by Bob Stokes

[Editor’s Note: The text version of the story is below.]

The convergence of the internet, faster computers and a rip-roaring bull market gave rise to the 1990s stock market day-trading phenomenon.

It was all about the hope of getting rich quick.

The same psychology was at work with “house flipping” when the housing boom was at its height in 2005-2006.

Our January 2006 Elliott Wave Financial Forecast saw the writing on the wall and said:

We conclude that the latest real estate bubble has resulted from the easiest money environment in history.

U.S. homes prices peaked just six months later. A historic tailspin followed.

But old habits die hard. Even as short-term real estate investors had to re-calibrate after the big housing bust, the ensuing bull market of the past seven years has re-ignited the desire to “flip.” What’s more, this time around, more avenues are open for flippers seeking loans (Bloomberg, Sept. 21, 2016):

House-Flippers Turn to the Crowd for Quick Cash

Our October 2016 Elliott Wave Financial Forecast elaborated:

Flippers and property developers now get “quick financing” from Internet-lending platforms, such as RealtyShares, LendingHome, PeerStreet and Patch of the Land. … This is nothing but the “day-trading” mania of 1999 in new clothing. …  Since these digital lending platforms essentially replace bankers with anonymous lenders, they necessarily represent a slackening of underwriting standards.

But, when a bull market is raging, it’s easy to ignore the warning signs, just like in 2006.

Indeed, returning to the January 2006 Financial Forecast, the publication showed this chart and said:

This chart of housing affordability shows the shaky foundation on which the final phase of the credit bubble rests. Just since 2002, the percentage of homes that families earning the median income can afford has declined from more than 65% to 43%. Every major real estate bust begins with a sudden realization that lending standards have slipped. Lax mortgage underwriting standards certainly attests to similar conditions in the present case.

And, now, according to the Wall Street Journal (Nov. 29, 2016):

U.S. home prices have climbed back above the record reached more than a decade ago.

The result?

A Jan. 3, 2017 Los Angeles Times headline reads:

California’s housing affordability problems ‘as bad as they’ve ever been in the state’s history,’ housing director says.

In our view, the implications are clear.