The Housing Bubble

Did Main Street have any assets left after the 70’s?

True, Bill, but lots of people on Main St never heard of Vanguard back then.

Who could have seen the Greenspan-Bernanke put, then QE1, QE2 and QE3 coming?

“I’d guess REIT prices were crashing while dividends stayed relatively fixed.”

If dividends stayed fixed (which is my guess) then the price of these dividends is what was yanked up and down. But the dividends are generated by what the assets earn so it comes down to watching the price of the dividend-earning assets go up and down. And if Price equals Value then the VALUE of the assets is what went up and down.

So billions of dollars of value in the form of assets went up and down if one is to believe that Price equals Value.

Which is really crazy but there it is. And it’s there because so many people think it is there, think that this concept is not crazy. And if these people are buyers and sellers then they are the ones who set the prices. And if they set the prices - as crazy as their reasons may be - they set the values.

All this crazyness ends up creating massive distortions in Price. And if one has a general sense of value - a sense of value other than price - then the massive distortions in price creates opportunites to buy assets when then are under priced and to sell them when they become over priced.

If you look at the chart you will see that the price of the dividend yield is near its low, that because the price of the REIT assets that generate the dividend is near its high. The higher the price the lower the yield.

But this high price attracts new money because if the price is going up then that means the value is also going up. And this increasing value of the RE held by the REIT translates into rising value of the comps - RE not held by the REIT.

So because houses that would otherwise remain vacant - the comps - have increasing values they attract money that will go into buying them up from whomever it is that owns them, will have money invested into fixing them up, and then they will be rented out. And if enough of them are rented out then price pressure will be put on rents, and if pressure is put on rents then the REITs will not be able to get the rents they need to generate the dividends that investors are expecting, which will drop their dividend yield down even furthur.

One thing to remember about 1975 was that nobody in the middle class had ANY retail investments in stocks, bonds, etc.

It simply did not exist for them.

One thing to remember about 1975 was that nobody in the middle class had ANY retail investments in stocks, bonds, etc.

It simply did not exist for them.

BS. My father and uncles were buying and selling stocks throughout the 60’s and 70’s. Hell… they were buying me bonds as gifts in the 70’s.

“One thing to remember about 1975 was that nobody in the middle class had ANY retail investments in stocks, bonds, etc.”

I am pretty sure you are wrong about that.

Of course there were exceptions, but they are just that. The VAST majority, did not.

Savings accounts, CDs, maybe some bonds were about exotic as it got.

P.S. Dual tracking does seem like a scam, and I am surprised it is legal anywhere.

Huh??? Why?

The bank is just exercising their legal right to foreclose. That is a totally separate issue from whether they choose to approve a short-sale.

I see no problem with proceeding with both at the same time. If they decide that the offer isn’t good enough, strong enough, or sufficiently-likely to close, then they should always be free to proceed with the foreclosure action.

The bank _approves_ a short-sale, but they generally have NOT entered into any sort of a contract requiring that they conclude a short-sale. If they had, then dual-tracking would be wrong.

Forbidding dual tracking is really way to restrictive. Disclosure of where the bank is in the foreclosure process whenever the parties talk to each other should be required and it would be fantastic for both parties. The owner would be much more motivated to take a deal (even if it isn’t as good as the one they fantasized about) if they knew they were 60, days, 44 days, 29 days, etc. from a foreclosure. The bank would be more likely to offer some sort of deal if they could clearly see that a deal was possible that is better for the loan owners than getting the projected auction sale price. It at least would protect them from getting sued under the terms of their loan servicing agreement.

“Disclosure of where the bank is in the foreclosure process whenever the parties talk to each other should be required and it would be fantastic for both parties.”

Maybe I misunderstood what ‘dual tracking’ entails, as I took the impression that banks were routinely leading borrowers into believing they might be able to qualify for a modification if they stopped making payments, then using the payment stoppage to secretly start a foreclosure action.

This is what I have gleaned from MSM articles on the topic; I don’t claim to have a banker’s insider understanding of what dual tracking is or isn’t.

Dual tracking is any situation in which one part of the bank is “talking” about a modification and another part of the bank is moving forward with the state’s process for foreclosure. What has lead to the foreclosure might have been the person thinking they had to stop paying to get a modification or it might have been them just not paying because they can’t afford to pay or not paying because they don’t feel like paying or not paying because the neighbors stopped paying a while ago and haven’t been kicked out yet. Inducement by the part of the bank that accepts and supposedly processes modification information is irrelevant.

