That Sound You Hear Is The Bubble Popping
Long time readers of this blog will remember Bill Fleckenstein. It sounds like he’s been reading your comments! “A recent story in the Wall Street Journal offered lots of its useful vignettes that serve as a microcosm of manic markets. That’s the mentality often seen in manic markets, the belief that you can’t possibly lose, and, when the price goes against you, you don’t have to deal with it, because it will come back.”
“I loved the point that what seems to be really alarming is how ‘real-estate agents in some of these formerly red-hot markets have been surprised at how suddenly market conditions have deteriorated in the past few months.’ Of course, that’s what happens when manic markets and bubbles turn. Prices change radically and, seemingly, for no reason.”
“Many people will say that the real-estate market has turned due to higher interest rates, and rising rates have hurt. But the real-estate market ignored rates going up for quite some time. Its topping was caused by exhaustion.”
“As I have said often, the housing bubble has been more a lending bubble. It will be the impairment of the financial institutions that will stop the flow of credit to the real-estate market. In turn, that will accelerate the collapse in house prices somewhere along the way.”
“A recent edition of The Liscio Report put into perspective how wacko the current climate is. It said that the ratios of (a) stock value to GDP and (b) real-estate value to GDP are both nearly twice their averages from 1952 to 1970. As the report noted: ‘If mean reversion still has any role in market valuations, then both markets have plenty of room to fall.’”
And a letter writer in Florida must post here, too. “While the market moves to correct the ‘irrational exuberance’ of housing, governments are considering ‘fixing’ the disappearing problem with subsidies. These subsidies will serve to benefit certain groups of homebuyers while harming other potential buyers through artificially maintaining still irrational prices.”
“Government created the bubble through cheap money and Freddie Mac and Fannie Mae buying recklessly issued mortgages with unsustainable terms for grossly overpriced houses. Mass speculation and panic-driven buying fueled the classic bubble, prices far in excess of value.”
“House prices have been falling for six months and will continue as excess supply created by the speculative binge is liquidated and terrible mortgages come to roost.”
“As the march back to equilibrium continues, many hardworking people are caught with speculators. The real challenge for government is not to find ways to subsidize certain buyers at the expense of others, but what to do with the recurring expenses and debt recently created, once the housing bubble revenue windfall of the last five years evaporates.”
“Some people are sanguine these days because, as the article notes, “while sales are slackening, they aren’t collapsing.” To that, I would add: “Yet.” They will.”
Nice.
That’s because any house that hasn’t sold is still magically worth what it was 6 months ago.
Great column by Bill Fleckenstein! He is right on the money. Well worth the read.
David
http://bubblemeter.blogspot.com
Wjere is Robert Cote when you need him..Even this article claims that the gas prices will have a major effect on the housing market.
Can’t be everywhere all the time. Since you are such a student of my comments you might also recall that I have been the strongest proponent of how very fast the market has/will turn. I personally don’t care how many people subscribe to gas prices will kill the suburbs selectively or even how many people are partly right about inflation squeezing the bubble. Please don’t misrepresent my position in this manner.
I like the way you talk, Robert.
This was the first honest article I have read in the mainstream media in a long time regarding the bubble.
I would also recommend his articles on the CPI, and how the government tweaks it so as to not show “real” inflation.
Fleckenstein has been the only consistant and sane media voice out there from the beginning.
Let’s not forget Robert Shiller.
Yeah, since about 1999. He’s about to be right 7 years later…
Of course you’re conveniently forgetting how he also called the tech bubble crash, the rise of gold, the rise of silver, decline of INTC and many other stocks. I’ve been a very happy (and much wealthier) subscriber of his. Much like the readers of this blog he’s ahead of the curve but that just means you can get in (or out of housing for example) long before Joe Public realizes what’s going on.
Yep, Fleck has been there for quite awhile… previously on SiliconInvestor, and now MSNBC’s shill site. At least they have a taste for the different. Or in his case, the correct.
That link to the Florida Today article is right on…I went to college at the Florida Institute of Technology in Melbourne, FL (Brevard county). My senior year (1999-2000) I rented a house, small but livable, on an acre for $750/month, and after we moved it sold for $55,000. I saw it’s since been flipped twice, once in 2002 for $139K, and then again in 2004 for $225K.. It was only about 1100 sq ft with an iopen floor plan, I can’t imagine what anyone could have really done to it. The appreciation there has been unreal, there was lots of land to build, though, so I imagine there’s a fair amount of speculation. Jobs have come there though, particular gov’t contractors, so some higher appreciation was inevitable. But Brevard county was kind of a hidden little spot, and people figured it out. Wish I would have bought that house after I graduated!
baltimorehousing.blogspot.com
Nikki — at that price, the house must have been near the school and right off 192. You didn’t lose out on much. It seems like half that area is for sale now. I think that reversion-to-the-mean will have the price of that hovel back down to not much more than it was when you graduated, if that.
