Housing bubble

With all the talk about the coming “housing bubble”, what would make this downturn different from any previous ones? Was there talk of a “bubble” before the 2000 dot.com crash? The housing market is cyclical, but I hear this one may be different than the rest for a variety of reasons - high amount of ARM loans being just one of many. Historically, on average, housing prices double every ten years - some areas much higher, some lower. From that perspective alone, real estate still looks like a good place to put your money. Are there any investors out there who’ve invested for more than 20 years who can compare what’s going on today vs what happend 5, 15, 20 years ago? Is there a way to draw a parallel? Any similar indicators today to compare with earlier cycles to better prepare for the future of investing?

Best wishes to all…

<<Was there talk of a “bubble” before the 2000 dot.com crash? >>

There was in my world (telecommunications)…!

The biggest problems today are:

(1) People are using ARMs to buy waaaaaaay more home than they need or can afford…it is the whole “super-buffet, all-you-can-eat/no consequences” mentality.

(B) People don’t understand/don’t think that interest rates can (and probably will) escalate and maybe rapidly. When it does and the ARMs they are sitting on go from 7% to 12% are they going to be able to make payment? They bought way too much house and paid way too much on top of that. They have $700K and $800K houses. They are betting that the rates stay flat (and they stay employed) or that the market will continue to escalate and they will find a ‘bigger fool’.

My two cents…


you’re right this time will be different.

i think we’ll see an inflationary period like the late 70s followed by a recession led by the devaluing of the dollar and the fact that the US is now the world’s largest debtor nation.

On top of that, we’re going to china and tell them that they should borrow more and save less. thats like a C+ student telling an A+ student he should study less and party more!!!
sorry, its irrelevant but i just had to share. ;D

Housing Bubble is a term the seasoned real estate investors made up to keep the newbies afraid of investing. That way there’d be more pickings for the experienced guys.

Now, this is a joke of course but… think about it…really.

I think that the “Housing Bubble” stories are coming from the stock market guys.

Since their bubble popped in 2000, the stock market hasn’t been as much fun as it was in the last half of the nineties. Maybe they just want to ruin our fun because they are envious.


I first started to hear the term “Housing Bubble” some 5 years ago…shortly after the so called ‘tech bubble burst.’

Bubble Heads always have predictions as to what’s going to be the ‘tipping point.’ I think it’s all so much speculation.

I’ve read some so called experts predict 25…even 75% decline in property values…I say, “they’re not experts at all, they’re sensationalists.”

I’ve always felt that when the new paradigm was over (and I think it is)–we’d see a cooling period w/perhaps some of the higher end homes loosing some equity. We’d see marketing times getting back to what’s traditionally been a norm (90-180 days). I also think we’ll see more options for borrowers coming from the lending community in the future.

Many areas of the country are currently entering what appears to be a transitional period. But than again…this is what has traditionally been the slow time of year for real estate sales (Oct-Jan).

Some regions will take longer to recover than others. Those will be the areas that have seen the greatest amount of speculation, and appreciation (Vegas, Orange County, areas of Florida…).

I prefer to react to markets…rather than predict them.

Areas that interest me currently are; Miami (still), Nashville, Boise, Pheonix, Seattle & Maui. There appears to still be a significant imbalance in supply vs. demand in these areas.

“I think that the “Housing Bubble” stories are coming from the stock market guys.”

I wouldn’t totally disagree with that assessment.

People got stung, and stung bad in the stock market. Bunch-o-dirty-SOB’s didn’t play fair & took investors to the cleaners.

People haven’t forgotten, and despite the fact economic indicators look favorable for areas of the stock market again…many investors haven’t gotten the taste out of their mouths yet.

I’ve also noticed PMI companies have jumped on the Bubble Bandwagon the last couple years–writing articles & making predications of which cities are at most risk. Could it be because, they’ve lost market share w/creative financing making the scene? Could it be because, they’re insuring riskier & riskier loans?


Prices have stalled in Vegas now, and here in Tucson too. No real drops yet, but if interest rates go up even two percent, there will be any thousands fewer buyers able to buy. By the way, it looks as though fewer buyers will drive up rents here, so this may be the time to invest in rentals. There is a way to play every market.