I took the impression that banks were routinely leading borrowers into believing they might be able to qualify for a modification if they stopped making payments, then using the payment stoppage to secretly start a foreclosure action.

This seems to have been the case in many instances reported here. And I see no legitimate excuse for it, it seems like fraud to me: ‘Here, do this and we’ll help you. Whoops- you did it! Now you’re screwed, sucker!’

Yeah, nothing wrong with that.

Inducement by the part of the bank that accepts and supposedly processes modification information is irrelevant.

Seems like in any rational legal system, it would be relevant.

It isn’t relevant because the contract that established when the bank had the right to foreclose already existed before anything else happened. Anything less than a change in the terms of your mortgage that officially alters the circumstances when the bank can foreclose to exclude the first 18 months or so of non-payment as long as you have a written acknowledgement that the bank received your loan modification agreement is just talk. See you, need a mortgage modification just to change the circumstance in which they can foreclose.

Contracts have meanings folks. If you had signed a lease for studio apartment 101, and the guy on the phone said, don’t worry, we will really give you 5 bedroom penthouse A for the same price, would you just believe it, or would you want it in writing? The folks who stopped paying get stuck with the deal they originally made. Because it was their deal and they made it. If you want a different one, cross out those parts of the mortgage documents before you sign. Just don’t expect the bank to accept the changes or give you any money.

“…it seems like fraud to me: ‘Here, do this and we’ll help you. Whoops- you did it! Now you’re screwed, sucker!’”

Exactly! Don’t know if this fits the legal definition of fraud, but it certainly does fit Merriam-Websters’ definition:

fraud
noun \ˈfrȯd\
Definition of FRAUD
1a : deceit, trickery; specifically : intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right
b : an act of deceiving or misrepresenting : trick
2a : a person who is not what he or she pretends to be : impostor; also : one who defrauds : cheat
b : one that is not what it seems or is represented to be

“Contracts have meanings folks.”

So do what people say in their business dealings, bankster utterances possibly excepted.

If there is a clear written contract, then what is said outside the bounds of the piece of paper don’t have meaning - not in a way that is legally enforceable. If you were induced to do something that breaks your contract obligations by the other party to the contract, that makes the other party an asshole. But they are still allowed to enforce their rights under the contract.

And, of course, Webster’s isn’t a legal dictionary and legal dictionaries don’t have force of law. You need to conform to all the elements of the fraud statute (or common law definition) in your state, and good luck proving it when all you have is that you are pretty sure that on the phone “Becky” told you that you had to stop paying to get considered for a modification and did not say that applying for modification would relieve you of any other responsibility under your already existing contract.

“And, of course, Webster’s isn’t a legal dictionary and legal dictionaries don’t have force of law.”

I never suggested that.

But I still consider the dual tracking as reported in the MSM to be fraudulent, and it appears that at least some attorneys concur with me, as evidenced by the passage of the California Home Owners’ Bill of Rights into law.

Published: March 9, 2013
Updated: March 11, 2013 12:31 p.m.
5 mythbusters for underwater homeowners

‘There is so much misinformation out there … the law is constantly evolving.’

By MARILYN KALFUS / ORANGE COUNTY REGISTER

Home values are going up, and many struggling homeowners are gaining equity in their property. But nearly 14 million U.S. homeowners remain underwater – with mortgages worth more than their homes.

More than 27 percent of U.S. homeowners with a mortgage, and nearly 20 percent in Orange County, had negative equity in their homes at the end of 2012, according to a report by Zillow.com.

Many homeowners face foreclosure or are having a difficult time making their payments and are considering options such as a short sale, filing for bankruptcy protection or just handing the bank the house keys and walking away from their debt.

The choices can be confusing.

“There is so much misinformation out there,” said Doug Bickham, a real estate lawyer in Lake Forest. “The law is constantly evolving and even Realtors don’t understand all the fine distinctions in the law.”

The Register asked Bickham, managing attorney at Rasmussen Law Firm, and Bob Hunt, broker at Keller Williams OC Coastal Realty and a longtime member of the California Association of Realtors’ board of directors, to explain the most common misconceptions held by underwater homeowners, or those trying to help them.

