Past Housing Bubbles

Posted by: Amey Stone on July 12, 2005

It has been six weeks since I wrote a story that discussed the experience of homeowners who experienced a real estate meltdown in their local markets in the past (See, “Getting Crushed in a Housing Collapse,” May 31, 2005.

It proved to be a very popular topic with readers and I’m still getting feedback.

Surprisingly, many of the emails have been challenging the same point in the story, which comes very near the end. I wrote, “Two things have to happen to pop a real estate bubble: Interest rates have to rise and jobs have to disappear.”

The following email from Kent Beuchert, which I just received on Sunday, is the latest example. Below is his note, (posted here in its entirety with his permission):


I read your article, "Getting Crushed in a Housing Collapse," and agreed with most of your claims. However, when you state that only two things can cause the bubble to bust (recession or sharply higher mortgage rates), I have to respectfully disagree. While either of those two events may cause the fastest bursting of the bubble, there are plenty of others.

The bubble exists because of speculators. Pent up demand and lack of supply is not the cause, otherwise the rental market wouldn't be so depressed. Current supply is in fact outstripping population growth. The excessive demand is produced by speculators. Since this doesn't satisfy the demands of housing anyone, the demand is totally artificial, thus creating totally artificial prices.

Eventually, there will be a physical lack of "Greater fools." There is, after all, a limit to the number of new real buyers. At that point prices will stabilize or possibly drop a little. That in turn will spook investors, who will dump their properties because they can't carry them or rent them. This will cause downward spiraling prices, causing prospective buyers to hold off, waiting for prices to stop dropping, and away we may go into a collapse.

Interest only mortgages will be walked away from and the collapse may accelerate. It will be far worse than previous price drops because the run up has been so much greater, the stability of the owners so much less, and the degree of speculation so much greater. Looking at past bubble busts doesn't provide an analogous situation. We're in a different game this time.


It's a pessimistic case, but worth considering. Thanks for writing, Kent!

Reader Comments

seattlecoder

July 13, 2005 9:19 AM

It's a new paradigm, and everybody who doesn't buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.

Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.

This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.

Eric

July 13, 2005 4:05 PM

I agree with Kent, the housing bubble does not require both the rising of interest rates and the disappearance of jobs in order to burst. In most of the "frothy" markets, the occurence or one of these two would be more than adequate.

Also, Kent's scenario of the unwinding due to speculation is right on spot. Virtually every bubble in human economic history was driven by speculators getting overly optimistic, new speculators entering often too late, and using the riskiest of means to get it.

Think about the NASDAQ let stock bubble that we experienced in the late 90s. As it built steam, more and more people were becoming investors. Don't have money? No problem, that's what a home equity loan, or margin loan is for. In some cases, even credit cards. Look at margin debt levels in early 2000. Investors were financing thier speculation in the riskiest of ways possible, just like real estate today.

Also, in virtually every speculative bubble, it is the lack of "greater fool," as Kent describes, that eventually begins the unwinding. We have seen ample stories of the same home being sold two, three, even four times within a short period of time. Each time for an outrageously higher price. See Chris Palmeri's "More Flipping Tales" on this site. Are there really fundamental reasons for this type of activity and rising prices? Or is this the "greater fool" at its best?

In today's real estate market, the fact that roughly 35% of real estate in 2004 was sold to investors or as second homes is widely publicized. However, talk to many new homeowners. Ask them how they financed their purchase, why they bought now, and how long they plan to stay in this house?

Frequently, you will find that the house was financed with little or no down payment, interest only, and Adjustable rates. They bought now because they were fearful that they would not be able to afford a year from now (as it is a foregone conclusion that prices will continue to rise at this breakneck pace). And they plan to stay 3-5 years, take the equity that they are sure to build up and trade up to the house that they REALLY want.

I don't see Kent's view as pessimistic at all. This is how bubbles deflate.

aha

July 13, 2005 8:09 PM

The decline of house market does not necessarily need any trigger (eg. interetst rate or job...). The market can fall by its own weight.

Aha

Colin

July 14, 2005 1:17 AM

I also agree with Kent's posting. It has been proven time and time again (stock market booms and busts, gold booms and busts, etc.) that whenever any asset class is bought and sold without any regard to it's underlying value and prices spike or plummet unexpectedly, that the market is fueled by hope. Hope is how people lose a lot of money.

OK...let's do some math. Let's say a family of two brings home $100,000 a year for two. After taxes (at Married 0 0), a 6% 401(k) contribution, and insurances that's around $55,000 a year for two. Conventional wisdom says at a median, 33% of GMI can go to debt payment - $2800. They have monthly debt (car payments, credit cards) of $700. So, maximum net nortgage payment would be $1800. Conventional 30 year loan at 5.5% - $392,000 most expensive house.

This is going by "10 Steps to Home Ownership". Written in 1996 it sounds outdated now. Sounds like a lot of money but it doesn't get you a lot around Baltimore/Washington any more.

It seems to me the new frenzy is feeding off of the equity of established homeowners and pricing out the middle class. Plus, first-time homeowners will eventually be scared off. Established homeowners need rist-time buyers somewhere in the chain to upgrade homes. Speculators and investors are the "hope" part of this cycle and when it dries up it will be messy.

Even my dentist is flipping real estate...come on.

Just my $.02.

Colin

gabby

July 14, 2005 1:40 AM

I had to re-read the first comment posted as I'm *pretty sure* it's a joke. Usually I would be 100% certain but unfortunately I've seen people who actually believe this to be true. And they are betting their families future on this being a true outcome.

I'd change the part about living in Hondas though and make it living in Hummers, with the price of oil they could be the new apartment of the future for the dispossesed housing poor:)

concerned_citizen

July 14, 2005 1:51 AM

It is mind boggling to imagine a response that a house will be $10M in 15 years.

Even though there is incredible speculation we as american seems to be always self-centered in our thoughts.

How can a house be $10M when no one has a job. A guy working in McDonald's, Wendys, Burger King or target?

Remember your house doesn't give you money simply because you own it.

A house appreciate in value when the economy and the United States are doing well. Both is not the case currently.

Consider a very nice house in China. That beautiful 3/2 in Los Gatos will cost 100k in China. And that engineering worker there will earn a modest salary at 20-30k.

Approximately 2-3 less than an average american engineer would make.

Consider the case.... On the latest travel to China, the amount of bilingual Chinese people who are ENGLISH fluent is 50%. Consider that for a minute and why your house is more connected to that Chinese guy who is making your next iPOD for dirt cheap prices.

Just think for a while out of your own centre of universe and why the US is headed to become the next Europe with high unemployment.

C H

July 14, 2005 2:27 AM

New paradigm ? Sounds eerily familiar and I'm not speaking about the Internet land grab of 2000, which could also apply here or any mania for that matter (even the Cabbage Patch Kids craze). I'm looking back to 1980 when gold and precious metals were reaching all time highs. People began to horde gold at $900 an troy ounce. People were becoming frantic saying that gold would never be under $1000 dollars... ever...by 2000 it will be unattainable. That the US monetary system was going to collapse and hard assets were the only guarantee for the future. But in 1980 it looked quite possible, inflation and oil prices were at an all time highs. It did look like they were right but like all parabolic markets they eventually unwind under there own weight. I still know people who have gold that they paid $800 dollars ounce believing it will go back up but 25 years is along time for losing money .I wonder how they felt when it hit $250? in 2000. Some people will say ...gold is a commodity and cannot be compared with housing because people need a place to live. Well that's true but housing has now turn more into a commodity then ever before because of the rampant speculation. People are hording houses and flipping them like stocks in 2000 or just like the scrap metals dealers did 1980 on a daily basis. Markets can commoditize anything in a short period of time, tulip riots in Holland in 1600's . Why isn't rents going up and vacancies going down?

