what bubble ?

Yes, there is most definitely a bubble. It may be most pronounced in coastal cities, but it is affecting most of the country. This article outlines the data pretty well. Graph #2 pretty much says it all.

http://www.forexrate.co.uk/news/item/769

“I have found that people who believe in the bubble don’t invest in RE.”

Sooooo True!

Some of the most staunch Bubble Heads are deeply entrenched in the Stock Market. I’ve come to believe some reporters (CNBC) are actually trying to create a Housing Bubble to get some volatility back into the Stock Market. They’ve abandoned maket fundamentals for market mentality & hope their seeds will germinate & grow in the minds of the public (I believe that’s why they address the so called Housing Bubble 3-4 times a day now…they’re tired of waiting for something to happen in the Housing Market. They probably believe a Housing catastrophe would chase investors back into the Stock Market).

Additionally, I know a small group of Appraisers who border on Bubble Activism. I think they’re actually hoping for a Bubble because, they specialize in appraising foreclosed properties. A popping Housing Bubble would prove a windfall for them. The worst–nearest as I can tell–doesn’t even own property.

-Infowell

sw.

Interesting article, though I am confused how the statistics prove a bubble, rather than a normal business cycle for real estate.

For example, in the first graph, the historical nominal rate of housing price increases was at a peak of 15% in 1977, then declined to zero in 1990, and now increasing again, is at 12.5% this year. If the conditions are ripe for a bubble now, why wasn’t there a bubble in 1977 when rampant inflation was driving the prices of everything up and 15% mortgage interest rates did not really stem home buying enthusiasm?

Isn’t this really a graph of a 15 year business cycle where the rate of price increases may slow down in the valleys, but housing prices don’t really drop if the market is not influenced by external forces?

The next chart (Graph 2) purports to be a graph of the US Housing “PE” ratio – the ratio of price to rental income generated. The graph is at an historic peak for the period 1974-2005, however the graph makes no sense. If the PE is peaking now at 1.62, which says that price is 1.62 times earnings, then my $100K property should be generating $61728 in annual rental income (Actually my $110K property generates $11400 per year for a PE of 9.6). If the graph is correct, then why is a PE of 1.62 bad when the stock market PE is averaging around 22 right now? The graph, as presented, makes no sense to me.

Consider the following quote by Susan Schmidt Bies (the article alludes to her being a member of the Federal Reserve Board of Governors) cited in the article:

[b]We see indications that underwriting standards are beginning to weaken. For example, “affordability products” - such as interest-only loans, negative amortizations, and second mortgages with high loan-to-value ratios - are becoming more popular; sub-prime lending is growing faster than prime lending; adjustable-rate mortgages, or ARMs, have grown substantially and now account for more than a third of all mortgage originations, the highest level since 1994. Industry experts are increasingly concerned about the quality of collateral valuations relied upon in home equity lending and residential refinancing activities. [/b]

Why doesn’t the author conclude that this is a precursor to another lending institution crisis such as we experienced in the 80s with the collapse of the Savings & Loan industry? Perhaps we will see a higher number of foreclosures at some point in the future as a result of these lax lending practices, but how does the author leap to the conclusion that this is a sign of a bubble? If it is, when why wasn’t there a bubble back in 1986-1987 when these same lending practices were around when the S&Ls got in trouble? I don’t see it.

I see the moderator (or editor) is also taking the national bubble notion espoused by the article with a grain of salt when his signoff tagline is “Your wishing we had a bubble in Texas real estate analyst, John F. Mauldin”

Since, Montier (the author) opens his article with a confession that he knows very little about housing, I suspect this article at an online commodities investment website is a not too subtle attempt to scare money away from real estate investors and back into the commodities markets.

Just how I take it.

People who believe in the housing bubble do not have an ulterior motive and they are not trying to sell you something. They simply have read books on economics and are trying to warn you. I feel like a doctor warning primitives not to drink infected water, and they reply, “I don’t see no bacteria.” Similarly, RE maniacs don’t see a bubble because it requres a conceptual understanding of market forces.

