Bigger than the Tech Bubble

You cannot compare technology with real estate. You can always do without technology, but, you can never get away from the fact that you have to live in some sort of shelter...

In addition, technology is a business of commoditization whereas real estate always has some kind of intrinsic value.

Anyway, referencing a quote from a previous BW article, there may be more stupid people left who are willing to pay the price that sellers are asking for...

You know, that's just what they said about technology in 2000, when I predicted the end of the tech bubble.

Everyone needs a place to live, but they don't need a vacation home, they don't need a place with 5000 square feet, and they don't need all the extras.

Plus--a lot of the growth in local economies is itself generated by the housing sector (i.e. construction workers, materials, legal, real estate, furniture and so on). You'll see that in a lot of housing demand will simply vanish into thin air when the bubble fades.

Dean,

That is a common argument, and a weak one, because :

If 'everyone needs a place to live', then why is housing spending at 6.1% vs. 4.5% before? People needed a place to live 5 years ago as well, correct?

Plus, since most people put only 10-20% down on a home, housing only has to fall 10-20% for some people to lose 100% of their equity. Imagine what happens when a person's entire net worth is merely the 20% of their house that they own. It is true that housing never drops 100% like stocks, but it does not have to to wipe people out.

Lastly, housing can certainly fall at the same rate it has risen. When the Nasdaq crashed from 5000 to 1500, it really only retraced back to the levels of early 1998, or 2 years before the peak. So what if it was a 70% drop, it was still just a 2-year retracement.

Similarly, housing can retrace 2 years of gains. That would mean that housing in some bubble markets like California and Florida could drop 40% or more (back to where they were 2 years ago). Remember, it is only 2 years of gains being reversed, just like with the Nasdaq.

Business investment from the massive cash on their books and increased M&A activity, will next year add extra investment finance into our GDP to make up for slippage in housing.

But that may not fill the slippage of employment lost from downswing housing sales and construction.

Today's post in Hot Property by Peter Coy in 2006 a Harsher Reality for Realty, show the almost doubling in agents to support housing expansion from 1995. And I would think the same goes for construction employment in housing over this time.

There may be greater return on investment in M&A and capital investment, but it is not a great plus for spreading fuller employment.

Michael,

It may be bigger, but housing is more pervasively owned as well. Is 4.5% of GDP the equilibrium level of housing? 5%? How do we know?

Similarly, what is to stop housing from becoming 7% of GDP? It is true the the Fed Funds rate is rising, but the 10-yr just isn't rising, and is keeping mortgage rates lower. What if the 10-yr never gets above 5% again?

Mike,

To the extent that the housing market loses ground, what might be the impact on the stock market? To the extent that people are able to successfully yank equity out of housing before it falls, then the flow of funds should benefit stock prices..but to the extent the equity just plain vanishes, it will do stocks no good.

Is there any correlation between housing prices and rates of residential investment?

And also, is new home purchase (ie. investment) significant? It seems to me to be quite different from residential investment (upgrading existing homes). Upgrades added to new homes would seem to be more more significant as a measure of investment as it would be a comparison of apples to apples. Just some thoughts. It seems to me that average new home construction could be greatly skewed by the type of homes being built, thereby driving up the residential investment number but reflecting no real increase in residential investment, just a change in preference on the type of new homes being purchased. To elaborate, lets say in the mid-1990s, when home investment was a little over 4% of GDP, that homebuilders targeted the entry-level housing market. Homes were located in cheap, outlying areas and were generally smaller. By 2002, due to demand, executive type homes were being built, and infill luxury condos began to skew the average investment up. Entry-level demand was rerouted to condo conversions or older homes as preferences or price points shifted. We would see an increase in residential investment without any corresponding change in the underlying activity. Its just that in one instance its reported and in the other its not.

I don't see any reason for tech to rebound unless something new and truly remarkable comes along, something that would take much more than a decade to develop. I doubt we will see any more than a flattening in housing as a result; the economy will go to pieces otherwise.

Kartik,

What we do know...and what the chart shows, is that there has been a massive shift in resources towards housing construction/renovation. That is, the housing stock is not just larger, it's growing faster. Now, unless the rate of population growth has accelerated, this state of affairs can't persist

David,

The real question for me is whether economy-wide productivity gains will continue. If productivity keeps rising, then the money will go somewhere...i.e. if housing stops being an attractive investment, then the money flows will go into other assets, including equity and nonresidential capital goods. To put it another way, if productivity growth stays high, the economy's wealth will stay high, but just take another form.