What happens when Grandma and Grandpa, who invested in three vacation homes because their fix income doesn't look as attractive as the 30% appreciation in those homes the last couple years or when their grandson, who has brought five homes at top dollar using a negative amortization loan, (basically buying on margin)...because everyone knows that real estate always goes up and now with limited supply maybe 30-40% year over year.

People should step back and take a long hard look before they play the greater fool because housing historically appreciates 5% year over year since WW II. Sometimes more, sometimes less. The last five years in some locals close to 200% but why? For one the Fed had cut the FED Funds Rate “ overnight rates” to 1% to restart capital spending after the dot com crash where some investors lost 75% of their stock profolio and bankruptcies were threating to throw the economy into a shallow depression. Most large investors were spooked to invest in equities so they started to put more of their money into hard assets, ie: real estate. Lower interest rates made it possible for the small investor to buy in. Especially when real estate had always been perceived as a safe investment. It pretty much snowballed from there. Banks and mortgage companies found the fees lucrative from refi and new mortgages products especially when Fannie Mae and Freddie Mac were the underwriters for these products.(don't let anyone fool you these GSE are perceived in many peoples minds as GBS which the taxpayers are on the line for).So these institutions started to heavily market these products to the general public (TV ads). Enter the hedge funds, who live for “alpha”(highest return) these are hair trigger operation who follow “hot money” with even “hotter money”. They came in and are playing both sides of the coin, first they been buying up housing projects and condos by doing so raising these asset prices (limiting supply) then investing heavily in construction companies and homebuilders so it a win win situation as long as the greater fool steps in and buys, which they have. But before you call me an conspiracy theorist, first of all this is not a large conspiracy or anything like it. It's pretty much the same game that was played out in 2000. It's called running with the story and more the story pans out or in this case a self fulfilled prophecy the more insane it becomes because of greed. The big loser eventually will be the small players and your local neighborhood because these people who are profiting now do not care for the repercussions of what is happening. They're in it for the fast buck. It happen in 2002 in tech... The aftermath it's pretty. I saw it first hand.
It's funny that people never talk about the real estate crash in Texas in the mid 1980's after the oil crash...yes real estate goes down...yes any asset class can crash...yes there are pumpers out there with a vested interest in fees that are generated. Which in the end this all about... FEES, just like your broker and for the homebuilders their stock price, which inside selling is pretty heavy. I kinda laugh when people live on every word that's coming out of NAR or homebuilders quarterlies. Didn't it dawn on people that maybe they have an interest in painting a rosy picture. Short are people's memories. I can still remember Bernie Eberts and Ken Lay talking about the incredible futures of their companies and seeing many people running out to buy the stock. Except that was just worthless paper, now we are talking about people's homes and neighborhoods. Any way where I live the North Shore of Long Island it looks like everyone selling but little buyers. Houses have been sitting for months and in one very trendy neighbor signs are posted as reduced. A top?

Xtalprotector

July 14, 2005 5:03 AM

I totally agree with Kent, Eric and Aha. I worked
in Silicon Valley from 1996 to 2002 and
experienced the last great bubble first hand. I
am now living in San Diego, one of the most
bubble-ish house market in US. I can tell you
there is a lot of similarity in people's attitude
to house nowadays and their attitude to stock
in 2000. These so-called investors who bought
stock with negative earning or P/E of 500 were
betting on stock price going even higher. Nowadays
people are buying condo or house with a monthly
owning cost to rent ratio much higher than one
(in San Diego this ratio is about 2.5).

The comment by "seattlecoder" is outright ridiculous. It sounds awfully similar to what
all those so-called stock analysts said in 2000:
"We are now in the New Economy. P/E ratio can
no longer be viewed in a traditional way. We raise
our price target of this stock (ticker symbol: ABC) to $600 by next July, so at $400 now it is
a steal. You have to pay a lot now, because you
will make a lot next year....."

Does it sound familiar?

yuri

July 14, 2005 12:23 PM

I read some posts above. It’s laughable to read that “since WW2 real estate appreciate 5%” so it must continue in this pace, otherwise it’s “bubble”. It’s laughable to read about Texas down market because of anomaly oil drop below $10. Why don’t recall that Indians sold Manhattan for $25, so it must be “bubble” there.

Indeed, it’s new paradigm. It’s 21 century now, you know. Oil will be higher and higher, population will be larger and larger, and beside US has the greatest population growth among developed countries. People demanding larger and better houses and some of them demanding 2nd and 3rd house. It’s named “lifestyle change”. What about supply? Many old houses need to be bulldozer. Shift in government bureaucracy make it harder and harder to get building approval. This make land much more expensive. This makes construction prices skyrocket.

As for “comparison” to stock market, well, it’s easy in Wall Street, just print billions new shares, analysts upgrade to $600 and sell them, or just announce split 3:1 every 6 months. But you can’t split your house into tri-plex, not even duplex. You even can’t build new house on you own land because multiple government agencies, neighbors, anti-growth group make sure to sue you as soon as you stick shovel into ground. You’re basically on mercy of the government, and with these government regulations (sometimes absurd) we’re getting to the point that only 10-20% of population would afford to buy house(s) the rest would be their tenants. I don’t understand why it’s so surprise many people, for instance in communist countries 100% population are tenants and nobody complain. There is only one relationship with stock market collapse – indeed investors don’t trust it anymore and shifted money to real asset.

Reading “housing bubble” economist theories since February 1999 (yes, that’s right, have copy), I expect real estate prices to continue to increase, especially in desirable areas. It’s because economist theories normally have nothing to do with real life (in this case they employ wrong assumption, criteria, and don’t even consider the right ones); don’t forget that all communist foundators were economists, and we all know what happened.

Billy B.

July 14, 2005 2:14 PM

By the time the dumb money starts flowing in, it's time to get out -- and the dumb money has been flowing now for some time. A house on my street in Columbus, Ohio - 1700 s.f., 1932ish, nothing fancy - sold for $175,000 in 2003. last week it just fetched $352,000. Meanwhile, the house that I rent, which is nicer, rents for $1,250 a month. I don't cut the lawn and have no maintenance or taxes, and i could probably do even better if i moved. By my calculation, the other house owner is paying $2,100 plus maintenance and a couple hundred a month in taxes (if the auditor doesn't catch up to that sale price anytime soon). What a great investment if they ever were forced to rent it out! You, too, could be losing 50 percent a month for being so savvy.

Merlin

July 14, 2005 3:13 PM

I agree with Yuri and NO ONE ELSE - MERLIN

Chris

July 14, 2005 3:34 PM

Here's another point towards the argument that maybe we're creating a society where a large part of the population will be permanently priced out of owning a house.

Germany had rampant inflation in 1923. At some point in time in the fall of 1923, a piece of bread cost millions of marks.
The only people not having their savings wiped out were the ones who owned "hard assets", mostly real estate.