RE will crash until mortgage + taxes + maintenance equals rent. It’s really that simple. This means RE will fall 30-80% in the future. RE bears don’t know when it will happen, but we are CERTAIN it will eventually happen.

If your $500k in stocks loses 50%, you’ve lost $250k. But if your $500k house gets cut in half, since you put no money down, you now OWE $250k to the bank, PLUS you owe taxes on the loss. Look it up. Additionally, when RE crashes, you can’t find buyers at any price, so you keep paying the increasing ARMs, hoping for salvation, until you end in bankruptcy. It’s a very dangerous game you’re playing.

“For example, in the first graph,…”

I’ve been reading graphs & charts from so called Real Estate Experts for years, and years, and years, and years, and years (count em…5 of em). I’ve been hearing about a looming housing disaster nearly as far back as Y2K, and those folks continue to be wrong while those investing continue making money. “You’re only an expert on the way up”…and at this point I’m questioning the competency of those who’ve been warning of a coming calamity for so long.

“RE will crash until mortgage + taxes + maintenance equals rent.”

I don’t think you have a realistic grasp on the new paradigm Bob.

“People who believe in the housing bubble do not have an ulterior motive and they are not trying to sell you something.”

I don’t know that it’s even so much an ulterior motive…as wishful thinking. For some of the Bubble Heads I’ve been hearing from…they’d stand to make some pretty good money, or at least finally start to look like they knew what they were talking about if a Bubble were to burst.

"I feel like a doctor warning primitives not to drink infected water, and they reply, “I don’t see no bacteria.”

You know…this is liable to come off wrong. I don’t mean it to be overly harsh, but purely an observation based on my experiences:

Some of the most caustic and antagonistic people in this debate are those who believe there’s an ever growing ‘Housing Bubble.’ That fact absolutely continues to floor me…as they continue to be wrong. They’ve been wrong…they are wrong, and they’ll continue to be wrong (30-80% depreciation…how ridiculous!–nothing short of an all out war on American soil could cause 80% depreciation in the housing market…in my opinion).

Someday…individual markets will cycle. But, something will have to happen to change the Supply & Demand ratio (whether it be steeply rising interest rates, or whatever). Until that happens, however, you’ll continue to see appreciation (market fundamentals).

“Similarly, RE maniacs don’t see a bubble because it requres a conceptual understanding of market forces.”

Many consider me to be a housing expert (myself included). This is how I earn my living. That’s not narcissistic–just fact. I have multiple licenses (some I’ve allowed to expire)…I’ve been proven correct by the market (not incorrect), and I make money investing & helping investors buy homes. I keep an eye on the markets daily (especially locally), and I see continued growth. Overheated markets in some areas will slow & outlying areas will continue to grow (due to continued strong demand looking for more affordable housing).

Despite history, I think we’ll continue to hear from doom & gloomers many years into the future–even if they continue to be wrong. Unfortunately for us…this doesn’t have an ending like Y2K.

-Infowell

“I don’t think you have a realistic grasp on the new paradigm Bob.”

What is the new paradigm? Is it the same paradigm where profits don’t matter as long as the company has a cool web site?

You’ve got to realize that any time in history that something starts to work, immediately people are out saying it won’t last. It is our nature.

Will RE last like this? Nope. It is a a cyclical beast. The question is how long will it last? Will it continue to be a wealth builder like it has throughout history? Yep.

Buy when they sell, sell when they buy. It would be smart to have cash reserves to take advantage of the upcoming sell/foreclose off. Areas of California, Florida and upper east will be first to run into trouble because of the property costs. I doubt we will see much action in the mid-west because the overall low costs in comparison.

One reason for the boom is the easy terms for getting loans. There are millions of Americans out there who can indeed afford a mortgage but did not have the down payment, especially on the west and east coast. 10% down in these markets is a 30-100k venture. By having 0 down loans, many of these Americans can basically just assume the payment.

If the “bubble” is going to burst in 18 months, does that mean you should not make all the money you can until then? Too many have this all or nothing mentality and they are usually the ones who miss out on everything or make very little.

Just like in the stock market you have people buying up all sorts of stocks they should not be and not doing due diligence. Many lose fortunes there but the wheels keep going round and round.

