I like the story, but I have trouble thinking in real words!  LOL!  What ever the words are for bubble or anti-bubble the one thing they both have in common is the fallacy of their beliefs.

Mike -

You're supposed to be the one supplying us with the answers,

 not the questions!

Jim, Sara - Give it a shot. I'll even go so far as submitting it the FT for judging. What do you say?

PS @ Sara - funny pic.

Made me think of sort of a Reflexive Big Bang theory.. one of those mind twisters in Astrophysics or Macro-economics that I used to pull my hair out over in college. 

What ever is going on here, I'm sure there's some kind of graph that can explain it and invariably predict an outcome at any given point in time.

Are there any Keynesians out there that can tell me when we're going to pull out of this hole?

All kidding aside, that was a very thought provoking piece Mike.

I am hearing you.  I think the downswing bubble is going to pop sooner then it took the upswing bubble.

So, if a bubble is light, frothy, airborne, transparent, hard to capture without killing it, is the opposite a tunnel (dark, solid, earthheavy, opaque, difficult to get out of without killing oneself?     I think it's better to err on the side of optimism, always, as the universe appears to reward the forward spirit.

Thanks for the post!

Li

Li Read, RE/MAX Salt Spring, B.C., Canada

liread33@gmail.com

One way to describe it is economic or market implosion. A bubble can only get so big, prices can only get so high, before it bursts in on itself.

As John Mualdin puts it, We are in "A Muddle Through". It is fear based and recessionary. In the creation of the unity of the opposites (Yin and Yang philosophy), it is the antithesis.

Bubble ~ Yang / Anti bubble - Yin

Call it what you want....we are going to be in it for while. It was a ridiculously huge bubble!

Nice read!

Bo

Why must you always make me think.  You know everyone is affected by the tightening mortgage markets, not just the places that inflated the bubble.  Even stagnant or normally appreciating markets are feeling pain.  What would that be called?

The inverse of a bubble is a "blowout"!

Can you hear that "big sucking sound".  The line that Ross Perot made so famous.  The sound is money coming out of your pockets...

....."If exuberance causes a bubble...it did not---Greed did!  Thanks for sharing.....Great Post!

It's a bubble when it is expanding, it's like a black hole when contracting, sucking in all the equity and value into itself. Or maybe a toilet bowl.

How about the Real Estate Fizzle of 2007 to ???

We should pitch it to Starbucks....I'm sure they could think of a creative name for a smaller drink mortgage to account for the lack of foam value that we're seeing today.

"An opportunity" :)

" I think the downswing bubble is going to pop sooner then it took the upswing bubble."

Looking at data from many real estate down turns.  The downswing is almost always about equal length as the upswing.

Fred - "Bubble" isn't very scientific, just descriptive. So what I think we are looking for is something quite simple. It's probably a word we use daily.

Chuck - Hmmm....

Li - There's no wrong answer here, so I'll take Tunnel. Used in a sentence: "We're in a market tunnel"... Not bad.

Liz - "Market Implosion" is a great one but I think that's the result of the anti-bubble pathogen. Know what I mean? I'd give it another shot, you're in the zone.

Bo - "A Muddle Through", I like that. "We're in a market muddle-through"... It rolls off the tongue pretty well.

Renee -  Contagion...

Jan - Now that's funny. Used in a media piece: "The market is experiencing severe blow-out, Charlie. Now for the weather outlook..." (smiling)

The term used in investment circles is usually called "capitulation".  It's when sellers give up and  just want to get out at any cost.

Many times buyers come in too early and they "catch a falling knife" on the way down and get hurt pretty bad.

Usually you get a "dead cat bounce" before you really hit the bottom.  This is a small rally in prices after a huge drop in prices.  People get fooled back into the market right before it continues to drop again down to capitulation levels.

Aida - I see your point. And sure, greed plays a role. Much like a burglar who burgles only at dusk and when no one's home. If he sees a light on, and fears he'll be caught, he may not take the risk. So imagine the euphoria he feels when he realizes the family is on a month long vacation... See my point?

Peter - I personally like the black-hole analogy but John Kay found a flaw in it: "Perhaps the analogy is found somewhere in physics. We observe a bubble when a tiny quantity of matter expands to become a very large object. The opposite is when a large quantity of matter seems to be compressed into something even smaller. That process needs to be distinguished from the black hole, from which no value will ever emerge - as at Enron, where short-sellers drove the price towards its fundamental value of zero."

Bill - If the bubble was a Café Americano, is the anti-bubble a Skinny Latte? :)

Matt - "Opportunity"...exactly. And an extended AA meeting for investors.