In the following years (1924 - 1930), a huge real estate boom set in, bigger than what we have here today. Real estate prices rose 700%, pushing the price of a house in the cities out of reach of ordinary people (I'm still trying to find hard data on this).
Of course, this caused much social distress, and combined with a economic depression (perhaps correctly perceived to be caused by "speculators" and the easy money in the 20s), Hitler came to power with a platform of right-wing national values plus socialist redistribution from rich to poor.
This is, of course, oversimplified and not backed up by hard data. But something to think about.

The interesting thing is that real estate prices stayed relatively high in Germany, even after the war, and affordability never went back up.
Germans were willing to make huge sacrifices to own a house, and even then only a smallish percentage could.

Germany now has one of the lowest percentage of homeownership in Western economies, and until a few years, housing prices there were about 2-3 times as high relative to income as in other neighboring European countries like France.
Also interesting is that, while all of Europe enjoyed a lot of housing price appreciation in the last 10 years, in Germany prices went down(!) in real terms. This is probably because now that the housing market for EU citizens is really all of Europe, imbalances get levelled.

Eric

July 14, 2005 7:22 PM

Every generation believes they are living in a new paradigm. Sometimes a generation gets two or three shots at a new paradigm. There is an asset class for which rapid appreciation leads the masses to believe that it is justified, inherent and never ending. They come up with reasons loosely related to economics, sociology, and maybe politics as to why this time is different.

Tulip bulbs in the 1600s, British stocks in the 1700s, the Florida real estate bubble in the 1920s, the stock market crash of 1929, Gold in 1980, Dot-com bust of 2000.... They begin a little bit different. As they grow they become a self fulfilling prophesy. The very nature of a pyramid scheme begins to arise. And then, the next "greater fool" doesn't appear. Prices flatten, those overly leveraged begin to panic, and sell. This causes prices to decline. Now, those who thought they were comfortably leveraged are getting nervous. And the whole process begins to unwind.

No industry can consistently and continually grow at a rate that far surpasses the overall rate of growth of the economy. It's literally not possible. Let me give you an example using a corporation. Say XYZ corp. is a very large company and it comprises 5% of the GDP of its home country, RealLand. Assume that XYZ corp. grows at an impressive rate of 20% annually for the next 30 years. This is similar to the growth rate that real estate has experienced in the hot markets during the last few years. Now assume the RealLand's GDP grows at a comfortable rate of 5% annually over that same time period.

In 24 years XYZ would amount to 107% of the GDP of RealLand. It would be bigger than the GDP of the country!!! The same goes for gold, oil, stocks, tulips, and yes, Real Estate.

I don't doubt that you read housing bubble economic theories in 1999 (although the author would have been a rare, lone voice). Bubbles all throughout time have lasted longer and gone to greater extremes than even the most informed economist believes it will. Remember, Greenspan's infamous "irrational exuberance" speech was given in December 1996.

How long will this one last?

tommy D.

July 14, 2005 9:10 PM

Yuri's comments are some of the most uneducated and financially unsound comments I have read. He has no understanding of the financial soundness of the immigrants or their offspring which make up the mass of population growth in the U.S. One of the hottest markets in the nation, San Diego, had a net OUTFLOW of population last year (state to state, i.e. people with money). Population (another measure) there did go up, but is mainly attributable to immigrant (legal and illegal) births and inflow from Mexico. These are not the demographics that can afford houses. The current affordability of homes for the median wage earner is about 14% in San Diego. Real soon there will be no one able to buy an entry level home (500k) which will ripple through the entire San Diego market and cause downward pressure in prices. A few other comments made by Yuri also make no sense..."Oil will be higher..." How do you relate that to high housing prices? If anything that will contribute to downward pressure on home prices as homeowners will have less money to spend on housing. Also merely stating that population will continue to grow has no bearing on upward prices of housing, if anything, the U.S. will become a 2nd world nation as the population masses without good paying jobs flood our great country. Houses are CHEAP in Tijuana... and Yuri, the population there is enormous and it's just across the border from San Diego.

This is a classic Bubble! I trust the current stock market regulations and oversight much more than the complete lack of oversight in the Real Estate market. If you follow the news closely the Feds are busting rings of unethical realtors, mortgage brokers, and appraiser across the country. Sounds similar to stock brokers at the end of that bubble. There will be a lot of people in the real estate industry being sued or going to jail once this bubble bursts. I reviewed some paperwork on my refi's the other day. There is NO logical reason why my house appraised at 450K in September of 2003 and then appraised at 690K the next June when I sold. This same exact house sold for 320K new in 1992. I bought from the original owner who sold it to me in 1999 for 282K. Consider that. The trick to this whole bubble thing is that it is impossible to time.
I would bet that Yuri is a "new" realtor or real estate speculator to make his moronic comments. Just remember that the money that many people will end up losing isn't really lost...it is just transferred into the pockets of the people that got out earlier. As many people that loose when the bubble collapses, just as many people will have raped them making easy profits when the bubble was forming. The Billons of market cap "lost" in the stock market crash enriched certain people. The cash wasn't burned or lost at sea, it simply changed accounts from those that suffered to those that made out.

Lupus Est

July 15, 2005 12:29 AM

What new could be added to what has been said already?
Real Estate prices started going up in March-April of 1997.
Yes, I belong to "bablelogist" because I witnessed fall in Real Estate in the 80-s and 90-s.
I am using just common sense (at least I prefer to think so).
1. We live in San Francisco. 2. Our household income is above 100k but quite far away from 150k.
3. Our rent for a 2000 sq foot house is $2000 a month. 4. It would cost someone else about $2500 to rent it today (down from the peek of $3500)
4. If I buy a townhouse for 450k and take a conventional 360k mortgage at 7% - my monthly payments (including association fee) would be $2500 a month.
5. I count nether interest deductions nor property tax - one will pay for another one.
6. Why would I pay a cent above the mentioned $450k ?
It DOES NOT make any f***n sense. I would rather rent and save money every month than to pay a ridiculous price for WHAT?
I consider my family income - average for the area, so I do expect Real Estate prices to go down 40%-60% in the near future because an average family
simply cannot afford such prices. What about college grads who are happy to get $12-15 an hour now days?
Further more I would like to remind you that for anyone who wanted to buy a piece of Real Estate in San Francisco during 92-96,
there were hordes of sellers chasing buyers and ready to make ANY concessions just to get rid of a property.

c_fud

July 15, 2005 11:56 AM

I tend to use common sense in today's US real estate market. I've been thinking of a real estate bubble since late 2002.

I was born in Hong Kong and now I live in one of the bubbly region - New England. I remember back in 1997, when Hong Kong was ready to be handed back to China, people there were celebrating/speculating by pushing both stock and realty market through the roof. Since then, many "villages", "estates", or "communities" have never seen even 1/3 of the price reached at the peak in 1997. Do keep in mind that Hong Kong is one of the most populous cities in the world (very limited land), and its realty price has gone down 6 straight years (up to the point when SARS was exploited in 2003.) I know government policy has a lot to do with supply of land, or how policies could change realty price directly or indirectly (ie Japan since 1991.)

Turn the picture to present. I've seen many parcels of wet/marsh land being converted to condo's or townhouses in my area, and I think there will be lots of supply in the next 1-2 years. Also, I just don't see how people could afford some of these crappy houses with a ridiculous price. Bidding war is not uncommon in here as well, though not as severe as coastal Florida, or coastal California.

One other phenomenon I see is, every person I talk to would mention real estate related subject. Most of them does NOT believe there's a housing bubble, and those who are still renting think housing is a good investment and would think about owning a home in the near future. That sure sounds like what happened in 1999/2000.

