Remember the dot com’s in the 90’s. No one thought a bubble was possible and everyone thought they could all get out if it ever crashed.
No one can predict when the bubble will pop until it actually happens. But it will happen…
[b]Remember the dot com’s in the 90’s. No one thought a bubble was possible and everyone thought they could all get out if it ever crashed.
No one can predict when the bubble will pop until it actually happens. But it will happen…[/b]
Man, I wasn’t going to get pulled into another bubble debate, but the above comment got me, so let’s break it down.
Yes, I remember the dot.com’s of the 90’s. No one thought a bubble was possible? I don’t think that’s correct. There is always someone that will shout “the sky is falling.” Trust me on this one.
everyone thought they could all get out if it ever crashed.
And that’s exactly why it crashed, EVERYONE tried to get out at the same time. Hey that’s how stocks work.
No one can predict when the bubble will pop until it actually happens. But it will happen
And that’s the point, that Infowell and others have been saying all along. The bubblists (for lack of a better word…maybe chicken littles) all say, “don’t know when, but definitely will.” So whether it’s 10 minutes later or 10,000 years later, they’re right. Wow.
Now, anybody who thinks that there is a National housing bubble really does not understand how the housing market works. The housing market is affected by local conditions, not global trends for the stock market.
Locally, there may, or may not be a housing bubble. CA for example, is a prime example of a possible housing bubble. However, the bubble may or may not burst depending on how local conditions affect the market. Even though the CA market is currently booming, my area’s market here in NC, is a struggling to remain stable. Again, it’s a local trend due to the current area’s job market. The Charlotte, NC area, however, is currently doing quite well (Same state, different market.)
I could give you tons of data, but Infowell and others have supplied a great deal of good data already.
Raj
Thanks for all of the input,
Well, one thing is certain that I learned from this post is there’s NO WAY you are going to make any money worrying about a bubble. Being on the sidelines and watching people make good money is not financially smart. I will continue to invest and if a bubble does happen I will figure out a way around it/minimize my losses. I guess that’s what advisors are for.
The bubblists (for lack of a better word…maybe chicken littles) all say, “don’t know when, but definitely will.” So whether it’s 10 minutes later or 10,000 years later, they’re right. Wow.
I’ve read one Investor liken this to predicting an accident @ a busy intersection.
I rate my clients as ‘Pipeline,’ ‘Hot Prospects’ & ‘Possibles’ on a spreadsheet: At any given time I have 5-10 deals in the pipeline, 5-10 hot prospects, and 50-70 possibles.
Bubblist rarely attain ‘Hot Prospect’ status & tend to dwell at the bottom of the ‘Possibles’ list. They’re their own worst homebuying nightmare. Consequently, homes matching their desired criterion rarely (if ever) come to market. Their expectations are unrealistic–they just want more home than they can afford. They constantly complain about the economy, prices of homes, and reminisce when Tennis Shoes cost $15 & you could see 2 movies for $5 & got to see cartoons to boot. Quite simply…they get left behind, and many don’t even own a home.
-Infowell
I always wonder if the increase gas prices will have any effect on the current housing prices. Gas is up and it keeps going up. I doubt it will ever go back down to 89cent (1999 and late 2001) prices. Now gas is around 2.07 to 2.33 a gallon (nj prices regular). If gas hits $3.50-$4.00 what would housing do in that respect?
You also have to figure everythings else will also going up, public transportation, shipping, food, goods, plastics, heating oil, natural gas. Fuel efficient cars.
Things that would go down (my prediction) inefficient cars and truck and large homes.
I always wonder if the increase gas prices will have any effect on the current housing prices.
It’s possible, again, depending on your market’s particular conditions. However, it’s doubtful that the price of gas will affect the U.S. housing as a whole. Why do I believe that? Because you can look at the historical data and see what effects high gas prices had on real estate.
The 1973 energy crisis, where the price per gallon was over $3 at it’s high (adjusted to for inflation), is a good example. The housing market, as a whole, made some great gains during that time.
You also have to figure everythings else will also going up, public transportation, shipping, food, goods, plastics, heating oil, natural gas. Fuel efficient cars.
Yes, it will, as it has throughout history. And somehow, people continue to buy things. I guess our income level has pretty much keep pace, too.
Really, Dan, this is similiar to the $15 Tennis shoes and 2 movies w/cartoons for $5 that Infowell suggested. You know, the old guy that says, “Yeah, well back in my day…”
Raj
“If gas hits $3.50-$4.00 what would housing do in that respect?”
