The 3 Stage Housing Bubble Collapse

Most Americans don’t know, but the housing market is heading toward another epic bubble.  However, the bubble forming today is much different than the subprime housing meltdown in 2007.  Back in 2007, there was an oversupply of homes, whereas today there is a shortage.  With more buyers than sellers bidding up prices, the U.S. median home price value hit a new record high of $338,000 at the end of 2017.

Unfortunately, wages have not kept up with rising home values.  For example, the average hourly earnings have only increased 21% since 2009.  However, the U.S. median home price $330,000 in Q1 2018 is 53% higher:

Now, to make up for the shortage of homes in the high-demand cities across the country, the new-home building boom is once again on the rise.  The U.S. housing starts in March are up to 1.3 million from the low of 478,000 at the bottom of the 2009 recession.  Now, even though current housing starts are more than double what they were at the lows in 2009, they are nearly 50% less than the peak of 2.3 million in 2006.

However, there is a much different dynamic today as the cost to build a new home is much higher than it was in 2006.  At the peak in 2006, the U.S. median new home price was $262,000 versus the $337,000 in Q1 2018.  Moreover, the U.S. median new home price is 60% higher than the low in 2009:

Even though the average wages of an American increased 21% since 2009, the median new home price is 60% higher.  Part of the reason for the higher new home price is the increased demand but it’s also due to higher costs.  For example, the lumber price shut up 170% since the beginning of 2016.  When the U.S. median new home price reached a high of $262,000 in 2006, the price of lumber was $330.  Today, the lumber price isn’t quite double, but at $592, it’s pretty darn close:

You will also notice that the lumber price fell in mid-2014 to a low of $220 at the beginning of 2016.  The falling lumber price was party due to the falling oil price.  One of the significant costs for cutting and transporting lumber is energy.  As the oil price fell in half by 2016, it impacted the price of lumber.  However, the lumber price has increased a great deal more in percentage terms than the oil price and seems to be in a bubble or huge top formation.

We can see this by the record positive lumber sentiment.  I have recently subscribed to Sentiment Trader and have found their service as a great tool to show changes in market trends.  If we look at the lumber sentiment of 86, it has never been higher.  Any reading above 70 is overly optimistic, and anything under 30 is excessively pessimistic:

While the lumber price can move higher, we can plainly see that bubbles are forming everywhere.  According to Dr. Housing Bubble, Total Value of U.S. Homes is $31.8 trillion- Los Angeles homes now valued at $2.7 trillion, the value of the U.K. economy.

Housing values in the U.S. have reached a new peak. In total, U.S. homes are valued around $31.8 trillion according to Zillow. That is 1.5 times the GDP of the U.S. and close to three times the GDP of China. Crap shacks in Los Angeles are now worth $2.7 trillion, which is more than the United Kingdom’s GDP. What is very telling is that real estate values across the country in virtually every large metro area are near peak values. In places like San Francisco, they are in a new stratosphere. The allure of real estate is now fully engulfing the nation and flipping rates are at decade highs. People want to get a piece of the action. You also have many ex-pats now taking their money abroad and retiring in more affordable countries where they can stretch those Taco Tuesday dollars while money from China is flowing the other way and boosting prices in some areas dramatically.

Not only are Americans bidding up housing prices, so are foreigners.  Money is sloshing around the world searching for the biggest gains.  Unfortunately, the oil that drives the U.S. and the global economy is getting into serious trouble.  While I didn’t think the oil price would shoot up as high as it has recently, it may move up even higher before the stock market rolls over.  Regardless, the U.S. economy is living on borrowed time as it’s Shale Oil Industry continues to add more debt to produce uneconomic oil.

Furthermore, the world is burning one heck of a lot more oil than it is discovering.  For example, in 2016 the world found 2.4 billion barrels of conventional oil, but consumed more than ten times that amount at 25 billion barrels:

Now, we are making up the difference with unconventional shale (tight oil), tar sands and heavy oil:

(chart courtesy from Crudeoilpeak.info)

Regrettably, unconventional oil sources need higher oil prices.  As I mentioned in my previous article,

How Wall Street Enabled the Fracking ‘Revolution’ That’s Losing Billions:

The U.S. shale oil industry hailed as a “revolution” has burned through a quarter trillion dollars more than it has brought in over the last decade. It has been a money-losing endeavor of epic proportions.

