The $9.1 trillion bailout price tag – American households have lost $6.8 trillion in residential real estate values while mortgage debt has increased. The banking Stockholm Syndrome.

“It takes two to speak truth, one to speak and another to hear.” -Henry David Thoreau

For those following the housing boom and bust carefully, the solution to let prices correct is not a novel concept.  That is why it is surprising to see headlines, four years after home values peaked and have been falling, arguing for home values to fall.  The equation is simple because people that make less money can only afford a certain amount of home.  The only reason to keep home prices inflated artificially was to appease those with tremendous amounts of housing debt.  It took four years for some to see the light (many have not) yet trillions of dollars are now out the door under false pretenses for something that was going to happen anyway.  In the end we have created the biggest moral hazard with housing as the centerpiece in this modern game of Monopoly.  Yet after all the pain and economic suffering that Americans have suffered and with obvious culprits, nothing has occurred to fundamentally change our banking system.  To that issue we focus our attention today

Banking Stockholm Syndrome

Some people still believe in the narrative that we had to save the banking system.  There is a legitimate case for this.  But did we have to save in the way that we did?  Absolutely not.  Under pressure and fire the biggest looting of American wealth has occurred and no revolution was necessary.  Remember when good old Hank Paulson gave us a three page memo requesting $700 billion for “troubled assets” which was a nice euphuism for toxic mortgage crap?  Some have forgotten the days of September 2008 when the word bailout seemed to be a daily utterance.  By the way, the vast majority of those toxic mortgages still sit on the balance sheet of banks even after the money is now out the door.

Some suffer from a banking Stockholm Syndrome where they now believe in the propaganda pushed out by the bailout winners.  Use logic when thinking about this.  If that initial bailout was to remove toxic assets from bank balance sheets and banks still have those toxic assets, then the program was an expensive failure by definition.  And this bailout was only one of many.  The big issue is who has shouldered the cost of the banking and housing calamity.  We need only look at the biggest net worth line item for American households, homes:

household debt vs mortgage debt

Source:  Federal Reserve

At the peak of the housing bubble in 2006 Americans had $13 trillion in equity in their residential real estate.  At the peak, total residential mortgage debt stood at $9.8 trillion.  Today, American households have $6.2 trillion in equity while mortgage debt has grown to $10.3 trillion.  In other words American households have faced a real financial loss of $6.8 trillion.  At the same time you’ll notice that the amount of mortgage debt has remained steady.  The toxic mortgage waste just sits idly by while banks use the taxpayer wallet as an ATM.  You can’t have a double-dip without bouncing first.  Americans hold most of their net worth in housing.  That has not recovered because employment is weak.  Stocks, which are heavily tilted as a primary source of income for the top income earners has only made people feel better temporarily.  The mainstream media for the most part represents this tiny group and that is why it has taken so long to even realize that there really is no recovery outside of the stock market.

Again, without fixing the core of the banking system we are doomed for another crisis.  Those that believe the narrative that “we had to do what banks wanted us to do” forget that it was the banks that spearheaded this housing bubble in the first place.  They were the industry that created collateralized debt obligations and options ARMs.  The anger in this upcoming election is justified but might miss the real financial problems.  The fix has been in for decades.  Until we reform how banks and corporations lobby politicians we can simply expect more crony capitalism for years to come.  In fact, the amount of lobbying dollars went up at the height of the crisis:

total lobby dollars

Source:  Open Secrets, data up until July 2010

You don’t become wealthier as a nation by shipping off your jobs or diluting your employment base.  Years ago my focus was on jobs and it still remains there.  So what if a home costs $750,000 if local area incomes were at $300,000.  Home values need to reflect a healthy job market meaning wages can support local home prices without taking on some exotic loan.  Instead of focusing on that key part of the equation, banks with the support of the government have been obsessed with lowering lending standards, 3.5% FHA insured loans,  HAMP, wacky refinance programs, ignoring non-payments, pushing option-ARMs into 40-year interest only balloon mortgages, but in the end it hasn’t worked because jobs can’t justify bubble home prices even today after a severe correction.

