Is Real Estate The Next Shoe To Drop - Part 2

As we continue to delve into the looming Real Estate crisis that will likely hit the US and globe over the next 12 to 24+ months, we want to focus on the human psychological process of dealing with a crisis event and how that relates to economic engagement. In the first part of this research article, we discussed how the time-line and events that have unfolded over the past 120+ days have setup a continuing global crisis event. The best of our knowledge, there has been nothing like this, other than massive wars like WWII, that have taken place on the planet over the past 75+ years.

This presents a very real possibility that human psychological processes have engaged throughout the planet that may disrupt how effective the recovery efforts are in the near future. If humans engage in a traditional psychological crisis-cycle process, then there is little chance that the economic recovery will reach 2018-2019 levels very quickly. Let’s review the psychological process of a crisis event.

The Normal Psychological Reactions To A Crisis Event Are

Vicarious Rehearsal: People that are distanced from the crisis event (location or expectations) tend to react in a way that reflects their belief that “it won’t result in any dramatic changes to their lives”. Thus, they continue behaving and acting as they would without the crisis.

Denial: The process of denial takes on many forms. Some people simply ignore the warnings or information related to the crisis. Others become agitated or confused. Some simply chose to believe the threat is not real and others may believe the threat does not relate to themselves.

Stigmatization: Sometimes, segments of society may become stigmatized by their community as anger or blame drives people to believe infected people or segments of society that may promote the crisis event are identified. We’ve already seen some of this type of activity throughout the globe take place.

Fear and Avoidance: Fear becomes a central psychological element that may drive certain people to act in extreme, and sometimes irrational, ways to avoid the perceived or real threat. Fear, much like Greed, is to primary element of all human activity and we must understand these components and how they transition throughout this virus event.

Withdrawal, Hopelessness, and Helplessness: When people realize the threat is real and feel there is nothing they can do or change in their lives to avoid the consequences of the threat – a feeling of Hopelessness and Helplessness begins to set in. When this happens, people tend to withdraw from normal activities and isolate themselves from the threat and society as a whole. (Source:

We believe these components of how society reacts to a crisis event are more like a “transitional process” than a series of separate events or actions. We believe, initially, Vicarious Rehearsal and Denial are the initial reactions to a crisis event. Then, these transition into Stigmatization and Fear when society realizes the threat of the crisis is very real and tangible. Lastly, society moves into a balance between the last three elements where Stigmatization, Fear, and Hopelessness permeate as the crisis event continues to unfold.

Can we find any evidence that consumers were acting in a manner consistent with this psychological process within the data? What would we look for in the data and how would we identify key characteristics of this psychological process?

First, we would look for Vicarious Rehearsal and Denial in the form of “opportunity and greed” in the data. The US Fed lowered interest rates to near ZERO on March 15, 2020. This may have prompted a surge in refinancing real estate and purchase commitments from qualified buyers. We would look for a surge in mortgage applications in March 2020 as the expansion and severity of the virus crisis was surging. Additionally, we would also look for a surge in home prices and sales levels as qualified buyers attempted to profit from lower rates in the real estate market.

When we look at the charts below, pay attention to the spikes on the charts in March 2020 and how they correlate to the US Fed decreasing interest rates just prior to the shut-down “National Emergency” order from President Trump. The good news in early 2020 related to Q4:2019 earnings and economic data seemed to lull people into believing the risks were minimal. Well, quite a bit has changed since then…

US MBA Mortgage Applications (WoW): Notice the spike on the week of March 11, 2020, above 50? This level was nearly double the previous peak levels going back over 2 years. A flood of buying and refinancing activity took place in real estate in early March 2020 near peak price levels.

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US Existing Home Sales (MoM): This existing home sales data shows that both January and March 2020 exhibited strong sales numbers of existing homes. Pay special attention to how quickly this data changed in April 2020. Existing home sales levels have collapsed from the previous monthly levels as consumers have moved beyond the Denial stage and into the Fear stage.

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US House Price Index (MoM): This chart shows that house price levels are still appreciating while demand has already started to collapse. Again, pay attention to what happened in March 2020 and what is happening in April 2020. Mortgage applications have collapsed. Existing home sales have collapsed. Yet, prices remain rather high right now. It would appear that home sellers are reluctant to decrease pricing as aggressively as potential buyers are exiting the real estate market. Eventually, the lack of real demand will prompt price levels to contract to attract interested buyers. As we’ve seen before, though, when prices start to decline – a vicious cycle begins where potential buyers wait out the bottom or “low-ball” offers because they know the dynamics of the markets have changed in their favor.

