Housing Meltdown Epicenter Part 1

The idea that house ownership is a store of wealth and source of equity to finance consumption has been destroyed in the state of Arizona.

The degree and speed of the meltdown in housing prices is mind-boggling.
A 1400 square foot house in metro Phoenix that sold for $135,000 in June 2006, is listed for sale at $39,900, a less than 5 years later.

A drop in value of 71%.

A 1300 square foot house in a different community near Phoenix that sold for $147,500 in March 2006, is currently listed for $39,900.

Drop in value - 73%.

Another house, 1100 square feet, that sold for $128,000 in May 2006, is now listed at $20,500.

Drop in value - 84%.

Entire subdivisions are either vacant, or have a few houses with tumbleweeds growing in the surrounding lots.

The bottom picture is a subdivision south of Phoenix in a small town that is over 600 acres of empty streets with all the utilities in place. There are a grand total of 6 houses (showhomes) built in this area designed for 3000 homes.

This is one example of the massive mis-allocation of capital that has happened in the United States, and indeed, around much of the world in the last 5 to 10 years.

So how did this happen?

One major reason is manipulation of short term interest rates by the Federal Reserve and other central banks through much of the world.

When an economy starts to sputter out, like the US did after the tech bust of 2000, the central bank decided it should lower rates to "save" the economy.
After all we can't trust the market to correct itself.  Right?

Let's look at the Fed Funds graph from 2000 to 2010:

So down went the rates, very quickly in 2001 to stimulate the economy.

And guess what?

It worked.

At least temporarily.

Once rates started to creep up as the economy "recovered", the unintended consequences of artificially lowering rates showed up.

The bubble burst in 2005 and 2006.


Drop rates like crazy again to save the economy.

The problem is this time the hot money did not want to flow back into real estate, it went elsewhere.

This is the problem with central bankers playing god with the economy. They just don't know what they are doing, but they have the Ph.D.'s to back up their mad schemes.

The problem is very simple. The economy wants to correct itself, it doesn't want more houses built on speculation in the middle of the desert.

What does the market want?

We don't know, because the artificially low, manipulated short term interest rates are giving the wrong signals to capital.

It was wrong interest rate signals that created the housing boom. It is likely that it is wrong interest rate signals that are creating a boom in commodities and stocks.

And it will go on until the bond market stands up and says "Enough" and gives central bankers a thrashing.


  1. And it will go on until the bond market stands up and says "Enough" and gives central bankers a thrashing.


    I yearn for it. Great Post PW.


  2. What's in store for act II ?

  3. Act 2 will look at housing bubbles that have not yet popped. Coming soon to a blog near you.

  4. 10:15a


    7.0-magnitude earthquake strikes Myanmar region


  5. If I am not mistaken, Pheonix is on 33rd parallel.. Not the best location to own a property.

  6. Yes Bill, the large earthquake is unfortunately right on time. The location was different than anticipated, but this is a new frontier so errors are expected. Hopefully as this field develops it will protect people in the future.


Post a Comment