Here’s what they said.

Myth: The new California Homeowner Bill of Rights keeps a lender from foreclosing on a home regardless of whether the borrower is pursuing a loan modification or a short sale.

Reality: The Homeowner Bill of Rights, which went into effect in California on Jan. 1, is supposed to restrict lenders from “dual tracking” – that is, repossessing a home while a homeowner is awaiting a decision on a home loan modification application.

But a short sale is a different situation, Hunt said. By the time the law kicks in on a short sale, it may be too late.
…

The whole inducement into a negotiation is an oddity. If the person is paying current on the mortgage on an underwater house, isn’t the lender better off keeping the person paying current? What does the lender gain for “tricking” the borrower into stopping paying?

It makes no sense to me.

I’ve heard “dual tracking” much more in the context of keeping the bank’s options open…if they don’t start the foreclosure process, banks need to recognize that it will take them 4-6 months to resolution once they DO start. So, “dual tracking” allows the bank to run the foreclosure timeline while still exploring other options.

Why do they do this? It is commonly used for commercial properties. Banks frequently DO NOT want to take back a commercial property as REO, but they run foreclosure processes in tandem with talking to property owners to keep pressure on the borrower to come up with their best offer. This happens so frequently that it is surprising when they DON’T proceed this way.

Because they can.

Take this for what it’s worth (ie a worthless internet opinion), but there are gobs of money in Cyprus banks from Russian oligarchs.

Methinks Eurozone looks at this as more of a bailout of those guys (rather than the average Cypriot), and methinks this is their way of reducing a “hold your nose” bailout of Russia.

Take this for what it’s worth (ie a worthless internet opinion)

It’s reported as such on the BBC:

“It is believed that eurozone leaders, particularly in Germany, insisted on the levy because of the large amount of Russian capital kept in Cypriot banks, amid fears of money-laundering.

The speaker of the European Parliament, Germany’s Martin Schulz, has called for the levy to be revised to protect small-scale bank customers.”
BBCNews

I think it comes down to the simple fact that government(s) has interfered with a free market economy, and create false (growing) market(s) based on money that really doesn’t exist.

I take a look at the Canadian and American mortgage business… where banks are guaranteed the loan payback to them, because government (IE: We the people) will pay if the (high risk) borrowers don’t. (by printing more)

Who, other than government… would loan over-leveraged borrowers 95% LTV at 2.9% on a property at the top of a bubble? Its INSANE.

This ponzie scheme has got to stop at some point. My question is, how and when?

I have been following these bubbles since 2004, and always seem to falsely predict the fallout. Why? Because governments create a new set of rules to “fix” the problem.

I think what many of us here are looking for are answers, ANNNND opportunity. There should be blood on the streets after a market crash. It is then patient, smart people can walk in and make sound purchases.

I finally gave up on buying a house in Socal, and moved to Des Moines Iowa, where I bought a house in a market that made sense to me. SoCal is getting back to 7-9X’s income in some markets, and we know that just isn’t “real”… OR… has that become “real”?

Its like we are playing a game of Monopoly, with a savvy “big brother” changing the rules as you go along to favor himself. I’m calling Mom.

‘why would interest rates go up’

Competition for deposits. Here’s where we have been conditioned by extraordinary circumstances: I have followed economics for decades. It was always considered a truism that a central bank didn’t set long term interest rates. I’m not familiar with how the Canadian mortgage market works, but they do have a GSE like entity. And like the US, we now have “officials” telling us that mortgage rates will be at this level or that. How can that be? Are the central banks/governments now in control of interest rates 20-30 years out? Or are they setting rates today and arranging for loans for that amount of time? Because if rates do “normalize” somebody is going to lose a lot of money. And why would they take such a risk?

http://thehousingbubbleblog.com/?p=7448

‘Since 2008, the government has thrown the rule book at the real estate market. Its reductions to maximum amortization alone have increased monthly payments 26%, other things being equal. That’s on top of new refinance restrictions, stricter qualification rates, a prohibition on high-ratio insured rental financing, stated income restrictions, covered bond restrictions, stricter documentation rules, HELOC LTV reductions, withdrawal of liquidity (rationed portfolio insurance), elimination of insurance on high-end properties, debt ratio limits, and much more. Now, virtually every analyst in the country predicts a housing selloff of some degree.”

