Housing: Round Trip to Pre-Bubble Prices Underway
by ilene - October 27th, 2009 12:43 am
Charles argues that bubbles retrace all the way to pre-bubble levels, which means housing has another 25% further to fall. – Ilene
Housing: Round Trip to Pre-Bubble Prices Underway
Courtesy of Charles Hugh Smith Of Two Minds
Popped speculative bubbles tend to retrace to their pre-bubble prices. Housing has already retraced 75% of the bubble--only 25% still to go.
When it comes to post-bubble retraces, the fundamental reasons may not matter as much as the technical case for a full reversion to pre-bubble prices. We all know the fundamental reasons why housing shot up--a credit bubble of epic proportions plus securitization, fraud and low interest rates, to name but a few factors--and why housing has plummeted: foreclosures and inventory are rising, tightening of credit standards by private lenders, etc.
But the ultimate predictor of price is technical: speculative bubbles retrace to their pre-bubble prices, or in many cases even crash below those levels.
Those arguing the fundamentals are always grasping at various straws to support the case that prices won’t drop all the way back to pre-bubble levels, and they’re always wrong.
Thus when the NASDAQ dot-com bubble topped above 5,000 in 2000 and then sank to 3,000, the fundamental analysts piled on reasons why 3,000 was "the bottom." Indeed, the market did recover the 4,000 level briefly--at which point it reversed and drifted all the way down to 1,100, it’s pre-bubble level.
In other words, regardless of the fundamental reasons offered (they’re not making any more land, inventory is drying up, foreclosure rates are dropping, etc.), markets tend to fully revert to pre-bubble prices.
Here is a chart of the national median prices which have already reverted to 2002 levels. The future full retrace has been added as a projection:
While there is no absolute way to project the final bottom, many bubbles exhibit a symmetry in their rise and fall. Thus if a bubble took eight years to reach its apex, there is some history to suggest that it will bottom out in roughly the same time span.
That would put the final bottom in the 2013-2014 time frame.
The truly bubblicious markets have already reverted fully 75% of the bubble. Take a look at this chart of median prices in California. Median rices have already dropped to 2001 levels--a staggering 55% decline and a 76% retrace of the entire bubble…