Rich

July 15, 2005 2:17 PM

Hey Yuri, famous last words. "It'll be different this time". We're in a credit bubble folks. Don't mistake it or call it by any other name. Excess liquidity is the underlying driver of this phenomenon. I fully expect a slowdown from here on out with stagnant to declining prices for a few years.

Wes

July 15, 2005 5:10 PM

Yuri and seattlecoder sound like some of the home builder economists. They are looking increasingly desperate to justify the current market increases.

Oil price is slightly relevant in this discussion. It does appear we are in a long period of oil price hikes which could in turn pop the housing bubble as people have less money to spend on houses since they are spending so much money for gas in a SUV. There might be a mass migration out of the suburbs closer to workplaces as well. This could cause outer-city rot, as some suburban areas (Atlanta, Dallas, etc) are so far from the core city that $3.50/gallon gas would have major macro-economic implications on commuting affordability. I have little faith the American people would trade in SUV's in a large numbers; the same people who think housing prices will rise 20-30% per year cannot be counted on to use sound judgement in regards to vehicle costs vs. quality of life.

Warrior

July 16, 2005 12:54 AM

I am intrigued by the posting of Billy B, and Lupus.

Billy, which part of Columbus are you in ? I am also living in Columbus OH, northern side, but I never recall Columbus enjoy such high home price appreciation at all, seems like we are being left out of this round of real estate bubble.

Lupus, why you would not pay more than $450K for the townhouse, besides the affordability issue ? My thinking is that, as long as you are renting, you are helping your landlord to build his/her wealth!

See, let's make a hypothetical assumption. Say the house you are living in cost $450K, your landlord loan $360K, and assuming it costs the landlord $3K a month to maintain. So, the landlord is losing $500/month. Sound like you get a deal ? At first thought, YES. But from a longer term perspective, you are paying $2500/month to help the landlord to build his wealth by paying the house. The landlord just need to pay $500 to own a house of $450K, plus downpayment of $90K.

Yes, I think the house price will come down. But, when you decide to buy a few years later, how much money you would have paid the landlord to build his wealth ? Will that be enough to make up the price dropped? More importantly, the opportunity loss in pleasure in owning your own home for years.

This is an economic question that has troubled me for a while. Any landlord or real estate expert has an answer ? Based on this logic, then everyone who can afford should have bought a house. Am I missing something ?

trotfox

July 18, 2005 3:15 PM

Warrior,

What are you missing? - nothing except the opportunity costs of that money. Simply put, as the property owner what else can that $90K plus $500 a month go towards that would put me further ahead in the end?

In your hypothetical, the owner has plunked down $90K at the beginning plus $500 and has a $450,000 asset at the end of 30 years.

But wait - if he puts $90K plus $500 a month towards stock investments that earn an average of 6% per year, he has a value of $518,400 at the end of 30 years. Plus no headaches associated with renters, better ability to diversify a portfolio, more liquid assets, etc.

Lupus Est

July 18, 2005 4:10 PM

Warrior:
"how much money you would have paid the landlord to build his wealth"
I do not care about my landlord's wealth. I do not care how much taxes I pay.
I am willing to pay 50% of my total earning If I could earn cool million a year.
I care mostly about how much I can earn and save.
What I said only is:
1. I've been paying $2000 rent a month;
2. I am willing to pay $2500 mortgage a month (7% interest), not counting for tax deductions, real estate tax, insurance, etc.
3. I am willing to put down $90,000 + 10,000 escrow fee + 30,000 repairs = $130,000;
4. $130,000 + $5,000 (extra payments a year) pay me today 4.8% (state tax exempt) - $6,500 (see http://www.publicdebt.treas.gov/sav/sav.htm)
5. The house must be no more than $450,000 to satisfy those conditions.
6. A similar house costs today $730,000.
7. It makes no economic since for me to buy the $730,000 house.
8. It must come down about 40% so I'll consider buying it.
9. I believe, my family is just an average family, with an average income.

leedo

July 22, 2005 8:32 PM

the music is playing, everybody's partying! some are playing "hot potato." the prizes are great for the ones who win the game then, everyone starts to play.
the music stops! who gets stuck with the last potato? is it you?

billy b

July 25, 2005 2:30 PM

Warrior;

I live in Clintonville. the prices there have gone nuts. everybody has doubled their money in five years, if not done better. (and nobody has any closets).

You make a valid point, but you're changing the subject. true, at the end of 30 years, you own the rental house, and that's good, because finally you'd be making some money. but, normally, an investor wants to "make money" the entire time.

however, people on average only own their houses for seven years, which is why mortgages track the 10-year note.

The danger is, people are completely ignoring the rental market, and risk a huge correction. Either rents will rise - and they could, although it seems unlikely given the new supply of units being added - or prices will fall.

when a business buys a downtown office tower, what determines the value a building sells for? when the county auditor appraises such towers for taxation, what's the factor they look at?

It is how much money the property does in fact return on the investment. the cash-flow should be positive, or you would have a negative P/E ratio. In fact, you would have no "earnings" that could be booked to that investment, only losses. What bank would finance such an office deal based on this business model? Why don't all the downtown businesses buy their space? As you say, they'd be better off - until their stockholders revolted.

I don't know of many businesses that survive very long losing 50 percent a month. In the business world, that's known as a bad investment.

But if you survive to the end of 30 years, after taking this massive loss, you will own the bad business, thanks to your customers. And when you sell it, what will it be worth? By then, I assume, its worth will be back to something based on how much money it could potentially generate, and the historic norms for property price inflation.

Billy B.

Mike M

July 30, 2005 12:17 PM

Simply put, anyone who deny's that most "hot" real estate markets are not in a "bubble" is the "Greater Fool". Do the math and look at the overwelming facts presented on this page.

I am a licensed realtor in Florida, specializing in businesses. I am a business broker. I also am a real estate investor. I bought my first house at 19 (I am now 54) and I have bought and sold over 250 houses since, as well as 10 or so commercial buildings. I flipped 53 houses in 2003 and have bought nothing since Dec of 2003.

I have lived through several bubbles and if you think real estate cannot devalue you are a dumb ass.

I cannot add anything to what has been said here, except that I winessed most of it (No, I am not old enough to have seen the "tulip" thing)

My advise is, if you live in a house and everyone wants to buy it from you at some outrageous price, sell it and buy it back 1 to 2 years from now when it's value plummets. Thats good business. Incidentlly, rents are and will continue to plummet, making it an even smarter decision on your part.

Anyone who deny's the existence of the bubble, is usually someone who will loose his shirt when it pops.

Ahh....the Greater Fool now, unknowingly aids the demon "bubble" in it's dastardly deeds by denying it's existance....

isenberg6

July 31, 2005 7:12 PM

Lots of serious thought on this forum.

Living up the coast from Los Angeles, bought in 1994 post-earthquake when foreclosed, just inside my reach to buy. No regrets, just some bills to pay and insurance ripoffs to contend with.

Panoramic view of mountains and pacific ocean from a fixer on the hillside with a local mudslide this January 10th. For me, there is no better place on this planet where I can live, work, and commute to LA easily for business meetings.

Local property values are insane, maybe someday sell out and move to.....where ?

Its not paradise, but you can see it from here.

