Discussion: Is there a real estate housing bubble, and, if there is, what will pop it?

letting others take over with quick summary below ...
Edit by Moderator: For clean up and usability the thread has been moved here.

Thanks for the thread, very interesting.

Especially since it's looking increasingly like long rates WILL increase a point or two before much longer, and probably stay somewhat higher, at least until we get this soaring deficit under control--which won't happen for awhile if GWB is re-elected (and might not even he's defeated.)

chiefw, you're confusing long and short-term rates. The market sets long-term rates, the Fed largely sets short-term rates.

You're probably correct, IMHO, that the Fed won't raise SHORT rates until after the election. Greenspan has abetted GWB so far, and there isn't much reason to think that will change--plus, inflation still isn't a worry.

What happened to deflation ?
Consumer items and groceries seem cheaper than a few years ago, thanks to WalMart.

He has more cash on hand so he has to finance less.

MarkM said:

<< buy at peak interest rates & sell at the low >>

Its very atypical for housing to appreciate much during a recession. When was the last time it did before the past 3 years ?

There have been lot of predictions past few months/years. Nothing came out correct.Six months back, I've stopped looking for buying house,thinking prices will go down (in bay area,CA).But I was wrong.They actually went up.in fact, some places they went up 5% or so.

Another point most of us including myself missing is this 15% is from its peak.Let's say prices go up 10% from now and then there is 15% drop,so the net drop for you is around 5% which is not bad.Had I bought home six months ago, I would have been up by 5%, and that would have been my cushion for any drops.

So why wait? You should buy now and can still ride some of the upside potentials left.

bozango123 said:

<< There have been lot of predictions past few months/years. Nothing came out correct.Six months back, I've stopped looking for buying house,thinking prices will go down (in bay area,CA).But I was wrong.They actually went up.in fact, some places they went up 5% or so. >>

Yes, such predictions have been made before & not come true. But perhaps one reason they did not come true was becasue mtg rates kept going down, when everyone thought they might already be as low as they could go. The very premise of this article (IF rates go to 8% ...) specifically takes continuation of that into account. In other words, the article itself concedes it's conclusions are irrelevant if the low rate environment of the last few years continues.

Alcibiades, you ask a good question. Does anyone have an answer?

.

Crazytree said:

<< hi WSM.

I hope home prices fall so I can actually afford a freakin home here in LA. >>

Ditto, except in D.C.. I freakin' hate commuting, but I can't afford a $250,000 700 sq ft shoebox downtown (yet).

robertw477,
I think you have a legit point. But for people who might have to leave the house due to job change or other reasons, they have to take the appreciation rate into consideration. If they sell the house after the drop, they'll be taking a loss.
It is in some sense like a gamble, no one has the crystal ball to tell if the price will go up or down.

GoTerps said:

<< No!!! I just bought a place in DC (Arlington)... keep on going... higher and higher... don't fall off yet >>

Wow. Doesn't that sound a lot like what folks said about equities 4 years ago?

Can only wonder how long RE is going to party like it's 1999. Yes, "they aren't making any more of it". But it's become the 'no brainer' investment.

And when something becomes a 'no brainer', it often ends badly.

robertw477 said:

<< No offence...but I could care less about some WSJ report prediciton about real estate. Where were they before the stock market crash? I for one do not think that your own home is such an "investment" I feel a home is not an investment when you own one and live in it. I feel the home is a hedge against inflation of sorts. If you pay rent you accumulate a ton of cancelled checks and the rent goes up over time. So I feel if you buy a home for whatever price so what if it drops 10-20% from what you paid if you are living there. If your home drops 10% all the homes in your area also drop. So if youare looking for a bigger home in the same area it is a wash. When your house goes up, so does everything in your market area. >>

No offence taken. Indeed, none of this is my opinion, I am just the messenger. I have no idea what will happen, though I am trying my best to guess.

