Housing market bubble, when will it end?

6-months..maybe 9.

Housing stocks have been on a terror since last spring, some doubling or more. Lately they've begun to show a few kinks. Even though several homebuilders reported increases in December new home sales, and their stocks rose yesterday, they've all fallen today (and many 8 of the last 10-days).

They've been rising for a long time and don't seem to be increasing profits like they did the last few years. Wall Street seems to be shedding them and the street usually leads the rest of the economy by about 6-months.

 

i personally believe that the housing market is the next bubble to go. since i run a hedge fund, there is a common wall street wisdom that the average joes chases yesterdays hot market. piling into last years hot funds, stocks, etc and then the rug gets pulled out from them. the average joe has gotten crushed in the market, has run to cash only to see rates got to near zero. (and now is probably jumping back into stocks) i remember during 2002 on cnbc when "real estate" investing was a daily topic and stocks were shunned.

the average joe has seen this recent past performance and thinks you can't lose money in real estate or your home.

Watch out if rates rise!

a house can theoretically be compared to a bond. you pay 500k for it and finance it over 30 years, but what happens to you when you've bought a $500k bond paying 5% and rates rise. the value of your bond drops.

i also believe that home buyers shop by payments. they can afford $2,000 a month and in this low rate environment that buys X amount of house but when rates rise it buys X- of a house.

i recently saw a research blurp that discussed how the vast majority of mortgages are getting financed short term via interest only type mortgages and that the average loan amount was $275k+- and that the average loan amount on mortgages financed via 30year was $150k or so.


before i get blasted - i am speaking short term and i am not implying that 30 years from now you won't make money but if you live "marked to marked" like i do and need to sell short term you very well could be in for a real hurtin.

 

I purchased my house in Sonora,CA in '96 for $170K. It has gone up an average of 20% a year. Its nuts! Being 2 hours from the SF bay area, people are cashing out of the bay area and finding 'Cheap' homes in my area (compared to what they are use to paying). I'm sitting on a goldmine with this house and two rentals I purchased between '96 & '97. If the bubble starts to burst, I can still sell out and make a great profit.

 

It will be a year before prices level off but longer before you see a decline if the interest rates do not skyrocket. As soon as they do, the refi market is going to be hit hard. I know ours is.

Sunny (Southland Title Corporation)

 

an article in worth mag said there is a 30% chance that prices in boston will go down 10% in 04. Boston has just been up & up lately, Miami is probably in the same boat. NY & SF are long overdue for price corrections

 

In my area there is very little land to build on. It's going to be supply and demand. Too many people want to live here and not enough houses. One rental I own was purchased in June 96 for $149,000.00 and the renter have offered to buy it for $575,000.00 . The funny thing about it is that the house is tiny 3bds 2 baths 1700 sq ft inland not on the coast. If your city has room to expand fine you may see a dip but here open land is almost all gone.

 

funny, the japanese were saying the same thing. the supply / demand curve is always a function of price.

wasn't there a nice housing bubble that burst in the early '80's ? hmmm, about 20 years ago. long enough for most to have forgotten and re-learn.

 

this is the key point. we can make more cars. we can make more doritos. we can't make more land in desirable communities (though we can make desirable communities on currently undesirable land, but that's a separate issue from general housing prices).

william: i don't begin to see how prices in boston could fall 10% in 2004 - close to 0% probability, not close to 30%. maybe if there's a big downturn and you average in a 120 mile radius from the city you can collect up enough stuff on the fringes and in the dead areas to get the numbers down, but inside the 495 loop? i don't see it.

for starters, there's apparently a big chunk of pent-up demand right now in the desirable communities. each town has a goodly number of people trying to move within the town, but it creates a chicken & egg problem over the winter because they can't buy unless they can sell, and nobody can sell because nobody can buy. this isn't likely to rectify until late spring when people start coming in from outside, buying in earnest to move during the summer vacation - at which point the logjam gets busted and a bunch of transactions will move along. but at that point you're into july and august and you're 7-8 months through the year and there's no reason the valuations are going to move DOWN during all that logjamming. i don't really see any negative movement for the CY, never mind 10%.

i mean, if you own condos in lawrence maybe, but for the vast majority of single family home owners in decent towns.....

doody.