A large percentage of U.S. oil supply was from the huge increase in shale oil production.  However, most of that shale oil production wasn’t economical. Thus the companies were forced to tap into investor funds to increase production.  Not only are shale oil companies borrowing more money to grow or at least sustain production, but many are also paying higher interest expense to service their debt.

In looking at the fundamentals, I see the U.S. shale oil industry beginning to disintegrate within the next 1-3 years.  And by 2025, U.S. oil production will be considerably less than it is today.  With the collapse of the U.S. domestic oil industry, it will significantly impact the overall economy and Dollar.

For these reasons, I see a 3 Stage Collapse of the U.S. Housing Market.  The 1st stage of the housing collapse will occur when the broader markets experience a 25-50% sell-off.  At this point, the U.S. median home price will fall 40% to $200,000.  As U.S. oil production continues to decline, we will enter the second stage as the U.S. median home price drops 60% to $120,000.

The 3rd stage of the U.S. Housing Collapse will occur likely by 2030 (or possibly sooner) as domestic oil production falls  50-75%.  As Americans and citizens of the world understand that oil production will continue to decline, the value of stocks, bonds, and real estate will also continue to fall.  Which is why I see the U.S. median home price to $40,000 in the 3rd stage of the collapse.

Of course, my timing could be off by a few years, but not decades.  Either way, the notion that real estate values will always rise in the future will be DEAD for GOOD as the market is impacted negatively due to falling oil production.

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48 Comments on "The 3 Stage Housing Bubble Collapse"

    • David Toussaint | May 11, 2018 at 9:11 am |

      I would think that tighter oil supply would cause a significant increase in oil prices, thereby sustaining the fracking oil industry. What am I missing here?

      • Spanky Bernanke | May 12, 2018 at 5:46 am |

        I suspect there is no large pool of oil in the tight oil fields in the Dakotas, Colorado, and West and Central Texas. Fracking will degrade no matter what the price–you have to have supply. Now, the really bizarre statistic of the IEA WEO chart is “Yet to be Developed”?? How the frack can it keep growing in a world of falling reserve finds? It doesn’t make sense.
        Now, I can see home prices falling as energy prices rise. That is because of a declining demographic–Millennials and Gen Z. They won’t have the paper gains that Boomers and X’ers have been able to leverage. Look at the cryptos–the derivative game is dying quickly.

  1. I might stick to silver….announcing your expertise on everything under the sun…not compelling. Stick where you have a relative competitive advantage…steve laffey

    • Stephen,

      While I appreciate your input, I like to analyze how ENERGY impacts all markets. So, you don’t have to be an expert in the housing market to understand a collapse is coming. Thus, when oil production declines, so will the value of Real Estate.

      Lastly, this article discusses in more detail how the Falling EROI and declining oil production will impact STOCKS, BONDS, & REAL ESTATE.

      steve

    • The way I see it, is that Steve uses the same chain of logic that Milton Friedman does in his story of the pencil. Milton talks about how all the components of the pencil are sourced. Put that thought into energy terms. How much energy does it take to cut down the tree, to transport the wood, the mine the steel for the saw, the rubber for the eraser etc…

      In looking at energy in this way, one can understand how a disruption in the energy supply effects absolutely every product and service.

      https://www.youtube.com/watch?v=4ERbC7JyCfU&t=329s

  2. Someone will in the near future be able to buy nice homes for pennies on the dollar with there stash of pms. But the question will be who to sell em to?
    Things may crash, home values may crater, but how can a recovery producing new buyers happen with no energy?
    IMHO the govt will place a moratorium on housing repo because where you going to relocate all those who have lost there job and can no longer service the debt? Big enough problem feeding them, why not house them in place?
    DEBT is the problem and in the great reset those who have benefited from the debt creation will be the big loosers.

    Folks this is NOT and will NOT be just another recovery, not even one contributed to other parts of the world.
    This is different because of no energy.

    The generation that saw the fig tree re-grow may need to worry about more than their future physical financial state.

    • I may be able to buy all of the houses on a city block for a couple hundred ounces of silver, BUT they are still a juicy target for tax collectors if I want to keep them. “for the children….” (and the holders of defaulted school rebuilding bonds).

