On May 3, the U.S. Kentucky Derby witnessed the worst tragedy of the event’s 134-year history: Shortly after crossing the finish line and placing second, the race’s only Filly and beloved crowd favorite Eight Belles fractured her two front ankles and buckled to the ground with “catastrophic injuries,” ultimately forcing Derby vets to euthanize the horse right there on the open infield.
All politics aside, one fact remains indisputable: No one could have foreseen such a terrible outcome to the day’s competition; that dream would abruptly turn to nightmare, the euphoric high of the crowd to utter horror, and triumph to tragedy.
In many ways, the Derby disaster is not unlike the fateful events unfolding in the U.S. real estate market, otherwise known as the mournful Housing Race.
At its peak, the five-year undefeated housing BULL made history by sprinting across the finish line in record time, leaving all contenders in the dust. As the victory flag was raised, the mainstream spectators (speculators) popped off their champagne corks and tossed their hats in the air in celebration of many more conquests to come.
“There is a new paradigm in housing in which prices rise indefinitely,” exclaimed one March 2005 CBS column, while a June 2005 Time Magazine cover story titled “Home $weet Home” reaffirmed the get-rich-quick nature of real estate.
By 2005’s end, hybrid-adjustable rate mortgages made up 42% of home financing versus 1.9% in 2001, as officials praised “creative” debt for its ability to give “poor-credit buyers… the home of their dreams.” (Associated Press, January 2005)
In a devastating turn that seemed, for many, to come out of nowhere, the subprime boom went bust in 2007. The housing bull’s legs were broken, and the animal continued tumbling in the worst downturn since the Great Depression. All the while, the mainstream public sat in stunned horror as home values came to a crippling low.
This, however, is truly a horse of a different color: The downfall of the housing bull did NOT come out of nowhere. It was not a “freak accident,” unforeseeable until the damage was already done. In truth, it was the fulfillment of the long-term outlook presented in Bob Prechter’s “Conquer The Crash,” published 2002.
There, Bob warned that the real estate bull would not be fit to run the Housing race on debt alone. In his own word: “What screams ‘bubble,’ giant historic bubble, in real estate is the system-wide extension of massive amounts of credit to finance property purchases… When prices begin to fall, lenders will experience a rising number of defaults on the mortgages they hold.”
Three years later, the animal spirits surrounding the U.S. housing bull had become stronger than the animal itself. Our analysts saw the potential for a serious breakdown and issued the following alerts:
March 2005 Elliott Wave Financial Forecast: “The Real Estate Bust Begins… The next phase of the housing market will see weakening demand and supply spikes higher. As the most aggressive dispensers of credit to the housing industry, [sub-prime] firms are on the front edge of the housing bubble.”
July 2005 Elliott Wave Financial Forecast: “There’s no mistaking it… Now is the most dangerous time to get on board the Housing bandwagon.”
That year, the S&P Home Builders Index peaked to confirm the end of the housing bull’s record run.
The house has fallen. Whether it will soon recover and return to the financial track is not a future to gamble on. Get the objective facts today via a risk-free subscription to the Financial Forecast Service.