However, I will state that I don't agree with what you said, about rent/nothing more than cancelled check, & so what if home prices fall. If you could somehow be reasonably assured that home price will fall 15% in the next two yers, and you can put aside the non-investment aspects of home ownership, renting is a LOT more attractive than you are suggesting. Sme hypothetical math - say you have $50k today:

1) buy 123 Main Street for $250k today, put 20% ($50k) down, finance $200k @ 6%, pay avg of approx approx $975/mo interest over next two years + $325/mo property taxes = $1300/mo, & figure real cost of $900/mo after tax break (VERY rough numbers here! but i think generous towards the idea of home ownership, if anything). market value drops 15% in 2 years to $212,500. Your cost for shelter over the two years = $37,500 equity loss + 900 mo*24 mos = $60,100.

2) rent a place for $1500/mo for two years, then buy 123 Main (or comparable property) at then current market value of $212,500. Your cost for shelter over 2 years = 1500*24 = $36,000

In other words you come out $24k ahead in your net worth (in this very simplified example) after 2 years by renting, while still ending up in the same/comparable home aat teh end of that period. Note I am not even including repair costs, increased insurance costs, etc, for home ownership, nor figuring opportunity cost on the $50k you ot to downpayment (e.g. stick it in 2 Presidetnail Bank checking accoutns for 2 years, you'll have $2,750+ (figuring simple interest for simplicity, .0275*2*$50k). In other words I am trying very hard to err on the side of the ownership arguement.

Of course it is impossible to KNOW that prices will drop, and home ownership is MUCH more than a finacial decision, but I just feel I need to point this out, because I feel that there is a mantra "home ownership is good, renting is bad" that you hear everywhere is grossly oversimplified. In the spirit of SIS's "Suze Orman" thread, I feel we should keep this a place where we look at the actual variables & math of finacial investment, and not factor out the true complexity & uncertainty by just accepting truisms that are simplified in order to be understood by the majority, like some of these financial pundits follwoed by the masses do.

added: one advantage of buying now rather than 2 years from now is that you get a rate lock at 6% instead of 8%. However I believe that is to a great degree cancelled by the fact that you in two years you will still have a balance of $197k+ on your mortgage you are paying at 6%, while if you buy a comp 2 years later at $212.5k & put down the same $50k, your mortgage balance is $167.5k. Though you are paying a rate 33% higher, you are paying it on a balance almost 20% lower. Yes your monthly payment will be lower, but it will take a LONG time for that to make up for $24k in lost equity (and veven that assumes rates will never drp lower & allow you to refi the 8% loan).

MarkM said:

<< Note I am not even including repair costs, increased insurance costs, etc, for home ownership, nor figuring opportunity cost on the $50k you ot to downpayment (e.g. stick it in 2 Presidetnail Bank checking accoutns for 2 years, you'll have $27,500+ (figureing simple interest for simplicity, .0275*2*$50k). In other words I am trying very hard to err on the side of the ownership arguement.

I just feel I need to point this out, because I feel that there is a mantra "home ownership is good, renting is bad" you hear everywhere that is grossly oversimplified. In the spirit of SIS's "Suze Orman" thread, I feel we should keep this a place where we look at the actual variables & math of finacial investment, and introduce the ture complexity & uncertainty, and not just repeat truisms that are oversimplified in order to be understood by the majority. >>

Despite the other benefits touted, home ownership is an investment, and as such carries both upside and downside risk. Yes, you are safe from loss of equity when renting, but you are also prevented from any possible gains. I understand the argument that rates seem to have little place to go but up, and how that may impact house prices, but nothing is certain. You just have to determine the best solution for your (& the market's) situation.

I bought 18 months ago, and was concerned that I was buying at the top of the market. But due to continued price appreciation (N.Ca) I could probably withstand a 15% drop and still be close to even with where I started. Of course, if I was forced to sell I'd still be out whatever realtor costs I experienced, but I'm not planning on moving any time soon.

xix

MarkM,
So you mean if you are not staying in the house for >5 yrs, you will not consider buying a house? But if the price appreciates even at an average of 3% per year, you'll be better off buying.