  3. Oil consumption in 2016 was 25.1 billion barrels of oil vs 2.4 bb of oil discoveries. Those numbers look troubling for the future of industrial civilization. What did the 2016 numbers look like when you include shale oil?

    What do the numbers look like for 2017?

  4. I’m sure the banks will be in on the housing action also, inventing some new loan schemes. Many people are already underwater on auto loans, why not jump into a new oversize home?

  5. The govt has many options to dampen the coming housing crash. You might never heard it before but some countries call it forced mortgages. So all the ppl whom paid of their homes will get a nice gift from their own govt in the form of new forced mortgage. This will stabilise the housing market pretty well. We need not only to look at the oil market but need to look at the gas market too as this market is really huge globally. In fact we can do same with gas as with crude in many ways. Lastly with money printing going even faster the housing market might even get crazier same as the stockmarkets but we all will feel that we living in a really banana republic. Bail outs and bail ins and currency reset all is on the menu.

    • I have never heard of “forced mortgages”, that’s a first. It sounds a lot like “extortion” but that’s the type of business centralized government is in, regardless of the Country. So the poor saps who paid off their homes get another mortgage to pay off with interest.

      And that is why I am of the belief that “no one” ever owns anything. You just pay to use stuff.

      • You can own portable compact wealth. It’s portable and deniable, extremely difficult to find for tax purposes if the owner doesn’t bring it out for sale, and doesn’t rust. That’s why the multi-generational wealthy have a good fraction in physical gold. Then, it’s about timing if the gold is to be turned into currency/property/art/political-power or arms.

  6. There is a bubble in Toronto Canada too. But the economic momentum of millions of hungry, greedy, car loving people is immense. The bubble isn’t just a housing bubble, its a credit bubble. The rising gas price is a symptom of easy money, rather than a symptom of war lust.

  7. Jumpin’ frijoles! Anyone know of a leveraged, inverse lumber ETF?

    • Oil Guy,

      LOL… I looked. There isn’t any. However, you can Short the WOOD or CUT ETF.

      steve

  8. great insights Steve

  9. Petedivine | May 11, 2018 at 2:18 am |

    Great article. We should play what would a western oligarch do?
    My guess..
    1. Take someone else’s oil. ASAP
    2. Reduce the population so that the oil we do have lasts longer.

    As the energy crises manifests itself in its various forms…it will soon boil down to the energy haves vs. the have nots. The war drums are getting louder and louder. The big war will start soon or they won’t have access to the energy required to project power into the last big oil reserves. Syria was just round one of the energy wars.

  10. Paul D Anders | May 11, 2018 at 3:47 am |

    I’m no economist, but I didn’t just get off the boat either. I most certainly do think we are in a housing bubble at this time, but for an average house costing $380k to go down to $40k, the average wage would have to go down to $4/Hr.

    • Paul,

      Americans have no idea what a 50-75% decline in oil production will do to the domestic economy. We have never experienced this before.

      steve

      • Paul D Anders | May 11, 2018 at 10:23 am |

        I do agree with you there, there’s a rude awakening coming that’s for sure. I have 20-30 years left with luck…glad I’m not a millenial…lol

        • Jordan Wright | May 11, 2018 at 3:18 pm |

          Glad I’m a millenial who doesn’t have crap for brains. XD

          • We'll see... | May 12, 2018 at 5:20 am |

            Go buy another 2 iPads millennial. Buy a $380k house and indebt yourself. Go out every night to a restaurant for dinner. Travel a lot. Enjoy it while you can.

          • Jordan Wright | May 12, 2018 at 10:03 am |

            To the gentleman/lady (however you self-identify) below: work on your trolling, amateur.

  11. Real estate is hugely bullish in the west and namely in the USA, the sky is the limit.
    Break out in US stocks just happened :

    https://www.zerohedge.com/news/2018-05-11/stock-bulls-take-charge-technically-speaking

    • DisappearingCulture | May 11, 2018 at 10:25 am |

      Here is a quote from the article you provide a link to above:

      “We still maintain stocks are in a bear market and will see much lower prices before year-end based on the macro environment.”

      The sky is the limit on real estate? Nonsense.

      • Macro environnement : total BS. Minor breakout has been completed.
        Real estate will continue to rise as long term rates will not rise much.

    • Off the lows is a common argument from someone in the cellar.

      • Bear trap.