PS: sure, bubbles happen and values go up and down. but if you pick out the 1000 highest-value towns in the country and chart the average housing price there over the last 30 years, i'd be surprised if you saw anything like 10% annual drops.

location location location. don't buy in crappy towns and hope they'll get better.

PPS: and don't forget to index that chart to inflation.

 

where does this data come from? i don't think it's true.

my understanding was sub 10% per year the last two years - close to 6% or 7% on average (for closer to 15% compounded).

and, no, i regrettably do not know the source of that number, sorry.

doody.

 

Real estate values are very local. Think about the place where you live- if it's like many places values can change dramatically 20 miles in any direction. In some neighborhoods, values can change when you cross the stree to the next block. I don't buy the premise that there's a housing bubble. I think in some place RE may be overvalued, while other places it may be undervalued. National home value have NOT risen 30%- you're probably looking at local numbers. The national number is somewhere between 7% and 8% depending on who you ask.

Paul

 

Prices may be skyrocketing in Las Vegas, but it's not a national phenomenon. It's very regional. In Michigan, where the economy has been in bad shape, houses aren't selling and prices are very depressed. You could say the bubble has already burst. I know I got far less for my lakefront home than I would have gotten a few years earlier, and it took a lot longer to sell. Consider yourself lucky.

 

In 2 1/2 years, our house has appreciated 30%. We purchased a little under value, but 20-25% is consistent with the area. If you look around, the bubble has already burst in some sectors. We live in the Wrigleyville area of Chicago, which will always be popular. Downtown, too many high-rises broke ground at the same time--too far behind the curve--and now many are being forced to try and rent the many unsold units. Quality locations will always hold value, but there was a lot of "coat-tailing" with the housing market, and those places were the first to feel the sting. The growth rate is sure to slow, but we're not looking to sell. If anything, look for the opportunity of a buyers market.

 

There are plenty of areas where values have increased dramatically the last two years.

I just built a property profile for an F-chatter who bought a house in Carlsbad and its raised in value over 20% in the last 2 years and change. The average increase in Burbank and Glendale has been 14-15% for the last two years in a row.

I see all the info on the property, deposits, loan amounts, what the original cost was to build, what the selling price was, and the most recent appraisal info on file, taxes paid, and nauseum.

What is really depressing is seeing what these houses sold for 2, 3, or 5 years ago to what they are worth now! I can't wait until I'm in a position to buy.

Sunny

 

Here in South Orange County California the most desired areas are pretty much built out like I said. My best friend is building his home in some of the few open acres left.He's somewhat close to the ocean. He will have a ocean view but not be on the water. He paid 3mil just for the lot .He has been offered 8 mil lot only (construction will not start for 3 months). Most people are finding homes inland . It's very hot in the summer, cold for So Cal in the winter, smog problem most of the time. They mostly work in Orange County and get to commute a hour or two each way(rush hour speeds). That has to suck big time. On the one house I mentioned, having someone pay double the mortgage since 96 and being able to sell at what's being offered ain't bad. Free money for me ,mortgage on that place is around $945.00 they pay me 2300.00 a month because it's the going rate and it's 3 miles from his employer. My brother and I snagged condo's in this area back in 96 for $60,000.00 to $75,000.00 we've dumped a few in the $230,000- $255,000 range. Crazy market here but I ain't complaining .

 

My prediction:

Office market will crash heavily. Right now prices are WAY over inflated while office rents are alreadu down and lots of vacancies nationwide. With new technology many companies are outsourcing their employees to their own homes with computers and internet connections. Office space will become a not so hot commodity.
I sold a lot this year at the peak.

Apartment market will also crash but not a feercely as the office market. Currently price vs rental rate is at about 4-5% return. Absolutely nutz. You can better stuff your money into your mattress and watch it disappear. Rental prices have not come up since the real estate boom began. Neither can they much as the job market is not going anywhere soon.

Home prices will also deflate when the overly expensive homes families have bought on cheap interest will have to be refinanced at higher interest rates in the next few years. Money is better re-invested into the stock market.

My predition in the last 24months was, when the stock market goes above 10,000 again, the real estate barket will burst! Watch it happen in the next 6-9 months.

Did I mention I have a closing today for another sale of an investment property?