My advice — wait until just after the bottom, then invest. And if it’s a rental, don’t be too far from it.
I see you know the area…actually, it was in Palm Bay, in a nice location…Babcock to (L at the McDonald’s and Publix) then L on Roc Rosa…now those houses right behind campus were going for like $35K and students parents were buying them then, as it was cheaper to buy them then to rent them (or you’d at least break even…)–not anymore!
Try this:
In San Diego, a 3/2 home in Normal Heights - one block north of El Cajon Blvd:
‘99 $55,000
‘03 $250,000
‘04 $508,000
Yes, there was some work done between summer of ‘03 and ‘04 - but I still can’t speak to my brother about RE since he signed up for the half million, double mortgage, interest only, adjustable rate… you know the deal. Can you believe he offered, politely at the time, for me to “get in on the deal?”
Oh, if you want to know what El Cajon Blvd between the 805 and 15 is like, just ask any San Diegan.
I don’t feel unsafe there… but the area seems a bit challenged.
Hmm… “…a big challenged…”
Is that a new name for a street with innumerable gang tags?
“Oh, if you want to know what El Cajon Blvd between the 805 and 15 is like, just ask any San Diegan.”
Yeh, like 15 Vietnamese living in a 2 bedroom apartment.
Yea, that’s where sign twirlers go for training, drugs are cheap and there are gangs of every ethnic background living harmoniously together. Great place.
I work there, our local liquor store owner was shot and killed a block from my office. Reversion to the mean streets?
Psycologically there is a big difference to loosing a large sum of money all at once and loosing it in small amounts. Imagine loosing $10,000 50 times vs loosing $500,000 all at once; in the first case you think you have a chance to get it back, in the latter you know you’ve been had. People just don’t want to face the hard truth that they’ve been had!
Kind of like gambling in Vegas…
No, EXACTLY like gambling in Vegas. (I know that’s what you meant)
The more the mainstream media does stories on this bubble the quicker the fall. Here in Boston we are still in the “denial” phase.
I agree. There are still a lot suckers buying here in Newton, MA.
I posted this on an earlier thread - it is from MarketWatch, Marshall Loeb, entitled: America’s Borrower-Industrial Complex
http://tinyurl.com/g4c3f
“Three: America’s ballooning debt, which has mortgaged the country’s economic health to financial speculation.
The first two points are fascinating enough, but our column focuses on the economy, so what concerns us most is point three: those expanding debts. They may be worse than we imagine, much worse.”
I linked to that article on my blog, and I can’t WAIT to read that book…it’s nice to see a realist as opposed to a blinded partisan idiot, either way. Any fundamentalist religion is bad, our debt is too great, and we do have our fingers in too many places around the world. But nobody listens until, well, ever…so this book will only serve to further educate already knowledgable people, and those who need to heed his warnings the most walk around blindly pretending all is well with the world, racking up debt and buying the spin.
My feeling is that those are the same type of people who’d rather waste time driving in circles for 10 minutes looking for the closest parking spot instead of just driving 200 ft farther away and actually getting some exercise by WALKING to the door to buy something they can’t afford. Sorry, those people drive me nuts.
Yea, I agree, but you gotta understand for everyone who wants a little exercise there is a nagging spouse telling them to try and get a little bigger house…er a little closer parking space. Such is life…
LA-RealityCheck, you can always kindly offer to drop the spouse off at the front, then park and get some exercise. Divorce is always an option, too.
Worst part is, they’re going to the gym.
My wife and I laugh at those people. They really do spend mega amounts of time to get that parking spot 100 feet closer. Ever pay attention to the weight they are pulling around when they get out of the car? Sometimes they could use the extra exercise.
Why is “any fundamentalist religion bad”?
It seems like there has been a vast awakening the past few days about the problem. Ben, his regular readers, and a handful of other blogs have been like candles in the dark. Suddenly the media notices, and even the idiots on Craig’s List are starting to voice their doubts.
I agree completely. Last night CBS evening news had a piece on risky ARMs. The concluding sentence was a warning on the 500 million in ARMs, taken out by high risk borrowers, that will readjust this year. The reported sounded like he was parroting what he read on the bubble blogs. 6 months too late IMO. Perhaps they were waiting for data to back up bubble theories? Now with exploding inventories and distressed sellers everywhere they have the evidence that they need to run the stories and sound the alarms.