Bill

John Dixon

July 31, 2005 11:23 PM

Amey Stone considers Kent Beuchert's case pessimistic. Yet don't we in fact have two cases right now--namely, Britain and Australia--in which house prices have levelled off and in some areas dropped, as a result of exactly the dynamics that Kent has outlined? In these countries, there was a high level of speculation keeping demand artificially high. There was overbuilding in response to this artificial demand. Meanwhile, affordability was falling despite low interest rates and renting was becoming a bargain. Of course the actual trigger of the cooling off was interest rate hikes in both countries. But the hikes were not major by historical standards, and were soon ended. And the economies in both countries have been experiencing solid growth and high employment. As the Economist magazine wrote recently:

"It does not require a trigger, such as a big rise in interest rates or unemployment, for house prices to decline. British home prices started to fall in the summer of 2004 after the Bank of England raised rates by a modest one and a quarter percentage points. Since 2002, the Reserve Bank of Australia has raised rates by exactly the same amount and unemployment is at a 30-year low, yet home prices have fallen. ("In Come the Waves, June 16th, 2005).

So these countries have positive fundamentals of the sort that real estate industry economists always point to as ensuring that house prices can't decline, namely, fairly low interest rates and solid economic growth. And yet there is marked cooling. The likely explanation is, just as Kent argues, that speculators have been exiting the market at the first sign of price leveling and that this process is beginning to feed on itself. Just as the trend produced the trend on the way up, the trend will start producing the trend on the way down, this feedback loop being the defining feature of speculative bubbles. So far in Britain, investors are not dumping homes, they are just ceasing to buy additional ones. Yet now that house prices have levelled, the "wealth effect" is already going into reverse: consumers are borrowing less and spending less in both countries. And already there are signs that this loss of consumer confidence is becoming an important driver of the economy in its own right, especially in Britain, creating the spectre of a vicious circle, namely, a housing decline causing an economic slowdown, which causes job loss and further housing decline. None of this was caused by any major shift in the fundamentals. As many people have argued, it was caused by loose monetary policy and too much global liquidity with nowhere profitable to go after the stock market collapse, except real estate. And that created a classic asset price bubble, that is already collapsing under its own weight in two countries with sound fundamentals. Can we be far behind?

Eric

August 1, 2005 8:51 PM

John Dixon raises a relevant point. This original discussion was the result of Amey's contention that "two things have to happen to pop a real estate bubble: Interest rates have to rise and jobs have to disappear."

Kent's e-mail to Amey was a well written, well reasoned piece on how the R/E bubble may pop without either of those events. Amey considered his views pessimistic.

We somehow fell into a discussion with others over whether a real estate bubble can or does exist. If she is still reading this, I would be very interested in hearing Amey's reaction and response.

John Dixon

August 2, 2005 8:45 AM

Just a brief comment. Before any more people start criticizing seattlecoder, I'd suggest considering the possibility that he is being ironic.

Amey

August 5, 2005 1:08 PM

Hi all (and Eric),
Eric asked me to respond and I have to admit I find many of the posts here very thought-provoking. I'm going to cull some of the insights that strike me as the most original and post a new item on Monday.

As for my views, I think there is a bubble in many areas and I think something has to happen to make it pop (or deflate). But I realize now that more than just job losses or higher rates could cause such a decline.

DK

August 6, 2005 7:56 AM

Well, the only question I have for the "blind optimists" is why are there so many exotic means of financing a mortgage.
Interest only, ARMS, 40 year mortgages.
True, these have existed in the past, they have only become so popular because, the average consumer cannot afford the traditional way of paying for a house.
I need someone to tell me of an asset class in history that continued to appreciate rapidly when everyone knows there is money to be made in it.
The real investors have quit this game about a year ago, what we have now are a bunch of wanna be investors who are lost at sea.
The most recent article I saw recently was a "minister" of the gospel, who only came to the United States 2 years ago, preaching the value of home ownership to his congregation ; "why rent when you can buy".....I guess that say it all

Dr. Freeze

August 9, 2005 11:43 PM

My wife and I bought a 4BR/2.5BA SFR in Riverview, FL (just outside Tampa) a year ago for about $200K. Now it's worth around $300K and counting. Rents on similar houses are averaging about 1/2 of PITI payments on those same houses at today's prices. Folks, this is a big, red DANGER sign. We're getting out NOW...we're gonna lock in our $100K tax-free profit (bird in the hand), pay off our cars and credit cards, put a big chunk of $$$ in the bank, be debt-free, and rent for the next couple of years until this whole insane mess is over...

sharkmeat

August 16, 2005 2:32 AM

Consider this:
It's estimated that 20% of new mortgages are interest only ARMs. These new owners are betting on the market to provide the equity on their investments, i.e. property value increasing b/c of demand.
So, once the market starts to flatten, (and it will) this 20% of the buyers has no reason to buy. Most of these are stretch buyers anyway who couldn't afford a house with normal financing. Then the speculators and investors, which represent close to 30% of new buyers, split the market because they DON'T LIVE IN THE HOUSES.
Who really gets screwed is the interest only buyers who are stuck refinancing their $500,000 eight hundred sq ft apartments in 2009 when the market price has dropped to $275,000.

D. Reiner

August 16, 2005 11:55 AM

Anyone who needs a reminder about past housing bubbles need only look at Japan in the late 80's. Found a good quote here referring to the Japan crash, ( The Real Estate Bubble End Result - http://www.investmentu.com/IUEL/2005/20050328.html ) - "When the bubble burst, property prices plummeted more than 80%... wiping out many families' wealth and helping plunge the economy into 13 years of stagnation."

Alot of investors are going to heading to the poorhouse soon... alot of them probably having lost their shirts in the dotcom crash also.

tokyobubble

August 24, 2005 1:39 AM

It's curious that, except for a single posting, no one mentioned the Japanese equity and real estate bubble of the late 1980's and subsequent crash in the 1990's. In fact, one almost never sees any discussion of the Japanese asset bubble in the U.S. press. Curious because it was one of the greatest asset bubbles in history. Curious because the Japanese economy is still feeling the impact of the bubble's aftermath 15 years after the stock market peak and 13 years after real estate prices started collapsing. Curious because there are some eerie parallels with the current state of the real estate market in the US.

Both the Japanese asset bubble of the late 1980's and early 1990's and the still-running US asset bubble that began in the late 1990's were a combination equity-real estate bubble. In both cases the equity market popped first, Japan in 1990 and the US in 2000. The Japanese real estate market collapse that began in 1992 trailed the equity market peak by about 2 1/2 years. We are now just over 5 years from the equity market peak in the US with some signs that the real estate market peak may have just passed.

Another important point is that the Japanese real estate bubble was primarily a land price bubble and it appears that the current US real estate bubble is also primarily a land price bubble.

For the record, the residential market in Japan declined by roughly 50% to 60% from its 1992 peak . If it is any comfort, building values tend to be higher in the US than in Japan so the coming deflation of the US real estate bubble may result in a smaller percentage decline of total real estate assets than in Japan. Another thing to remember is that much of the Japanese real estate bubble was concentrated in a few major cities but that declines in residential prices were eventually felt in the entire country.

Sorry to throw cold water on the US real estate party but, from a vantage point here in Japan and with history in mind, something very unpleasant may soon unfold in the US.

