The Housing Bubble: Fact or Fiction?

Alright,
I have neither a thorough knowledge of the housing market (i'm nowhere close to owning a home, nor do I plan to be anytime soon, I'm 24) nor a perspective of the market over the last 20 or so years. However, I have been seeing more and more articles appearing in reputable sources (the Economist and the Boston Globe, to name a few) that are suggesting that the so-called "housing bubble" is going to burst sometime in the near future, which presumably would have catastrophic effects on our already sputtering economy.

Here in Mass., the median price for buying a home rose nearly 70% from 1997-2002, and other markets (NYC was one) have seen similar spikes in pricing. Here is where anyone with a knowledge of the home buyers market comes in:

Is there any way that the "real value" of these homes is really this high, and can they sustain this kind of price and appreciate at anywhere near that rate for the foreseeable future?

Or has the rise in price exceeded the "real value" and demand for these houses, making a market correction all but inevitable?

The reason that I am interested in this is that many Americans quite literally have their life's savings invested in their homes. Since the median home price in this area is roughly 413,000, that would mean that if the market devalued home prices even slightly (say, 10 percent) that, assuming a homeowner had paid for their home in full, that they would be losing 41,300 dollars (not to mention all the money that they paid for in interest over the years) were they to sell, which would obviously deepen our current economic woes. Any thoughts?

n/t

I really hope this bubble does burst. I am a relatively high income person and am not sure how the hell I am going to afford a modest home in massachusetts (2 bedroom). The prices are totally insane in this state. To buy a "median" house with only 10% down would mean plunking down $41,000 cash (not to mention closing costs). Who the hell has $41,000 cash? It would mean payments in the $2000/month range, not including PMI, taxes and home owners insurance. I dont have parents who are able to help out, so me and the ladyfriend are on our own. I can't imagine how a low-income person in massachusetts can even hope to one day own their own home without moving away from family and friends.

The market is overheated just like the stock market was five years ago. I expect values to drop as long-term rates rise. Don't know when or how quickly they will fall. It may take awhile. A drop of 20-30% is not unrealistic.

And, yes, it will affect many Americans' savings. A lot of people will have negative equity. Despite the new restrictions, bankruptcies are one of the few escape routes from this kind of hole. Social security is needed now more than ever.

The economy will recover. If I were buying a house, though, I would try to buy cheaply in a working class neighborhood and avoid the $400K areas.

Mortgage rates are rising, in spite of a stable prime rate (there was an article on this in the NY Times just a couple days ago). Just wait 'till the prime starts to rise. The housing bubble won't burst because the market isn't liquid enough. I predict a long slide down.

I put my house on the market yesterday. Will be renting for a while.

Mortgage Markets Are Out of Control

By GRETCHEN MORGENSON
NY Times

Since interest rates began surging a few weeks back, the folks wearing the rose-colored shades have said the climb is proof that an economic recovery is nigh.

But there is something more than a nascent rebound driving rates today. It is a force so large and brutish that it could propel rates higher and faster than many investors expect.

The market-roiling force in question is the huge mortgage-backed securities market and the leveraged traders who call it home.

Although many investors think that the Treasury market sets mortgage rates, mortgage-backed traders are the ones who hold sway. Their hegemony is a function of two things: the runaway growth in the mortgage market and the way mortgage portfolio managers must respond when rates rise or fall.

MORE

is that owners usually pay 1/4 to 1/2 their income in mortgage. It's now at the upper end of that range. Any increases in interest will push it higher.

Struck me as true.

But in a lot of cases nowadays it's more than that. You can increase your odds of getting approval for an outsize loan by paying off all other loans, so the only debt hanging over you is the mortgage.

The likelihood is that the banker himself doesn't really care, but if he wants to sell your mortgage on the secondary market, or to Fannie Mae, he needs you to conform to guidelines.

I think the bubble is real too. When I was looking at houses four years ago in Southern NH the average price was about 150-175k for a modest 3 bedroom either on land or in a Pleasant Valley-esque subdivision.

At the time I was approved for a 60k mortgage, and amazingly, still found places within this price range. None of them met my needs, but they were there.

I shopped around a year ago, now that my income has improved, and was approveed for 120K mortgage, not bad really... I could have afforded it. But the average price of homes leapt from 150-175k to 275-330k. Some of these were the same houses I looked at four years ago.

As for finding anything in the 120k price range, hell, I was even priced out of mobiles.

The tremendous explosion of house for sale signs I see suggests that the 100% + increases are starting to take their toll...

Consider that a 250K house in Southern NH will cost about 3 gs a month with property taxes and without basic services like phone, oil, or electricity, and I can see how the economy and these costs have diverged.

When it bursts and several thousand of these places clog the foreclosure mechanisms it's going to yank the economy even further into the shitter as unsold homes generate no property tax revenue, and personal bankruptcies flush capital out of the credit industry.