It's been a while since I've seen the phrase "catch a falling knife" and that's a great visual for the dangers in many markets today.

Rather than the strict financial definitions, I'll answer your question with something we're quite familiar with on the Las Vegas Strip -- implosion. In many ways the market is collapsing in on itself ... and hopefully we will see something bigger and better in a couple of years.

Tim - So far I've witnessed a couple of dead-cat bounces and too many falling knives catchers to count. I've yet to see capitulation where it needs to happen...loss mit.

John - If history is any indicator, good things will follow. I sincerely hope however that we, as a collective enterprise, measure success differently moving forward. Instead of asking "how high" can we build that skyscraper, the question should be how long can we make the structure last this time. If we do that, bigger and better will take on a hell of new meaning.

How about a bowl?  Eventually, if we run back and forth we can fall out of it or flip it over.

California was the epitome of this housing bubble. We had the largest excess and now we are seeing the biggest bust. I would call it spending like a drunken sailor but I really haven't met too many drunken sailors in my lifetime. How about we try coining a new term with a California twist. Whenever you see someone spending like a maniac blowing cash beyond their means, we can label it "Spending like Laura Richardson" or SLLR. So if you have a friend with a leased Lexus and Hummer and a mortgage that will make Ed McMahon look frugal, you can tell them, "hey Bob. You are spending too much. Why don't you stop spending like Laura Richardson?" This of course would be a massive insult with a California twist that only a foreclosure specialist can produce. You can watch as they begin to cry with your below the belt insult. After all, if people are willing to elect such a financially irresponsible person, we might as well get something for our tax dollars. A phrase is all we can afford at the moment.

Before you feel bad for six-figure politicians, this article is going to attempt to look at the future of Southern California housing. The reason that we can start making educated guesses now is that the party has come to a screeching halt. We now have a static peak that we can work off from and apply some financial logic to what will happen over the next few years. I wrote an article aptly titled Nostradamus in the House. Looking at 4 Potential Scenarios for Southern California Housing on August 4^th, 2007. Of course this was a few days before the massive credit crisis that was supposedly over many months ago. In the article I also have a swipe at WaMu which at the time was trading at $37 a share (today it closed at $6.38). Essentially, we are now at the worst case scenario from that chart. So we will now revise it for the next year.

1 - Looking at the Case-Shiller Index Past Los Angeles Bubble

The Case-Shiller Index uses the MSA (metropolitan statistical area) to track housing prices. The Los Angeles component of the index combines Los Angeles and Orange County. Given that these two counties have more than 13 million people, it is a good representation of the housing insanity that is going on in Southern California.

Some people may not know that Southern California had a previous bubble in the late 80s to early 90s. At this time our national economy was in a recession and the economy was once again a main focus for politicians. On this constructed chart, I used the previous peak (June 1990) and bottom (March 1996) and superimposed the new peak (September 2006) to give a better idea of how much more further we have to go to reach a bottom:

*Click to enlarge for a clearer image

The data in the most recent iteration of the Case-Shiller index goes until March of 2008. The startling thing you will notice is it took over 6 years from peak to trough in the last downturn with an overall decline of 27 percent. Now, we are only 1 year and 6 months from our peak and the market is already down 24 percent! And we have yet to see $500 billion in pay option ARMs to recast with 60 percent here in the state. California it would appear was Spending Like Laura Richardson (SLLR).

As the market is being slapped around like a mortgage piñata, people are scrambling to gather the little bit of real money that was locked inside. The reality has become that people equate credit with money. To a certain extent it is. But now many that have had their credit lines shut down and lost all their equity are realizing that credit is not as good as cold hard cash. There is a reason people say cash is king.

Now back to the chart it would be hard to conjure up any reason why we are nearing a bottom. The California economy is in such shambles, that we are getting cockamamie ideas that only serve as a good laugh. For example, some proposals include letting out inmates early onto the streets where there is very little employment. Guess what will ensue if that happens? Also, the Governor is throwing around a lottery idea which is the absolute stupidest thing one can propose. Yes, we are broke therefore let us exploit the most primal part of our humanity and take money away from those that do not understand basic statistics. Good job amigo! The fiscal year starts in July and it looks like we are going to have a bunch of arse grapping and posturing before we get any budget through. Ironically the budget is following the trajectory of our old governor Gray Davis.

Can prices go down for 6 years like the previous burst? Absolutely. The economy is in much worse shape and the types of mortgages floating out there would make Enron seem like a walk in the park.