I estimate the vast awakening will get somewhat vaster about 4 hours from now, when the NAR’s March Existing Home Sales numbers are released.
I make it a point to send this link to any friends and family who show the slightest interest in buying a house. Happily, I’ve already disuaded several people who were prepared to buy on the basis of “popular wisdom” rather than a sober look at market trends and realities.
Boy have you got that right. It really has been just the past few days that an awakening has started to occur.
I’ve been gently nudging people about this bubble for months. Absolutely no response.
Until this past week. THREE people concurred. A woman at the grocery store told me her daughter is a financial planner. They had a huge meeting last week . Her daughter told her all the financial planners were getting ready for a recesssion and that the housing market was going to “tumble” (sounds better than a crash, doesn’t it?!).
Another whose house is for sale in Seattle right now had a friend-of the-family RE agent tell her the market’s going to crash.
This kind of talk was simply not happening out in public a mere 2 weeks ago.
This is one of the final steps in the right direction. The word is getting out.
I live in Cape Coral Fl. on a canal. Since July 05 I have seen new houses built and sold and still at the same pace currently… no noticed change. BUT, resales especially over 10 year old homes are basically a dribble to last Spring and this this year. Prices are off the high 10% on my observations… and few buyers to be found… It’s definately a drought.
Things happening to the list prices:
http://www.centexhomes.com/Washington-DC/
From today-
The prices are quoted to the nearest 100’s
e.g.
Centex Homes East Market at Fair Lakes Fairfax Condominiums Homes available for Quick Move-In
$400s
The google cached page from 5 -6 days ago (April 18th) had this
Centex Homes East Market at Fair Lakes Fairfax Condominiums Homes available for Quick Move-In
$474s-$542s
I am sure I saw higher prices for many localities much higher than even the cached version
I am glad I waited and didnt get caught up (wasnt easy)
OT:
courtesy of calculatedrisk
http://www0.gsb.columbia.edu/students/organizations/follies/media/EveryBreath.wmv
LOL! Too funny!
FANFARE, PLEASE.
From San Diego’s ziprealty inventory:
“Your search has returned the first 200 of 19294 homes”
19,294 > 19,280 = July 1995 inventory. We are at the highest inventory level in over ten years, and climbing. The San Diego bubble has popped. All is denouement from here on down to the bottom of the hill.
there’s also this other city in arizona flirting with 44,000 listings.
it’s sosa and mcgwire all over again.
Sonoma County 2863 listings as of 4/25/06
3/20/06 = 1742
3/26/06 = 1766
4/03/06 = 1888
4/19/06 = 2828
4/25/06 = 2863
35 houses in 6 days…
1097 in just over a month…
GS,
I hold my glass high in a toast to you and our fellow SD housing bears here on Ben’s blog. It looks like we will finally be vindicated.
CHEERS!!!
Are there any houses that are not for sale in the US of A?
Damn……these are huge numbers.
Oh well…….houses for all those that have waited in this insanity.
I’m in NYC and noticed that in some parts of town there is a lack of for sale signs. Long Island and the suburbs is a different animal. Here is NYC 75% of the market is co-op’s and it’s very hard for investors to get in. You need at least 15% down, a lot of times they won’t let you have crazy loan and they do a credit and background check on you to make sure you can pay the monthly dues. And the investors who own apartments are usually cash flow positive in all buy a few cases. I’ve been checking craigslist and don’t see a deluge of apartments for sale. Condos and houses are a different market and i think a lot of recent buyers will be in trouble soon.
DBA, your info is way off:
http://furmancenter.nyu.edu/CREUP_Papers/state_of_the_city/chapter01.pdf.
Most NYC homes are conventional homes. You seem to be looking at Manhattan info only perhaps.
Also, take note that on craigslist approximately 30 percent of all properties these days are either reduced/motivated or negotiable, and take a look at the # of open houses you see advertised in the NY times/daily news on weekends vs. a few months ago - waaaay up.
In addition, in the boros co-op prices already are going down, and you in fact can get a co-op with a riskier mortgage and less down in the boros, and if you are sneaky enough, you can in fact get a co-op with 100 percent financing if you conceal this from the board. It can and has been done — only co-op boards that can afford due diligence can be sure to avoid this type of buyer.
It’s not a deluge yet, but it may very well be.
Correction on craigslist figures — safer to say about 10 percent of properties that have “sale” in text are reduced/motivated/negotiable - this is still a huge percentage - I can’t get # of total cragi’s nyc properties, and often times you can see a property re-listed at reduced price, (but seller won’t directly say it’s reduced), it’s pretty safe to say that # could be quite a bit higher.