 

Thinking about it I have "outsourced" myself out of my office and rented it. Now working from my new computer at home and on the road and in my warehouse.

 

I'd agree on the rentals. People around here are buying 3 family buildings and then renting them out for less then cost, basically subsidizing their tenants. These are the silly latecomers who think real estate values can only go up "since they aren't making anymore land". Meanwhile they are buying in the middle of a dieing, bankrupt city and there are farms less then 10 miles away that are sprouting low tax McMansions 15 miles away. Dumb Dumb Dumb.


The bubble won't "burst" in housing. You'll start to see the "real estate" nightmares on the evening news on how folks are losing all their equity and how the "appraisers and real estate agents" suckered them into buying the 5000 square foot house. Righttttttt. Foreclosures will shoot through the roof. People will swear never to own again and I'll be there to rent them their old house for the same as their old mortgage payment createing equity with their money.

In office space. You'll see the market really burst. Hopefully we can get back to people having offices instead of this stupid cubicle mindset we've given ourselves over the last 20 years. The single biggest killer to productivity is the lack of independent meeting area's with a DOOR and offices for GOOD people to GET **** DONE also with a DOOR. Some folks still need the watchful eye of a supervisor that cubicles dictate but they should be canned anyway.

 

Because I have some background in this area, I'd like to point out that all real estate is local. For example, national numbers on housing starts are meaningless when it comes to evaluating real estate opportunities in your home town. Indeed, the only number that has any real impact is local job growth. Interest rates are not the driver that everybody thinks they are.

However, to get really blue sky here, to be successful in real estate you must understand that the real estate market has very high information costs. Stocks and bonds, on the other hand, have very low information costs. This means that by using personal due diligence and sweat, you can uncover "diamonds in the rust" that have been overlooked by your local real estate market.

I'll give one example. Jim-Bob was a superintendent for a local home building company making, say, $40k a year. There was a tract of land that had become a "hole in the donut" with development on all sides. Only problem was that the owner, Bubba, who lived in a tar-paper shack in the middle of this track, hated yuppies. Nobody could even get Bubba to talk. Well, Jim-Bob loads a case or two of brew into his 72 Chevy pick-um-up truck and pays a call on Bubba. Long story short, Jim-Bob talks Bubba into giving him a 90-day option on the land for $5k. The next day Jim-Bob flipped the option to a yuppie developer for $500k. This happened in 1983. Jim-Bob went on to file bankruptcy in 1987, but that's another story.

Point is this. Real estate has very high information costs. All the hype and BS that makes the rounds of any local cocktail party curcuit about housing prices and what not is worse than any car guy bs. So become your own "True North" and learn to trust your own instincts.

Good luck, DrTax

 

Couldn't agree more - wise words. If rates go up, there will be an issue. Remember 1989 and on. I think long term R/E is always a good play but you have to be able to ride the swings.

 

Such a heavily debated topic these days........

However, the old saying goes.....when everyone is pessimistic, buy. When everyone is optimistic, sell.

Remember, everyone needs food, shelter and clothing regardless of the economy, inflation, etc, etc, etc...

Don't confuse price and value. Inflation is a devaluation of the $. That makes prices in dollar terms go up for the same item of value. If inflation takes hold of the economy, the price (# of $'s) of property will go up over time. Think hard assetts vs. $ in a bank (or in mattress). Hard assetts will maintain purchasing power because they will increase in price. What's working against this in our economy is the possibility of interest rates making the monthly payment go up for the same value. That places downward pressure on price which may, or may not, overshadow the increase in price caused by inflation itself.

Inflation will not rise quickly unless the economy is also picking up speed in other areas. Most importantly jobs/employment. If that's the case, there's still the possibility that incomes will rise (in # of $'s), making the 'crazy' prices less 'crazy' in $ terms.

 

Here in the UK (maybe the same as the states) on average housing prices double every 7 years. That means no matter when you get onto the proprty ladder 7 years down the line your investment would have doubled, guaranteed. It may go up or down in between, but there is truth in the saying safe as houses!

There is a woman in the UK who with her husband started buying houses in about 1970. Through the increase in proprty prices she bought more houses. She now owns houses which in total are valued at over £500million. She's built up a portfolio of a couple of thousand houses.

Bubble might burst, but if you are in property for the long term you can never lose.