        • In the meantime bears are just annihilated. New all time highs for stocks are coming and soon. Maybe not so much for emerhing credit…
          Hopefully all the BRICS will be heavy hammered first by fed increased rates.

  12. Thank you for this post mr. St. Angelo !
    I think people should reread that classic from the 70s THE LIMITS TO GROWTH and then learn something about System Dynamics. With this knowledge the common citizen wouldn’t be so prone to fall in these scams. A bubble is always extremely dangerous for the uninformed guys.

    A small suggestion for you St. Angelo: maybe you could post the sketches of your System Dynamics models which are behind your reasonings. I think System Dynamics is probably the best tool to understand complex systems and you certainly are a complex systems analyst.
    Good weekend !

  13. “For example, the average hourly earnings have only increased 21% since 2009. However, the U.S. median home price $330,000 in Q1 2018 is 53% higher”

    A $330,000 would roughly buy 66,000 barrels of crude oil @ $50 a unit. And that’s just about it, really!

    Energy from fossil fuels is the only real value-generating element in the economy since the 1712 steam engine in Britain. The rest are parasitic economics and synthetic choreography, all along.

    https://the-fifth-law.com/pages/eroi-revised

  14. Great article, Steve!

  15. Geoff Hamilton | May 11, 2018 at 5:40 pm |

    Steve,
    You have often mentioned that the cost of production provides support for the metals so that they wouldn’t trade below production cost for any long period of time. I am curious if you hold a different view for housing. Currently the average cost to build a 2000 sqft home is $250,000, of course this will vary depending on materials, location, etc. But using that as the reasonable estimate, how can housing prices fall to $40,000 in the 3rd stage? Are you suggesting that the cost to build would collapse as well? Does your $40,000 number include the land upon which the house is built as well? Your stage 1 scenario could be in the cards. I am having a hard time seeing how stage 2 and 3 can work unless cost of land and to build collapses as well.

    • Geoff,

      Yes, it would be different for housing. When oil production heads south in a big way, economic activity will seriously contract. It will be slow at first, then quickly pick up speed. When U.S. oil production has fallen 75%, it will impact traffic and economic activity. A lot of people will not be able to afford the homes they have purchased or all the costs associated with running a typical suburban 3,000 sq ft home.

      What we will experience is a MASS EXODUS from the suburbs as the economics of suburban living are turned upside down. So, there will be millions of homes vacant, thus no need to build new ones. Sure, a few people might be building a new home, but at that point, the problem will not be a new home cost, but the ongoing massive vacancy rate of homes.

      steve

    • A suburban house may cost a quarter million to build, but it does not cost a quarter million Dollars to build a dwelling that will be completely suitable for a family of four. It will be smaller than the suburban 1/4acre-lot 3800+square foot mcmansion, but it will be “good enough” and inexpensive to heat/clean/maintain.
      I live in a 640 square foot 109 year old house with the family, and with the sub-standard 4000 square foot lot, find it acceptable. When the kids move out, it will be almost spacious. They WILL move out, because living in a small place is not “great”, but it is warm-dry and full of family. This only works when people are reasonable and like each other.

  16. Great article again Steve, same forecast for us here in Europe too I guess.

    Looks like gold production in South Africa fell again, ” Additionally, gold production fell faster (-18.0 percent vs -7.0 percent)”
    https://tradingeconomics.com/stream?c=south+africa Look for the Mining Output articles.

    • Jon t,

      Yes, I firmly believe the world will experience a SENECA CLIFF life decline in oil production and economic activity. Once this occurs, the world becomes a much different place.

      steve

  17. Easy and cheap credit is responsible for Housing Bubble.
    It’s easier to see it in countries like Canada , Australia ,Great Britain etc.
    I would add on top of it another reason – China’s middle income families buying houses over the World and pushing prices up and Media propaganda. The Banks trying to catch as many people as they can. People who are buying now ,going to be slaves for the rest of Their lives and stuck with big loans as long as they can service loan.Good luck with that ,the future looks pretty gloomy.

  18. “Controlled Hyperinflation” is what is going on. TPTB can print unlimited fiat and have the power to also direct that fiat into the assets of their choice. It’s called social engineering. Not only that, they also have the power to deprive an asset of fiat, ahem….the precious metals anyone? The crypto sector has become the “General Patton end around” the Maginot Line of fiat.