If anyone else has figured out a way to mine craigslist, let me know.
You don’t see “For Sale” signs in some NY neighborhoods because then it is easier to keep certain “elements” out.
Thus avoiding fair housing laws.
It doesn’t mean there aren’t any houses for sale.
Good (and sad) point, and one other thing you don’t see is realtors sharing their data with each other - they don’t want to share listings, so they wouldn’t encourage for sale signage. And of course this also means it’s easier for misinformation/hype to be spread.
“A recent edition of The Liscio Report put into perspective how wacko the current climate is. It said that the ratios of (a) stock value to GDP and (b) real-estate value to GDP are both nearly twice their averages from 1952 to 1970. As the report noted: ‘If mean reversion still has any role in market valuations, then both markets have plenty of room to fall.’”
Can someone with an understanding of econ help me understand this?
Arguably, all investment decisions revolve around a comparison of fixed capitol and an expected income stream. For houses the income stream is the equivalent rent minus the holding costs.(maintenance, taxes etc.) For stocks the income stream is divedends. For individual investments the P/E ratio is used. That is, the price of the stock or house divided by the annual earnings in rental equivalent or divedends. This allows one to compare different investments to see how much money they will return you over time. Of course there are many things that can change one’s estimates of future returns, from gentrification of a neighborhood for housing to a newly patented drug for a company. In general however, since the reason to buy is the returns generated, the higher the ratio is, the more probable it seems that the selling price could go down. However, another factor is reinvestment. If a company builds a large factory, or you refurbish your kitchen, instead of returning the money as a dividend, the expected future returns are higher even though the current earnings may be lowered. Since the author in this case is trying to see whether stocks or property in aggregate total are overvalued, he is comparing them to the entire size of the economy, the ultimate source of any income.
“Reversion to mean” refers to the idea that sometimes prices are high, sometimes they’re low, but on average they’re…average. Prices that are high would have to go down (in real terms) for the average to be maintained. This is the opposite of the “it’s different this time” and the “it’s a new economy” ideas. So his argument is that for these ratios of price/gdp to go back to what they were, prices would have to drop 50% or gdp double (extreemely unlikely)
Personally, I’m a little suspicious of the comparison to a particular 18 year post war span. I see no reason to believe that period should be regarded as a better (or worse) yardstick to judge the current degree of speculation than any other in the postwar period. While we all would agree during WWII it really WAS different, even leaving out the great depression can skew your sample. By saying a priory, that we won’t include that in the sample that we are using to compute our mean (average) we to some extant discount the idea that it would ever happen again, as if the particular brands of avarice and stupidity that had somehow been eliminated from the human genetic profile.
That should be priori, not priory. oops.
Thanks for taking the time to explain. I appreciate it very much.
Robert Shiller has tracked housing prices back 100+ years. According to his analysis, we are well above double the mean.
Of course reality is usually somewhere between the “everyting reverts to mean” and “it’s a whole new economy,” extremes. Before the popularization of the automobile for instance, most people who worked in a city rented apartments in it. The suburban sprawl that we now complain about WAS the prewar dream of a better world. Interstate banking, national credit reporting agencies, and the GSEs have also changed the mortgage (and therefore the housing) market considerably. Even Shiller’s charts show a big postwar jump in inflation-adjusted house prices. They haven’t returned to their pre-war values.
The difficulty is that the more years you include in your averages, the more actual, structural changes to the economy you ignore. On the other hand if you only include a short period of time when totaling up to calculate your mean, you discount the risk of infrequent events. If you looked at flooding in N.O. between 1970-2004 you might conclude that you didn’t have to worry about major flooding.
To some extant the “there have been no YoY declines in house prices” meme has both inclusion and exclusion naccuracies. They have not included the great depression when there WERE national price declines, and by averaging over the entire U.S. they ignore the fact that many cities, regions, and market segments have seen significant price declines. After all, you don’t buy an index fund for national house prices, you buy a particular house in a particular place.
I should point out to anyone who finds this in google years later that in the above explanation, that I’m confused in the above about P/E ratios. The Earnings in P/E are corporate profits, not dividends returned to investors.
Here in Cincinnati, the realtors are in the classic denial stage. They are expecting 8% gains this year after years of 2-3 percent gains. Headlines from today’s enquirer and the first paragraph. The url is at: Enquirer Article .
House values may be rising
Home prices in our region expected to increase by up to 8 percent this year
BY JEFF MCKINNEY | ENQUIRER STAFF WRITER
Just because Greater Cincinnati and Northern Kentucky missed the jackpot of surging home prices on the East and West coasts doesn’t mean home sellers should fret.