I thinik it's going to get really ugly in the next five to ten years.

The entire property tax system crashes and burns in Texas.

Higher and higher appraisals mean more tax money without the taxing entity having to look bad and raise the actual property tax rate more than a few percentage points each year.

If appraisals go down because of a piss-poor housing market?

Lower interest rates have made the payment for more expensive homes workable for people whose income has not gone up in relationship to the price of homes. As interest rates rise, housing prices must fall since you cannot find qualified buyers to sustain the payments at higher levels.

The other major factor is supply and demand. Look for demand to fall off precipitously as boomers retire and no longer can or want to maintain large homes. There will be a glut on the market of larger homes the boomers are trying to get out of, and smaller, less expensive homes should see price stability or some increase. In my area (Indianapolis), there is a 1 year supply of homes on the market in the $500K and up range). I think this trend will get worse, not better in the near future.

Of course, as the economy continues to deteriorate, with jobs being exported overseas en masse, we could see 10-20% of today's homeowners forced into liquidation, causing more price deterioration as supply dramatically exceeds demand.

Hence the bubble is very likely to burst do to population demographics, interest rates, and a failed economy.

What is different about this recession compared to all others in the history of the US, is that we have no industry sector that has positive business prospects now with the exception of biotech. There are not enough opportunities in biotech to offset the massive dislocation of all the other industries we have here. And the market for biotech degrades as more people are cut loose from their jobs and no longer have health insurance that can pay for the biotech products.

Companies are scrambling as fast as they can to get out of the healthcare, pension, salary, and taxation costs of operating in the US, and move their operations to low cost, low regulation gulags in China, India, and other third world countries.

Of course, just who these companies think they will sell their products too is a major flaw in the long term strategy. None of the workers in China, India, Viet Nam, etc can afford to buy the products they produce, and without employment prospects, neither will Americans be a viable market in the near future.

If people cannot afford to buy a new dishwasher, they sure as hell won't need to buy a house to put it in.

break, although it will be a long, precipitous decline. Another question: Is there anyone out there, given the current market trends listed by the posters on this thread, who feels that the housing bubble is a myth? If so, please explain. Thanks:)

I don't think you can generalize. In the Boston area I think there will be somewhat of a decline because the market was so overheated but because there are so little housing starts in the close-in suburbs, there is still a pretty high demand. I bought my house in Newton, MA 22 years ago for 100K with a mortgage interest rate of 17%. It is on the market now for 800K but the interest rates are so low that someone buying it would probably not spend much more than I did each month for mortgage payments. If I was in the market in the Boston area I would take a careful look at the school system and school district. I would do this even if I didn't have school age kids. I would try to kind a fixer-upper in a neighborhood of more expensive homes and, in this market, I would plan to stay put for a long time.

You probably know this already, but: House prices are "sticky," in that existing homeowners looking to sell are unwilling to admit how absurd the valuations created by the bubble are-- as well as the savings/investment considerations you noted above. The pattern last time around ('80s) was double digit gains as long as interest rates were falling, followed by a flatline. (I bought in 1985, so I got not quite a year of ridiculous price appreciation, which of course resumed in the '90s.)

On the other hand, the carrying costs of mortgages depend as much on interest rates as on the dollar value of the loan, and while a new buyer such as yourself might be able to bite the bullet and borrow $400K at 6%, you're not gonna be able to do it at 8%, which implies that a seller pricing his home at more than $413,000 isn't going to attract a buyer easily. And prospective buyers with an iota of economic sophistication have known this all along, and have been trying to buy now while interest rates are low, thereby pushing prices up further. So this time there might even be some squishiness in prices. But my prediction is, not much, unless the economy really tanks (always a possibility under this maladministration).

There are assistance programs for first-time home buyers. The model for many of them is NACA, which stands for Neighborhood Assistance Corporation of America. I used to have their phone number committed to memory. (Mrs. Squeech worked for them.) The reason for that name is that they believe that owner-occupied housing is the key factor in preventing urban blight (people take better care of what they own than what they rent), and the reason they exist at all is that the guy who runs the company successfully prosecuted the biggest banks in Boston for red-lining (refusing to write mortgages for certain neighborhoods, thereby ensuring that they would decay) and the judgment was that the banks had to lend to these neighborhoods and that NACA would vet the borrowers and to some extent guarantee the loans. The deal is, you attend their educational program (it takes up one Saturday, or two evening sessions) and some financial workshops with their counsellors, and use their buyer-brokers, and they can get you a loan with no money down and no closing costs. You also promise them a few hours of community service time, something like helping them with crowd control at their educational program. (I've done this, it's not too onerous.) They also self-insure for mortgage insurance, so you have to write them a monthly check-- but it's money that you would otherwise have to pay the bank, so no biggie. The real problem is that their counsellors used to be incredibly overworked, not to mention stressed out trying to deal with the loose cannon CEO, and I have no reason to think there's been any improvement in that situation. So you may invest a chunk of time in their program and end up with nothing to show for it.