The price tag of the bailout is much higher than headlined

How many times have you heard about the Federal Reserve on your morning news?  When we hear about the bailout it is usually confined to the tax breaks and stimulus funds push forward.  Not to diminish that but the one simple action of the Fed buying mortgage backed securities is double that amount yet not much is mentioned about this in the media.  If we really want to break down the numbers the total cost is astronomical:

total cost of bailouts 2010 data

Source:  Nomi Prims

The current total price tag is $9.1 trillion.  When you break down who got what, you can see the biggest wealth transfer in history.  We can debate whether we should have let banks completely fail or to bail them out.  Yet there was no debate or even open public discussion about the biggest bailouts in our nation’s history.  Wall Street scared the crap out of people in those days when the DOW was dropping constantly so all this was passed in a panic by Congress (with lobbying dollars flowing in).  Yet if you remember, it was the public who didn’t want the bailouts in the first place.  Their gut intuition was right but our government is unfortunately broken when it comes to protecting us in the financial realm.  Right now, this is predatory capitalism where all the productivity of the American public is being skimmed off like froth from a cappuccino and handed out to Wall Street bankers.

Where does the housing market stand today?

It isn’t sufficient to say that giving banks everything they asked for has saved us from a second Great Depression.  For the 26 million Americans that are unemployed, underemployed, and have given up looking for work this is a depression.  Plus, how many people that have lost jobs and have taken up lower paying jobs are not cited in the above figure?  We know that 4 out of 10 of those fully employed workers now are part of the low paying service sector.  Do you think buying a new home is the first thing on their mind?

Let us look at housing starts:

housing starts

The $9.1 trillion didn’t seem to do much here to help out.  In fact, this collapse is on par with that seen in the Great Depression and no $9.1 trillion was handed out to Wall Street back then.  Let us look at home sales:

home sales

New home sales never did any significant movements because people don’t have the funds to buy expensive homes.  Existing home sales had tiny spikes but this was all based on government tax breaks and massive amounts of gimmicks.  Once that was removed, home sales collapsed.  So $9.1 trillion did what for the housing market?  Now we have people saying home prices should correct?  They already have and would have done that anyway!  We need to go back and get a refund on that $9.1 trillion especially when it comes to the banks.

So what is the solution?  At this point, the system is so broken and from reading comments here on this blog and other places the public gets what is going on.  This is no mystery.  Right now we need some heavy handed leadership to step up and bring justice to the financial ills that have occurred.  $9.1 trillion flushed down the toilet should bring up some new Pecora Investigation.  As we saw with the AIG deal only after the fact, Goldman Sachs recovered 100 cents on the dollar for all their bad bets.  Can you walk up to the Fed and ask for the 30 percent you lost on your home purchase?  Or maybe you want a refund for that bad bet on roulette?  In the end home prices need to correct.  The longer we delay the inevitable the more we look like Japan and their zombie banks.  We can debate culture, demographics, and all other things but our banks are doing exactly what their banks did.

Home prices falling is merely a reflection of a bubble popping and people not having incomes high enough to support current prices.  How about we focus on fixing the income side of the equation and let housing prices fall where they may?

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63 Responses to “The $9.1 trillion bailout price tag – American households have lost $6.8 trillion in residential real estate values while mortgage debt has increased. The banking Stockholm Syndrome.”

  • Dr., why do you hate America? If home prices fall, the terrorists win!

    Sarcasm aside, your chart detailing spending by lobbyists says it all. Banks give much more to the politicians than us citizens, so guess who gets their way? Until we have major changes in campaign financing, this is not going to change.

    • Troubled Loner,

      Nothing will change without revolution. Seriously. But the sheeple don’t seem to have revolution in their hearts. They need a leader. Maybe Troubled Loner should be that leader!

  • I don’t think housing prices will ever recover in our lifetime. It’s over folks,put a fork in it !

    • Interesting wording.

      Actually, I think just the opposite. Housing prices are now “recovering” from the unwarranted rapid appreciation of the bubble. The crazy wealth in home values never really existed! For people priced out of buying a home, this is the “recovery” of the market back to a reasonable level.

      Young families being priced out of a home or needing to take on insane loans to buy is a sad thing. The Doctor’s recurring point of truth is that rising housing price values are ONLY good when the local incomes do the same.

      I know most everybody that owns / owned a house during the peak truly believed that was their house was worth that much, but it was all an illusion.

  • The good old boy network is alive and well, unions are losing members and as this article posts, the money is gone. Ross was right and all I hear is a big sucking sound. Corporation leaders have gotten together and created there own ‘union’ of offshoring jobs and collectively brought down wages. They have divided and concured the job market. They are dividing up congress to confuse and slight of hand, and while the public is watching LUCY their walking to their yatch. Because they are untouchable. God help us.