But if the productivity gains slow down, then a lot of wealth will vanish, of all sorts.

Lord,

I'm just a lot more optimistic about tech than you are. To me there seems to be a lot of stuff going on that people are excited about.

I'm doubtful that anything in tech will drive a major uptick in spending in 2006. Microsoft's new operating system is such a dramatic shift (and likely as dramatically buggy) that most corporate IT depts will avoid it like that plague for at least 18 months. Most businesses have no need for more computing power at the desktop; they'll see no real productivity gains by doing so. Server sales alone sure won't drive it. As impressed as I am with Apple since the return of Steve Jobs, they won't drive tech alone. The new Mac's based on Intel will likely cause delays in purchasing (while Macophiles wait out the bugs). If there's any growth due to Apple it will be if they manage to turn the iPod into a dockable, portable audio/video "TiVo" over the next year.

The upshot is, I don't see tech driving anything.

Just as a sidenote and introduction: This is my first posting to this blog (or any on BusinessWeek). My economics background is merely from my BBA education (where I majored in marketing), in addition to my own reading. I did not do any study of it in grad school (M.S. Leadership). Hopefully I can still provide useful input to the discussion on this topic, and others. I've read a few of Mandel's postings and I'm quite interested.

Brandon, welcome aboard...

The way us simple folk look at it, if I bought a house because I needed a place to live, I'll still have a place to live if the price falls dramatically. Sure, my net worth will go down on paper, but my payments won't go UP! In fact, even modest inflation will diminish the share of my income needed to service my debt - unless I went out and bought a variable interest product. Tsk! Tsk! A bubble only figures into my life if I purchased a house that I didn't really need, in order to try to make a quick buck, or if I was silly enough to consider the roof over my head as something I could sell to finance my retirement. Again, Tsk! Seems to me that only a flattening can truly occur, as, barring default, I won't be inclined to sell a house for a loss, thereby taking it off of the market, decreasing supply, and increasing demand for the housing that's left ... which ought to buoy up the prices for those houses. Hmmm ... not even one number included in the argument!

Haa hahha...I like the way you described the flow of intelectual property....but shouldn't it be 'bright matter'!...badadadum!!!

Hi Larry,

Having lived through the NYC housing collapse of the late 1980s and early 1990s, I can tell you that home prices can go down much further than you think, as long as there is excess supply on the market. The sellers are builders of new homes with high cost bridge loans; people who have to move out because of job changes, divorces, or deaths (many more than you would think); and senior citizens who are either moving into nursing homes or warmer climates. Yes, if you can wait it out, you'll be fine...but the forced churn is enormous.

Mike,

My stomach is in knots over this topic and I would love your opinion on whether or not your forecast includes areas like Northern NJ's fairly aflluent suburbs. I'm considering a lowball (20% under asking) offer on a million dollar property but now I wonder if that's even low enough...

It may all be moot as the offer may be rejected, but I'm trying to make a case for the sellers that it's in their best interest. Their house has been on the market for 8 months and is likely overpriced anyway...

Many people in New Jersey seem to think that the fact that the area is pretty musch built out will insulate the area for a downturn. Would love to know your thoughts!

Thanks, and I really enjoy your blog! Keep up the good work!

Shelly

Re the discussion about tech and "the next big thing"...

The standard usage of the term "tech" is far too narrow. Technology isn't just about information technology in the sense of desktops and servers. There are also embedded devices, such as machine-vision systems in factories used to control assembly robots, and flight-control systems for aircraft. And there is a whole world of tech that has nothing to do directly with info tech...advanced materials, for example.

Technology is on the brink of a large uptick. Whether this occurs in 2006 or 2007 is not known and not that important, but many things are building a head of steam..

1) Thinner, lighter laptops.
2) A dizzying array of new home networking and home network storage solutions.
3) Wireless speeds doubling every 12 months
4) 10 Mbps+ home Broadband becoming available through every provider.
5) GAMING! The game technology cycle has been on a plateau for the last couple years, and the PS3 will cause a staircase jump. Expect 40-80 million PS3s to be sold by late 2007.
6) Nanotechnology will start to seep into the marketplace, with a couple of high-profile IPOs.
7) Biotech is going great guns, with massive new drugs in the pipeline.
8) India and China will have 100 million new consumers come on line by late 2007 with need of cellphones, TVs, DVD players, and PCs.
9) Google's blogosphere ecosystem, supported by Google Adsense, will emerge as a gigantic new beast.
10) Innovations in energy technology are finally getting some traction.
11) 2004 sold just 5 million iPods. 2005 sold 25 million. With costs dropping and capacity rising, 2006 and 2007 should be fun.

