Charles Hughes Smith at oftwominds.com warns that the industry may be just two years from an implosion of the bubble we’re in. Also, if you didn’t know, he argues we’re already in an echo bubble from the last bubble.
The last housing bubble took about 3 years from peak to trough, and this provides a baseline projection for the decline of the current housing bubble, which is shaping up as a classic echo-bubble: very much like the previous bubble, but of slightly lower magnitude.
The projected decline over the next three years to the 110 level is the best-case scenario. Analyst Mark Hanson made a very persuasive case for a much sharper drop when the current housing bubble pops: Mark Hanson Is In "Full-Blown, Black-Swan Lookout Mode" For Housing Bubble 2.0.
In essence, Hanson suggests that the narrow base of the current bubble expansion–all cash buyers (speculators, private-equity funds, overseas oligarchs and corrupt officials, etc.) and marginal borrowers relying on highly leveraged FHA and VA mortgages–will collapse much quicker than the previous bubble, which was inflated by a much larger base of market participants.
Bubbles also have a habit of overshooting when they finally burst. the Federal Reserve acted quickly to re-inflate the housing bubble by lowering interest rates to near-zero and buying over $1 trillion of mortgage-backed securities. Given the narrow base of the current bubble, these tricks will not work should the Fed attempt to inflate Housing Bubble 3.0
In general, bubbles are followed by echo-bubbles, and the bursting of the second bubble ends the speculative cycle. There is no fundamental reason why housing could not round-trip to levels well below 100 on the Case-Shiller Index when the current bubble finally bursts.
If Mark Hanson's analysis is prescient, it may not require 3 years for the current housing bubble to implode; 2 years (2017) might be more than enough time for the speculative excesses to evaporate.
Read the full blog here.