  • Even places like Oregon, which mainly has minimum wage jobs, house prices are still 25% too high. Because of the upcoming elections, everything is “on hold”.
    We will have a truer picture, right after the elections in Nov. With re-election behind the, Congress and the states will be free to make the tough choices.

  • Effn awesome write you did!

  • Last night WCBS-TV had a report reguarding 86,000 job opennings in New York City & how that leads the nation in job growth. The spin part comes in to play when they mention that 1. many jobs pay high six figgure salaries & 2. the best way to apply is to go through NYS One Stop program. When you are interviewed you hand in a form that allows the employer to recieve a tax cut for new highers.

    Basicly it comes down to this, employers need a free ride to hier otherwise things stay the same. Put another way, you are paying the employer to higher you or someone else through your taxes.

    • Please spell hire correctly!

      • Howard, I’ve learned to give up on trying to correct people’s asinine misspellings. Invariably, you get labeled as a grammar nazi, and no one really bothers to change. The sad thing is, most of the time it’s not like they’re even typos, but people trying to sound smarter than they really are and looking foolish in the process.

        Everytime I see someone who can’t tell the difference between “loose” and “lose” a little part of my soul dies. Still, for my own sanity, I think it’s better just to filter the drudge and appreciate the service that DHB is offering.

  • Unfortunately doc, in some places prices have definitely NOT fallen all that much yet. Here in the Bay Area, there are large areas where average home prices are still at 10x incomes.

    • Tell me about it. They are still handing out and drinking gallons of Kool-Aid in the SF Bay Area. More desirable areas are probably only 10-15% off peak. Previously they doubled or tripled in value between 1995 – peak. Complete morons are thinking they are getting a great deal buying 10% off peak! They are still selling though and I am still waiting…………..

  • Amen, Dr. HB,

    The first step, once we see the blighted landscape as it really is (as you describe it, not as the MSM paints it day after day), is to stop blaming each other and turn our collective attention to the twin villains: Wall Street and Washington.

    I am so sick of people blaming “greedy mcmansion buyers” or foolish subprime borrowers for this crisis. When cash is put on the table with a “TAKE SOME” sign in front of it, who won’t take it? The point being that the people who set up the table and their political enablers are getting away scot free (with their pockets relined by bailout funds!!).

    Our problem is that we are turning on our neighbors, not taking our grievances to the higher ups who caused them.

    Some of us have already taken our lumps (we did a Deed-in-lieu this month, losing 10 years’ worth of equity in the process–we now start from scratch in our mid-40s). But the pain is coming to all, as the real estate market correction continues apace. Mark my words, when people who bought in the late 90s see the water lapping around their feet, they will rethink the whole “it was my greedy neighbor’s fault” meme. Maybe then we can figure out how to take back our country from the plutocrats who stole it.

    • When cash is put on the table with a sign TAKE SOME, who doesn’t?

      I don’t. My partner doesn’t. A lot of us don’t, because we know that there is no such thing as a free lunch, and that when you stand on a snake’s rattle, his head will come on up and bite you on the ass eventually. Except in that example, the snake’s just being a snake.

      In the money example, the banks/lenders knew they could play on people’s greed and math illiteracy and desire to get something for nothing as they watched HGTV and felt entitled to granite countertops and six-headed shower stalls and recessed lighting fixtures sufficient to land a jumbo jet in the Bonus Room. Just for drawing breath and staying out of the way of fast moving heavy things.

      DHB’s message is, as ever, that this nation is only as strong as its productive, responsible, able-to-defer-gratification boring old middle and working classes. And since both the overlords and underclass and a lot of folks in between want to bash the middle class and working classes…well, it’s just one hecka clusterfuck, isn’t it? The debt-based game of Overextending Ourselves just isn’t working, but we’re so addicted to bashing the productive and responsible, what’s left but a bunch of victimization and whining?

      The whole point of every bit of politics and economic policy since Reagan has been to move to a model of economics where humans are just another crop to harvest for profits. Solid incomes and a rational, empowered, productive populace are a serious threat to that plantation/serfdom model…and the kind of profits that result from the kamikaze race to the bottom that puts no value on anything but piling up the monopoly money. This is how the destruction of jobs–and therefore people, dreams, families, communities, and regions–can be called “efficiency” and toted up in the black ink side of the balance sheet. The real costs are hidden off the books.


      • EXACTLY. Thank you, Compass, for echoing what many of us are thinking as well. Damn right there’s no such thing as a free lunch. Yes, it IS your fault for buying a house you could not afford. And I’m sorry to be a callous **** about it, but you deserve to lose it. You never had it in the first place. The only thing you did was prevent prudent people from being able to afford houses sooner, and for that, I cannot forgive you. YOU helped to caused prudent people to not achieve THEIR dreams of homeownership. Think about that for a bit.