Our original topic was the housing bubble. Part of the reason consumer spending has held at the levels we've seen is due to the equity people have been able to take out of their homes as second or refinance mortgages. With the housing bubble popping (or even just deflating) the biggest-spending consumers will no longer have equity to borrow against, thus reducing consumer spending.

Now, while I agree that there are an enormous number of new gadgets coming out on the market, I have my doubts that most will succeed. It appears to me that we're starting to see a 1999-ish "throw a bunch of crap against the wall and see what sticks" from the consumer electronics companies. I don't really believe people *want* their homes networked and storaged. Wireless is old news; those that want it have it, those that don't aren't going to jump onboard because of faster speeds. The only thing I agree will be a big seller are Xbox 360 and PS3; but how much of a driver of economic growth can a product that *loses* $100/unit really be?

No, tech isn't dead. People will still buy new iPods (hey, I'm replacing my old one sometime next year). The under-30 generation (which I'm admittedly not-too-far removed from) will continue to rot their brains playing video games. But consumer spending is about to back off. Corporate spending won't be driving tech (see my previous post). Tech simply won't be an economic driver next year.

Energy and Financials will probably drive the markets next year while most other things pull it down. I think we'll end up with the Dow right about where we are right now as I suspect the market will flounder about 1970's-style for the next 4-5 years. It will be interesting to see what the unemployment looks like as a million people - who had jobs 4 years ago - quit pretending they're Realtors (my personal vote for why the household survey has looked so much better the past few years) with the deflation of the housing bubble. That can't help in the construction employment scene, either.

I think 2006 will be a strong year for large-scale investors and people who own businesses that cater to the wealthy. (Sidenote: Of course, I think those are the only two groups who have seen much real benefit of the current economy for the past 2 years, and the only two groups that will continue to see it for the next 10-20 years). That will funnel enough money into the U.S. economy to make it grow, even if it's only the top 10% who actually see it.

As far as the GDP goes. The bubble part in housing, has been the creative finance part. And it is only finding new sellable instruments for this finance to invest into that is needed to fill any slippage in the housing market.

Business capital investment, that offers increases in productivity, and M&A that will give consolidation and the greater return on investment, will draw the finance that does not find returns in housing markets next year.

It will not hold up fuller employment lost in housing slippage, but there will be hoped for greater returns on investment for investors. Only new sellable instruments are needed to keep up the investment part of GDP.

Can't help but think, where are all these home buyers comming from. I know that Houston's rental rates are REALLY low. Lots of vacancy.

These are the same renters that the landlords constantly complained didn't make their payments on time, and they couldn't evict them for 6 months.

Can't help but think if a lot of this growth is due to lousy renters becoming lousy homeowners. Either that or they all learned how to make monthly payments suddenly...

I disagree, as technology is what is keeping productivity gains high. Home equity may help consumer spending, but is not helping productivity.

How can it be that only the wealthy are gaining, when the cost of technology is dropping so low that the prices are not off limits to anyone?

Many new realtors will quit pretending to be realtors when housing corrects, but a million new jobs, driven by technology, may be simultaneously created.

Half a million jobs have been *lost* in IT since 2000. If tech jobs are created, they'll be created in India and China.

Brandon,

Where do you get your data for the statement of half a million jobs lost? I've seen a lot of doom and gloom, but not a lot of hard data. I also remember reading an article not long ago that mentioned that while around 5% of IT jobs were being outsourced annually, job growth was in the 10-15% range. Much of this growth is driven by jobs in companies that are not traditionally it-based. Unfortunately I can't seem to find that article either, so I don't have a reference to give you. If anyone can point me at this article, or any article (saying either way) backed up by hard evidence, I would be very greatful. Thanks!

I dont agree with Michael completely. I agree with lot of spending in housing market, it has to stabalize. But every city is different story. NY, California, or Arizona, every state has its own statistics and can't be combined together. Since I am from Phoenix, AZ, I can still say that the market here is still ready to accept more new homes. This is primarily bcoz of New job opportunities. Every company is hiring be it Intel, Freescale or Microchip. Even google has plan to open their office here. These are all technology companies and would add over 2500-3000 engineers minimum. With this I think comes the need for the new homes and Phoenix, AZ is top most city in list of hosuing price escalation. And if as Micheal said about housing bubble bust, why would still new home builders would plan new communities and keep adding new homes.