“The fact is, Canada’s economic fate is tightly intertwined with real estate. One in five GDP dollars result from housing-related spending. The average Canadian has 67% equity in their real estate assets. The average homeowner has equity of $214,000, with significant reliance on that equity for retirement.”

“Housing and mortgage activities create significant employment in Canada. They account for more than 1.35 million direct and indirect jobs - about 8% of total Canadian employment. The construction sector employs 890,000 people. It has created 425,000 net new jobs in the past decade and 18% of job creation from 2006 to 2011. Renovation spending in 2010 (latest data we have) was $45 billion. Reno-spending will certainly be curtailed by new rules limiting equity take outs (ETOs). About $17.5 billion of those ETOs were devoted to spending and investment in 2011. Renovations have been the #1 reason people refi to pull out equity.”

“At this point, normalizing interest rates or adding significant new housing restrictions could be economic suicide.”

“I have followed economics for decades. It was always considered a truism that a central bank didn’t set long term interest rates.”

I have also followed economics for decades, and agree with the perceived truism.

But now the Fed has thrown a wrench into the gears of the normal long-term interest rate setting mechanism with Quantitative Easing, while pretending that nothing unusual is underway. Two of the biggest questions with how this plays out from here are:

1) How long will the Fed attempt to continue its long-term interest rate suppression policy?

2) Are there any factors beyond the Fed’s control which could undermine the rate suppression policy before the Fed decides to end it?

So far, the MSM seems completely oblivious to this soft underbelly of the loudly-heralded housing and stock market recoveries.

“I take a look at the Canadian and American mortgage business… where banks are guaranteed the loan payback to them, because government (IE: We the people) will pay if the (high risk) borrowers don’t. (by printing more)”

This seems like a crazy, self-detrimental way to run a mortgage finance system. How did America arrive at this state of craziness?

Are the central banks/governments now in control of interest rates 20-30 years out?

What about buying all those mortgage bonds, many of which are fixed-rate for 20-30 years? Is that a back door to controlling interest rates — at a low rate — for a large segment of the economy?

A couple weeks ago someone said that Canadian mortgage rates are guaranteed for 5 years, and you have to renew every 5 years. Every loan is a de facto ARM. What a disaster.

I can see a case for competition of deposits if we make foreign exchange radically easy. Acounts of British or Swiss banks, whatever, all easily accessible at any ATM machine. And the ability to switch banks from one to another by Internet. This would also make a stronger case for Monetarist policies to return.

The draconian “war against terror” excuse that invades Americans’ financial privacy is what defeats this idea.

We need to radically reasses our Wilson doctrine of “making the world safe for democracy” first. The “war on terror” is too lucrative. Now our government sees how good it is to restrict our liberties further. I see no end to this restriction on our liberties until our government declares an end to the war on terror. I won’t hold my breath. Especially since the Democrat Party has now been turned into a war party. They too, see how good it is to spy on Americans and know our personal finances.

But now the Fed has thrown a wrench into the gears of the normal long-term interest rate setting mechanism with Quantitative Easing, while pretending that nothing unusual is underway.

My impression was that most of the QE purchases were short-term Treasuries, rather than long-term—and thus should affect only short-term rates directly.

Now Operation Twist was definitely a different story…

A couple weeks ago someone said that Canadian mortgage rates are guaranteed for 5 years, and you have to renew every 5 years. Every loan is a de facto ARM. What a disaster.

I would point out that it was in large part the structure of loans that got so many folks into hot water during GD-I—except that our style was even worse, as they tended to be 5-yr balloon payments. So re-fi every 5yrs was required, and when the mortgage market dried up, those loans were unavailable.

Canadians may not be in that much trouble as their loans as long-term, and only the rate will change. And if our history is any guide, their central bank will be suppressing rates like CRAZY, so the average Canadian’s mortgage payment may go down rather than up.

Remember, our ARMs in the US didn’t blow up nearly like we thought they might due to the above.

“Is that a back door to controlling interest rates — at a low rate — for a large segment of the economy?”

If so, it doesn’t work very well, at least if judged by the historical evidenced.

For example, check out what happened to long-term U.S. Treasurys over the 1966-1982 period.