That’s what I was thinking, Infowell. I’ve been hearing a “bubbling noise” for about 5 years now, and it seems to move from area to another. I’d be much more concerned about American debt in general than with the housing market in particular.

And I believe you’re right, Steve. There is a way to “play” every market. Some of the greatest financial gains of the last century came out of “depression” and “recession”, for those who were able to get themselves into position.

The tech bubble in the late 90’s was driven by companies with inflated earnings goals and companies with internal burn rates of 100% or more. (Burn rate is the rate that you go through your startup capital. 100% burn rate means you’ll burn through it in 1 year. Traditionally, startup businesses in classical mold were designed to be self sufficient by the end of year three and profitable by year 5). All that being said, the dot.com era was alot of speculation on essentially fictional companies. It’s always tough when you speculate on something that isn’t a requirement of the public. There are wildly volitile swings in luxury items every day because it’s something people can live without.

Real estate (at least on the residential side, commerical is a WHOLE different animal) or more specifically SFR or most Multi Family residences are a requirement of every community. Everyone needs shelter, it’s fundamental. No one really needs stocks. Sure, it’s nice to invest your money to make returns on equities, but if you don’t you can live a very fruitful life (just like 90% of people did prior to 1960). No one has to have commodity futures, call or put options, bonds or any other investment vehicle. But people need homes. Everyone needs shelter. So, while there could and may be some price correction of the higher end homes, the bread and butter neighborhoods are always going to have strong demand.

To the poster who wrote that ARM’s are dangerous because people are buying mroe home than they can afford, I offer a couple of rebuttles. One, if the ARM rates jump to 12% then alot of people would JUMP FOR JOY because that means that your other investments are getting extremely high returns because prime rates at that point would be 14-16%. Your bond returns would be 10% and your money market accounts would be getting 8% on a 100% safe investment. Two, If interest rates jump that high nationally then it’s because of inflation. Since the #1 cause of sustained inflation is wage growth, then we would be experiencing phenomenal wage growth as a nation and thus, you could most likely afford the increase in housing payment. That’s why real estate is for the most part a recession proof venture. If the economy is poor (bear with me on the oversimplification) rates are low and people can afford to borrow money cheaply. If the economy is good, rates are higher but people are getting paid more and their other investments are generating good returns so they have more money to spend on homes.

Over simplified but just look at times of high interest rates and the # of home sales and you’ll see traditionally that higher rates does not mean a housing collapse for residential real estate.


Just a comment

"One, if the ARM rates jump to 12% then alot of people would JUMP FOR JOY because that means that your other investments are getting extremely high returns because prime rates at that point would be 14-16%. Your bond returns would be 10% and your money market accounts would be getting 8% on a 100% safe investment. "

One of the differences that may be occuring this time around is that fewer and fewer people have your usual “other investments”. I read recently that as a nation we have a savings rate right now of -1.8% (we are spending more as a whole than we make ). This is seriously different than the last time we had interest. If more families have no investments to offset their home mortgage interest going up, then it could hurt the market more.

My two cents,


That’s correct. However you have to look at the economics behind the savings rate. When borrowing money is inexpensive (low interest rates) then it makes good financial sense to borrower more because it’s not only cheaper to borrower, but your own money that you’re ‘saving’ is generating very poor return on investment. As borrowing money becomes more expensive it makes good financial sense to borrow less and save more for exactly the opposite reasons. Essentially, when rates are low you extend yourself, when rates rise you pay down debt.

I think that what gets lost on some people is the REASON rates are low or high. Rates are a function of supply and demand on the monetary supply. While we can discuss our theories on monetary policy all day, the bottom line is that rates are low to ENCOURAGE less savings and more spending. That’s completely intentional and it’s how the economy is designed to work.

You can’t ever look at a statistic like the national savings rate, the budget deficit, the trade deficit, etc. without taking that statistic in context. As long as the overal fundamentals of the monetary health of the economy make sense then the results are predictable. As of now, the system is stable because all of the results have been predictable.

Realize as well that the fluctuations in the economy in the last 15 years have been less severe than in the 15 years before that. With information transfer as rapid as it is now, corrections can be made much quicker than before.