Responding to: "Fasten Your Seat Belts in '06":
Though not an economist, I do have a business education from Bentley College, and I am also an active full-time realtor in the greater Boston area. Until seeing recent surprising transactions, I too had fallen victim to believing the R.E. bubble bluff. My only statement is that each market is town specific and visa versa (large cities like Boston, NYC, etc. excluded due to their large geographic and demographic spectrum). Make that two statements ... the real estate market is not liquid enough to react like the stock market -- only true investors (planning to hold less than 2 – 3 yrs.) have much to risk. Okay, so where’s my banking credibility? I don't need it. All mortgages are (and have been) reviewed by a non-bias third party appraiser who is looking to protect the bank’s best interest (i.e. their lenders). So, behind their tricky lending algorithms, I'd say we're pretty safe.
But still, I'd like to ask you and the reader to consider the following questions, then come to your own conclusions.
1. Will a reallocation away from construction investments reduce the number of new homes being built? Does a reduction in supply typically result in lowered prices?
2. What's a real "tech investment"? Is it safe to say that we are a technologically driven society that is centered on technological services and products? Isn't this just business as usual (these days), or is the Internet still cutting edge? Is it time tech. stocks be reorganized as service companies in the public’s mind?
3. Again, will a decline in the success of homebuilders cause sales of existing homes to suffer?
4. Still not sure what a tech. stock is -- why does telecom get its own category? How about a CRM, ERP or XYZ stock?
5. [Bonus statement] Think tech stocks, think Darwin – the collapse of many tech companies was a result of poor business models that could never be supported by “poorer” services and service models. Services that no one really needed. Services that investors did not understand. What is a 4-bedroom colonial used for?
Best wishes in '06, hope this hype continues to keep magazine sales strong. To be safe, I will pack my bags and prepare to sell in case my neighbors do.

To Mr. Mandel.

First I want to make it personal, the fact that you
have a PHD from Harvard means nothing.
I have an MBA from Tel Aviv University and there you wouldn't even make the cut for being accepted for a BA.
I had a very smart professor back than who happned
to be the Israeli Fedral Reserve chairman back than and he said something that follows me till today:
"All this PHD's smart guys if they were so smart they would have gone making money and not lecturing"
I personally know few Israelis that had no degree at all and worth between 50-100 miliion dollars each and because they wouldn't listen to guys like Mandel.
In fact to all guys here: go and do the opposite of what Mandel is forcasting you'll be rich!!!
Now not so personal:
I agree that the speculators I mean the guys who
bought Florida/Las Vegas Condos to make a quick flip will get out of the market. The market will cool down of speculators, however you have to understand that something fundamental has changed in the saving/retirement thinking model of the American household. American households will diversify their protfolio to include reale state, at least to include one to two houses or condos for the retirement process. This is not speculative it is a healthy investment in which poople were not keen in previous decades.
Second the speculators will turn their profits from real estate made during the last 3 years into
the stock market and technology will be their prime target although I think that oil and biotech will be good as well.
Fed reserve won't raise rates more because it is a delicate balance, unlike the stock market a real estate collapse will drag everything including the stock market to a cataclismic recession.
So what will happen is that: once the public will realize that the FED's is floating the rates within a range to curb inflation on one hand and to maintian a healty real esate/economy growing
on the other hand they will start feeling comfortable again as far as the real estate goes.
The range is around 4.5-7.0 for the next 5 years no big deal if you're a developer or a condo owner. So as far as I'm concern one hand (real estate) will feed the other hand (stock market)
and they both help each other sort of husband and wife till the divorce (I don't think it'll happen in the next 5).

This losers including Mandel are PHD vudus and if you listen to them you won't go far.

Rafael...
Feel free to disagree with Mike Mandel. Attack his arguments point by point if you disagree with him. But personal attacks are totally rude, immature, and unnecessary.

I think economics is a social science, not a mathematical science. I think econometrics are descriptive but fail completely at being prescriptive. I think that the "free market" legal construct is a ploy by the wealthy to suck wealth out of mass populations into their pockets.

But not once have I ever personally attacked Mandel. Whether you agree with him or not, it seems to me he makes an honest effort at his field.