Dave

August 25, 2005 11:35 AM

There was a pretty good piece in the June 18th issue of The Economist that talks about real estate bubbles in other countries. The author refers to the current global real estate bubble as the biggest bubble in history and discusses the Japan real estate collapse as well as the collapse that has now begun in Sydney, Australia (probably 12-18 months ahead of California in the cycle) where prices have dropped 16% in the past year. This did not require significant increases in interest rates or changes in the local economy. The market, as a previous poster wrote, will fall by its own weight. Interestingly, Harry Dent claims that Japan is exactly out of phase with the US in terms of economic cycles so perhaps it's a good time to invest in Japanese real estate now.

AlanSchmitz

August 29, 2005 3:21 PM

Some people's argument (including my stupid girlfriend whom I bought a house with in Florida) when you cite these recent references is that they're foreign countries and that is totally different. I know... I know... My brain hurts from how irrational that logic is too. So I was doing a little research and found documentation about a HUGE real estate crash here in FL. So those that say "Real estate has never gone done"... do more research than the last five years, get yourself a better education, read this
www.investopedia.com/features/crashes/crashes4.asp
and would you like some ketchup with your crow?

Troy

August 30, 2005 3:03 AM


Thank goodness for this website. My wife and I sold the home we bought for $155K in 2001 for $235 in 2004. We live in a small rural community about 120 miles east of San Diego which by no means is a hub of artistic, scholastic, political, or social grace. The reason we sold was because we were concerned with the potential of a housing bubble carrying over from San Diego to our community. We decided to take our cash and pay off all our debt and move into an apartment and weather the storm. What a strange storm it has been. In the past year similar houses in our old neighborhood are now asking (not yet selling) for upwards of $350K. What continues to interest me is that our community has yet to see any increase in local economic infrastruture, developement, or industry, that would conceiveably support an increased demand in new or existing housing. I honestly believe this increase in housing prices is being driven by a psuedo paranoia (if you will) precipitated by those who stand to make the most money (i.e. real estate brokers and agents, appraisers, mortgage bankers, etc). I'm not an expert in these matters by no means. But I can say this. I'm pulling my hair out not knowing whether I made a huge mistake in selling and cashing out early or if I was fairly astute in taking a reasonable gain and walking away from a possible windfall had I not sold. Only time will tell of course. Until then, I have to say it's somewhat encouraging to hear that other folks are dealing with the same issues. I'm not thrilled to hear from folks like Yuri who think the bubble does not exist, and I tend to agree that Yuri may be one of those benefiing from the bubble, but boy the thought that Yuri just my be right, really bugs the heck out of me. Good luck to those of you trying to negotiate these unforcastable times. My only recommendation would be that you don't overpay for your dream home just because you're afraid the opportunity will never come again. BUST THE BUBBLE.

DaveInCA

September 19, 2005 8:15 PM

It's really interesting to me that among all this bubble talk there is no discussion of the imminent demographic shift and technological revolutions. Most homeowners assume house prices ALWAYS rise and since about 1955 they have risen about 7% per year on average. This is close the the actual value of inflation and a couple of points above the hokey inflation number the government concocts by cherrypicking stats and then uses as the basis for fixed income payments, pensions, etc. Between 1890 and 1940, however, the average real estate and land price FELL in the United States. This was due in part to a westward expansion, but mainly to a technological revolution--the personal automobile and network of roads that were constructed curing this period. People were no longer forced to live very close to employment centers, but had other options and took them. What we face now is another technological revolution, broadband telecommuting, that will allow people to keep their LA or New York jobs and work from their home office in Moab or rural Idaho using realtime videocameras to TALK directly to coworkers in LA, NY, Bombay, Shanghai, or wherever and networked computers to share all documents, work and information. People will still travel to corp HQs a few times per year but won't need to physically be there for day to day work. Given a choice between a $900K condo in NYC or $1M home surrounded by traffic and ranting homeless people in Santa Monica or a $200K trailside mansion in Moab with great schools and no crime, while maintaining the same or similar income, what will yuppies choose? The other obvious demographic factor that is never addressed by the bubble articles is the coming retirement of babyboomers. There will be a huge number of people turning 70 and downsizing about 10-15 years from now. They won't want 4,000 square foot stucco boxes in suburban Maryland or California. They will want 1500-2,000 square foot places next to a beach or golf course in a semirural setting with a good hospital and a low cost of living. When I hear of surveys that show homeowners expect double digit appreciation to continue indefinitely or see posts here insisting that an obvious and glaring bubble is not a bubble, it frightens me because it is indicative of the American disease of being willfully blind to absurd levels of unsustainability. It seems obvious that the current bubble is bursting as I type, but ALSO that certain shifts in the way we live are beginning. I have one friend who lives and works in Germany for Sun in Mountainview, CA. My most recent employer has most of their software development done in India now and project managers work in California and Texas, but interface with India daily by videolink and e-mail. These professional might as well be in Idaho or Alaska or the Cayman Islands. I predict many others, not just tech workers, but much of middle management, will be doing this 10 years from now. When looking at technological revolutions, it is common to see stops and starts at first and Harry S. Dent proposes that the recent (2000-2004) sputtering of tech stocks is exactly what happened to the auto industry between 1919 and 1921, after it shot up and corrected sharply, then continued rocketing up until the great depression in 1929. He suggests that Intel's chart now looks pretty much exactly like GM's chart in 1921. Many other demographers and economists have pointed out that there is typically an economic depression about every 75 years with the last one in 1929. None of these trends bodes well for absurdly inflated housing markets for quite some time. I guess my main point is that, given the assumption that the bubble is bursting and speculators are now rushing for the emergency exits, Los Angeles or Boston might not recover from this bubble bursting in 10 or 15 years. These places where highly educated yuppies now have jobs but where the quality of life has taken such a hit because of traffic, pollution or crime might take 30 or 40 years to recover.

Dave

Pat

September 22, 2005 3:42 PM

I agree with kent about the market crashing. So many people are in denial about real estates prices falling, probably because they just don't want it to happen. I live on Long Island where prices have more than doubled in the past 5 years. Everytime I bring up the subject with someone who owns a house they say the prices aren't going to come down and that if they do it won't be more than 5%. They are so sure that the prices will hold, but when I ask them what they would tell me if I told them 5 years ago that prices on Long Island would double, they usually shut up. This is how bubbles form, people always forget bad times and always remember good times. History shows that bubbles do pop and prices do go down. The higher the prices go up, the lower they have declined and since this is the biggest incline in history, you have to be logical about what is to come. Kent is right on the money about speculation and the rediculous mortages people are taking on. If you have to stretch yourself that far (100% financing, interest only) to buy now because you believe you will not be able to afford later, then you must also believe that most other people will not be able to afford....and if that is true, how could you believe these prices will hold???

Dave

September 23, 2005 4:43 PM

What a bunch of bubbleheads. Real estate is not going to ever come down. It is called inflation. Do you really think the Fed would allow Deflation! Come on now. These investors buying houses how are making the best investment they possibly can, because they know the Fed will do Anything, including dropping interest rates below 1% to stave off deflation. Get a clue and get a house. If you were smart, you would get 2, and rent one...

danielf

September 25, 2005 1:25 AM

In 2000 paid $90 a share for Siebel, $300 a share for Redhat, Sun Micro was a bargain at $68...lost over $100K in six months...

Ouch...man did that hurt...

In March 2005 sold my Sausalito townhouse for 830K...bought it in 1998 for 380K...

In August 2005 sold my San Jose house for 760K...bought it in 2002 for 470K...

Student loans are history. Credit card debt is history. Bank account is fat and I'm moving somewhere warm and cheap...maybe Panama...maybe Costa Rica...maybe New Mexico...