This seems like a crazy, self-detrimental way to run a mortgage finance system. How did America arrive at this state of craziness?

By repealing Glass Steagall?

If so, it doesn’t work very well, at least if judged by the historical evidenced.

For example, check out what happened to long-term U.S. Treasurys over the 1966-1982 period.

Were they trying to control long-term rates during that period?

“Yesterday I was talking with a guy in Golden Valley AZ. He mentioned his house had been valued at $200k a few years ago, and was now at $40k.”

I wonder how many of his Hardest Hit neighbors did the Stanley shuffle and extracted their “equity” when their houses were valued at $200k?

lendingtree commercial - YouTube
http://www.youtube.com/watch?v=hn5EP9StlVA - 204k -
Nov 4, 2006 … “I’m in debt up to my eyeballs”

FWIW, 300K houses are selling in my nabe.

Another house just went under contract. It was listed at 315K, don’t know what the actual offer was.

http://www.zillow.com/homedetails/3949-Crestone-Dr-Loveland-CO-80537/13887893_zpid/

Ben…From yesterday;

IMO the question regarding these things is, has there ever been a period when so many central banks pursued a zero rate (or near zero) policy for so many years ??

No there has not….The future consequences of which are up for debate….I am seeing housing prices around here that cannot be supported with interest rates that would reflect historical norms…Mortgage loans for some bungalow house that @ 8% money would be costing $9,000. per month…

“I am seeing housing prices around here that cannot be supported with interest rates that would reflect historical norms”

+1

“FWIW, 300K houses are selling in my nabe.”

Of course they are.

Just reporting what I’m seeing. I’m as surprised as the next guy.

Also, what I’m seeing is that they are selling fairly quickly, in less than a month. A year ago they would have sat unsold.

Sequester punctures area economy’s government-dependent bubble
By Jim Tankersley, Published: March 7

Recent American history is strewn with examples of regional economies that grew dangerously dependent on a single industry: Los Angeles with aerospace in the early 1990s, Northern California with tech at the turn of the millennium, Detroit with auto manufacturing and Las Vegas with home building in the mid-2000s. When shocks rattled those industries, those regions bled jobs, and their economies sputtered.

None of those areas relied as much on a single source for jobs and growth as the Washington region does on federal government spending today.

This is the economic vulnerability exposed by the budget cuts brought on by sequestration. A decade of expanding federal largess has shielded the metro area from the worst effects of the financial crisis and the slow recovery. It also left the region, in investment terms, with a precariously unbalanced portfolio — heavily concentrated in a single stock, which is now falling.

“This is our spending bubble,” said Stephen Fuller, director of the Center for Regional Analysis at George Mason University. “It’s really distorted our economy.”

That sort of distortion is exactly what economic development officials usually try to avoid. Balanced growth is more stable and less prone to disruptions from technological advancement, international trade or, in this case, Congress.

But economists say there’s reason to believe that Washington’s coming disruption won’t be as bad over the long run as what other regions have experienced. For one thing, the federal spending slowdown doesn’t appear likely to slam the economy as hard as the Great Recession slammed housing or the tech crash hurt Silicon Valley. It’s looking like a slowdown, not a meltdown.

Also, the nature of Washington’s government-fueled growth — particularly the highly educated workers it brought to the area — should help it rebound and diversify in coming years. That’s because highly skilled workers tend to be more adaptable in the labor market when they lose their jobs, able to transition fairly easily into new industries or take the initiative to start innovative companies of their own.

In the near term, however, most economists expect the sequester cuts to hit the regional economy harder than almost anywhere else in the country. Fuller projects federal payrolls in the region will fall to $37.9 billion in 2017 from $42.4 billion in 2012, a 10 percent drop even without adjusting for inflation. He says that contracting spending dropped 8 percent from 2010 to 2012 and will fall an additional 5 percent this year and next year because of sequestration. The District, Maryland and Virginia will combine to lose about 450,000 jobs as a direct and indirect result of the cuts, he estimates.