Dear Rafael,

Your personal attack of Mike Mandel is childish and only diminishes any argument you're trying to make. Mr. Mandel takes the time to formulate a point; while you may use this board to disagree with him and offer your own thoughts, personal insults do not fair well for you, or for Tel Aviv University (of which I am a graduate as well). Titbayesh (=shame on you in Hebrew).

Hi all,

I appreciate the discussion back and forth, and I don't even mind the negative stuff (I assure you I've been called worse). Let me address MPH's questions, in order:

MPH:1. Will a reallocation away from construction investments reduce the number of new homes being built? Does a reduction in supply typically result in lowered prices?

MM: Eventually--but first the market overshoots and creates a lot more supply than is needed. Just think about all the development being done today

MPH: 2. What's a real "tech investment"? Is it safe to say that we are a technologically driven society that is centered on technological services and products? Isn't this just business as usual (these days), or is the Internet still cutting edge? Is it time tech. stocks be reorganized as service companies in the public’s mind?

MM: You'll know a year from now which companies are at the cutting edge..and by then it will be too late to invest in them

MPH: 3. Again, will a decline in the success of homebuilders cause sales of existing homes to suffer?

MM: Oversupply leads to falling prices. At that point the existing home market typically freezes, as sellers don't want to accept the depreciation of their biggest asset.

MPH: 4. Still not sure what a tech. stock is -- why does telecom get its own category? How about a CRM, ERP or XYZ stock?

MM: Telecom gets its own category because the telecom industry has historically been thought of as a utility. It still has different characteristics than the tech sector.

MPH: 5. [Bonus statement] Think tech stocks, think Darwin – the collapse of many tech companies was a result of poor business models that could never be supported by “poorer” services and service models. Services that no one really needed. Services that investors did not understand. What is a 4-bedroom colonial used for?

MM: Nothing if it was built as a second home and never occupied. Or rental property.

Housing crash? I'm pretty old now, been through the S&L debacle and all that. As long as people have JOBS, they will continue to pay down debt. Plus, people always get over extended in all types of economic climate. Again, the most important indicator is employment. The housing boom will slow, not crash.

Also, the point about taking equity out to spend was two years ago in the "refi: boom. That's come and gone, consumer spending is because people have jobs.

Another point, the tax cut, it was the greatest transfer of wealth from the public to the private sector in history. It means, the entrepreneurial class is managing a greater part of the economy. Most of the tax cut went to this class instead of mom and pop retail who would have spent it at Wall Mart. Thus, it is taking longer to get the ball rolling. Also, when rates were super low, capital was cheaper than labor. Thus, firms invested in new productivity, not labor. Now that rates are higher, firms will hire workers instead of increasing productivity.

Another stranger point is this, with all the hiring, there will be greater demand, thus, firms will make capital expansion a priority in 2006.

Another point, and I don't even know if this will post because I don't know my URL, the global economy is growing, it is actually cranking on all cylinders for the first time in my life. That's the old communist blocs, Europe and Asia. This growth is in the face of extremely high cost from commodities. Demand for commodities is driving an investment boom in all corners of the world.

I believe 2006 will be a strong year. However, I doubt it will be reflected in the markets. Mom and Pop retail is at 23% participation and thats mostly mutual funds. Plus, I don't believe recycling of Asian wealth will be a factor. Thus, the GDP will continue to grow and the markets won't measure the economy like it usually would. There are many historical examples of this in US business history.

Again, the most important factor is JOBS. If people are working, then they are paying down debt.

Hi MPH. My son is a Bentley grad in international economics (MBA) and he believes there is a housing bubble. I live in Nevada, and houses are sitting everywhere with for sale signs on them. Just remember that Tokyo is one of the most dense cities anywhere and it had a bubble. 400 square foot condos in Boston are going for 400,000 dollars. If you run over a cat, he jumps really high, but he is really dead. Sorry for the cat and sorry for a real estate market that fools you.

"I agree that the speculators I mean the guys who bought Florida/Las Vegas Condos to make a quick flip will get out of the market. The market will cool down of speculators, however you have to understand that something fundamental has changed in the saving/retirement thinking model of the American household."

Thinking has changed and it will change back shortly. Houses have always been part of a well diversified porfolio, but relying on an asset that traditonally appreciates 1.7% greater than inflation is folly for those growing retirement. The stock market is close to 10% long term. Especially now the housing market is more volatile with the high level of speculation.

"American households will diversify their protfolio to include reale state, at least to include one to two houses or condos for the retirement process. This is not speculative it is a healthy investment in which poople were not keen in previous decades."