      • Ha, tell that to the guy down the street from my parents who took out hundreds of thousands in HELOC money, and spent in on, among other things, his Porsche, which, even as he squats post-forclosure, he is (we are) paying someone to come out and detail in his driveway.

        You have NO CLUE about how your poor little neighbors pumped up the bubble, spent all this HELOC money on the Big Party, and made housing unaffordable in the process, and now expect Big Nanny to come in and save them at taxpayer expense? You must be a liberal.

  • “That is why it is surprising to see headlines, four years after home values peaked and have been falling, arguing for home values to fall.”
    I am not surprised. It will probably take 10 years for some newspapers to catch on. They still think that housing prices always go up, and that this is just a temporary dip.

  • We will look back at todays overstated prices and think we should have bought in 2011-2012. Prices will continue to fall in the next few years because of all the foreclosures and shawdow inventory. But when inflation comes back like the seventies starting in 2014-2015, housing prices will take off. But most current upside down mortgage will not be homeowners when inflation starts because of government debt and the fall of the dollar.

    • When inflation comes back and it will, housing prices will go down, not up. For every 1% increase in mortgage rates, home prices drop around 10%. Rates up, fewer qualified buyers, home prices down. Pretty simple.

      • I think you’re correct but if you bought at a relatively low point in, say, 2013 and still had a low rate mortgage, you’ll be in good shape for paying off that mortgage come times of inflation (so long as you stay employed, of course). It’s good to have a 4.5% mortgage if inflation goes to, say, 12%.

      • Dave, what makes you think that FED will raise the interest rates accordingly to the rising inflation. I think they will look the other way when it starts. They will let inflation rage in the beginning, because this the way to flush the system of all economic disproportions, indebtedness in this society, destroy what is left of the standard of the middle class (in order that we get more competitive against the low wage economies in the third world) and eventually just then when system is flushed they will start raising the interest rates to fight inflation. They are praying for inflation now, but it is not coming for 2-3 more years…

  • “Americans hold most of their net worth in housing”

    Yikes! That means they have little saved for retirement. I’m 59, happily unemployed with only 10% of my net worth in housing. I bought one house and paid it off. I didn’t get caught up in the frenzy. Instead, I saved. The only reliable way to wealth is by saving. And the next time a realtor says the word “investment” I will punch him/her right in the nose.

    • “Retirement”???

      What the heck is that, Baby Boomer?


    • First, I will say that I agree. Housing is not an investment and it is vital, if one wants to retire, to prepare for retirement by saving the appropriate funds and investing them in only the most cautious manner.

      But for people around my age (30) this is not something that is currently feasible. Look at it this way: A typical college graduate, let’s say 23 years old, finds work at typical starting wage, let’s say 45/year. A reasonable apartment costs $1400-1800/month. We’ll low-ball it at $16,500/year in rent and utilities. Taxes eat up about 30% of wages at that level. That’s another 15,000/year. $100/week in groceries and food for a single person marks off another $5000. Let’s say they’re fortunate enough to outright own a car. It still needs to be registered, insured, fueled, and maintained. That’s another $5000/year. We’re up to $41,500 and just barely living life. That extra $300/month needs to cover 6-figures of student loan debt, medical bills, and any other incidentals (a simple speeding ticket runs $300-500 these days), AND establish a retirement account, start saving up for a wedding/family life, and start building a fund for a down payment on a house.

      It simply can’t happen. Unless this generation is willing to live at home well into their 30’s and stay single and unattached into their 40’s, and put off retirement until… well… forever, there’s really not much hope of finding any legal and moral way to make ends meet.

      And that is why we are where we are today. The 2000’s were the culmination of many factors that existed in the run-up to the 1920’s, and now we find ourselves in a very similar aftermath. But no one wants to call it what it is.

      • They really have no choice about not reproducing. But the Elite have taken care of that problem for them. All those little white lids who thought they would have their parents standard of living will struggle, man and woman, husband and wife, postponing children until it is too late to have any.

        But that is fine! All those middle class white kids are being replaced with inexpensive third world peasants who know how to live on beans and rice crammed into a hovel AND make babies who are happy living a peasants life.

        A Mexican has 3.5-4.0 kids living in a hovel working scut jobs, whereas the middle class white kids have to have 3500 square feet and a $350 designer baby buggy and at least $100K a year in income before they will reproduce.