2 - Income is Stagnant and Credit is Closing Shop

I can tell you as someone who has gotten mortgages at the peak, things are radically different now. All my investment properties are financed the old school way with 30-year fixed mortgage even though many brokers and lenders tried to convince me otherwise. Many of those folks are no longer working. Trying to get a loan in 2008 is a world away from a getting a loan in 2003, 2004, or even 2005. The market has dried up. Getting a loan in today's market requires good credit, solid DTI ratios, and basically if you want a good rate it will have to be a primary residence. So now, income apparently matters. And as it turns out, we have a crew of people that were living in an economy were income didn't matter. Welcome to a quick reality check.

Here are some basic statistics for the Los Angeles and Orange County markets:

Los Angeles County:
Median Household income (2004 census): $43,518

Orange County:

Median Household income (2004 census): $58,605

Now I know many of you are going to cherry pick tiny enclaves in Newport Beach and Beverly Hills but you need to remember that the Case-Shiller data looks at the entire metro area. As much as you would like to siphon off 80 percent of the population and only examine 20 percent of the prime areas, this is not how the data is compiled. The above figures show us how out of whack prices have gotten here in Southern California. Let us look at the current median price in both areas:

May 2008 Data

Los Angeles County Median Home Price: $422,000
Orange County Median Home Price: $485,000

Compare that to the previous peaks of $550,000 for Los Angeles and $645,000 for Orange County. Given the current income we have the following ratios:

Home to Yearly Income ratio

Los Angeles: 9.69

Orange: 8.27

Let us compare this to data from 2000 to highlight how much of a correction we will need to come back in line with historical ratios:

Los Angeles County Household income 1999: $46,452

Orange County Household income 1999: $57,706

June 2000

Los Angeles County Median Price: $203,000

Orange County Median Price: $273,000

Home to Yearly Income ratio:

Los Angeles: 4.3

Orange: 4.7

So given the ratios starting in 2000, we would need a few things to happen. Either incomes double in the next few years or prices go down by half. Given the state of our economy and stagnant wages, you can rest assured that we are going to reach more reasonable rates by prices continuing to fall.

3 - Inventory on the Market

Given the vast amount of inventory floating out in the market, we can say with authority that simply looking at demand and supply prices will continue to fall. Let us look at inventory:

Current Data June 2008:

Los Angeles County: 52,956

Orange County: 16,250

Sales for May 2008:

Los Angeles County: 5,445

Orange County: 2,266

Months of inventory:

Los Angeles County: 9.7 months

Orange County: 7.1 months
Now you also have to remember this is based on MLS inventory. We all know that lenders are being owned by REO inventory and with record amounts of NODs, this number is artificially low. So we can add 2 or 3 months of inventory for each county. Bottom line is until we get closer to 5 or 6 months of inventory you can rule out any stabilization talk. My estimate is we are going to see shadow inventory "surprise" people in the next few months.

So when will things bottom? To be blunt, not in a very long time. Just look at the above data. Do you really see prices jumping up anytime soon? I will safely say that when all this is said and done, Los Angeles and Orange counties will be off by 40 to 50 percent from their peak. And this is being conservative knowing what we know now. If someone has some reasonable argument to the contrary I'm completely open to hearing it but all I've heard is a bunch of hot air and fluff that sidesteps the hard facts.

Enjoy the great California weather and if your significant other is pressuring you to buy a home tell her you are not going to be Spending Like Laura Richardson. They'll understand.

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I think that you could very well call the opposite of a bubble a recession. It may not be the exact word, but it means the same.

Lane - I'm struggling with that one. May need a visual for it.

Dr. Housing Bubble (assuming this is the real deal) - I thoroughly enjoyed this piece a few days ago. This isn't bearish at all. So long as you're numbers are right, they won't lie. Welcome here.

Wayne - Recession seems to hit it square on the nose doesn't it? I've used various nomers in my reports when faced with gnarly foreclosure stats (in a given neighborhood) and "recessionary price pressures" is a fave.

A concavity? LOL....I have no idea. But that was definitely a very interesting read. May be it could be considered a dimple?

How does everyone feel about; Atrophy...

From Wiki:

Atrophy is the partial or complete wasting away of a part of the body. Causes of atrophy include poor nourishment, poor circulation, loss of hormonal support, loss of nerve supply to the target organ, disuse or lack of exercise or disease intrinsic to the tissue itself. Hormonal and nerve inputs that maintain an organ or body part are referred to as trophic.

