I think we might find a comparison of the US housing bubble to the Japanese housing bubble enlightening since that is the only closest historical analogue IMO. For example, what kind of loans were Japanese homeowners taking out at the height of the bubble (how similar to the crazy loans offered in the US)? How did affordability (ratio of monthly payment to monthly income) compare at the height of the 2 bubbles? [The latter figure is similar to a P/E ratio on stocks, and the P/E ratio on the Nikkei at its height in the late 80s was 80, which is more bubblicious than the US stock market in late 2007.] In comparison to personal incomes, homes are more affordable now than they have ever been in the past 40 years:
http://www.nytimes.com/2009/03/07/business/economy/07charts.html

However, it does look like the housing market is going to overcorrect, both b/c of deflation psychology and b/c with the option ARMs coming due, there is going to be an uptick in supply without a corresponding uptick in demand. On the other hand, I don't think the national median home price is going to fall 90% from the peak (at least nominally) as the stock market did in the Great Depression. As exciting as it sounds for FWFers to be able to buy the median American home just by writing a check from one of their multiple Reward Checking accounts, that really isn't something to look forward to in terms of our economy and standard of living.

This graph of Japanese housing prices makes it difficult to argue Japanese homes have been a good investment at any point in the past 25 years:
http://upload.wikimedia.org/wikipedia/en/d/d6/EconomistHomePrices20050615.jpg
Could this happen in the US? yikes.

beethovengirl said:
This graph of Japanese housing prices makes it difficult to argue Japanese homes have been a good investment at any point in the past 25 years:
Could this happen in the US? yikes.

Interesting chart Beethovengirl. I think the fundamental difference between Japanese Real Estate (RE) and the US RE market is the demand side. Japan's declining population and strict immigration policy will keep demand low for the foreseeable future. Reminds me of this interesting article back in 2007. As long as the US keeps up its open immigration policy and maintain its "livability" advantage, I think the future is bright for US RE.

jayK said:BEEFjerKAY said:Still waiting for someone to provide a reason for why residential real estate prices will stabilize other than "because" ...Supply and demand. Steady supply (sharp drop in housing starts) and increasing demand (in some areas) = rising prices.

Of course, RE is inherently local, so some areas where demand does not recover will continue to drop.

OK. Now show me where the unmet demand will come from.

Unless those people are currently living in a van down by the river, every SFR they move into leaves another housing unit empty.

beethovengirl said:But Japan's population hadn't started declining in the years shown in the chart. And, if I'm not mistaken, isn't the majority of the future population growth in the US projected to be largely unskilled immigrants from south of the border? I don't see how that is going to maintain a $600K median home price in SF.Yeah, US is importing too many low skilled immigrants and too few high skilled immigrants. If the Obama administration is able to deal with the financial crisis and the other 20 things that need fixin they will come around to reform the immigration system. But I think the effect of more high skill immigrants will depress the income of professionals, which will also reduce income inequality.

BEEFjerKAY said:jayK said:BEEFjerKAY said:Still waiting for someone to provide a reason for why residential real estate prices will stabilize other than "because" ...Supply and demand. Steady supply (sharp drop in housing starts) and increasing demand (in some areas) = rising prices.

Of course, RE is inherently local, so some areas where demand does not recover will continue to drop.

OK. Now show me where the unmet demand will come from.Population growth (in areas with a strong local economy), immigration, and renters who are increasingly able to afford to buy a low end property.

There's also the behavioral component of the market, which tends toward boom and bust cycles for reasons that appear to defy logic.

Wow, I'm surprised how much activity this has generated! For the last year or so, I expected this conversation to just peter out. I'll have to take some time later to digest all the great comments and links.

BEEFjerKAY said:Still waiting for someone to provide a reason for why residential real estate prices will stabilize other than "because" ...Well .. they will eventually stabilize for the same reason that I always felt they had to come down, but working in reverse: because when prices come down enough, and/or rents/inflation goes up enough, then the rent vs. ownership ratio will be back in line.

For this argument, I'll let a picture stand in place of my usual thousand words : graph

And another related graph on income ratios, for fun: Text

And another, one almost too busy to grapple with, but it gives you a sense: Text

These are national, so pretty much useless for individual application, but they are at least useful for explaining "why now?" BTW, these are all from calculatedriskblog.com (definitely worth checking out)

Also, I feel that I need to be clear about what I personally am trying to say when I wrote "now." I did not mean literally TODAY. As I hope I made clear elsewhere in the OP, I don't think the bottom is TODAY. I'm quite sure it isn't, in fact. Dean Baker and other claim that the decline is actually accelerating. No, just like the very first thread, I'm not posting this thread because I'm trying to "call" 11/26/03 as the top, or 3/17/09 as the bottom. People always got hung up about that 11/03 date on that first thread to prove it was silly ... or other silly people got hung up on defining the word "bubble" so they could declare if the "call" was right or wrong ... I never could understand why, that always seemed childish to me. I'm not trying to be right, I'm just trying to get informed and share thoughts with other informed people.