And what will people do when the retire and realize there are two yards to cut, two roofs to keep, two places to furnish, two insurance/tax burdens? It's a great idea in theory but sometimes less is more. If your theory is correct the RV people better be very worried.

"Second the speculators will turn their profits from real estate made during the last 3 years into the stock market and technology will be their prime target although I think that oil and biotech will be good as well."

It appears most of this wealth is going to the stock market indirectly - rampant consumerism. Poeple buying SUVs, LCD tvs, exotic vacations. I doubt many are really investing their equity.

"Fed reserve won't raise rates more because it is a delicate balance, unlike the stock market a real estate collapse will drag everything including the stock market to a cataclismic recession."

They will certainly raise up .25-.50% again. Inflation is certainly not well-contained as anyone shopping can see. I do agree it can harm the economy but with any luck we'll have another year or two of growth before hell breaks loose.

Well, "hell" is breaking loose in the form of a large stock market dip Friday. If the stars line up, so to speak, and international turmoil, high oil, and consumer weakness piggyback on the housing burst, we could be in for a very difficult ride.

My father-in-law moved his family from Detroit to Walnut Creek, CA in 1980. He was still able to sell the family home, albeit at a loss. Others were not so fortunate.

The estimated population of Detroit has dropped below than 900,000.
http://geography.about.com/b/a/145226.htm

Houses have been abandoned
http://www.theallineed.com/news/0508/146570.htm

Yes, you can lose 100% of your investment in housing.

I would seem that Mr Bernanke has been left a very difficult situation. First, productivity lowered causing the fed to fear wage inflation. That will likely cause the fed to raise interest rates more, and will put even more pressure on holders of interest only and adjustable rate mortgages. It seems as though Greenspan gave Bernanke very little wiggle room in allowing inflation or in preventing deflation because of the housing bubble and excess debt. If he raises rates to combat inflation, the housing bubble could burst rather dramatically.

What's missing from that chart is the technological "dark matter."

Once you incorporate all that unmeasured economic value (as per the recent BW cover story), well, then, Tech spending is much more valuable than Real Estate . . .

(I love this dark matter stuff -- it trumps any logical argument -- its economic Santa Claus!)

Barry,

You've got a good point. Plenty of dark matter in the technology sector, but there's some uncounted stuff on the housing side as well.

I think Ken hit the nail on the head when he said it all depends on jobs. My mother has been in the real estate business for something like 35 years. She buys run down properties, renevates then and resells them. She's in her 80's and she still does this. She told me pretty much the same thing. If people have jobs, housing prices will be high.

Given todays climate of relatively low unemployment and the fact that in the past few years, a lot of creative mortages have been created to loan to those who in the past wouldn't qualify, I don't think prices can really go up any more than they are now. I think we're at the tip of the iceberg so to speak. I also agree that real estate is very regional, so I'm only referring to the markets along the coasts and in the western US that have had dramatic price increases the last few years. Also, real estate prices tend to follow long waves. They go up for several years in a row (relative to inflation) then go down for several years in a row. The ups are typically larger than the downs, so the envelope tends to go up. based on these facts, I suspect housing prices will begin to go down since I don't see how they can go up.

Ken got it right. In normal times, income is the major determinant of house prices. How often do we hear the experts being quizzed on what drives housing prices and listen to them trot out lists of "costs". The costs of labor, materials, local regulatory hurdles, etc. They always forget that it is the LOT that's going up so fast, not the rest of it (although of course builders build fancier, larger homes in order to absorb all that rising income). Since most buyers finance their house purchase, and banks lend for housing based on a formulaic percentage of the buyer's income, as income rises the percent that can be borrowed rises and BINGO, house prices rise. (With a little help from those disinterested "realtors" who just happen to have this information). This is the base, in nonbubble times. The other half of the equation, which begins to blow up the bubble, is interest rates. Lower interest rates expand the amount that can be lent via the formula just as directly as higher income. But interest rates are more variable than income, hence the bubble. Subsequent speculation and lowered lending standards inflate the bubble faster.

This is not economics. It is the opposite. Economics deals with scarce "men, money, materials". We are dealing with surpluses in all three. Surplus money must find a home and if productive investment is limited, something else must fill the gap. Periodically it becomes housing. But shelter, like food, is a basic necessity. In the past when food experienced boom and bust cycles the results weren't pretty. Housing won't be any different. We need a theory to guide us in dealing with abundance. Economics doesn't help. It is too prone to tell us that housing prices are driven by costs!

hello