I think folks are grossly underestimating both the global demand for liquidity and the feedback action inherent in housing. We have an almost triple-witching of classic collateral concerns.

For a new home, the land has to serve as collateral for the building loan, then the building has to serve as collateral for the purchase loan, then purchase loan is bundled into a MBS where it serves as collateral in the repo market.

This makes for huge amplification effects in and of itself. Place on top of that the fact that the price of land is extremely sticky and housing suffers from time-to-build and you have the potential for a massive Yo-Yo.

I had hoped that a massive expansion in rental housing would buffer this, but alas that seems not to be going to pass. Instead this, from Bill McBride is:

Second mortgage purchase mortgage lending above 80% loan to value has begun to creep back into the market. Prudent Underwriting standards and deep risk analysis have convinced some private money to come back into the housing finance market of late. We’ve added an 80 / 10 / 10 product recently that has no Private Mortgage Insurance.

I will be highly shocked if it stops here. The products will start coming out of the woodwork. Loans will gush in.

Folks will say – have we learned nothing?

But, there is nothing that could have been learned, save for the fact that the US government needs to issue more debt and support that debt with greater immigration, but that is fantasy at this point.

The simple fact is there is not enough collateral in the world and the US government is not issuing enough debt. This will happen again and again and again. If not in housing, then in metals. If not in metals then in polysilicon. If not in polysilicon, well . . . you get it.

The core problem is that the world needs lots of young people under the rule of a democratic government. But it has old democracies and young basket case countries. This does not make for a world where safe sovereign debt can be issued.

We could attempt to reform the basket case countries but the easier solution is to youngify the democracies. Europe is beyond help in this regard. The US, Canada, and Australia are the world’s only hope. More immigrants. More young immigrants and more sovereign debt.

If not, this will never stop.