to Vancouver will vanish, leaving only the unwealthy as buyers.

The only question of any real interest is how low prices will drop by 2025. We’re so accustomed to being surprised on the upside that we’ve forgotten we can surprised on the downside as well.

Source: by Charles Hugh Smith | Of Two Minds

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US Home Price Growth Weakest Since 2012

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“A decline in interest rates in the fourth quarter was not enough to offset the impact of rising prices on home sales,” 

 

 

US Housing Starts Crashed In December

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Year-over-year, housing starts tumbled 10.9% – the biggest drop since March 2011…

 

 

Debt Among Millennials Rockets Past $1 Trillion

https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/teaser_desktop_2x/public/2019-02/debt%20student.jpg?h=361ea814&itok=Kp6oBBxo

“Student loans make up the majority of the $1,005,000,000,000″, a massive handicap on ability to mortgage a home purchase at today’s prices.

2018 Will End With Too Many SoCal Homes For House Hunters To Choose From

(Ben Jones) A report from the Orange County Register in California. “When 2018 started, the housing buzz was ‘where’s the supply?’ Now with the year almost complete, the industry now wonders ‘where did all the buyers go?’ Ponder that in housing-starved Southern California, builders have the largest standing supply of completed homes to sell in six years. Yes, newly constructed residences are a pricey niche that’s not for everyone. Still, the change of momentum is remarkable.”

“Housing tracker MetroStudy reports that at the end of the third quarter, 3,401 new homes were finished but unsold in the four-county region covered by the Southern California News Group. That’s up 428 homes in 12 months, or 14 percent, and was the highest inventory level since 2012’s second quarter.”

“But this year, house hunters have pulled back — for both new and existing residences. If you need a stark measurement of the buyer reluctance, look at this: CoreLogic reported Southern California home sales of all types in September suffered their largest year-over-year decline in nearly eight years.”

“It adds up to a situation where not too long ago local builders had many buyers waiting months for homes to be completed. Today, most housing projects offer new homes ready for immediate occupancy — with special pricing, no less.”

“Look at the market upheaval in Orange County. It’s got the region’s biggest boost in new-home supply, according to MetroStudy. As of Sept. 30, O.C. had 1,074 finished residences for sale, up 277 or 35 percent in a year. It’s O.C.’s largest new-home inventory in nearly 12 years.”

“Builders, faced with their own industry competition, also are up against homeowners in the region who rushed to list their homes. As that new-home supply swelled in the third quarter, Southern California owners averaged 35,333 listings, according to ReportsOnHousing. That’s 4,568 more existing homes on the market than a year earlier — or 10 times the growth of unsold new homes.”

“Yet this is an autumn period when many owners typically take homes off the market. Who knew that 2018 would be the year when house hunters had too many homes to choose from?”

From Curbed Los Angeles. “The number of homes for sale in the Los Angeles area climbed more than 30 percent in October, according to Zillow. That suggests the region’s sky-high home prices could continue to fall, as they did in September.”

“During the month of October, inventory (the total number of houses and condos on the market) in Los Angeles and Orange counties jumped nearly 32 percent above levels recorded in October of last year. A bump in the number of homes available for sale often corresponds with falling prices, since sellers have more competition when listing their homes and are less likely to be overwhelmed with offers above asking price.”

“The spike in the number of homes available for purchase mirrors—and far exceeds—a nationwide trend. Across the country, inventory went up 3 percent since last year, marking the first yearly increase since 2014.”

“‘This is a phenomenon we’re seeing in several pricey markets throughout the country,’ says Zillow economist Aaron Terrazas. He points out that inventory has also risen by double digit percentages in San Francisco, Seattle, and San Jose.”

“Terrazas tells Curbed that much of the inventory growth in LA and other markets is driven by homes that take longer to sell, suggesting that buyers may be less willing to pay bloated prices.”

“‘This is a reflection of how poor affordability is in those areas,’ says Terrazas. ‘Buyers are starting to pull back a little bit from where they were a year ago.’”

Source: Ben Jones The Housing Bubble Blog

Hong Kong Condos Begin Underwater Journey As 20% Drop Results In Negative Equity

https://pix6.agoda.net/city/16808/16808-7x3.jpg?s=1920x

Hong Kong homeowners who bought flats in the last several months have seen their value decline as much as 20% in a matter of recent weeks, according to HSBC, sending values into negative equity which had only left the region from the prior downturn that ended in early 2017, reports the South China Morning Post.

https://www.zerohedge.com/sites/default/files/inline-images/hong%20kong%20housing.jpg?itok=PCFgNQk5Hong Kong’s famously expensive property market has started to feel the strain lately from a fall in demand caused by rising interest rates, a struggling stock market and fears about the impact of the US-China trade war. Negative equity occurs when a home loan exceeds the market value of the property, and has not been seen in Hong Kong since early 2017. –SCMP

“Theoretically, buyers who obtained a mortgage of 90 per cent of the flat’s value will fall into negative equity once home prices have dropped more than 10 per cent,” said Chief Vice-President at mReferral Mortgage Brokerage Services, Sharmaine Lau.

