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Bubble Symmetry And The Housing Market

  • Written by Syndicated Publisher No Comments Comments
    May 1, 2013

    If bubbles eventually revert to their starting level, Phase 3–capitulation and a return to pre-bubble prices–still lies ahead for the housing market.

    Way back in 2006 at the height of the housing bubble, I prepared this chart proposing the housing bubble might exhibit symmetry, i.e. the decline would mirror the rise. I also proposed that the decline would be characterized by phase shifts that corresponded to the decay of whatever reason was being given for the “recovery” in housing, for example, “this must be the bottom.”

    Let’s compare this idealized bubble symmetry with a chart from reality: housing in the bubblicious Los Angeles market.

    Here’s another look at the L.A. market as measured by Standard & Poors:

    Hmm, what would have happened if the Federal Reserve hadn’t dumped trillions of dollars into the mortgage market, and the Federal housing agencies hadn’t subsidized mortgages and housing with 3% down payments and tax credits?

    Perhaps all the trillions of dollars of intervention has accomplished is extend Phase 2. Central bank and state manipulation distorted the symmetry of housing’s decline, but did they stave off Phase 3 permanently?

    If bubbles eventually revert to their starting level, Phase 3–capitulation and a return to pre-bubble prices–still lies ahead.

    Images: Flickr (licence attribution)

    About The Author

    Charles Hugh Smith writes the Of Two Minds blog (www.oftwominds.com/blog.html) which covers an eclectic range of timely topics: finance, housing, Asia, energy, longterm trends, social issues, health/diet/fitness and sustainability. From its humble beginnings in May 2005, Of Two Minds now attracts some 200,000 visits a month. Charles also contributes to AOL’s Daily Finance site (www.dailyfinance.com) and has written eight books, most recently “Survival+: Structuring Prosperity for Yourself and the Nation” (2009) which is available in a free version on his blog.
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