Housing Bubble Bursting?

[Terrel L. Shields]

did you act on those convictions. If not it's like a priest doling out sex therapy.

In 1980 I was convinced oil would remain in short supply forever and a permanent bull existed. I invested something north of 50,000 into it. In 1991, I finally threw in the towel on the last of the 1980 'stuff" and I sold it for $3,300.
I became a contrarian. In 1999 when things in the oil biz were in the pits and everyone was buying dot.coms, I selectively bought oil company stocks. Global Marine - Pason Systems - Questar - Panhandle. When Halliburton, for instance, went to $13, I bought it. I sold at $50..did it go higher? yep. I am not a market timer, but going up or going down the only way to buy is value based. Did I make money on all of them? Nope. Parker Drilling was a dog.
Consuela Mack interviewed a guy the other night who said the obvious. He said about 2000 prices which has increased "a hundred years" [as he put it] on a steady uphill climb, suddening took off. And, now, as he put it, "we are regressing to the mean". I agree. Once I realized that the bubble was being created, I do not want to invest in real estate and didn't. Were this not my home, I would have sold the 80 I am on and bought elsewhere because this 80 was worth more 'dead' than alive.
Someone who regularly buys in the real estate market is probably a bargain hunter to begin with. not a gambler. They are not going to hurt in either a bull or bear RE market.

 

[Steve Owen]

I didn't know that...

...there is no bubble, everyone knows that.

There isn't one here, I know that. But, there might be one in some parts of California, Florida, or Nevada. There could be one in NW Arkansas (don't really think so, though). And, certain specific markets on the East Coast could also have one (a bubble, that is).

However, it might be important to note that you don't necessarily have to have a housing bubble for prices to go down. That is apparently happening in parts of the midwest (think Michigan, Illinois....) where there never was runaway housing inflation.

Up, down, up, down, up, down... yep, in all markets. But, usually, related economic and demographic items (interest rates, unemployment, population density, etc., etc.) have more to do with where house prices are going than where they have been has to do with where they are going. Up, down, up....

 

[Brad Ellis]

Moh,

Just reposting Randolph's chart is not providing your defintion of a bubble.

Randolph,

Thanks for all the info. FYI, I spoke personally with Prof. Schiller in June as did Denis Saix at the PMC. Interesting. He would NOT then say we were in a bubble- perhaps he does like the word anymore- I do not know. I will tell you that his original premise- told to me by him- was to measure prices against rentals. When prices escalated while rentals did not, he concluded that we must be in a bubble.

Now, his rental charts are showing a similar type of runup in rent levels. He was surprised. Wish I had them for you- frankly, I was surprised as well.

To all,

Based on that chart Randolph posted I have a question:

If the 1890 inflation adjusted index begns at $100K and ends at $199K, or a 99% increase in constant dollars, isn't anyone wondering how/why it would compare with other things?

I am not sure, but could we/would we, if we did this for other assets or even commodities find that some went up even more?

I would find that an interesting comparison.

Randolph? Feel like doing some more research? I would not even know where to start.

Roger,

You're on- all 116 of them! A team is in place and includes some of our Chicago posters!
Ain't going to be cheap either, old man.

Brad

 

[Terrel L. Shields]

There could be one in NW Arkansas (don't really think so, though).

Let's see...Market activity is much lower. Two of the larger firms are still building like mad while most local builders are laying off help. I just got two roofers to help me haul square bales of hay because they didn't have anything else to do. Last year they would have laughed at me. The largest construction company just sold 100 trucks to a Texas firm and laid off over 100....New construction selling over $250,000 simply is not moving. Foreclosures are up. Builders are getting behind on payments. Most banks simply will not loan on development tracts. The local business center reports the turndown is 'significant'. If that isn't a downturn in housing, what is? House prices will have to stay steady or fall. Staying steady in the face of inflation means you are regressing back to the mean....Yes, lots of people are moving to NWA. Yes, lots of people are buying houses. But the construction industry has quickly overbuilt. Hammonds says even motel space is rapidly exceeding the demand.

In places that didn't experience the boom, the bust is not likely to be felt either. But the overall general outlook for the U. S., imho and apparently a lot of the talking heads as well, is that this downturn will be serious, long term, and probably not bottom out until 2008 or later.

 

[Randolph Kinney]

Maybe if you knew the difference between opinions and facts.

That would help, maybe you can label which of your opinions are opinions unsupported by facts and which opinions you have that are based upon facts, then show your facts.

On the posted chart, all three rates make their highs in 1981, move together in a general downtrend for over 20 years and make their lows in 2004-05. Those are the facts I was referring to.