As usual, the smarter of the masses keeps moving on.

“Is it the same paradigm where profits don’t matter as long as the company has a cool web site?”

I don’t know what that means.

“What is the new paradigm?”

I’m glad you asked: A paradigm is a new pattern or standard.

Things have changed bigtime in the Real Estate World. This is due to a variety of reasons, but the collapse in the stock market has certainly contributed. People (very intelligent people) just don’t trust the stock market anymore. They’ve discovered Real Estate as an investment & feel more comfortable parking their money there instead.

Moreover, we have many more investment tools than we had just a few short years ago. More people now own their homes than ever before, and we see extended families living in some of these homes (common amongst some immigrant groups). Further, as the population ages…we’re seeing more Assisted Living Homes popping up around the country (profits in some of these homes is significant).

People are tending to stay in their homes longer, and population is outpacing building permits in many desireable areas. This results in high demand and low supply (you want to own?..you’ll have to compete & that equates to higher prices).

The real estate landscape has been changing & those who’re isolating their observations to the American markets don’t understand that people in other areas of the world spend a greater portion of their incomes on housing than we traditionally have. That’s because they come from more densely populated regions (Supply vs. Demand).

There’s roughly 6.5 million of us on the planet & half of us live in very close proximity to the oceans. Coastal cities on the East & West have seen some very sharp appreciation of late…thanks to increasing demand.

I could continue, but I’m getting typer’s cramp, I’ve got to get back to work, and we should leave something to discuss later.

-Infowell

So we all live in New York? Think you meant BILLION not million :smiley:

Demand is dwindling some as people are migrating to more rural and lower priced areas. Over the coming decade, places in middle America could see a good revival because of their low land and home prices compared with the coasts.

Because of new communication abilities proximity to a brick and mortar work site is becoming required less and less.

People are just waking up one day and saying screw it. They are tired of living in say Orange County and just getting by. They are taking the money out of their homes and moving to areas like Texas, Ohio, et al and buying nice homes outright for cash.

Having a home free and clear is the single most desired item for home buyers–especially when someone is not living the good life IE getting by.

“There’s roughly 6.5 million of us on the planet & half of us live in very close proximity to the oceans. Coastal cities on the East & West have seen some very sharp appreciation of late…thanks to increasing demand.”

I think there is about that many in NYC, so I think your figure is off a bit.

“More people now own their homes than ever before”

This is also false, I do not count a mortgage as “owning the home” you are paying the bank for the lien on that property. Once that is paid off, than you can say you “own” the house. Till than you are basically “leasing” it from the bank.

“I’ve been reading graphs & charts from so called Real Estate Experts for years, and years, and years, and years, and years (count em…5 of em). I’ve been hearing about a looming housing disaster nearly as far back as Y2K, and those folks continue to be wrong while those investing continue making money. “You’re only an expert on the way up”…and at this point I’m questioning the competency of those who’ve been warning of a coming calamity for so long.”

It was in '96 when the stock “experts” were pridicting the stock market fall, it kept going until 2001. Same here with Real Estate some have started in 2000, but I don’t think we will see anything until next year. So its 6 more months of Happy Flipping!

“Think you meant BILLION not million”

Yup…got me.

“This is also false, I do not count a mortgage as “owning the home” you are paying the bank for the lien on that property. Once that is paid off, than you can say you “own” the house. Till than you are basically “leasing” it from the bank.”

O.K. lets look at it your way (never mind the fact you can borrow on, improve it most anyway you please, and sell anytime you wish)…more people STILL own their home today than ever before. Here’s another way to look at it…more people have equity than ever before (sure beats flushing money down the toilet in a property you’re renting).

“It was in '96 when the stock “experts” were predicting the stock market fall, it kept going until 2001. Same here with Real Estate some have started in 2000, but I don’t think we will see anything until next year. So its 6 more months of Happy Flipping!”