I think 3% per year appreciation is very conservative. Is there anywhere on the web we can find housing price trend over the last, say, 30 yrs?

sixflags said:

<< MarkM,
So you mean if you are not staying in the house for >5 yrs, you will not consider buying a house? But if the price appreciates even at an average of 3% per year, you'll be better off buying.

I think 3% per year appreciation is very conservative. Is there anywhere on the web we can find housing price trend over the last, say, 30 yrs? >>

If you subscribe to briefing.com, they did a very nice piece on housing appreciation over that period, factoring out things like inflation etc. I have posted excerpts here before, early in the summer I believe. Can't remember the thread anymore.

BTW stocks appreciate at an average of 7-8% per year over the last xx years. But as we all know, that doesn't mean they go up 7-8% EVERY year. True, the principal risk (maybe 25%?) is probably much lower than equities, but most people are also much more leveraged (on margin, effectively) in their homes than in equities, so a smaller change can have a greater impact. If you pay 20% down & your market value drops 20%, you effectively lose everything. We have not seen homes appreciably lose value since the late 80s (on the coasts particularly, that time). You can take that to mean it doesn't happen often, or you can take that to mean we are perhaps due.

I am not saying I won't buy. I am saying I am trying to evaluate equity risk given a 5-year time frame, and if I think there is a high degree of that, then I may DELAY buying. (if my wife lets me ) I am saying that, if I thought I would stay in the home long term -- even 10 years perhaps, let alone 30 -- I probably would not worry so much about buying at a peak, because I will have the benefit of a locked low rate to offset initial equity loss, over enough years (as I further elaborated in my hypothetical example). But if I must move within a few years, that low interest rate will do me no good after I sell the house.

MarkM,

The more general problem I have with the housing market is something that negates historical data. That is, I see people that I personally wouldn't expect to get a $20 back from getting 105 - 95% LTV loans. I think that this may either a) help prop up the market or b) cause the market to be more volatile when either these people finally do get over their head as a group and/or the creditors tighten their standards. With the ease of money, how should I look at historical data? I assume our time has no parallel.

The pdf that I posted also tries to make it sound good that my locale is bleeding people but still has increasing house prices. It makes it sound as if that makes it not a bubble when I see it data that points in that direction, as if new people make a difference when they don't make up for those that flee:

<< 3. Migration out of Bay Area Stimulates Housing Growth in Sacramento
High house price growth rates in California in the early part of this five year period was
carried in large part by high appreciation rates in the Silicon Valley and surrounding Bay
area. Eventually, housing prices became prohibitive and failing businesses brought about
a leveling off of price growth by 2001. Bordering MSAs such as Yolo, Stockton-Lodi,
and Modesto have enjoyed strong housing appreciation as individuals and perhaps
businesses were forced to move further from the business loci.
With more plentiful and less expensive land and housing, businesses and labor have also
moved to the Sacramento area, which has sparked significant housing appreciation
(double digit since mid-2000). The Census Bureau estimates that net internal migration is
negative in most of the Bay area counties, particularly in Santa Clara, the heart of the
Silicon Valley. Sacramento, on the other hand, has experienced positive internal net
migration. This quarter, Sacramento ranks 20 among MSAs, with 10.75 percent annual
appreciation. ... It is notable, however,
that the Bay Area as a whole, while experiencing below average appreciation, has not yet
suffered the “crash” many feared. Continued international immigration into this area may
continue to support the economy and housing markets. >>

BTW: as a reader of the WSJ, there were many, many articles before the stock market burst that warned of it. I agreed with these more than the articles that said that the market was undervalued if you looked at it from another perspective. I see these as parallels because there were a record number of people in the stock market when it burst IIRC and there is a record number of home owners now (67.9% Housing Vacancy Survey).

I dont know where you rent from but I have a decent sized 4/3 house. To rent this would cost at least 2500-3K a month. My P & I is about 1K. Where I live in S Fla rents for apartments and such have gone through the roof. I have seen rents in my area rise far greater than even the real estate prices.

Rob

Its very atypical for housing to appreciate much during a recession. Before the last 3 years, when was the last recessionary period it did ?