I encourage everyone here to do some reasearch on what is known as the ‘bull-whip’ effect (it pertains to supply chain management for individual companies) and envision this whole process on the macro level with the US government. Now picture that whole process when information transfer is almost instantaneous (as it is closer to today than say in 1985). As you reduce this effect you normalize variances greatly in the model. We can discuss this more if you like, as it interests me greatly.

With regard to rents. I am finally begining to see rents rise. Finally some of the areas I have are going to bring in Market rent without too much wasted time. Previously it was get below market rent ($25-$200) just to rent it quickly or take the full hit every month and try to make it up in 5 years. If this trend continues, I should expect a steady increase in rents.


  1. … Rates are a function of supply and demand on the monetary supply. How?
    Over the past 15 years, the Federal Reserve and many other central banks have increasingly relied on interest rates, to the almost complete exclusion of monetary or reserve aggregates, both as sources of information for determining policy and as operating instruments for conducting policy. - FRSF

  2. … envision this whole process on the macro level with the US government. What process?

Oski that is not entirely correct/clear.

The Federal Reserve has several tools at their disposal to regulate the money supply. They can adjust the percentage of reserves banks must retain, this is the percentage of the total deposits they have on site. Remember that to a bank, a deposit is a liability on their balance sheet. The Federal Reserve has the right to require a certain percentage of their liabilities to be backed by actual funds (i.e they can’t loan out 100% of their deposits because when patrons redeem their funds the bank would not have the funds on site to accomodate this). This is the most drastic form of monetary tightening as even small shifts in this percentage reduce the velocity of money creation greatly.

Another tool they have is the ability to reduce the available money supply by issuing government back securities. This is used with a good deal of frequency as it can reduce a very predictable and controllable $ amount. It however doesn’t affect monetary supply on the scale that can generate great swings and as such is a secondary tool.

The primary tool the Federal Reserve uses is to change the Fed Funds Rate. This is the interest rate that Federal Reserve banks charge other banks for borrowing money. When you read on Cnn that the ‘federal reserve raised rates today’ that’s what it’s referring to. This has wide reaching implications because it directly affects the published Wall Street Prime Rate which is the rate that banks charge their best or ‘prime’ customers for loans. Almost all unsecured loans in the United States (and many secured loans for that matter) are a function of Prime ± points.

Your post that the Federal Reserve has relied on interest rates to determine policy and conducting policy is 100% true. The Fed adjusts the Fed Funds Rate which will then affect the cost of money and since there is an inherent velocity of money generated by the lending of money this DIRECTLY affects the supply of money in our system.

What I mean by envision the process (I was referring to the Bull-Whip effect) on a macro level is how Demand for products (in this case Money and thus interest rates) is affected by the transfer of information. Simply put, the longer it takes to gather informaiton the less precise the reaction to that information is. Since gathering information about the economy, real estate markets, job stability, etc. is much faster now the reactions are also less drastic. As such, you see fewer ‘GREAT DEPRESSION’ type falls and fewer ‘GOLD RUSH’ type rises. Things are more normalized and the notion of massive chaotic changes overnight are not nearly as likely (although not impossible). Faster information means less Knee-Jerk.

Nice one. What then is your take on the Housing market in general, for the next twenty-four months? Empirical studies have shown that … (I leave that to you to round up).
In response to your last paragraph, i consider the Bull-whip effect inappropriate. The Demand for money and the dessimination of information at a macro level will not cause a Bull-whip effect. In order for this to happen, housing stats and not rates will have to be inversely related to dessimination of information.

Oski, I don’t think it will cause a large effect either. In fact, the reason for me bringing up the bull-whip effect in the first place was to illustrate how lack of information or information that takes longer to disseminate causes greater swings in the supply chain. I’m arguing for the opposite to happen. I’m backing the stance that since information is almost instantaneously available today, as opposed to 20 years ago, that wide fluctuations or ‘bursting bubbles’ are much more unlikely than they were in the past.

One of the reasons that conforming underwriting guidelines have gotten more lax on the documentation required (i.e. stated income, stated asset, no doc, etc) is because of more information being readily available from a credit standpoint. There are many more complex computer models to calculate the performance of loan products and parameters for these products are amended based on early payment default rates, slow pays and the like. Just because people are taking advantage of more non-traditional loan programs does not mean there is a higher default rate on these programs. Quite the contrary.