You like comparing the stock market to the housing market?..me too. I’ll give you some stats in a second, but some comments first. There weren’t THAT MANY so called “experts” predicting a stock market crash in ‘96’…I remember…most of em had on party hats. Some had predicted (one even wrote a book) "The Coming Depression Of The ‘80’s’…later revised to "The Coming Depression Of The ‘90’s’…I’ve heard this compared to standing at a busy intersection & predicting an eventual accident. And as some are predicting actual timelines for disaster…I’ll make a prediction of my own; as the time draws near (next month for one doom & gloomer I know) they’ll begin seeking out markets which are actually depreciating (kinda like the news media), and cite that data as evidence they were right all along (never mind there’s always a depreciating market somewhere if one looks hard enough).

Some Stats:

Ownership:
Homes - A 2001 Fed survey found that 68% of families own a home, and the median value was $122,000 (long time ago 2001).
Stocks - The survey says only 52% owned stocks either directly or through a mutual or pension fund (yikes!), with a median value of $34,300.

Total Value:
Homes - represents one of the largest blocks of wealth in the U.S. economy. According to the Fed, U.S. homes are worth the equivalent of 145% of the gross domestic product in March 2005.
Stocks - Comparatively, the equivalent of all stocks and mutual funds values is 82%

Wealth Effect:
According to the Fed Chairman Greenspan homes have a bigger [than equities] “wealth effect.” According to the IMF (in a global study covering 1984 to 2000) a dollar reduction in housing wealth reduces household spending by 7 cents, sharply and immediately. And the impact may now be greater due to highly leveraged mortgage financing.
Stocks - A dollar reduction in stock wealth cuts household spending by 4 cents.

Accessing to Equity:
Homes - It is easy to tap into the equity of a home’s value to purchase a new home or consumer products. They are collateral for approximately $7.7 trillion (double check…got it right this time) in mortgage and home equity debt.
Stocks - The total margin debt in Investors’ stock brokerage accounts is only $194 billion.

Risks to Lenders:
Homes - Mortgages make up 40% of the assets of U.S. commercial banks, mortgage-backed securities another 16%
Stocks - By contrast, loans against stocks represents only 1%

Turnover:
Homes - Sales of new and existing homes in the U.S. in 2003 equaled 6% of the total housing units. Families live in their homes, resulting in longer & more committed ownership.
Stocks - Annual turnover on the New York Stock Exchange is about a 100% of all shares outstanding.

Speed and Cost of Sale:
Homes - A home can sit on the market for weeks before selling. Selling costs are approximately 10%.
Stocks - Stocks usually sell within seconds and selling costs approximately 1-2%.

Declines in Value:
Homes - Housing has not seen a sharp drop in 30 years, but they’ve also never risen as much as they have since 1995. The largest decline in housing prices was 6% in 1980 (and that was short lived).
Stocks - Real Stock prices have fallen more than 20% at least eight times, y/y, since 1976, with the steepest plunge of 29% in 3Q2001.

When arriving at a conclusion of what the future holds in store for the nations housing markets via the comparison method…it’s always wise to compare apples to apples.

-Infowell

GREAT POINTS INFOWELL

I also look at it in a different angle SUPPLY AND DEMAND!

I live in a market that in some areas the avarage Days on market is over 6 months is this a good Fix and flip town? NO there for I buy and hold take advantage of the low rates!

Now on the other hand if I lived in say New York I would still do the same thing I have been doing now for years! What is that? flow with the market! here is where I think most investors make there mistake! THEY ONLY KNOW ONE AREA OF INVESTING! and you see this quite often and I quote “The course I took said to only buy at 70-75% LTV” Well read another book on a 250k house I can make 20k at closing buying at 95% plus make 300-400 per month! and another 20k in two years!

Most of the books you read/courses you take only teach one thing to get really good at it I think you need to know all areas of investing and how to flow with the market!

REMEMBER WHILE YOU ARE LOOKING FOR THAT HUNK OF GOLD YOU WALKED BY A TON OF NUGGETS!! WHAT WOULD YOU RATHER HAVE ONE HUNK OR 10,000 NUGGETS!!!

I think some people here are stuck in a bubble of their own. It is called, the “there is only one way to do things and when that way stops, all is lost bubble.” :smiley:

If you own rental props, you want loan conditions to get tougher. This means more renters, which means more customers for you, and thus more money.