Even at that, the mortgage rate trend line that is on your graph declines while the FED was lowering its rates and rises while the FED was increasing it's rates. That's what I was referring to.

Are you unaware that most long term rates like prime, T-rates and mortgage rates tend to move together up and down?

Are you unaware that most long term rates like prime, T-rates and mortgage rates tend to move together up and down?

No Steven, I was not aware that the Prime is a long term interest rate, is that your opinion based upon facts? As the graph shows on Prime and 30 year fixed rate instruments, they all do not move together at the same time, that is a supported fact. I agree, all rates made historical highs in 1981. All rates made recent historical lows since that time. However, they did not move "together" over that time frame. As we did agree upon Steven, all rates went up and then down, up and down, up and down, many times during that time frame. Some rates moved together during that time, namely 30 year fixed rate Treasury bonds and 30 year fixed rate mortgages. The Prime on that graph did not move in sync or together at the same time with 30 year fixed rate instruments. There are periods where the Prime was going up and the 30 year instruments were not following. There are periods where the Prime was going down and the 30 year instruments were not following. Those are the facts. They run counter to your opinions.

Instead of confusing yourself trying to figure out what "together" means,

Due to what you say is your clear thinking and clear writing, I am not getting what you mean when you use a word "together" that does not fit the dictionary definition of what it means and runs counter to known facts when applied to the graph. Can you be more clear and use a word that fits what it is you are trying to say and that does not contradict known facts?

From the Washington Post:
"We're in a bubble, and prices could fall substantially," said Robert J. Shiller, a professor of economics at Yale University and author of the 2000 book, "Irrational Exuberance,"

Brad told us his definition of the word "bubble" so we all know what he means when he uses that word. Mr. Shiller has published a book and he talks about facts and uses data to support what he says is a bubble. You are free to agree or disagree with Brad and his definition as you are free to agree or disagree with Mr. Shiller. I do not use the word "bubble" because it has no meaning to me describing the rise in housing prices or the fall of same. Prices are rising, prices are stable (flat, little change in value), prices are declining. Over what time frame? Last year, last month? That is good enough for me. Your opinions can differ from others however, they are opinions, not facts.

 

[Randolph Kinney]

There isn't one here, I know that. But, there might be one in some parts of California, Florida, or Nevada. There could be one in NW Arkansas (don't really think so, though). And, certain specific markets on the East Coast could also have one (a bubble, that is).

However, it might be important to note that you don't necessarily have to have a housing bubble for prices to go down. That is apparently happening in parts of the midwest (think Michigan, Illinois....) where there never was runaway housing inflation.

Up, down, up, down, up, down... yep, in all markets. But, usually, related economic and demographic items (interest rates, unemployment, population density, etc., etc.) have more to do with where house prices are going than where they have been has to do with where they are going. Up, down, up....

Price do go up and sometimes they do go down. Prices on a historical scale gives one a perspective in which to judge other things, like interest rates. However, interest rates by themselves do not tell you where prices are going. Interest rates plus inflation tells you were prices are going.

Price becomes a measure when used as a ratio with something else that is relevant.

Notice the above chart that ratios house prices to rent and to incomes. Mike Neff should love this one because it would support his notion that rational investors would sell their homes and rent, investing the proceeds in some other rational vehicle.

Some would argue that the above chart supports the notion of a "bubble", whatever that is. One fact appears to be true; house prices have increased faster than other investments or incomes for some period of time.

Now the question; does house price levels today mean that they will in the future, rise, remain flat, or fall?

 

[Randolph Kinney]

Randolph,

Thanks for all the info. FYI, I spoke personally with Prof. Schiller in June as did Denis Saix at the PMC. Interesting. He would NOT then say we were in a bubble- perhaps he does like the word anymore- I do not know. I will tell you that his original premise- told to me by him- was to measure prices against rentals. When prices escalated while rentals did not, he concluded that we must be in a bubble.

Now, his rental charts are showing a similar type of runup in rent levels. He was surprised. Wish I had them for you- frankly, I was surprised as well.

Yes, I know rents are rising and so are wages, that is what is giving the FED the urge to raise interest rates. The FED is counting on the housing market to retard GDP growth. How?

If rents and wages rise faster than house prices for some period of time, that will allow some sort of adjustment to take place and bring a new equilibrium or ratios of income and rents to home prices.

I look at the interest rate curves and it is signaling a slow down or recession developing.

Too bad people get emotional about the word "bubble" however, when the meaning is broken down in a comparative way, it can be enlightening and useful.