I hope you are right, but I am having a hard time buying this reasoning.

I think that lending and underwriting guidelines have gotten more lax because the lenders want the money they make from writing the loans. They have to “lend or die” in this environment.

And logic dictates that weaker borrowers, or borrowers who are over-extended, will not have the capability to withstand even a modest downturn or market reversal without defaulting.

Check out the article called “Scary Stuff” by Eric Fry at the link below:


I hope I’m right too Valgolas since I’m an Underwriter and I’m one of the people approving borrowers for these loan programs :slight_smile:

I will say that we do constantly review the default rates (Early payment defaults in the first 180 days are our key concern since we don’t service our own loans) and our investors review each loan program’s performance on a constant basis. So far, the stated income, no doc loans are out performing almost all loan products. This is primarily due to the higher credit requirements and lower LTV’s required by the loan programs.

As for the article. I don’t dispute the statistics that he uses. But as I’ve stated in previous posts, the statistics by themselves don’t indicate anything other than the fact that home ownership is easier to attain now than before. Lending practices aren’t more lax to generate higher profits just for the sake of generating higher profits. The secondary market to which these loans are pooled and sold as mortgage backed securities is a very complex market. Between prepayment rates, servicing premiums, default rates, pass through income and a variety of other factors these loans are scrutinized quite heavily. After all, the institutional investors that invest BILLIONS of dollars in these securities could spend their money else where if the return did not outweigh the risk.

In the article you mentioned, the author states what would happen if ‘housing prices fell’. My question is what would make them fall? In his scenario, 20% of Americans would lose all their equity if home prices fell just 5%. Although I’d need more than just his word to buy these figures, we’ll assume they are correct for the time being. My contention is that if these people couldn’t walk away from their house because they owed more than they are worth that these homes would just be removed from the market as a whole. Now, of course there would be the distressed sellers from forclosure, divorce, etc. but those sellers exist today and sell below market to day anyway. My contention is that more likely than people losing all their equity and having this money ‘disappear’ you’d just have people staying put more. While this may decrease demand for homes (and some would say it would decrease home prices by lowering demand) it would also decrease the supply of existing homes coming to market and that is supposed to raise prices. Bottom line is that everyone says ‘if home prices decline’ but my question is what would make it DECLINE? Stablizing is probable due to the inability to sustain double digit rate growth, but actual depreciation makes ZERO economic sense.

What would make housing prices fall?

When my parents bought their last house, they were paying 13% interest (and they had perfect credit). Imagine how many people couldn’t afford a home at 9%, let alone 13% interest. There is one way they could afford it - lower prices.

It is true that when the drop comes, people resist lowering their prices and hang onto their properties. This effect caused a great stall in the Tokyo market fifteen years ago, before people finally accepted that they had to drop their price by half to sell anything. But that’s the point - prices are set at the margins. If almost everyone sits on their “investment” some will still have to sell, and sell for less.

Prices are affected by not only interest rates, but unemployment too. If that rises as well, it will mean less demand. Our website started because of our experience buying a home for $17,500 in a town that lost jobs and saw declines in home prices for twenty years - so it can happen.


Agreed. I’m not saying prices can’t fall. I’m not saying that economic conditions can’t create conditions conducive to declining home prices.

Several people seem to be misunderstanding the point I’m making. My point is that the factors that would cause a ‘housing bubble’ are not factors that have to do the housing market specifically. They are factors such as unemployment (which you bring up), major economic changes, or localized changes.

To use your Tokyo example - The Japanese real eastate market decline was a product of their inability to stave off deflation in their economy by what many consider poor monetary policy.

To reitterate - It’s possible that the real estate market could turn and values could plummet. But for that to occur, you’re talking about massive economic downturns on a national level. You’re also making the assumption that this decline would be long standing (much like the 10 YEARS of economic decline in Japan). So instead if your overall outlook for the US Economy is very pessimistic then it would make for a better hypothesis. However, you won’t have a real estate bubble bursting if the economy as a whole doesn’t burst.