Even if a bubble exists and pops, if anyone will get hurt, it will be those invested in areas without solid economic and historically proven migration factors. For example, these “Starter” towns that people flock to because they are on a fastest growing list. Easy for them to be flashes in the pan.

To be honest I’m NOT a RE guru but I will be. Reading the paragraph above isn’t this the perfect time to buy property? When a so called bubble
pops? and housing values are low? Will interest rates be sky high then?

Interest rates might be higher, or they might not, or they could be lower. Bubbles are hard to predict and it’s hard to determine what will pop them. It will more likely a combination of things that will collapse the bubble.

I live in a market that in some areas the avarage Days on market is over 6 months…

The Seattle Housing Market made CNBC News today for continued appreciation & expected continued growth.

The last 4 homes we listed all sold within 5 days…the latest one within 24 hours. All had multiple offers and sold slightly over listing price (that’s what we aim for). It’s been suggested here that I was leaving money on the table, but with 15 years experience & an estimated 4,500 valuations under my belt…I think it’s safe to say I know exactly what I’m doing at this point in my career.

“Reading the paragraph above isn’t this the perfect time to buy property? When a so called bubble pops?”

Two things:

1st - “The Doctor” isn’t listening to the patient. Don’t worry about it…THERE’S NO WAY you’re going to see 80% depreciation in these markets…I doubt seriously you’ll see anywhere near 30%. Who knows…maybe we’ll see further appreciation for that matter!

2nd - Eventually, you’ll see stagnation before you see depreciation. CA has followed this pattern before - anybody remember sellers burying St. Christophers upside down in their backyards?..many Californians thought that was suppose to bring them luck in the early to mid ‘90’s’ when homes weren’t selling. The market declined slightly & then went sideways for quite a period. However, there were investment opportunities even then.

I’d be cautious about purchasing in any declining market though. It can be like trying to catch a falling knife.

I keep an eye on the number of new listings coming to my market daily. Additionally, I track sales, pendings, expireds, cancellations & a variety of other data which will give me some idea of which direction the market is heading.

-Infowell

80% Depreciation would be pretty drastic, it might happen in certain undesireable locations, that only went up because everything else did (Camden(east coast) Compton (west coast)). It also depends if people have to sell. If you owned your home for 20 years, why would you sell if it went down in value? It would make no sense, unless you have to move. Also supply will eventually out do demand. This happens whenever their is short supply and high demand. The market will correct itself just in that respect. Prices will eventually cool off, in some places it already has.

is there a bubble??? who knows? maybe in some areas, maybe not in others. these recent price increases are not just in the US but are worldwide. in many areas (especially southern cal its turning into an affordabillity issue). fewer than 15% of current homeowners in orange and san diego counties could afford to repurchase their current homes at current prices.

in some ways i think we’ve had the perfect storm of factors that have ENABLED housing price increases. Historically low interest rates, the fed enabled gushing liquidity, lenders who will lend to any buyer who can fog a mirror, institutionalized creative financing – there are lenders in southern cal who will make 100% no income doc loans. you just tell the lender how much money you make (lie if you want) and you get your loan – go figure.

will it continue??? only time will tell. but i have a tough time reconciling how prices will continue to significantly increase from current levels (at least here in southern cali) with increasing short term rates, and possible more onerous lending standards (fewer 100% loans, fewer option ARM loans, no more 40% or more front end ratios, etc. ).

and one other thing that has probably enabled the market is that lenders don’t really care about the loans they make. very few lenders warehouse their own loans anymore. most loans are securitized and sold on wall street. generally after one year of seasoning, in the absence of fraud they are off the hook if a loan ultimately goes bad.

“…is there a bubble??? who knows?”

This may not be as difficult to determine as many might think. I’ve been debating Bubblists for years & thusfar…I’ve been right. It’s a matter of interpreting marketing fundamentals…whereas many Bubblists seem to concentrating more on market mentality.

But first I’d like to address two other points:

1st - “…you just tell the lender how much money you make (lie if you want) and you get your loan…”

That is mortgage fraud and extremely ill advised.