    • GLP,

      You said this about the Crypto sector, “General Patton end around” the Maginot Line of fiat.”

      Quite interesting that you label the latest and Biggest Bubble in history as a General Patton end around. Funny how individuals can’t see a bubble when they are in it.

      steve

    • Agree that they were not ready for crypto’s, but neither was I. I do understand that PM’s are suppressed. This is actually great for someone looking to buy long-term pm’s instead of a tax vector like a piece of housing property in a bubbled city or a beta-test car like a Tesla.
      PMetal coins are real. Not much in this world is.
      Best wishes in your scheme resulting in 10x more Monster Boxes than you would have otherwise owned. Don’t be a pig, ’cause pigs get slaughtered.

  19. Steve, you throw out terms like “bubble” and don’t even address the concept I was discussing. Metals are managed and TPTB did not see the crypto sector coming. Now they are freaked out about it because they cannot control it. The metals guys still do not get it either and for some reason see crypto as competition. You would be surprised how many crypto heads are silver lovers and can’t wait to trade 1 bitcoin for 10 AG monster boxes. I am one of them. I learned my lesson. Earlier I traded 1 BTC at $ 2000 for silver. If I had only waited. Words are cheap I know but let’s see how December this year turns out. If I’m right I will not gloat, I will just be the happy owner of 10 AG monster boxes that I traded 1 Bitcoin for in which I bought for $200.

    • DisappearingCulture | May 14, 2018 at 11:09 am |

      “Metals are managed and TPTB did not see the crypto sector coming. Now they are freaked out about it because they cannot control it.”

      Does anyone REALLY BELIEVE governments, central banks, governments & CB’s working together can’t clamp down on a competing currency like Bitcoin? All they have to do is start by linking [could be lies] Bitcoin payments to terrorism, crime, child pornography, tax evasion, etc. as a prelude to legislation.

  20. I’m debating whether to even continue commenting at this blog or others for that matter. You may get a kick out of that, Steve. It is simply giving me anxiety and nothing changes.

    But let me say, I agree with glp about what is happening in the financial markets. They are closing off all the exits. Gold and silver suppressed: check. Stocks, housing reflated: check. Confidence manipulated upward: check. Pessimists banned from discussion: check.

    They are engineering a new reality in which we live. Yes, indeed that can be done! Those who insist there is a physical reality are only right at the moment that it least counts, namely, when everything has fallen apart.

    So there’s not going to be a pay off, remember that. Gold and silver will not revalue higher in a normally operating world.

    • There will be a financial exit for owned and possessed gold and silver. It might be the market called “black” by the PTB who want 90% of the value to bring it into the “system”, but they may not be able to afford to compel you (or your heirs) to give up wealth they do not control.

      Every lock has a key, and can be picked, or smashed. Find the key, or a hammer.

  21. Most people are disconnected from the concept of true value anymore. Everyone is chasing 100 different bubbles trying to get rich, when the things of value remain stagnant. Thats what they want… As long as they keep bubbles going in every place EXCEPT PMs, then they are happy. People will jump from one bubble to the next, dazed by % gains in Fiat. In about 30 years, there will be no more gold left to mine. Price will probably go parabolic then, but in the meantime they must keep it as suppressed as possible. It will continue as long as they possiblity can because if the whole world realized PM real value they would lose control. They keep the price low and suppressed and only a few people buy it, rather than have everyone bail out of credit inflated bubbles. They are actually gaining more in the long run by making it unattractive. But we are getting close to where things will go parabolic on PMs. The ore grades continue to deteriorate, and the gold is harder and harder to get at each year. The cliff is coming. 1 ounce of gold may buy you that brand new suburban home someday.. that’s the type of valuation reset we are talking about here.

  22. Laurel Phoenix | May 22, 2018 at 4:54 pm |

    Steve, when you talk about a severe drop in real estate assets (using the median house cost), would that be a more severe drop in the overheated markets on the coasts and Denver, etc, and not as much of a drop in the more rural parts of the country where housing costs don’t change much? Or do you think that real estate drop would be pretty evenly spread between the hot markets and the rural outposts? Housing in northern Wisconsin hasn’t changed much in value for a long time, so I am curious to know how you think this parses out. How evenly or unevenly does the bubble pop?

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