I should think interest rates would come down as gas prices in that range would definately have an affect on many other segments of the economy (cost of bringing goods to market for one thing).
Example: Vinyl siding is manfuctured with petroleum based products from what I’m told…the cost of vinyl siding would go up (if this is true) & hardy plank would rule the day!
“Things that would go down (my prediction) inefficient cars and truck and large homes.”
During any economic downturn…large homes are typically the canary in the mines. That’s to say they tend to depreciate early on…signaling some kind of down turn to come in the economy. Why? Because, the pool of potential purchasers with discrimating tastes & needs, and the financial wherewithall to buy expensive homes (large homes) tends to dwindle.
I don’t, however, subscribe to the theory that home prices will drop should gas prices rise to those levels. People will simply change their lifestyles: Less travel, car pooling or mass transit to get to work, making better use & taking fewer trips in the car, etc. They’ll adapt.
These scenarios are all so much predicting & rather gloomy…I prefer to watch & REACT to the markets than make long term predictions which have proven to be EXTREMELY unreliable.
It’s all so much fear mongering.
-Infowell
Kinda long, but insightful …
[b]IRRATIONAL EXUBERANCE[/b]
by John Mauldin
Looking at a recent magazine covers one is left with the impression
that the whole world is concerned about U.S. real estate prices. This is
borne out by the fact that if you go to Google and type in sex you get
78,000,000 hits. If you type in real estate you get 110,000,000 hits,
which makes housing about 40% more interesting than sex. Is there a
greater sign of a bubble? But if you type in housing bubble you get "only"
1,120,000, so there is not much worrying going on
In doing my research, I rounded up an amazing list of facts and
figures. Let's first start with good friend Gary Shilling, who always manages
to come up with an assortment of data and charts. This is from his July
2005 letter, which came in just in time for this week's letter on
housing.
No surprise, Gary is worried about their being a bubble and the
possibility it could damage his prediction of a rather benign, if not in fact
good, deflation. He starts out:
"The housing bubble is not local, but national-not surprising since
it's driven by economy-wide forces: investor zeal for high returns but
skepticism over stocks, ample cheap mortgage money, and lax lending
standards. Indeed, these forces and the housing boom are global. Earlier U.S.
housing booms-busts were driven by local business cycles such as the
rise and fall of the oil patch along with oil prices in the 1970s and
1980s.
Since houses are much more widely owned than stocks, the bubble's
likely demise will shake the economy more than the early 2000s bear market.
It could change the good deflation of excess supply we foresee to the
bad deflation of deficient demand. The most likely bubble-pricking pin
is massive speculation itself, and as prospective buyers stand aside,
mounting inventories will precipitate a downward price spiral."
"...The national scope of the housing bubble is no surprise given its
driving forces. They aren't local economic booms. Indeed, there's
nothing anywhere in the country today to rival the oil patch boom in the
1970s, the Cold War aerospace spending jump in the late 1980s or the dot
com bubble of the late 1990s. Instead, the driving forces, discussed
earlier, are national - the appeal of real estate as an alternative to
stocks and low interest rates. And lax lending standards. The leap in
subprime loans from 9% of total mortgage originations in 2003 to 20% last
year, according to the FDIC, is telling. So are the high loan-to-value,
interest-only and option ARMs mortgages mentioned earlier."
The National Association of Realtors estimates that 23 percent of U.S.
homes purchased last year were for investment. Another 13 percent were
second homes. About 23 percent of homebuyers nationwide are using
interest-only loans, according to Loan Performance, a company that tracks
loan originations. Interest-only and other types of adjustable-rate
mortgage loans allow borrowers to pay no principal and sometimes little
interest for an extended time while gambling that home prices will keep
rising.
But investors are nothing if not optimistic. The LA Times, in a recent
survey, reports that local homeowners expect to see housing prices rise
by 22% annually for the next ten years. Now this is a group, while
admirably optimistic, that clearly didn't pay attention in math class.
Compounding at 22% a year for ten years is an 800% appreciation, doubling
every 3.27 years. 22% doesn't sound like much. Let's just project today
into the long-term future. Not doing the math, they do not realize that
means homes would have to go up in value 8 times! But such is the
nature of bubbles. That is why it is called "irrational exuberance."
A UBS/Gallup poll shows that only 13% foresee a decline in housing
prices over the next 6 months. 67% of investors see real estate investments
as more profitable, and 77% see such investments as safer than the
stock market.
