Housing Bubble Bursting?

[Terrel L. Shields]

I too am swamped with work but new construction is languishing. Sales are off over 10% from Jan to Jan of 06. We have rental vacancy in some apartments as high as 60% and on market over a year with new "upscale" apartments just across the road under construction. Rapidly developing glut even though new house prices are going up steadily. 30% vacancy in commercial retail space in Bentonville. 7000 platted lots and 2800 of those developed in a town of 3,500. Centerton. Cannot be a good sign

 

[JSmith43]

All I know is that the wind is blowing in different direction now. Am I wrong?

I think you are right about it blowing in a different direction for a while. I was toying with the word "artificial", in that the market is almost never self-aware when it is at or near equilibrium. It is such a relative concept, so the question of what is "real" and what is "artificial" is a lively question, indeed. Bubble talk vs soft landing? We have to make our best guess about elements of performance and gauge the relative significance of the elements. Darts, anyone?

Personally, I'd peg the new center of the long term interest universe around 6%+, but I have a box of slide rule style mortgage rate calculators that start at 6% and are basically worthless, unless the market stays North of 6%. I got the order for free, when the promotions company mistakenly printed and delivered my custom information on an old box accidently stored with current inventory.

At the time, Fixed 30 was close to 5% and the hybrid ARMS were mostly in the 4%-5% range. The calculator rates I had ordered started at 4.0% and went to 9.75%. That "paradigm" has gone bye bye

 

[Randolph Kinney]

How does one know what is a "soft landing"? How is it measured, compared to what?

This whole business of how high is high and how low is low is worthy of discussion. I suppose if one were on top of a 10 story building and has crossed over the edge walking backwards and begins to fall, if asked, what's it look like? One might say it looks Okay, a soft landing. As one passes by the 5th floor on the way down looking back up, someone asks, how does look? It might be a soft landing. After hitting the pavement on the street, does anyone know whether that constitutes a soft landing?

A point of history concerning the NASDAQ.

December 31, 1999, the NASDAQ closed at 4069. A mere two months earlier, on October 29, 1999, the NASDAQ composite finished the day under 3000 at 2966. In the 43 short trading days leading up to the tremendous uncertainty of the millennium changeover, the NASDAQ, which was proudly heralding itself as “The Market for the Next Hundred Years”, gained a mind-blowing 37%! Annualized, the index was rocketing up at an unsustainable 223% rate in the last two months of 1999! While the previous 1000 points beginning at NASDAQ 2000 had taken 329 trading days to tack on, it had taken a mere 39 trading days to leap 1000 points to the unreal NASDAQ 4000 level.

The NASDAQ composite quickly burned through the next 1000 points and marched for the stars, breaching the once unimaginable level of 5000 on March 9, 2000. It was up an incredible 111% in a single year, yet few investors found this odd. The following day, on March 10, 2000, the index reached an all-time intraday high of almost 5133 before settling down to an all-time closing high just under 5049. The NASDAQ bubble had finally run out of steam after a once-in-a-lifetime mania rally.

September 21, 2001 low of 1423 was NOT “The Bottom”!

The San Diego market has had a terrific run up in home values since 2001. It parallels the easy money and credit following the stock market down turn. One can only imagine a soft landing for this market. It most likely will not compare to the NASDAQ scenario although both have their beginnings with the FED easy money and credit. The ending for the NASDAQ was termed, "Irrational Exuberance", by Greenspan who was determined to deflate the "bubble" by raising interest rates. Greenspan then started to reverse course, lowering interest rates in response to the NASDAQ steady decline. Strangely enough, we have the FED doing the same thing now for when there was "Irrational Exuberance", raising interest rates.

 

[JSmith43]

Real estate, food, water and devices utilizing bullets might be the ultimate basket of goods. At least you can live in a home, and new land can't be issued.

I think that enhanced fundamental utility of basic residential real estate (located near employment or sunny beaches) protects against stock market like downside slides.

 

[Randolph Kinney]

I think that enhanced fundamental utility of basic residential real estate (located near employment or sunny beaches) protects against stock market like downside slides.