To all,

Based on that chart Randolph posted I have a question:

If the 1890 inflation adjusted index begns at $100K and ends at $199K, or a 99% increase in constant dollars, isn't anyone wondering how/why it would compare with other things?

I am not sure, but could we/would we, if we did this for other assets or even commodities find that some went up even more?

I would find that an interesting comparison.

Randolph? Feel like doing some more research? I would not even know where to start.

I have done some research. You know that Shiller publishes in his book data on building cost, part of which is wage information over that time period. Of course, some here want an independent source other than Shiller since his data and charts are placing a great fear into them. Anyone can collect inflation data over that period. Seems you can discount backwards in time for some item that you are interested in. Or one can look at the trade-weighting of the dollar exchange rate into various currencies, commodities, etc., over that time period. Things have change over that time period; we import most of our manufactured goods these day.

 

[Fred]

Randolph

I do not use the word "bubble"

Oh yes, you do.

Steven, there is no bubble, everyone knows that.

 

[moh malekpour]

Moh,

If you equate the cash on cash return of your quote (129%) with the runup that Randolph's chart shows, and apparently is the Bubble Bible, I agree with Brad E. give it a rest.

Is it the math, the fear or the lack of real estate knowledge that holds you back? You sat in the hottest market, per your previous posts and the chart, where an 80% leveraged position would have returned 900% cash on cash in a couple of years.

Your view point from the rear view mirror never changes does it? I don't know if you were here before the bubble talk. If you were, I'm sure you were not predicting the runup.

I don't dispute the charts, because frankly I have no time or desire to study them.

Simple test of credibility for bubblers. Did you have the same convictions when the runup started and did you act on those convictions. If not it's like a priest doling out sex therapy.

Mike,
I am talking about here and now, the reality in the market. I am not predicting. I am not a fortuneteller and I don’t have a crystal ball. I didn’t have the conviction that the market was going to reach the level of 2005-2006 neither the FOMC. There are some out there who say they knew in advance about the run up, but not me. I am just a realist that doesn’t believe that an accident makes a norm, that falling snow in the middle of summer makes the norm that we get snow in every summer. I believe in natural, equilibrium, balanced market economy and if its participants tried to manipulate it, the market takes care of it sooner or later.
I know the different between cash on cash return and the power of leverage in real estate investment but the problem starts with the leverage.
If you know, they granted the leverage to day traders in stock market a decade ago and let them to buy on margin without money in the account and you saw what happened to stock. It is a big problem for some people that when there is cash available to them; they take it without thinking that they have to pay it back. It happened to stock market and it happened to real estate market.
Another problem with the leverage in real estate investment is that you cannot cut the loss as quickly as the stock market and that is the current situation in real estate market, which is very dangerous.
If you were a real estate investor prior to the bubble and hanged on, you felt the market jolt and were pleased to see higher profit but if you claim that you knew what was coming and you had the crystal ball, I would like to know what your crystal ball told you then and what is telling you now.
Remember, when the fed started cutting rates in 2001, it started with tiny little 25 basis points. Every time that they cut the rate, it was some indication that it might be the last cut but they kept cutting it down to the lowest of the low. They event didn’t know how far down they will go. Now, they are doing the same thing on the way up. They don’t know when they are going to stop increasing the rate but there are some who think they have the crystal ball and predict that the fed is going to stop raising the rate or start cutting it down.
A friend of mine who is an appraiser and a broker bought 5 condos 2 years ago. He had no clue what would to happen to the future of real estate market but he bought them because everyone was buying them. They all are vacant and sitting there now. He has to pay association fees, maintenance fees, property taxes and loan payments. The only positive side of that is that he can deduct the interest and property taxes. He marketed one of those condos at 50% above the price that he paid but could not sell it after 6 month on the market. He has listed another one for 40% more than he paid but cannot sell it after 4 months on the market. He still thinks that the market will come back and he will sell them with 50% or more profit. I think he is dreaming. This kind of investment is not based on knowledge of math or real estate; it is an appetite for greed and quick profit.
If real estate investment was your customary business prior to this run up and you kept doing your business as usual, my hat is off for you but if you jumped in the market because everyone was jumping in, I have to believe that you are not a professional investor.

 

[Randolph Kinney]

Shiller's Data Base In Excel Format Available

http://www.irrationalexuberance.com/Fig2.1Shiller.xls


For those who are interested in Shiller's data, the above link will download the Excel spread sheet complete with chart and raw data used in his book, Irrational Exuberance.


Since the raw data is there, you can chart separately each of those variables in whatever program you care to use and whatever scale.