There are clearly bubbles in some areas of the country. That being
said, the average home is still affordable by the average person, according
to the housing affordability index. But not in the bubble areas. Only
17% of the U.S. can qualify for a mortgage on a median priced home in
California. In certain areas it is much worse. This is not surprising for
certain wealthy enclaves, but this is for an entire state!
But if much of the growth in housing values has been in a few select
areas, and data suggests that is the case, then it also means that much
of the ability of homeowners to use their homes for refinancing is also
in those areas. So much of the U.S. economic growth that was created by
the asset bubble in housing is coming from a small (yet significant)
number of areas in the country. Various estimates are that this adds as
much as 2% to overall GDP. Further, economists at the Fed estimate that
the economy would slow by 0.2% for every 1% drop in housing values. A
softening in housing values in those bubble areas would significantly
affect the whole country in a negative way just as their growth
influenced a positive growth.
Last year, we built 2 million new homes. Yet we added only 1.2 million
new households. That means we absorbed about 800,000 homes either as
second homes or for investments. Given various studies, it is probable
that around 500,000 homes were bought for investment over and above the
number of new households.
That is a major part of the bubble. If new homes were rising in line
with the growth in households, there would not be the potential for
supply to outstrip demand. When, not if, we enter a recession with a
significant overlap of excess supply while unemployment is rising, that could
cause a sharp break in housing values in certain areas.
We live in a cash flow society. We look at our income and then judge
how much we can afford to spend. Rents are actually falling while prices
rise. When home prices fail to rise every year, when investor
confidence breaks, households will look at their cash flow and realize that they
might be better off renting.
But that may not be for some time. I remember writing about how the
NASDAQ was overpriced in the 4th quarter of 1998. I watched the stock
market take wings after that. Bubbles which are caused by investor
expectations and irrational exuberance can last a long time.
This is especially true if interest rates stay low. It goes double if
mortgage rates drop from here.
Let me outline a very plausible scenario, and one which will illustrate
why the Fed is in such a bind. If the Fed stops raising rates at 3.5%
(meaning one more 25 basis point increase in August), what impetus will
there be for long rates to rise?
The economy is still growing nicely, up a revised 3.8% in the first
quarter. The ISM number rebounded today. Unemployment is down. Inflation
ex-energy is benign, and soon we will be at a place where the oil prices
from a year ago will not reflect the significant rise that they do now.
It is highly likely that we print a lower inflation number in the last
half of this year than we did in the first. And with all the good news,
long-term rates are still low.
The world is awash in capital, and it seems to want to find a home in
U.S. fixed income instruments. The U.S. government deficit is dropping,
which means we are making less new government paper for foreign central
banks to buy, yet they (and foreign private citizens) are buying more
of our debt, putting more downward pressure on interest rates.
Low inflation, excess world savings coming to the U.S. (for whatever
reason) and a flat Fed policy is a prescription for lower long-term
rates. This means the environment for housing prices could be quite good for
some time to come.
But let's say the Fed is worried about the housing bubble and wants to
slow it down, as well as create a more classically normalized interest
rate scheme. So they signal they will continue to raise rates. The
market fears the Fed will continue until they cause a recession (as they
historically have) and in anticipation they begin to buy long bonds,
dropping long rates.
Either way, I think the chance of significantly rising long-term rates,
which would kill the housing market is less than 20% in today's
environment. By that I mean I do not think the ten-year will rise to over
5.5%, which is what is needed to really slow the housing market, if that is
your objective. (This could all change of course if say China and the
rest of Asia were to start doing something else with their dollars, but
that is not a likely short-term scenario.)
Bill Gross and others speculate about a 3% ten-year note, which would
roughly mean a 4% 30-year mortgage. Can you imagine the wave of
re-financing? Every mortgage in America would be re-financed. I think that
could easily happen in the next recession. It would certainly soften the
usual recession cycle again; postponing the ultimate day we hit the debt
re-set button. It would trigger what Roach calls another round of Bad
Growth (growth based on debt).
That is just another reason why I think it will probably take two
recessions (and thus a long time) to get to the ultimate bottom of the stock
market (in terms of valuation) and to hit the re-set button on debt. It
is also why I think the Muddle Through Economy will be the paradigm for
the rest of this decade, at the least.
And this worries me. Because the above scenario is a prescription for
deflation. Staving off deflation, which is evidently part of the
programmed DNA transfer that is required when you become a member of the Fed,
will not be as easy the next time as it was last time. Ben Bernanke,
who is the man I think will be the next Fed chairman, will have his job
cut out for him. I fully believe him when he says that the Fed would
"move out the yield curve" in a fight against deflation. He will help the
market bring down mortgage rates to help stimulate the economy. Simply
lowering short term rates may not be enough.