        That’s why white kids are dying off and being replaced by Mexicans. Mexicans are the New Americans, engineered and adapted to poverty. The white kids will work like dogs, pay taxes their whole lives and then go extinct. White people cannot handle tough times. Mexican peasants can … with a smile! That is why they have been selected by the elite. That is why Obama has declared an amnesty and now refuses to deport them.

  • With the continuing deleveraging in the credit and mortgage system, does anyone else agree 2014/2015 at this point in time is likely our bottom? Think ’94/’95 in the last cycle….

  • It is scary were we find our country today. We are so far from our greatest days, when we had a middle class, the Financial Industry only accounted for around 10% of our GDP and we were a true leader in the world.

    Today we find ourselves in debt, a substantially reduced middle income class, a growing lower income class and a hugely growing upper income class. The top 1% of income earners own more now then in anytime in our history. We need to grow our middle income class so that people can afford to buy things. Henry Ford had the right idea when he paid people enough to purchase what they made. Instead we give tax breaks to the corporations and the ultra rich and reward the people running the huge corporations. In my America I want the people who create the companies, the people who risk thier own capital to be able to make lots of money. But not some guy hired to run the company. I don’t buy that Jack Welsh or anybody else who did not create or risk his/her own money to start a company, is worth what we pay these crooks to run these huge companies. I believe we would all be better off with a thousand smaller regional banks then five or six huge national banks. This country was founded on small business’ and we need to get back to that paradigm. It is the small companies that create and innovate and the large companies that have ties to other ventures that hold back great ideas because it may hurt their profitability.

    With that said we can all hurt the large banks by not banking with them. If enough people stopped banking with them and turned their business over to small regional banks or credit unions then they would not be able to charge us $3.00 to use an ATM or $25.00 for overdraft protection. We can bring them to thier knees but not giving them our business. Period.

    As far as the politicians, lobbyist and financial contribution reform goes that one is much tougher, but some how we need to stop this vicious cycle. Naomi Wolf is right on when she says we are turning into a Fascist Country. If you have not read her books you should read them they are fascinating.

    • Buying things doesn’t make a healthy nation.

      Producing things and living within one’s means does.

      Limiting and deferring one’s whims does.

      Buying things simply means turning more and more of nature into “resources” and speeding up the time between the mining of that nature and the discarding of those resources in a landfill. This is not a sustainable model of anything.


      I live in Nashville Tn says our house is worth $270,000 but my neighbor whose house is the same size and price can’t even get people to look at his for sale for $220,000 You can basically look at what price your house was 10 years ago and thats the REAL value now…

  • Falling house prices is good news for half the population, the renters. Obama is going to concentrate more on them, his base, not the Republican home owners, (Marx had a name for them, petit bourgeois). Obama has a vision that is not shared by many home owners.

    • Since when has the government ever focused on the renters? Maybe when rent becomes partially tax deductible like mortgage interest. Oh haha, that’s funny isn’t it? Government policy for decades has been: unfairly favor homeowners over renters at all cost.

      • Why does the government focus on home owers instead of renters? The government does give landlords all types of tax breaks. The question should be, why not be like Canada and not focus on housing, owner occupied or rental. Is it government’s job to be involved? I think not. Let the market place decide. It is business that uses government as their tool and pocket book to benefit them. We the taxpayers end up footing the bill for their folly. Go Ron Paul!

    • Um, I don’t think you have been paying attention, John. Obama has implemented numerous programs designed to keep real estate prices artificially high, and continues to pitch more. He is every bit in the bankers’ corner as the previous administration was.

  • bryan cappelletti

    The Bernanke Federal Reserve is running the SEVERE risk of creating a hyperinflationary depression via use of QE. Once worldwide gasoline supply outstrips demand ( maybe that will happen in 2011 or 2012 ) the Fed will be ‘boxed in’ … with no other choice but to raise interest rates sky high.

    • “From now on, depressions will be scientifically created.” — Congressman Charles A. Lindbergh Sr. , 1913 (The year the Fed was formed)

      History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and it’s issuance.” James Madison

      The Trilateral Commission is intended to be the vehicle for multinational consolidation of the commercial and banking interests by seizing control of the political government of the United States. The Trilateral Commission represents a skillful, coordinated effort to seize control and consolidate the four centers of power–Political, Monetary, Intellectual, and Ecclesiastical.”–U.S. Senator Barry Goldwater from his 1964 book “No Apologies”

      Carl Marx and Friedrich Engels claimed that, in the effort to create a classless society, a “graduated income tax” could be used as a weapon to destroy the middle class. [ . . . ] Through the clever use of language, the government promotes the fraud.