Yuri and Seattlecoder...thanks for the laughs...and I'm just glad it's not me this time around.

cory

September 25, 2005 4:11 AM

Money supply is tied to the interest rate. Excess money leads to inflation and shortages of money lead to inflation. Price Deflation is caused by high interest rates. The feds want to keep a generally low predictable interest rate of 3-4% a year. When things are out of balance is when things go awry. What typically breaks the balancing act are decreases in corporate profits and wages. So, with the price of gasoline going up, you will have a decrease in household disposable income. When the ripple effect becomes deep enough that 20% or so of the people can't make ends meet or don't have jobs you will see a large decline.

Inflation is defined as the overall general price trend going up based on a pre-determined basket of goods. It is not just the interest rate. With fuel going up in price you will see everything go up in price. This will lead to inflation and the federal reserve will keep interest rates low.

However, as inflation worsens, low rates exacerbate the problem. This is when the fed will be forced to raise rates. At this point, prices in the economy will already be at an all time high. Corporations will be losing money and unumployment will be up. Then, all the people on variable rate loans and negative amortization loans will see a large rate of foreclosure. There will be a large excess housing inventory and few buyers that will have money to buy.

A ripple effect like this typically takes a 2-3 year cycle to complete. I believe we can ride out the bubble for a few more years (not all areas). The feds will try to balance everything and maybe even someone will take care of the oil problem (not likely).

You also have to remember that prices come down slowly. If the trend starts in 2-3 years then it may not fully shake out for another 2-3 years.

I think a simple calculation is to take the average household income in an area and figure out what people can afford. Then start to figure out how much lost income will put them over the edge. I think a 20% increase in prices would put most people very close to the edge.

Any thoughts.

dumb cory

September 27, 2005 5:28 PM

you are dumb, cory. you obviously have only a very primitive understanding of macroeconomic theory, and a misguided one at that.

Hans

September 27, 2005 10:03 PM

Isn't it time to consider abolishing Central Banks in general, and the Fed specifically?

The FED's bad judgment manifesting in terrible decisions has destroyed countless people's lives since 1913. If it wasn't for bad judgment, they wouldn't have any at all.
Perhaps it is just a function of what they are asked to do?
Central Planning... need I say more? I will.

Sadly, the FED (and other central banks around the world) will not soon leave the stage, nor will the extreme damage they cause soon be alleviated.
Their raison d'être is supposedly to "smooth" the business cycle and diminish the pain. Ha!
There is no greater augmenter of the 'cycle' in the business cycle, than is the proverbial Central Bank. It creates the pain and keeps itself in business by promising to mitigate that pain. What a fraud! What extortion!

The FED created (or, if you are generous, it exacerbated) the boom of the 1920's, which led inescapably to the Depression, which the FED then managed to aggravate into the GREAT depression.
Most recently, the boom of the 1990's and the bust of the 2000's.
And now their latest act of infamy: the housing boom.
It would be funny if it did not kill.
Enough said.

Hans

September 28, 2005 12:38 PM

I agree with those that see the bubble and not with those who cannot.
Time will tell who has the clearer vision.

However, the ultimate causes of this housing bubble are not clear.
While human psychology is clearly a main player, it is a player that acts to facilitate the bubble and not to directly create it.
The ultimate cause is the FED and, as quaint as it might sound, the lack of any foundation for our money system.
Of course, we all swim in the same pool, and there are other derivative players as well (pun intended). The whole world is now playing in a Ponzi sandbox of unkown size. We are so far out of the envelope that we have gone nutty.

We have a money system that is no longer self-limiting and self-governing.
The FED (and other Central Banks around the world) have no restraints, nor does the rest of the financial community, when it comes to their behaviour in the creation and use of money, nor do they, nor any of us, have any useful, timely feedback to indicate when we are in harm’s way. There is a hurricane bearing down on us, but all of our eyes in the sky are blind.

We used to have limits, before we decided to trust in paper money, which is backed by nothing, except the printing press. We are so used to this approach in our daily lives, that we take it for granted, as if nothing could ever go wrong with this system. It has gone wrong, terribly wrong. But we are not yet aware of how wrong. The storm is still off shore.

There may never be a perfect system for money, but the one we have today is most likely the riskiest and the most open to abuse and mismanagement of any we could possibly have invented (other than possibly having counterfeiters and loan sharks running the show).

Isn't it time to consider abolishing Central Banks, or at least changing the directives that they operate under? Can a Command Economy approach ever work? It hasn’t yet (and the Communists gave us a pretty good history lesson on that topic). How can it be expected to work from a Central Bank perspective?

The FED's bad judgment has manifested in terrible decisions that have destroyed countless people's lives since 1913. If it wasn't for bad judgment, the FED seemingly wouldn't have any at all. Perhaps it is just a function of the mandate they are asked to fulfill? Central Planning... need I say more?

Sadly, the FED (and other central banks around the world) will not soon leave the stage, nor will the extreme damage they cause soon be alleviated. Their raison d'être is supposedly to "smooth" the business cycle and diminish the pain. Ha! There is no greater instigator of instability in the business cycle, than is the proverbial Central Bank. It creates the pain and keeps itself in business by promising to mitigate that pain. What a fraud! What extortion!

The FED created (or, if you are generous, it exacerbated) the boom of the 1920's, which led inescapably to a depression, which the FED then managed to aggravate into the GREAT Depression. Most recently, the boom of the 1990's and then bust of the 2000's. And now the latest act of infamy: the housing boom. It would be funny if it did not kill.
‘NUF said.

EZ E

October 5, 2005 6:20 AM

Housing Bubble ?

You people are nuts !

Housing will rise 30% a year for the next several years. When I bought my new house this summer it went up 10% before I could unload my new big screen and slide the navi into my 3 car garage.

You all say housing will drop, well wait and see when my new house makes me a cool 500 K soon :)

BigBuy

October 6, 2005 6:51 PM

After cashing out from my L.A. home in April 2005, I've been starting to hit the pavement in San Diego to look for a new roost (I'm renting in between). The market, the inventory, without a doubt is increasing, and prices are dropping. In fact, knowledgable and honest agents with a variety of listings will even say that things began to soften ever so slightly as early as last Fall (the L.A. market remained strong, but may be softening now as well).
With this softening upon us, the critical question becomes, when is the best time to buy? I'm already able to get 20% off the original list on homes in the $1-$1.5M range, since rising inventory clearly has sellers squeamish. The question is, how low will it go, and when will all of us who haven't repurchased start to flinch and buy again? We tend to accuse current sellers of speculating, but the real psychology we need to understand as we slip from the highs is the psychology of all of us buyers who have speculated that it is best to wait. We will soon be driving the market.

sal

October 14, 2005 2:52 AM

I can't believe some of you are actually selling your homes to try and take advantage of a market correction. Yes were probably in a bubble. Don’t gamble with your family's home. I can’t imagine how nerve wracking that can be, heck I sold a rental last November and I find myself second guessing the decision since values in central California have increased another 30% but then I think about the 100k I netted after taxes and I am seriously considering selling my other two rental properties. My advice to those of you with some home equity but have no rentals to sell. Borrow out your equity now at the best fixed rate you can find and afford. Go ahead and tie it in a CD or some other safe financial instrument. Wait a couple of years and go buy yourself a rental to sell in the next boom. I know this isnt the most efficient way to save but it is effective. I ought know since this is the formula I used get my three rentals in the first place.