Atrophy is a general physiological process of reabsorption and breakdown of tissues, involving apoptosis on a cellular level. When it occurs as a result of disease or loss of trophic support due to other disease, it is termed pathological atrophy, although it can be a part of normal body development and homeostasis as well.

* Emphasis added

A market in a state of atrophy is reabsorbing due to various marco- and micro-economic influences (contangion inputs) that seemingly have physiological parallels.

Thoughts?

Christy - I love concavity. Way more a propo than dimple given the scope of the problem. :) Thanks. 

This sounds rather a lot like a particle physics lecture I attended a little over three decades ago.  I must confess that I fell asleep halfway through it.

I like concavity too!   Black hole is also appropriate I used that term for an article I wrote for the newspaper.   

Eric - Funny that you mention particle physics, one of my all-time favorite books is on quantum mechanics. Go figure. Sorry to put you to sleep.

Allison - Perhaps what I like most about concavity is that it has an instant visual quality to it. Kind of like a bubble.

"If the result of manic buying is termed "bubble" on the upswing, what is the name of it's opposite?"

In the financial markets, they usually talk about a "correction", or in this case "over-correction"

Hi David, "correction" is an oldie but a goodie. Good to see you.

Wow, what a great question and it is almost a trampoline effect. You can only go so high, but you can also only go so low, but 75% of the time you are right in the middle of the jump, not at the top or bottom.

I really don't have an answer for this one at this time, but it sure does give me something to think about!

Hi Todd, that is a great analogy. And it begs the following question: If gravity prevents a body (or market) from escalating (expanding) indefinately, what natural component do the springs (or coils) which provide downward resistance vis-a-vis the canvass, represent? If you find us a word for that, you'll be crowned king!

I didn't read all the comments (too many) so hopefully I'm not being redundant.  I think a teeny, tiny barely noticable new bubble is forming.  It's so small you can't see it yet.  But it's there.  It's an emerging bubble.  Remember, you heard it here first.  :)

Rita, perhaps you're sensing the beginning of a trough. The forming of the proverbial, illusive and otherwise non-existent "floor" of the market. :)

The trouble is, the "bottom" or "trough" or "floor" of a downward curve that finally reaches its low point may not look like the lowest part of a hyperbola or a parabola.  It may resemble a plateau instead, at least for awhile.

Hi Eric, I was thinking along the lines of a parabola. But if the plateau is actually the peak of a crumbling catenary arch, we're hosed.

Disclosure: I looked this up. Not a math guru by any stretch... :)

Concluding the Anti-Bubble naming contest is John Kay's follow-up on FT: Metaphors in free fall: the anti-bubble named.

Judging by his entries and the crowned victor, I think we would of taken it had we submitted. :)

Anti-Bubble??? how about IMPLOSION!!! Just kidding, but that's how it feels!

Hi Ruthmarie, it certainly feels that way. With a sort of "Matrixy" slow motion feel to it, except we're the ones dodging the bullets. :)

Michael - I do like the answer selected by Kay.  However, I also like 'void'.  It is a simple, everyday word that implies the dark, empty, and unknowing conditions of the market.    

Erik, bingo! I like that one too. "Market participants are in a state of avoidance".

Ruthmarie, implosion is the right concept because each loss triggers another wave of losses. 

When the real estate bubble burst, boom town economies lost a big chunk of their job market.  That had a cascade effect on everyone else in the area who made money providing goods and services to those in the real estate industry.  Tax shortfalls have even led to job loss in the usually safe government sector. 

But, there is a second and far more profound problem, which was suddenly shutting off the home equity ATMs.  The amount of equity being converted to cash and spent during the bubble was staggering.  A $1,500 check from the government doesn't offset not being able to spend another $50,000 per year from a HELOC or refi, which was an epidemic here in California.  That forced reduction in spending will cause more job loss, which reduces the spending of those people, which causes more job loss again.

The real estate industry wants desperately to believe this is psychological and can be reversed by waving the pom poms or propping up Fannie and Freddie.  It's fundamental.  Our entire economy borrowed against the future and it is now in default.

Money on the sidelines?  Economists estimate that our economy will lose 1 to 1.5 trillion dollars due to the housing bubble collapse.  There isn't enough "money on the sidelines" to cover that loss.

Right now we are in a slow market for most of the country. But, we are not in a BAD MARKET.

It is bad for the sellers right now...but it is GOOD for the buyers. When it is GOOD for the sellers...it is BAD for the buyers....and so it goes.

Real estate, as the stock market, goes in cycles, and really, as does our economy. So what else is new.

If only the press can get this....things would be much easier to explain to the general public.