Understanding and Bursting the Housing Market Bubble

The current state of the housing market is a delicate balance that is sustained by artificial demand, which can easily lead to a bubble. As the political landscape evolves and elections loom, this artificial support is set to crumble, causing a significant impact on the global economy. This article delves into the factors contributing to the creation of the housing market bubble, the inevitability of its collapse, and the steps required to prevent further damage.

Artificial Demand and the Double Bubble

The housing market bubble created by government policies is a double-edged phenomenon. By artificially supporting the demand, the government has created two interconnected bubbles that are currently inflated. As elections near or conclude, these bubbles are primed to burst, resulting in panic and significant economic turbulence.

The government's artificial support includes measures such as maintaining low interest rates, extending eviction and foreclosure moratoriums, and providing financial assistance to individuals without the need to return to the office. These policies have kept the market artificially inflated, but without sustainable demand, the bubble is destined to pop.

Why is Now the Time to Burst?

The timing of the housing market bubble's burst is crucial. As the political landscape changes, and the artificial support is removed, the bubble will inevitably burst. Unlike the 2008 financial crisis, where a rapid 30% drop in prices was witnessed, the current scenario is more likely to see a moderate 5-10% reduction in prices.

However, certain areas with extreme overpricing might see a more significant drop of 10-20%. A deep recession, if it coincides with the bursting of the bubble, could intensify the impact, but such a scenario is not guaranteed.

How to Prevent Further Damage

Preventing the housing market bubble from causing further economic damage requires a strategic approach to policy reversal. Here are some essential steps:

Normalize interest rates to restore normal market conditions. Force the Federal Reserve to taper and unload MBS assets to remove liquidity from the market. End eviction and foreclosure moratoriums to allow the market to readjust. Restore the requirement for workers to return to offices to stabilize employment markets. Stop unproductive government spending measures that encourage idleness. Balance the budget to reduce the dependency on endless trillions of rescue packages.

Bubbles persist until they can no longer sustain themselves. The significant change comes when the mindset of the market participants shifts. During the 2008 financial crisis, the market's attitude remained unchanged for a long time before the reality sank in. This inertia is a critical factor in the persistence of bubbles.

The Economic Costs of Housing Bubbles

The bursting of a housing bubble often transfers the costs to the middle class, who are the backbone of the economy. The middle class, historically the economic engine of the country, bears the brunt of such market collapses. This is not just a local issue but a systemic one, as the definition of "middle class" has been redefined over time to include a larger portion of the population, often at the expense of the true economic middle class.

In recent times, the economic realities of the middle class in America have become starkly evident. In cities like Seattle, a significant portion of the population, including a third of public school children, rely on free school lunches, indicating a high poverty rate. This reflects a deeper economic issue that needs addressing.

Conclusion

Understanding the dynamics of the housing market bubble and its potential impact is crucial for policymakers, investors, and the general public. By taking timely and strategic actions, it is possible to mitigate the risks and ensure a more stable and sustainable market. It is essential to focus on policies that promote long-term growth and stability over short-term fixes.