Tuesday, October 25, 2016

The Echo Bubble In U.S. Home Prices Reaches Previous Peak

The Case-Shiller Home Price Index reached the previous high set back in 2006 with the data set released this morning.

Is this echo bubble the same as the last? It some ways it's worse. Real income is lower today than it was at the peak of the previous bubble. See the blue line in the chart below. Real income is important because it factors in inflation. If the rest of your bills are higher (inflation), it leaves you less money to make your mortgage payment every month.

At the peak of the last bubble mortgage rates were hovering around 6.75%. At the peak of the current bubble interest rates are hovering around 3.75%.

When interest rates move upward it will be more painful from this lower level. If rates just move back to where they were in 2006 mortgage payments will almost double. That means new buyers for homes will have 50% less purchasing power and will need to pay 50% less for a home in order to qualify.

How low can mortgage rates go and home prices rise? We'll have to wait and see. The further this goes on, the more painful it will be when the adjustment process finally arrives.

Tuesday, October 11, 2016

Which Event Will Mark The Peak Of The Bond Bubble?

The most recent example of the bond bubble's speculative euphoria are the 50 year government bond sales in Europe. Martin Armstrong wonders if this insanity finally signals the top;

"If there was ever any question that this is a bond bubble with a 5,000-year low in interest rates, the final bit of insanity just took place. Italy managed to sell its first 50-year bond last week as investors were betting that the European Central Bank might soon add ultra-long debt to its asset-purchase stimulus scheme. Draghi has said he would do whatever it takes to stimulate inflation. Hence, speculators are betting they can sell these 50-year Italian bonds to the ECB for a profit.
The speculation was so great that about 16.5 billion euros in orders were received for a bond issue that was about 20% of that amount. They are not considering the risk that the upcoming referendum might overthrow Italy’s prime minister. This is speculation gone completely mad. These insane speculators have already bought 50-year bonds from Belgium, France, and Spain as well. Many of these same speculators have also signed up for Ireland’s 100-year bond in March."

Tuesday, September 13, 2016

The Farmland Bubble Has Burst

It was amazing to watch farmland prices skyrocket as residential real estate was falling from 2008 to 2012. Now that the market has hit a peak, it will be interesting to watch how far prices falls back to earth.