BTW, for DUers in other parts of the country, NACA has programs in over a dozen other cities, all places where red-lining has been a known problem, and the branch offices aren't as dysfunctional as the home office in Boston.

Hope this helps.

many people have convinced themselves they must live in a miniature version of Versailles and as a result they sell existing homes at high rates to make minimum downpayments on monster homes...

And not to sound corny, but it really does come down to Location. I've worked in real estate going on ten years now, and though I specialize in commercial property I keep my ear to the ground for residential listings.

I don't think the bubble is as exaggerated as it's made out to be. At least not in Denver. Prices have definitely hit a plateau, but they're still climbing in the right parts of town. The suburbs are hit the hardest, where prices are stagnant and it now takes months to sell a house. Prices may end up reversing if the economy continues to worsen, but I don't think it will be very drastic. And I think this could correct itself once the economy straightens out (read: elect a democrat).

But here in town, there are a lot of factors that are keeping the home prices from decaying. In urban Denver, houses are still selling within a few weeks (or days) and getting a good price. Here's why:

-High quality houses. These are old brick bungalows or tudors and have been kept in generally good condition. Many of them are updated and renovated. Having lived in many houses, I personally think houses built in 1920-1930 were the best built houses ever. They'll last forever if maintained well. You should see the shit Useless Home Corp. built down in Douglas County; made 10-15 years ago and they're already falling apart.

-People want to live in town. You're closer to pretty much everything living in town. In the 'burbs, everything is a 10-30 minute drive away. Where I live, I don't even need to own a car - everything is within walking distance. Soon I can walk to a light rail station and take it downtown for hockey games.

-Mature landscaping, lots of trees, good parks, good bike trails, access to all sorts of things.

Anyway, all this stuff means is that the finite number of houses in Denver will probably be in high demand for a long while. Denver is still on the climb from being the one-horse-town it was 20 years ago to being an Actual Big City. Real estate isn't bullet proof, but it's still a solid investment if you know where to invest.

http://www.denverpost.com/Stories/0,1413,36%257E27772%257E1547736,00.html

Pretty good one that highlights the differences between the suburbs and urban Denver.

Fort Lauderdale area has been included in that "overpriced" range-

Of course-- "Fort Lauderdale area" is a tad vague.

My situation:

My partner & I got a place last year (via buyowner.com--cool tool, btw--cuts out a lot of fees) for 130K (3/2 w/ pool&garage) Yes, it's not the largest place, nor the newest but its solid (i.e. 1970's construction--key down here in SoFla post-Andrew) and suits our needs. We're re-financing and have had it appraised at at least 165 range...
Our goal-- to keep ahead of the curve if the bubble bursts--keep making the improvements on the bathrooms/kitchen and put the mark of fabulosity on it that would be the Queer Eye for the Straight Guy crew proud.

We're lucky in that we're west of Ft. Lauderdale-- we couldn't even begin to afford the places East of us--now those are overpriced--

175K for a 2/2 townhome-- now I ask you? (Remember--we're talking SoFla--not the Northeast)

and it has tripled in value since then- and even if the bubble "bursts", the value will stillprobably hold up pretty well, due to the neighborhood where we're located.

And I'm not sure about the state of the housing market in general, but here in Chicago, it seems like new condo buildings are going up on every available piece of land to be found, and older buildings are being torn down to make the vacant lots. I wouldn't be aside if lots of units start going unsold. When interest rates made a bit of a jump a week or so ago, the re-fi market pretty much dried up a lot, and pretty much overnite- the effects of that will be felt in the consumer numbers in a month or two.

Take California around LA for example. Prices for awahile went up then divebombed. Now they are coming back up again and are nearly where they were. I hear northern CA is already bursting because of the layoffs in high tech. Of course those industries were based on the net boom and were shaky anyways.

Here in KC prices are going up everywhere, even in downtown where they have horrible schools. Alot of empty nesters, singles and others love the large old homes down there. One area to deal with crime setup their own neighborhood association and hired their own security and that neighborhood has higher values.

My story:
I bought my first house when I was 24 (and single). I put $15k down on a $49k home. My payment was about $400 monthly and I had a renter who brought in about $275 a month so I lived cheap. I sold it 7 years later for $82k and I probably could have gotten more. We bought our current home, a fixer upper for $112k and now its worth 4 years later about $140k.

Prices are going up here because the high demand. Any bubble burst will be short.

Some areas of the country like Arizona and Colorado keep growing so there will never be a "bubble" there.

Real estate is still your best investment.

The right wing assholes will tell the public lies and they will believe it.