The largest losses are likely to be flat owners who paid sky-high prices for tiny apartments in older tenements, according to industry watchers, who add that banks tend to become very conservative in valuing such properties when the real estate market takes a turn for the worse.

https://assets.bwbx.io/images/users/iqjWHBFdfxIU/ibCYKiHZaaG4/v0/1200x-1.jpgPhotographer: Justin Chin/Bloomberg

“Lower valuations will first apply to flats that have less marketability. Banks’ valuations, which are supported by surveyors, are made in line with market conditions,” said Cushman and Wakefield head of valuation and advisory services for the Asia-Pacific region, Chiu Kam-kuen. 

Meanwhile, SCMP was able to find apartments at older housing developments which are now valued at HSBC far below their recent selling prices. 

A 234 square foot unit at 36-year-old Lee Bo Building in Tuen Mun, which was sold for HK$3.82 million on October 8, is now valued 20 per cent lower at HK$3.08 million. In North Point, a 128 square foot unit at 41-year-old Yalford Building, sold on August 29 for HK$3.1 million, is also valued a fifth lower now by the bank, at HK$2.48 million.

In Kowloon, a 210 square foot unit at 34-year-old Hong Fai Building in Cheung Sha Wan sold for HK$3.87 million on June 20 is already down about 13 per cent, according to HSBC, at HK$3.38 million.

The spectre of negative equity is only going to get worse, according to Louis Chan, Asia-Pacific vice-chairman and chief executive for residential sales at Centaline Property.

“More homeowners will fall into negative equity next year as flat prices may decline by 10 per cent,” he said. –SCMP

The precipitous drop may force companies such as the Hong Kong Mortgage Corporation (HKMC) to adjust their mortgage insurance program in light of market developments. 

Under the program, buyers of flats worth less than HK$4.5 million can get mortgage loans of up to 90 per cent of the unit’s value, capped at HK$3.6 million, while for flats priced between HK$4.5 million and HK$6 million the maximum loan-to-value ratio is 80 per cent, capped at HK$4.8 million.

In the first quarter of 2018, HKMC said 6,955 applicants secured HK$26.86 billion in home loans under the mortgage insurance program. In 2017, a total of HK$32.3 billion in mortgages were granted to 8,829 applicants, up from HK$24.6 billion of 7,145 successful in 2016. –SCMP

Negative equity reached its peak in Hong Kong in 2003 following an outbreak of Severe Acute Respiratory Syndrome (SARS) which sent already-teetering home values plummeting. According to the HKMA, over 105,000 households found themselves in negative equity at the time – all of which were above water as of the first quarter of last year.

Source: ZeroHedge

Bubble Trouble? Fannie And Freddie LTVs Higher Now Than During The Catastrophic Housing Bubble

Fannie Mae and Freddie Mac, the mortgage giants in seemingly perpertual conversatorship with the FHFA, have mortgage loans that are even more risky in terms of loan-to-value (LTV) ratios than during the catastrophic housing bubble of the 2000s.

https://confoundedinterestnet.files.wordpress.com/2018/10/ffpeak.png

The “good” news is that the average FICO (credit) score for Fannie and Freddie loan purchases is above those from the housing bubble. But the trend is worrisome.

https://confoundedinterestnet.files.wordpress.com/2018/10/ficoughdd.png

In terms of Debt-to-income ratios (or Detes as Tom Haverford would say), the Detes are below housing bubble levels, but have been rising since the end of 2008.

https://confoundedinterestnet.files.wordpress.com/2018/10/ffdetes.png

Source: Confounded Interest blog

CNBC: Home Sellers Are Slashing Prices At The Fastest Rate In Over Eight Years

The housing market indicated that a crisis was coming in 2008.  Is the same thing happening once again in 2018? 

For several years, the housing market has been one of the bright spots for the U.S. economy.  Home prices, especially in the hottest markets on the east and west coasts, had been soaring.  But now that has completely changed, and home sellers are cutting prices at a pace that we have not seen since the last recession.  In case you are wondering, this is definitely a major red flag for the economy.  According to CNBC, home sellers are “slashing prices at the highest rate in at least eight years”…

After three years of soaring home prices, the heat is coming off the U.S. housing market. Home sellers are slashing prices at the highest rate in at least eight years, especially in the West, where the price gains were hottest.