Growth and job creation will both be “very slow” in 2013 in the area, in large part because of sequestration, said James Bohn­aker, an associate economist at Moody’s Analytics. They should pick up again in coming years, he added, but for the near future, “the Washington area is definitely going to be a laggard compared to the national economy.”
…
Relying on a federal paycheck

The Washington region ranks fourth nationwide in percent of workers in federal jobs. See full graphic
…
View Photo Gallery — The Washington region relies heavily on federal government spending, an economic vulnerability that was exposed by the budget cuts from sequestration. Post 200: Each year, the Post’s Capital Business ranks the firms and organizations that power the local economy. Here’s a look at the organizations that topped each segment of the list.

As a sign of where the DC housing market is headed, guess what company is the area’s top large employer?

Wait for it…

Top large employer: McDonald’s

McDonald’s ranks first on our list of U.S. companies that are headquartered elsewhere but employ large numbers of workers in the Washington area. The company has a workforce of 22,000 in this region. The sluggish global economy has been a drag on sales at McDonald’s, the world’s largest fast-food chain. In order to boost revenue, the company has said it will emphasize its value-oriented “Dollar Menu” after focusing its marketing muscle on other menu items earlier this year.
…

+1…Nice post Pbear…

According to Zillow, prices in their area peaked in early 2007 at a very unaffordable $100K relative to median household incomes in the area (circa $36K).

I’m confused—wasn’t 3X our rule-of-thumb for affordability? If so, that sounds affordable, rather than “very unaffordable.”

“I’m confused—wasn’t 3X our rule-of-thumb for affordability?”

Your confusion is understandable, as the HH income multiplier varies geographically. For the Midwest, the long-term average has been around 2.2. Out here in LaLaLand it has averaged something closer to 6.

3 times income is a very bad idea at the bottom part of the income scale. First of all, a household making $36K is getting no benefit from MID or property tax deduction. They still have to eat and buy gas and heat the house. If they have two adults working for that $36K, they still may need to provide childcare. There is a good chance they don’t have health insurance (though kids could qualify for s-chip) and they may lose income if they have to take a sick day. Compressing all those costs on what is left over after paying for the house is hard.

My parent’s first mortgage was 3 times my father’s salary when they got it. My nursery school was our only luxury item as far as I can remember. One car which was a hand me down from grandparents. No movies. No restaurants. My grandmother took my mother food shopping on the days she could get us her senior discount. And we were doing it without child care expenses and with a really, really low interest rate (VA).

3 times income is a very bad idea at the bottom part of the income scale.

They can’t pay $500 a month? That doesn’t seem too hard on a monthly net income of probably at least $2500.

BTW- Where are you getting this info on regional HH income multipliers, PBear?

It’s in a paper by Shiller and coauthor (maybe Case — can’t remember) which I read over ten years ago. Can’t find it on the internet and I would have to dig through a box of papers to find the reference…

$2000 for car payments, insurance (car, house, health, life, etc.) food for however many people, telephone, heat, hot water, electricity, gasoline, property taxes, day care, clothes, retirement savings, putting aside reserves for house repairs/car repairs, and maybe a few gifts for the kids for Christmas and a movie every once in a while?

No, I wouldn’t call that very doable. And that is before you even try to add cable or karate/ballet lessons or restaurant meals.

Retirement savings, life insurance? I don’t think you understand lucky duckies, polly. They aren’t doing that, renting or owning. People that do such things live in households that earn more than $36k a year, or they will soon, after they graduate or finish their internship or the like.

Lucky duckies chug along, barely paying whatever bills they have, be they rent or mortgage. The forced saving involved in a mortgage might be their best bet.

We are talking about what they can afford. If you are neglecting major places where you should be spending/saving money because there isn’t enough money to handle it, then you “can’t afford” some other area of your life. The question is whether you can afford a $500 house payment if you are bringing home $2500 a month. The answer if you are a single person with no dependents, no student loans, health insurance largely covered by an employer and a paid off car is probably yes. The answer if you are a family is no chance. The fact that lucky duckies don’t buy/save for those important things doesn’t mean they can afford the payments on a $100K house. It means they pretty much can’t afford to pay anything. At least if it is rent they can move easily if a better job situation comes along.

The answer if you are a family is no chance.

And yet many are doing it. Many fail, but certainly not all.

At least if it is rent they can move easily if a better job situation comes along.

If their networking skills land them a job in a McDonalds across the country? Again, I don’t think you understand lucky duckies.

I think this is the paper with the ratios I mentioned, and it was ten years ago when I read it. I can’t figure out how to download the .pdf.