In fact, projections by leading real estate analysts say that this year - for the first time in six years - home prices in our region will rise at the national average, about 8 percent.
For local home sellers accustomed to gains of 3 percent to 5 percent a year since 2000, the projections mean that at least an echo of the national housing boom can be heard in the area.
A home that sold for $200,000 last year might go for $216,000, if the predictions by real estate industry watchers Moody’s Economy.com and Fiserv Lending Solutions are correct. And if you live in a neighborhood where housing is in high demand, you could cash in at a greater rate. After all, the rule of real estate is still location, location, location.
hi tell all, what part of Cincy are you in? I’m in Monroe/Liberty Township. The enquirer is a piece of crap. I used to work for a Fortune 50 company downtown, even when we fed the Enquirer information for an article on our company they got the facts mixed up. As far as the bubble here, we have PLENTY of people who will be in trouble with rising rates. In my neighborhood, houses seem to be going for about the same as 2-3 years ago. No 8% gains so far.
Am in the Blue Ash area.
8% headlines in the Enquirer is going to wake up a few sellers. Maybe the invetories will rise even more.
I don’t think a 8% rise is impossible:
Looks like Cincinatti is one of those areas where the bubble is just starting (judging from the very low appreciation in the last 5 years). In that case a 8% price increase would be a low estimate, the price rises in the late bubble areas are often the strongest.
A rising tide lifts all boats and near the end of the mania, even the worst properties will appreciate beyond imagination.
Also, realtor estimates are usually for the average or median home. If there is a huge shift in the market (like relatively more transactions for expensive homes) this can cause a disconnect between the trend in the average/median price and individual home prices.
In Europe about 3-4 years ago the market psychology was similar in some ways to what we are seeing now in the US. For the first time in 15 years or so, the Dutch realtors association predicted a minor decline in the average sales price; In the following year, the average sales price increased by 18%…
Hmm, rising 8% eh? Funny, my realtor-bot in Ohio sends me listings everyday - many price reductions, especially in Hyde Park.
This quote is priceless:
“After all, the rule of real estate is still location, location, location.”
Yeah, and that has what to do with Cinci? Race riots anyone?
Btw, no offense - love Ohio, but this is just silliness. My family in Ohio tells me they have never seen so many for sale signs. They’ve been trying to sell my great aunt’s house for months and haven’t had a nibble.
OT, here’s an interesting (and long) Paul Krugman academic paper, “Will There Be A Dollar Crisis?” (the link has the text in full, as well as a link to the original PDF).
“The possible excesses in housing are the reason it may be a mistake to focus on longterm interest rates in analyzing the possible effects of a dollar plunge. Suppose that we have double bubble trouble, and the crisis takes the form of a more or less simultaneous downward revision of expectations about the future value of the dollar and expectations about the future price of houses. In that case, long-term interest rates could move either way…
“To put it crudely, if the contractionary effect of a burst housing bubble arrives more quickly than the expansionary effect of a dollar depreciation, a dollar plunge will be associated with an overall slump…
“But can’t the Fed offset any contractionary effect by cutting interest rates? There are two possible limitations to the Fed’s ability to act. One is that the Fed, concerned about inflation, might be reluctant to cut rates in the face of a plunging dollar. The second is the zero bound on the Fed funds rate. Bear in mind that the principal channel through which Fed policy affects domestic demand is via housing. If a burst housing bubble is part of the economic problem, the Fed’s leverage over the economy will be greatly reduced, and even a zero Fed funds rate might have only modest stimulative effect. So there’s a plausible, but far from conclusive, case that the initial impact of a dollar plunge will be contractionary, and that the Fed will fund itself unable to offset this contraction.
“Are we missing something here? Quite possibly. The history of crisis modeling in international macroeconomics reveals that each successive wave of crises exposes possibilities for crisis that were overlooked in earlier analysis. There may be risks of a hard landing – perhaps in the form of financial disruption – that are overlooked by our models. On the other hand, there are cautionary tales on the other side: currency plunges, from the dollar in 1985 to Brazil’s real in 1999, that were widely expected to bring recession in their wake but didn’t.”
Also this:
Readers respond to Paul Krugman’s Apr. 24 column, “CSI: Trade Deficit”
“Jan Beckedorff, Bethesda, Md.:Please follow up with scenarios of what may happen when the chickens do come home to roost. What will be warning signs? How to defend savings and assets for those not in the wealth class? …
“Paul Krugman:The chickens-home-to-roost scenario is actually the hard part, because we have no experience with a country this big and this rich being this deep in deficit. One thing is clear, though: it’s really bad for housing.”