It is quite interesting that prices are being cut fastest in the markets that were once the hottest, because that is exactly what happened during the subprime mortgage meltdown in 2008 too.

In a previous article, I documented the fact that experts were warning that “the U.S. housing market looks headed for its worst slowdown in years”, but even I was stunned by how bad these new numbers are.

According to Redfin, more than one out of every four homes for sale in America had a price drop within the most recent four week period…

In the four weeks ended Sept. 16, more than one-quarter of the homes listed for sale had a price drop, according to Redfin, a real estate brokerage. That is the highest level since the company began tracking the metric in 2010. Redfin defines a price drop as a reduction in the list price of more than 1 percent and less than 50 percent.

That is absolutely crazy.

I have never even heard of a number anywhere close to that in a 30 day period.

Of course the reason why prices are being dropped is because homes are not selling.  The supply of homes available for sale is shooting up, and that is good news for buyers but really bad news for sellers.

It could be argued that home prices needed to come down because they had gotten ridiculously high in recent months, and I don’t think that there are too many people that would argue with that.

But is this just an “adjustment”, or is this the beginning of another crisis for the housing market?

https://www.zerohedge.com/sites/default/files/inline-images/2018-09-22_6-12-11.jpg?itok=ytb_mJRX

Just like a decade ago, millions of American families have really stretched themselves financially to get into homes that they really can’t afford.  If a new economic downturn results in large numbers of Americans losing their jobs, we are once again going to see mortgage defaults rise to stunning heights.

We live at a time when the middle class is shrinking and most families are barely making it from month to month. The cost of living is steadily rising, but paychecks are not, and that is resulting in a huge middle class squeeze.  I really like how my good friend MN Gordon made this point in his most recent article

The general burden of the American worker is the daily task of squaring the difference between the booming economy reported by the government bureaus and the dreary economy reported in their biweekly paychecks. There is sound reason to believe that this task, this burden of the American worker, has been reduced to some sort of practical joke. An exhausting game of chase the wild goose.

How is it that the economy’s been growing for nearly a decade straight, but the average worker’s seen no meaningful increase in their income? Have workers really been sprinting in place this entire time? How did they end up in this ridiculous situation?

The fact is, for the American worker, America’s brand of a centrally planned economy doesn’t pay. The dual impediments of fake money and regulatory madness apply exactions which cannot be overcome. There are claims to the fruits of one’s labors long before they’ve been earned.

The economy, in other words, has been rigged. The value that workers produce flows to Washington and Wall Street, where it’s siphoned off and miss-allocated to the cadre of officials, cronies, and big bankers. What’s left is spent to merely keep the lights on, the car running, and food upon the table.

And unfortunately, things are likely to only go downhill from here.

The trade war is really starting to take a toll on the global economy, and it continues to escalate.  Back during the Great Depression we faced a similar scenario, and we would be wise to learn from history.  In a recent post, Robert Wenzel shared a quote from Dr. Benjamin M. Anderson that was pulled from his book entitled “Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946”

[T]here came another folly of government intervention in 1930 transcending all the rest in significance. In a world staggering under a load of international debt which could be carried only if countries under pressure could produce goods and export them to their creditors, we, the great creditor nation of the world, with tariffs already far too high, raised our tariffs again. The Hawley-Smoot Tariff Act of June 1930 was the crowning folly of the who period from 1920 to 1933….

Protectionism ran wild all over the world.  Markets were cut off.  Trade lines were narrowed.  Unemployment in the export industries all over the world grew with great rapidity, and the prices of export commodities, notably farm commodities in the United States, dropped with ominous rapidity….

The dangers of this measure were so well understood in financial circles that, up to the very last, the New York financial district retained hope the President Hoover would veto the tariff bill.  But late on Sunday, June 15, it was announced that he would sign the bill. This was headline news Monday morning. The stock market broke twelve points in the New York Time averages that day and the industrials broke nearly twenty points. The market, not the President, was right.

Even though the stock market has been booming, everything else appears to indicate that the U.S. economy is slowing down.

If home prices continue to fall precipitously, that is going to put even more pressure on the system, and it won’t be too long before we reach a breaking point.

Source: by Michael Snyder | ZeroHedge

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The Real Estate Soufflé
January 30, 2006

We have a decidedly nuanced view of Real Estate: While not neccessarily a bubble, it has been the prime driver of the economy since rates were slashed to half century lows 3 years ago.