      “The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the government since the days of Andrew Jackson.”

      All we need is the right major crisis and the nations will accept the New World Order.” David Rockefeller, 1994

      (2 + 2 = 4)

      • You did not mention about the CFR. You can check their website. Don’t forget the Bilderberg Groups annual meetings. Don’t forget Georgetown University professor Carroll Quigley and his writing,Tragedy and Hope.

  • nice post Dr. as always. keep it up.

  • 2013 is the bottom for many areas in Southern Cali, then 2014-2015 interest rate will start to go up, but the next decade until 2025, US is doomed for sure……I mean really folks……. Party is over people……

  • live_ina_batcave_cuz_itz_cheaper

    I have a friend who worked on the NYSE floor for many years during the pre-bubble and bubble years. As the bubble grew, so did his concern. After initial market troubles in the fall of ‘07, he estimated that U.S. banks were overleveraged by a conservative $17 trillion with a “T”.
    Maybe that’s why banks have burned through that $7 trillion so fast. In fact, you should be happy to know that we only have $10 trillion to go!
    Look for Paulson and Bernanke to play up this next cycle with even more gloom and doom scenarios. All the while, giving each other high-fives over cigars in a D.C. country club along with their buddies over at GS!
    That’s the way this ball bounces, and until somebody with some real power starts calling BS on the “advanced-mathematical-economic-modeling” crap they keep confusing our leaders with, this game won’t end. That is until the Banker’s are bloated with cash, and the average American is no better off than a 2nd or 3rd world citizen.
    I mean come on, only a very high IQ crook would use 4th order differential equations to justify laundering $7 trillion to their buddies on WS. Maybe someday there will be a special episode of “American Greed” featuring the U.S. Treasury and Federal Reserve…

  • Doc, an excellent article and an a good solution. We need heavy handed government that favors the working and middle class. There is no reason to see the financial sector posting bubble era profits after using taxpayer bailouts to stave off bankruptcy. Yes, we need the banking system, but we certainly do not need to reward failure. The US government should be clawing back those profits and capping exective pay. If those CEOs are so brilliant, force them out of the financial sector and into areas of the economy that actually produce.

    It’s sad that we have two political parties: 1) The Wall Street Bank Owned and Operated Party and 2) The We Can’t Do Much Because of the Wall Street Banks Party.

    • Both parties get money from the exact same plutocrats. And since money is the gateway to re-election, both parties diddle the same small cadre of super rich patrons for their bling.

      Meanwhile, Arianna Huffington, George Soros, and other billionaires purport to tell us what a Great Society looks like. (We must assume they’re referring to the one at the country clubs you and I will never see except on Google Maps.)


  • Yes, but the difference between the two (home value & mortgage value) is the same at the end of the chart as at the beginning. Saying that people have lost billions when you compare at an artificial spike isn’t really accurate. When I sold my house in ’07 did I lose $250,000 – or did I just have somebody pay me a fair market value when I sold? I still came out ahead compared to the price when I bought 10 years previously.

    Houses aren’t stocks, people can’t just sell and buy with a whim – so where is the real loss?

  • Here’s an important piece of information for anyone who thinks a new species of “unicorns and rainbows” will arrive in D.C. after the November elections. “No, it’s no shocker that Democrats have big problems in fundraising after their record from the past two years. It’s not even a shocker that Wall Street donors have shifted their money to the GOP; that started a year ago, and has only accelerated since. ” (from So instead of the old group of bought and paid for politicians we are likely to get a new group of bought and paid for politicians. Will any teeny-tiny message about shrinking the size and intrusiveness of the federal government reach the newly anointed? Unlikely unless all the campaign contributors (and their lobbyists) are suddenly pushed into long-term convalescence, with no visitor privileges. If wishes were horses…

    • Banks and Wall Street love a political winner. If someone looks like they’re very likely to win, these entities and many others like them try to be seen as being on their side. They donated tons of money to the democrats in ’08 because they looked like certain winners. And, sadly, many of the the dems were utterly captured by the banks and Wall Street. Will the same happen with the new repubs in 2010? Likely so with some portion of them but let’s see.

      And sorry to say anything so gauche but it would likely be the Tea Party types who would be most resistant to being captured by bank and Wall Street money.