But what would you have them do? Sit to the side and do nothing as the
U.S. slides into a steep deflationary recession? You can argue that
there should not be a Fed, but that is not reality. There is and they will
act to fight deflation. The die was cast when they decided to use
housing asset inflation to offset the bursting of the stock market asset
inflation bubble. The fact that it became a bubble was not helpful.
In hindsight, Stephen Roach is probably right. They should have raised
rates faster and kept a lid on the housing bubble developing in certain
parts of the country. But that is water under the bridge. Now, their
choices are fewer, and their weapons are less. Get ready to get the
lowest mortgage rate of your lifetime in a few years. But it will not be a
sign of a healthy economy. While 4% will be good for us as individuals,
we will not like the overall economy and the stock market. Can we hear
it for Muddle Through?
Regards,
John Mauldin“This is borne out by the fact that if you go to Google and type in sex you get 78,000,000 hits. If you type in real estate you get 110,000,000 hits, which makes housing about 40% more interesting than sex. Is there a greater sign of a bubble?”
Thanks for that…my screen needed cleaning anyway.
Housing Bubble…5 years & counting… 
hay when it crashes…I’m thinking what a perfect time to buy. thats the beauty in real estate. as for the property that you currently hold losing value, does it matter as long as you have renters? i mean the rent won’t go down and eventually the value will go up again and in the meantime, take advantage of the burst bubble and buy all you can at the devalued price!
“I have found that people who believe in the bubble don’t invest in RE.”
NOT SO TRUE.
You can sit and wait. When the market take a down turn then invest.
Whew, I’ve read every respond to the subject, it’s been a real informative and learning experience too.
I'll stay tuned for more.
actually if gas went to that prices, we would have high inflation and
the government would raise interest rates to curb it. just like what happened when president Reagan started office.
infowell, you probably remember those days. why don’t you regale us with some stories from back then?
Do you honestly believe that PRIME Real Estate will go down drastically in price? I sure hope not.
Even if it “corrects”, it will still cost you more to get in then verses getting in now or yesterday if you were in already.
I think the bubble, if there is one, will explode in these Johnny come lately markets like places in Utah and Arizona.
I am still waiting for a crash in San Francisco so I can buy a good home for under 500k 
My money is on places with no real draw like Gilbert, AZ crashing verses prime RE spots where the draw and numbers have been there not just today but for many years and decades.
evergreen, i strongly disagree with you.
undervalued markets or places that only went up 10% in past 7 years will not go down. there’s simply no place to go down. a 2400 sq ft that sells for 200k will not go down more than 10k. but an 800 sq ft condo in San Diego that sells for 400k can definitely go down 100-150k.
i live in san diego. in the past 6 months 2 of my coworkers have picked up and move out of state because they could not afford to buy a house on their salary.
2 more have just started talking about it and are seriously looking in Tx and Co.
people will not move to CA if they can’t afford to live here. go to uhaul.com. check out the price to rent a truck one-way from San Diego to any other city in a 1000 mile radius.[like portland, salt lake city, st george, pheonix]. the cost to rent it to SD from any other city is cheaper. why? because people are moving out and Uhaul has to pay someone to drive it back to San Diego. if this continues, why will prices stay high? they will eventually start coming down or will stay flat for a decade, just like during the last bust here in SoCal.
And niravmd has hit the nail on the head of what exactly is a housing bubble.
Rarely in the history of real estate has housing prices drastically fell, just to “correct” themselves. In fact, a large depreciation in home prices is usually because of a massive area population shift (no jobs in the area, pollution, etc.), alot more people moving out than in.
What is more likely to happen in most booming markets is like niravmd said. There will probably be a small depreciation shift with a long stagnation in price.
Raj
Like Moneytalks said THIS IS ONLY IMPORTANT IF YOU COLLECT BUBBLES!
Let me ask you this if the bubble pop’s where is the stock market going to be??
Oh yeah worse off then Real estate!!
Where is your 401k going to be?
That is right it is based off of the stock market!
How about your savings account?
Right there where it always has been! 2% not even enough!
Hummmm why not take Evergreens advice and invest in 900 numbers and/or A nice satelite dish system!
actually, i sort of did. i just bought a VOIP router with 150 toll-free and local access numbers!
How did that work out for you?
uh…so far i’m in the whole! but its only been 5 weeks.