2nd - “…fewer than 15% of current homeowners in orange and san diego counties could afford to repurchase their current homes at current prices.”

This is an erroneous way to look at the situation as those same “current homeowners” have realized appreciation. In otherwords; if they haven’t burned up all their equity…they could sell their home & buy one comparable thanks to the appreciation they’ve realized since their initial purchase. Otherwise, we’d have to pretend they’re just now entering the market with funds & credit they possessed in the past.

Regarding predicting the future: Conceeded it’s not easy, and there’s a variety of factors that could change at any given moment, however…

  • Keep an eye on the 10 yr. bond (home interest rates are tied to the 10 yr.). Economist have been wrong on the direction of interest rates for 3-4 years now (many predicted 30 yr. fixed rates to be near 7.5% last year…we ended @ 5.5%).

Check your area to see if you can locate A Land Use Economics Firm which could provide you with information (charts & data) for the following information:

  • Unemployment–especially projected annual employment changes. It continues to decline & despite popular sentiment…some good paying jobs are being realized.

  • Projected Employment Growth - Construction related jobs rank pretty high nationwide (that’s a tale-tale sign in itself). Some areas are outpaced by Professional & Business Services & Information Services.

  • Keep an eye on the Consumer Confidence Series

  • Revolving Consumer Debt is tapering off compared to 2000–2001 (that’s good), however, as a nation we are not saving

  • Keep an eye on the rate of projected population growth within area you’re interested in investing in

  • Tracking Median Prices & Home Price Escalations could indicate an emerging, stagnating or declining market. For example (past 3 years-2004): Las Vegas, NV has appreciated 81.0%, Los Angeles-Long Beach, CA = 81.6%, Orange County, CA = 84.3%, San Diego, CA = 87.4% - Combined with other factors–saturated markets.

Phoenix, AZ = 18.8%, Portland-Vancouver, OR-WA = 20.0%, Tacoma, WA = 20.1% & Seattle-Bellevue-Everett, WA = 19.5% - Combined with other factors–these areas look to be potential emerging markets with good opportunities for investors.

  • Keep an eye on % change in YTD in Residential Permits

Denver, Co & Los Angeles-Long Beach, CA just over - 20%

San Francisco, CA & Riverside-San Bernardino, CA - 20%

Reno, NV, Boise City, ID just under - 20%

Seattle-Bellevue-Everett, WA - 16%

Las Vegas, NV (still a surprise) @ roughly - 12%

Tacoma, WA - 5%

Orange County, CA - slight decrease

Oakland CA, Sacramento CA, Salt Lake City-Ogden UT, Portland-Vancouver OR - slight decreased ranging from - (-)4% - (-)7%

San Diego, CA - (-)11%

San Jose, CA - nearly -30%

  • Permit Activity - Single Family vs. Multi Family

  • Permits vs. Population Growth (Biggie!) Vegas permits were over 35,000 units back in ‘03’ while population growth was expected to decline significantly (looks like economist misunderestimated population growth?).

  • Keep an eye on resale activity vs. new construction. It would appear that people (uncertain, and concerned about world events) are beginning to stay in their homes longer–which explains the lack of listings (imbalance in supply vs. demand).

  • Track Housing Demand (by price range) & Single Family Upper End Sales (by region [county])

  • Track Affordability Issue (Median in relation to Affordability Index & First Time Affordability Index)

There are weekly & monthly indicators that give us some clue as to which way interest rates will go as well (at least in the short term). But, more on that later…this post is too long already.

-Infowell

You also have to look at where home values where before the appreciation.

For example, in Vegas, the median home price was very undervalued. 81% appreciation simply put a 80k home to 150k-ish, which is not much according to west coast pricing.

However, you point out Seattle. Homes there were already in the 300k+ range. So you would expect a much lower overall appreciation. Some markets are catching up, some are going too far, and others are staying the course. A 81% appreciation in Seattle would indicate an overvalued market because of the home value for area pre-rise.

Because of home values in relation to area. It is not correct assumption to put Vegas of a few years ago in the same analysis with California as a whole. When prices are on different levels, simply a % number does not tell the story.

Bubble or not, I am making money. Pop if you want. I am fine.