  • A few of the comments here are expressing fears over inflation. I’m no economist, but I know that inflation is what happens when too much money chases too few goods.

    It seems to me that this doesn’t describe our current situation, which is the exact opposite. Since the housing bubble burst, the Fed has pumped billions upon billions of dollars into the economy and inflation happened only very briefly. This is because all those trillions of dollars we thought we had in our houses and hedged our futures on never, in fact, existed. Poof. Gone. No more. So it follows that until we reach a certain point (I’m not sure where that is, exactly), we’re relatively safe from inflation.

    I guess I’m just looking for some clarification. Inflation never seemed to be in the cards for us. Deflation, rather, is what we need to worry about. Can someone help me out here?

    • If millions of Americans are unemployed, no longer producing and are still eating food, consuming goods and services (one way or another they always do), you do have a case of more and more dollars chasing fewer goods.

      And I know we are not Zimbabwe, as our reputation is much much better however our finances are not, they have a massive unemployment problem yet have massive inflation.

      Our reputation will only take us so far. If we are lucky we have 10 years but probably less than 5.

      • Disagree. Deflation is by far the likelier scenario because we are going through a net destruction of credit, which is part of the money supply, so it results in less available money for spending. True, the fed can print money, but the fed gives its cash to the banks and cannot force banks to lend it into commerce. Furthermore the banks have no interest in lending that money out because (i) they need it cover their unrecognized losses on mbs, (ii) there are no good credit risks amongst consumers (who are over-leveraged already), and (iii) the banks can invest those funds in treasuries for a guaranteed return at taxpayer expense.

        The net result is a continued reduction in the money supply, I.e., deflation. See, e.g., Japan for the last two decades, where they have taken all of the same steps and have not had inflation, nor any real recovery, but they have preserved the bankers’ and politicians’ status quo.

  • Petrin,

    Inflation can, and is currently taking place. The aspect you left out is dollar depreciation.

    The FED created high powered money has NOT caused inflation, because it’s not being used. Deflationary pressures are being felt now, but in the long run it’ll be inflation because the USD is being debased every second of the day. The only reason we don’t notice all the time is because other currencies are worse than ours.

    Too much money printed/borrowed by the USGovernment will eventually lead to a USD index below like 70.

    We are feeling some of the deflation now, but the currency debasement that has ALREADY taken place is what will kills us later.

  • Went for a walk today in my 92116 Zip code. Walked down one block, turned, walked one block, turned walked three blocks, turned walked one block and then the three blocks back home. I counted 17 for sale signs that I could see on the walk.

    The area is and “up and coming area”, there are nice older craftsman all fixed up mixed in with houses with couches on the porch, Bambinos screaming in the streets and thump thump stereos in the cars. And of course a nightly fly over by a Police helicopter that may last up to two hours (some times the police are nice enought to blare out who they are looking for). As the lower income people sell out the yuppies move in.

    Now that you have a picture of my lovely s.d. neighborhood, these houses that are sold as fixers are going easily for 500K and if it is fixed up you can get a 3 bed 2 bath with garage for 625K.

    I moved back to s.d. from Phoenix one year ago. Lucky enough to sell my house in Phoenix in late 2007 and then rented there for awhile. From 2006 to 2008 housing prices in far flung places of Phoenix and the lower income areas were falling up to 40 or 50% while the prime areas were down 5 to 10%. All of a sudden, mid 2009 the Prime areas suddenly started tanking. In the last 15 months they are now down nearly as much as the other areas.

    With 17 houses on my short walk in my so called “prime area”, I think we are on the cusp of one big decline.

    • Martin,

      I am very familiar with 92116, and San Diego. I agree, 92116 and other prime areas in S.D. that have not taken a big hit yet are next. I’m sure you hear from many in these prime areas that their neighborhood is different, that it’s immune from the type of price corrections that other areas suffered. Just because it hasn’t happened yet doesn’t mean it won’t.

  • The only places in this whole United States that were completely unaffected by the bubble and continue to see major poopulation grwoth and house price increases of about 7% a year is Austin TX and Houston TX. Yee-haw!

  • Including entitlement liabilities, the US is over $130 trillion in debt. The banksters, however, are flush. Their wealth is fungible, so the inevitable US default and collapse becomes little more than the buying opportunity of a lifetime for the corporatist elites.