Is There a Bubble in the Housing Market?
Karl E. Case, Robert J. Shiller
From: Brookings Papers on Economic Activity
2003, 2
pp. 299-362 | 10.1353/eca.2004.0004
In lieu of an abstract, here is a brief excerpt of the content:

Is There a Bubble in the Housing Market? The popular press is full of speculation that the United States, as well as other countries, is in a “housing bubble” that is about to burst. Barrons, Money magazine, and The Economist have all run recent feature stories about the irrational run-up in home prices and the potential for a crash. The Economist has published a series of articles with titles like “Castles in Hot Air,” “House of Cards,” “Bubble Trouble,” and “Betting the House.” These accounts have necessarily raised concerns among the general public. But how do we know if the housing market is in a bubble? The term “bubble” is widely used but rarely clearly defined. We believe that in its widespread use the term refers to a situation in which excessive public expectations of future price increases cause prices to be temporarily elevated. During a housing price bubble, homebuyers think that a home that they would normally consider too expensive for them is now an acceptable purchase because they will be compensated by significant further price increases. They will not need to save as much as they otherwise might, because they expect the increased value of their home to do the saving for them. First-time homebuyers may also worry during a housing bubble that if they do not buy now, they will not be able to afford a home later. Furthermore, the expectation of large price increases may have a strong impact on demand if people think that home prices are very unlikely to fall, and certainly not likely to fall for long, so that there is little perceived risk associated with an investment in a home. 299 KARL E. CASE Wellesley College ROBERT J. SHILLER Yale University We are grateful for generous research support from Wellesley College and are indebted to Sonyay Lai, Semida Munteanu, and Xin Yu for excellent research assistance. Fiserv CSW, Inc. has supplied us with important data and assistance. 1790-04_Case.qxd 01/06/04 10:32 Page 299 If expectations of rapid and steady future price increases are important motivating factors for buyers, then home prices are inherently unstable. Prices cannot go up rapidly forever, and when people perceive that prices have stopped going up, this support for their acceptance of high home prices could break down. Prices could then fall as a result of diminished demand: the bubble bursts. At least one aspect of a housing bubble—the rapid price increases— has clearly been seen recently. A rapid surge in home prices after 2000, as tabulated, for example, by the Economist Intelligence Service, has been seen in almost all the advanced economies of the world, with the exception of Germany and Japan. In some of these countries, price-to-rental ratios and price-to-average income ratios are at levels not seen since their data begin in 1975.1 But the mere fact of rapid price increases is not in itself conclusive evidence of a bubble. The basic questions that still must be answered are whether expectations of large future price increases are sustaining the market, whether these expectations are salient enough to generate anxieties among potential homebuyers, and whether there is sufficient confidence in such expectations to motivate action. In addition, changes in fundamentals may explain much of the increase. As we will show, income growth alone explains the pattern of recent home price increases in most states. Falling interest rates clearly explain much of the recent run-up nationally; they can also explain some of the cross-state variation in appreciation because of differences in the elasticities of supply of homes, including land. To shed light on whether the current boom is a bubble and whether it is likely to burst or deflate, we present two pieces of new evidence. First, we analyze U.S. state-level data on home prices and the “fundamentals,” including income, over a period of seventy-one quarters from 1985 to 2002.
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Pbear- What would justify a higher HH income multiple in some areas as compared to others?

Great question, and I don’t think Shiller and Case much get into that in their paper.

But I have a theory — kind of a no-brainer, really:

- Places where nobody wants to live (e.g. many cities in Flyover Country) have relatively low labor supply and housing demand compared to places where everyone wants to live (e.g. Desirable Coastal).

- Relatively low labor supply and housing demand tend to result in a combination of higher wages and lower housing prices compared to places with high labor supply and housing demand.

- Thus the equilibrium home price to household income ratio is a lot lower in Flyover Country than it is in Desirable Coastal.

How much of a drop will we see in 1,2 and 5 years? Will the rates drop nationally or regionally? I want specifics.

“I want specifics.”

How much are you willing to pay for the precise details of how this will play out?

You don’t have the credibility to demand a premium for your predictions.

I didn’t think the question implied that he would be the one providing a precise, credible prediction.

“You don’t have the credibility to demand a premium for your predictions.”

And your demand is a tacit endorsement of the corrupt forecast of the Housing Crime Syndicate operators.