Hans

November 11, 2005 3:30 PM

A "cool" note to EZ E:
Do you plan to move into a much cheaper home?
To get your "cool" $500K OUT of your current home, assuming you realize that kind of capital gain, would you live in your car? I guess you could buy a pretty fancy Motor Home for that kind of moolah?
Your gain is illusory until you move to a cheaper locale, or die and let your heirs take the proceeds.
I recommend that you take a moment to read a quiet and deliberate analysis of the potential for our being in a Housing Bubble by Dean Baker and David Rosnick at: http://www.cepr.net/publications/housing_bubble_2005_11.pdf
They do not KNOW if this is a bubble, but present evidence to suggest it sure quacks and waddles like one!

steve young

November 17, 2005 10:37 PM

Should I stay or should I go? 1998-1999 I purchased 4 houses with 3 rentals in each. 12 tenants. 9800.00/month. rental income
920,000.00 for 4 houses in 1998-1999. Now it's Nov 2005. I could cash out real fast for 2,350,000.00 Maybe move to a safer real estate market, any ideas.
steve

Doesitmatter

November 19, 2005 7:55 PM

Steve,

Go find a certified financial planner. All you will get here is opinions from unqualified anonymous sources. 2.35mil is too much to gamble on anonymous/biased opinions.

Terry

November 30, 2005 2:06 AM

Thanks for the (generally) insightful opinions on this site (others, like EZ, Yuri, and Dumb Cory, are simply laughable).

I'm a first time home-buyer who has relocated to the bubbly DC area. I actually haven't bought a house yet because all indicators are that inventory is going up and asking prices have already been reduced $20-50K in the month I've been actively shopping. Some say this is seasonal, but even compared to last Nov/Oct, things are clearly slowing down.

The question is: in a softening market, how much would prices expect to come down and in what timeframe? For example, by the upcoming spring buying season, could one expect more reasonable prices or will sellers still expect to get the same outlandish prices for moderately sized and located houses? Does it make more sense to lowball an offer now since houses on the market over the holidays are offered by those who must sell now?

Any insights?

Wes

November 30, 2005 11:46 AM

Steve - it sure would be nice to have 2.35 million in a brokerage account while you're sitting on the beach in Aruba right about now. Good luck in your decision.

Terry - The big issue with this overheated market and first-time homebuyers is the fact that you are buying with little or no equity. Any drop in price would have you underwater for what could potentially be the better part of a decade. This obviously has more severe effects than the guy trading up with 100K in equity.

Regarding the timeframe for a correction, your guess is as good as mine. Looking back on historical precedents, the 1929 stock market crash (that presaged the Great depression) had recovered nearly all it's gains within a year before finally heading downhill and being in the dumps for close to 20 years, causing a depression and a couple mini-recessions in the process.

Since the housing bubble buildup has really been ongoing for the better part of 8 years, it stands to reason that it will take close to the same amount of time to recover. My prediction is that prices might bouy near the top for up to two years before beginning a long march downhill that will last 7-10 years. I'll be real suprised if real-estate is ever again the primary investment vehicle to own in my lifetime. Does this mean everyone will lose money? No. Some areas will be hurt less than others; after all people still have to have a place to live. Houses will come to be seen solely as such - a place to live. The era of seeing a house as an ATM first and roof second will be as gone as seeing internet stocks double every couple months.

Prices - prices should continue to soften for the remainder of the year. I expect some 'bouying' of prices in the spring as people try to get high $$ for houses (as happens each spring) yet once reality sinks in prices should soften up.

Folks, the housing market is doing a much needed correction. We should all be thankful (and wishful) that this correction happens now and lasts enough to take the speculative steam out of the market. Immigration, employment, and population growth as fundamental recent changes in the economy is hogwash. Immigration is likely to get tighter - Bush proposed tightening the borders yesterday. Employment is fine, yet it was dropping in 2001/02/03 yet that is when the housing market hit a boil. Population growth is projected and will not likely hit levels seen in the past 10 years. If the market were to continue unabated we would be looking at a serious economic train wreck.

Good luck with your house hunting. I highly recommend reading "Irrational Exuberance, Part 2" for further information. Being an informed consumer is the best way to be.

Kay

December 15, 2005 10:48 PM

Housting Bubble? Houston.

Selling new homes for homebuilder, and I can tell you that I see in my sales office on a weekly basis 5 to 7 Californian's and Floridians selling and moving to a what they feel a more stable housing market, and getting alot for the money. This past week, I saw prospects from Ohio, New Jersey, Minnesota in addition. They are amazed at what I sell for $450K.

Ma. Roma@Miami

July 10, 2007 11:27 AM

Housing Bubble and Miami Real Estate
For most of us, owning a home has always been a serious business because we look at it as our most valuable asset. This is the reason why owning one is like striking upon a pot of gold at the end of the rainbow, so to speak.

In recent developments, homeowners are sometimes scared by the “words of gloom and doom” from experts in economy and media. Say for instance, Robert Shiller, a Yale economist, calls the global housing boom “the biggest bubble in history.”

Wes

July 10, 2007 10:31 PM

"In recent developments, homeowners are sometimes scared by the “words of gloom and doom” from experts in economy and media. Say for instance, Robert Shiller, a Yale economist, calls the global housing boom “the biggest bubble in history.”

Doom and gloom. Not to yank my own chain, but read my comment from Nov 30, 2005. I described pretty close how the market has performed in the 20 months since (down about 3% nationally) which is pretty much a wash when accounting for the margin of error. What is not disputed is the 3% inflation for each of the past two years, so we are looking at true price declines.

I suggest you take your Miami condo and keep looking for the 'pot of gold' at the end of the rainbow. Discredit Dr. Shiller at your own risk.

Carroll

December 12, 2007 2:05 PM

It's funny how the older posts ere read in hindsight.

Yes, speculation was a diver of the run -up-- and greed (as always) a trigger in the collapse. But the greed that no one seemed to see, back in 2005 (and some even now) is the greed in the stock market.

The funds for the "exotic" mortgages came from eager investors who liked the higher interest rates they paid. The sticky wicket its that they lent the money through a series of intr5ocate middle men-- the loans were 'securitized", sliced into "tranches" RATED (as to risk) and sold. (Can you say "junk bond"?)

That risk assessment crumbled because n o one took into account the INSIDER fraud, accompanies like new century, as well as other fraud which is a direct result of too much money easily available, and too little oversight of "vetting" of loan apps. (It was automated.)

Those fraudulent loans led to the "early defaults" you read about. NO payments. (Your Joe Schmo "liar loan" dude does not bail on the loan from day one!)

Those notes had to be bought back buy the originators who rapidly ran out of money, as the value of most of the "MBS" and "CDO" bundles became an unknown quantity.

So add that to the reasons why a bubble bursts.

Only it's not simple.

AbbeBrel

May 12, 2009 12:02 AM

What a great historical perspective. I was actually looking for historical housing bubble info. It is interesting to live through one. I hope there aren't any flat-worlders out there who still insist "there is no bubble". My big question is : how will things work out as the economic weakness combines with the upside-down mortgages on the Case-Shiller graph over the next couple of years. Some folks are predicting an overshoot on the downside - I am thinking that we will continue downward but at a flatter and flatter slope until we have entered the Era of Agony. Full disclosure: Renter (by choice) since 2004. AB

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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