  • 1981 to 1990 – Reagan debt prosperity, arms race, deregulation of banks.
    1990-1995 – Severe recession, S&L scandals, bank failures.
    1995-2000 – Internet stock bubble.
    2000 – Repeal of Glass-Stegall
    2001 -2003 Recession due to stock bubble.
    2003 2008 – War, option-arms, derivatives..another fake debt prosperity
    2008-? Massive deleveraging of debt

  • Prices have gone down, but not sufficiently. Houses that were sold for $300K in 2002 have reached $600K at the height of the bubble in 2006. Now they have corrected to about $450K. Still, that is about 50% appreciation since 2002. Have the incomes gone up by 50% since 2002? Has the population or household formation gone up by 50% since 2002? For that matter, has anything gone up by 50% since 2002? In these times of low inflation, until the house prices correct by another 30-40%, investing in a house is a losing proposition! Hope all buyers stay away from this market until the prices revert to the historical levels irrevocably!!

  • Wow, this is my first look at Dr. Housing Bubble. What a bunch of sharp posters. Best wishes to the author and to you all. Wish I had a matrix of your backgrounds in the field.

    I have 35 years in RE lending, mostly private money on commercial and agricultural properties. Fortunately, at least for now, our portfolio is holding up much better than the banks. Unfortunately, regulators have not a clue as to the role of private money lenders. Our hands are being tied from using specialized tools, when they may be perfect for a specific situation. On point, I fully agree that prices need to “recover” from the bubble, to that which people can actually afford. The elders called it “affordable housing”.

    Lee, in Santa Rosa, CA

    • Lee, I am also from Santa Rosa, born, raised in Bennett Valley, and a fourth generation native.

      I am also looking forward to buying a house for the first time, in the near future. Responsibly pulling off such a feat a few years ago would not have been remotely possible with my better-than-average, but not awesome wage. As the bubble grew, I pretty much assumed that every thousand dollar increase in the cost of a house directly translated to another mile in which I’d have to live away from my friends and family when I finally decided to settle down. It was as if the dollar value of their house was the distance I’d have to drive in my car to visit them, and that number just kept getting bigger and bigger.

      So in all, maybe the crash isn’t such a bad thing. =)

  • Dear Housing,

    As I have told you a million times already you truely are the love of my life. My well- being is not complete until you are complete, oh dear housing. I cannot stand the thought of anything bad ever happening to you. It frightens me to death to think the marketplace wants to control you and not ME. AAAARRRRRRRHHHH…The nerve of the American people to think that this is some sort of free market.
    Housing, have I told you that I loved you, lately? I do, I REALLY, REALLY, REALLY do. I promise on my life that I will not do anything to hurt you whatsoever, even if it means destroying the US dollar, economy and way of life. Just remember my love towards you is perpetual..

    Yours Truely,

    BS Bernanke

    P.S. Alan Greenbubbles says hello (but he doesnt love you as much as I do).

  • before you decide to say that this is over I just ask that you watch this video. It really worries me that north-america has truly sold itself down the river and higher debt compared to incomes will not fix the problem.

  • Hey Doc, I hate to sound like a broken record but could you please give us here in Ventura County (the Forgotten So. Cal. Paradise), more of your insights as to the truth of the housing market here? Can I bribe you with some of our local products…? Please, there is so much conflicting info here. What can we do to get your attention? We have been renting far too long with investments so risky, we want to buy a home as soon as we can. Remember Ventura County Doc! Thanks!

  • Coming bank failure….Expect 200 failure before Spring of 2011, then 100 by summer of 2011, then another 100 by fall of 2011……Damm, 2011 doesn’t look good and 2012 is the 100th years celebration of Federal Reserve as Federal Express…….Dec 21, 2012
    Its also the year of Venus Rising and celebration of Luciferian……..

  • I have been following the prices of real estate for quite some time. I am surprised at the prices in Phoenix though. I am seeing prices for duplexes, even triplexes for less than 100k. Even a few under 200k in San Diego . The cap rate seems to be a healthy 10% or higher . A few in LA county too-but I wouldn’t feel safe walking at night in those places.

    Just wondering, at what rate would it be deemed to be attractive as an investment? If we follow the path of Japan or worse Detroit, then probably never. But otherwise I know people who buy-well used to buy- a souped up pick up truck for 50k and to see a triplex for 90 k with a net of 10k a year is rather intresting.

    The main problem is falling rents though. If you estimate it on today’s rents, then rents fall and the prices fall and that throws off your calculations. Increasingly it looks like we are following the path of the great depression-they had a massive stock market rally after the crash and then the real pain began. Lets see what the tea leaves hold for us.

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