Defaults and a developing deflation go hand-in-hand.
As Robert Prechter’s 2020 edition of Conquer the Crash states:
Near the end of a major expansion, few creditors expect even the weakest borrowers to default, which is why they lend freely. At the same time, few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation because almost no one expects deflation before it starts.
With that in mind, consider this headline and two subheadlines from a Sept. 8 CNBC article:
Most expensive home in America defaults on $165 million in debt, heads for sale
A Los Angeles megamansion once expected to list for $500 million has gone into receivership after the owner defaulted on more than $165 million in loans and debt, according to court filings.
The 105,000-square-foot Bel Air estate, known as “The One,” was placed into receivership and is expected to be relisted at a lower price.
Let’s now transition from news about a “California megamansion” to Elliott Wave International’s analysis of what is going on with the overall U.S. housing market. Here’s a chart and commentary from the September Elliott Wave Financial Forecast:
Two… indicators suggest that a home price peak may be close. The first arrow on the top graph on this chart shows the July 2006 peak in U.S. Median Home Prices. The arrow on the second graph shows the last major peak in pending sales, which came in July 2005, 12 months ahead of the downturn in median home prices. Now observe the arrows on the right side of the chart. A similar divergence is occurring, as it has been 11 months from the latest peak in pending home sales to a June peak in median home prices. The bottom graph is the U.S. National Association of Homebuilders Market Index. Back in 2005, the index peaked in June, one year ahead of home prices. The index registered its latest peak reading ten months ago, with a record high of 90. In December 2005, when the NAHMI was six months into a 43-month decline to January 2009, pundits argued that “housing is simply taking a much-needed breather.” EWFF showed a chart of the seminal decline in the Homebuilders Index in that issue and stated, “The housing market is in the process of falling into an enormous crater.”