The only reason that thread might've been worthwhile was BECAUSE it happened way before the: it gave people enough time to think and act accordingly, since personal housing circumstances are not something you change on a dime . I'm posting these threads in each case because I'm saying "the inflection point is not today, but it has to happen eventually, and it seems like it could be coming soon enough that it's worth talking about how to recognize it, and what to do if you think it's near" I think it's close enough now (even if the bottom is over a year off) to start talking about how to recognize it when it comes. To me, these threads were never about saying what is happening right now for its own sake; they are about figuring out what is happening for the sake of planning what to do in the future -- but only in very generalities; I'm with geo123 that you can't exactly time this, that is impossible. If I buy within 12 months of the bottom, I'll be happy. That is why I finally thought it high time to change the title: talking about how bad the bubble is and will become has not been interesting to me for a long time, if you haven't reacted yet it's pretty much way way way beyond too late. It's time to think about when it ends & what you'll do when the bubble has finished deflating.

In that spirit, the apparent acceleration in ugliness is actually what has me intrigued to start looking for a bottom, paradoxically. If you look at the Case-Shiller index you see it too, from Q2 to Q3 the decline amount increased 80%, and Q3 to Q4 it increased 120% Text. In other words, the Q4 percentage decline (7.4%) is 3.5 times the Q2 decline. There was some talk last year about how projecting the rate of decline meant we would probably not return to long term norms until 2011 or thereabouts. But that assumes a steady decline, not a "blowoff bottom" If the decline is truly accelerating, then (short of Great Depression) the bottom may not be as far off. I used to think myself a year ago that this would be a prolonged slide. But the decline has been more breathtaking than I ever imagined, and because I believe in rational markets, and that is a hard long-term floor, ever-uglier declines just make me wonder if the bottom is getting closer at hand, not farther. Even if we overshoot, it will still return to the trend. That is what made me believe in the bubble in the first place, and I'm not about to stop believing in it now. I don't know when it will get back, and what will happen in between now and then, but it will eventually get back, and keep gravitating back.

MarkM said: Even if we overshoot, it will still return to the trend. That is what made me believe in the bubble in the first place, and I'm not about to stop believing in it now. I don't know when it will get back, and what will happen in between now and then, but it will eventually get back, and keep gravitating back.

Agreed, Mark. The only question is which trend line.

I think it is more likely it will be the pre-WW2 (house as shelter only) line than the post-WW2 (house as shelter + investment) line.

I do think the exception will be 3000+ s.f. houses which will go from a pricing premium (on a $/sf basis) to a significant pricing haircut.

A 3000+ sf house in a distant development of uncompleted structures will fare particularly poorly, as will urban upscale condos in partially converted buildings. (If I heard the teaser correctly, "This American Life" will be doing a piece about the condo problem.)

But hey, I was early and extremely unpopular in the first bubble thread. And as you might say, "I'm not about to stop believing in it now."

Thanks for the high quality links. My sincere thanks and good wishes. Best of luck.

screw housing. even the president of the united states said today we're not going to rebuild the economy by propping up already inflated current housing prices.

rent. it is better for society, a better use of money, and provides you:
1) ability to move if needed for your career, real career advancement and mobility
2) more free time. seriously, how many room do you want to clean and maintain? how much space do you need, and do you really need to be tempted to fill it with shit?
3) did you really need such a big stupid [edited for correctness] house? I mean, maybe it gives you a hard-on like owning a Ferrari does, but if your house have 4 bedrooms and 2 occupants, grow up and realize this is not good for you.

shit, in my opinion out of bonds, stocks, cash, commodities, and real estate, real estate is the worst choice.

I have a complicated question I hope someone can help me with:

I expect that inflation will hit our country in a few years because the government is living way beyond it's means, the fed is running the printing press 24/7, and there is a treasury bubble because everyone internationally is piled in 2.0% yielding bonds in a flight to safety. They'll eventually realize negative rates don't make sense and sell their bonds and push up interest rates.

Can anyone explain with solid logic the effect of housing in that scenario? Interest rates are currently artifically low which is helping prop up the housing market. If I bought a house now and the spectre of inflation set in a few years down the road, how would that effect me?

Inflation is like gravity for stocks because of the opporitunity cost of risk free bonds... but would inflation devestate home prices? During the times of inflation I've studied, people often hoard and scamble to spend their money on tangible assets like oil and gold. Would people hoard houses as a hedge against inflation and support current prices? Or would housing prices drop like a rock?

Would my wage eventually rise to compensate for inflation and eat away at my mortgage payment and make it easier to pay? Or would I be better of buying a house when interest rates are high and then refinancing when they are lower?

There's a lot of real estate industry dogma to try and excite people when rates are low... but is this warranted? If your interest rate is too high you can always try to get a lower interest rate later, but if you overpay for a home you cannot go back and ask the seller for a refund.

I'm curious what the best way to win in that scenario is.

orphanis said:In my opinion the price of RE is not full picture. The other day I stopped by to look at a 2BR 2.5BA condo in Brookline, MA being auctioned off. The condo fees $1300/month, RE taxes aprox. 14000/year, which comes to close to $2400/month just to own that piece of RE not including mortgage. For that much $$ one can rent an apartment in the area.
For $1300 a month, that better include a lot of hookers and blow

I can't believe it took a day for that. But seriously, I hope you get blowjobs for $1300 a month as that's ridiculous. I think I know why the place ain't selling.