Arguably, the root cause of all the troubles the US and now the world financial markets are having is the US housing bubble and its subsequent bursting, which has yet to end. In last weeks Economist there was a short article with the accompanying graphic seen on the right. The chart shows housing prices as percentage gaps over what can be justified by their respective market fundamentals. Though the US has already suffered a 20-30% decline in housing prices, there appears to be more room to go. More frighteningly, virtually all of Europe is only beginning to feel the impact of housing price declines and is still sitting a top a glaring bubble. The slight caveat to this is that some areas may not be quite as quick to deflate. Europe’s greater population mobility and lesser landmass in relation to the US played a role in helping prop up this housing froth and will likely play a hand in its decline. Besides the obvious economic impact on wealth that this decline has, it appears as though other financial markets may be spared the slaughter that New York felt. After all, with the exception of The City, I doubt many European financial centers have the arcane structured finance vehicles that NYC did.The inherent next question is: how does one profit from this bubble? The UK housing decline has witnessed a declining pound, however currency speculation is quite an ineffective as well as indirect way of profiting from the bubble. Anyone have any ideas on possible equity plays or creative fixed-income outlooks on the European housing bubble?
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