“You don’t have the credibility to demand a premium for your predictions.”

But your posts suggested you might have the gullibility to pay for somebody’s falsely-advertised precise, credible prediction.

You and George should stick with your chemistry lab work.

Those folks are counting on their Medicare and SS. They’re bitching that tuition at the State U has risen dramatically.

Socialism is alive and well on Main St.

Atheism might be “growing”, but churches on Sunday remain fairly packed.

I guarantee you that the GOP will continue to pander to the religious right long after you’ve taken your dirt nap, which should be in 20 to 40 years.

Anyway, the projected trend is that even “hard core” red states like Texas and Arizona will turn blue in the next ten years or so. I’m afraid you won’t live to see your Galtian, Libertarian paradise come into existence.

Anyway, the projected trend is that even “hard core” red states like Texas and Arizona will turn blue in the next ten years or so. I’m afraid you won’t live to see your Galtian, Libertarian paradise come into existence.

Not if current trends continue. But if the theory is correct that parties will adapt just enough to always be fighting for 50%+1, the question is what compromises will the red side make to keep it even? And if they screw that up, who will take their place? There must always be two…

Atheism, or “having no religion,” is growing in America. But I have no evidence that socialism is winning respect on Main Street.

It’s the progressives that made it possible for you to claim to be an atheist, and not get hung from a tree on Main Street for doing so. They also made the air you breathe when you jog far more healthy.

The progressives extended your life span and expanded your freedoms. You should thank one, Bill.

I’m afraid you won’t live to see your Galtian, Libertarian paradise come into existence.

Will we ever see one anywhere in the world? Have we ever seen one in history? It seems as elusive as true communism.

Palin Tease!

True. I like little about Sara Palin. Most Republican women are good looking and most Democrat women are frumpy. Sara looks good. She supports RKBA and she laughs at nanny staters. Hat is all the good I can say about her. When she goes into religion I roll my eyes.

I still feel just as threatened by the Obamarxists as I do by the bible idiots.

The vast sum of the deposits are not owned by citizens.

I saw that, but still, if they are penalized as well…

BTW, I posted a late reply to you on yesterday’s thread, BiLA….

I stopped criticizing misspelled and misused words a few years ago ??

Gee’s…A little sensitive this morning Bill ??

I was not criticizing your spelling besides Alley is not mis-spelled…I actually thought you were describing an area in Scottsdale called Alley City and I wanted to now where it was…

I actually thought you were describing an area in Scottsdale called Alley City
So did I at first, but gradually I recalled there is a Valley City out there.

I am sensitive to remarks on my posts on some blogs because I get grammar nazi replies a lot of times.

Prime, thanks. I replied there.

“…wanted to now where it was…”

Nice, sc.

Prime, thanks. I replied there.

Thanks for the response, Bill; got it. I think I have a suspicion of some of the victimless crimes you might be referring to, but avoid any rancor, I’ll refrain from guessing.

BTW, if you’re looking for a new part-of-the-year home-state, WA state has relatively sane CCW qualifications, and I am proud that my state is in the forefront of confronting the ridiculous, ineffective, and damaging “war on drugs” by legalizing recreational MJ. The climate can be hard for some in terms of the gray, but the summer months are quite lovely.

And you just topped it. Seriously, dude. You are losing it.

There will never be a war on ebonics because there are no people who can only speak ebonics. There is no school where the kids use it in class. Slang is different in different regions/neighborhoods. That is all you are hearing. Once American Idol comes on the TV, those same kids are perfectly capable of understanding standard English and they speak it just fine with their grandmothers and teachers. Presidents occasionally take a few days “off” though they work harder on those days than you do on any day of the year. The President has no authority to force banks acting under their contracts as servicers to bond holders to change their behavior. The one thing he could try to do was to request Fannie/Freddie to act more quickly to foreclose on their stuff, but if that action would cause higher losses, then he would be acting against the interests of the tax payers of the US and besides, he still can’t force a state to change its foreclosure procedures/laws to accommodate his whim.

The getting angry/acting black portion of your comment is so contemptible as to be pathetic. You can’t possibly believe it is the job of the president of the United States to fulfill your little fantasy of someone important being mean to people who don’t pay their mortgages.

I never played golf…I just like the green grass!