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US Jobless Claims 4-Week Average (WoW): The real kicker, in our opinion, is how the shut-down has resulted in a massive segment of new job losses in the US. It is hard to argue with the fact that the “average” 4-week jobless claims number shot up to levels above 1,000,000 recently. This is the highest level we’ve seen in this economic indicator EVER. These levels are nearly 10x the 2008-09 credit crisis levels – trying to put this into perspective.

When we have massive amounts of people suddenly losing their jobs (sources of income), this creates a massive disruption in the supply/demand side of the Real Estate market. How massive is this number?? Take a look at the last chart…

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Yes, this is a real chart of the jobless situation in the USA. Please remember, if the situation in the USA is as it is being reported, then the situation throughout the rest of the world may be similarly related to job losses. The point we are trying to make is that the job losses recently have been massively higher than anything we saw throughout the 2008-09 credit crisis – nearly 800% to 900% more massive.

I am hoping people can see what I am trying to warn about with the real estate market, which is the next major market crash, much worse than what we saw in March.

You don’t have to be smart to make money in the stock market, you just need to think differently. That means: we do not equate an “up” market with a “good” market and vi versa – all markets present opportunities to make money!

We believe you can always take what the market gives you, and make a CONSISTENT money.

Learn more by visiting The Technical Traders!

Chris Vermeulen
Technical Traders Ltd.

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation for their opinion.

5 thoughts on “Is Real Estate The Next Shoe To Drop - Part 2

  1. Would it be a good move to Refinance while interest rates are low. I'm paying 4% now.

  2. This subject or issue is far more complex, and linked with so many other factors, so it is quite difficult to get even any primary idea just through any one... two... three type simple evaluation. So I think above study is quite inadequate.

    However, I am fully agreed with warning, given in second last paragraph, next Crash in Real Estate will be a kind of ever worst, and will become a "New History" So,to remain cautious is essential.

  3. How do you know existing home sales collapsed in April due to Fear?
    Isn't it just as likely sales collapsed because most of the country was told to stop working and stay home?
    Nearly all open houses were cancelled (some were replaced with online alternatives, but that's hardly the same for a serious buyer).
    If people aren't going out of their home except to buy groceries, it's understandable they're not out shopping for houses.
    Your analysis may or may not be right, but at this point, it's too soon to know.

  4. "Crisis" or action and reaction? First of, its absolutely irrelevant how the market doing on a monthly bases. Second, in my view, there are two aspects to consider: 11 year real estate market behavior and covid19. Drop in 2009 was man made, call it stupidity of derivatives. I do not see anything like this right now. Till recent response to the covid19 market was relatively healthy. Prices were due to decline just as predicted according to 11 year cycle. High prices in certain states and pockets were purely related to positive condition of a labor market. As far as the crisis are concerned: people always behave according to "herd psychology".
    There is pattern to it which will repeat now days. However, how deep it will be, will depends on governments response to current covid19. So, far so good. Economical stimulus package that is being implemented will stimite the so called "crisis" and next level, already promised, should insure, in peoples head, certain level of stability. Lower interest rates of long term loans will continue. And, so, will we have "crises" or quick recovery will be highly dependent on the longevity of the pandemic. In addition, markets in general, were exuberantly high for no good reason. Current situation will bring some level of reality, accountability and mathematical logic to it. I predict that so called "crisis" will continue for 12 months longer and recovery will ensue new high prices of stock and real estate in about 4-5 years. I am looking into 40k on stock market and 30% appreciation of real estate in relatively close time case scenario. All of the new money "M1" will find its way into those markets sooner or later. Do not panic.

  5. In the highest priced Real Estate markets, most of the "high end" buyers are from the top of the 1% who have houses in many places world wide. They are the same people who have super yachts, private Islands and personal jets. They also invest in the biggest Hedge Funds and will be buying foreclosures by the thousands once the depression takes hold, just like Mnuchin and Richard Blum, the two guys that repo'd thousands of properties in 2008, and were paid $ billions of tax dollars to cover their "losses"....Mnuchin is the big Trump donor and now Secretary of the Treasury. Blume is married to Senator Feinstein, so it's going to be another big payday for them and their fellow Corporate Fascists, to the demise of the people who keep voting against their own interests....

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