Gee Roger, I don't see that. Lots of people really got hurt with the stock market decline of 2000 to 2002. For example, at the top in March of 2000 all NYSE listed companies was priced at $12.9 trillion and all NASDAQ listed companies was priced at $5.4 trillion, for a total listed company value of $18.3 trillion. October 2002 NYSE and NASDAQ companies were priced at $7.2 trillion. That's a $9.3 trillion fall in market cap (18.3-9=9.3) at NYSE and NASDAQ.

I remember reading many people who were retired had to go back to work. Many people who were going to retired, did not. Of course, if you did not have any savings or you did not have your investments in the stock market during that time, you were not directly affected.

However, I suppose it may be that dry wit of your; having a job and a house protects you when your savings are wiped out.

 

[JSmith43]

My argument is the elasticity of demand is greater for stocks than for shelter. It's a combination of economic theory piled onto Maslow's psychological theory that ranks relative needs.

In addition, the elasticity of supply is greater for stocks as well, since it's tough to build houses and even tougher to make new land, although, we could go the New Orleans/Holland route in some costal areas, fill in wetlands, etc. A lot tougher than splitting stock or rolling out a public offering of stock.

 

[moh malekpour]

. Definitions of Soft Landing on the Web:
· a moderate slowing of economic growth to a rate of about 2% to 3%, which is expected to keep inflation from accelerating
According to that definition, in real estate, you need to compare the rate of inflation to the rate of housing appreciation (Growth). The Fed says that the rate of inflation has 2% to 3% per year but the growth rate of housing price has been 20% to 30% in some area like So. Calfornia and 10% to 15% in other area. So, the soft landing in housing market means a decline in price from 12% to 27% in order to be in line with the rate of inflation. more than 27% decline, it would be hard landing

 

[Randolph Kinney]

Price elasticity of demand is measured as the percentage change in quantity demanded that occurs in response to a percentage change in price. I don't see real estate as being that elastic to price other than having it priced so high that no one wants it. When the price is falling, it does not cause people to buy more.

However, there is something to be said about Maslow's theory.

Moh, thanks for the definitions of soft landing.

 

[Mike Simpson]

"All you have to do now is to look at the inventory and number of sales of any regional MLS. It tells you everything you need to know that what is going on in the market."

Moh-

We often disagree & it's due to silly comments like the one above. How can you possibly profess to know the inventory & number of sales of ANY regional MLS???

I know of a number of examples around the country that contradict your assertion. But lets stick with the region in which I reside...it's so hot I haven't checked other areas around the country in quite sometime.

In the Pacific Northwest...inventory is down (has been for quite sometime), and while sales & pending sales have dropped...home prices continue to appreciate significantly.

WHY? Here just a few reasons;

An influx of in-migration for the regions very good jobs. We've one of the most educated populations in the nation per capita & local Universities cannot graduate enough students to keep up with the demand of local employers.

Lack of existing product in the marketplace.

New home builders have not overbuilt...they're barely keeping pace with demand. Whether it's baseball cards or dwelling units...when you've got a high demand, low supply scenario...it'll always equate to higher prices.

So often on the Forum the news is negative. Even during boom times the stats, theories, and news is spun with a negative bias by the status quo ("it's a false economy...just wait...it's all gonna come crashing down"). I don't know if it's fear, wishful thinking, or what, but that's always been the case.

I prefer to look at the markets with as benign an eye as possible. I'm not hoping for anything, I've got no preconceived notions...I need to know what's happening, and what's likely to transpire...my success or failure depends upon my ability to read the data and come to an unbiased opinion (sound familiar?). It's hardly gambling.

"How does one know what is a "soft landing"? How is it measured, compared to what?"

I think the definition is probably going to differentiate from person to person. I see it as an alternative theory to the dreaded "Housing Bubble." Those in the camp I'm from have always thought the markets would slow as rates crept upward...that marketing times would get back to a more historically "normal" time frame, and that we might even see some slight depreciation in some of the formerly hottest markets (it's happened for short periods before...it's called CHANGE). But 25-50% depreciation?...a second great depression? (we've read it here before)...disaster so often dipicted here? (with coming "tipping point" after coming "tipping point" presented time and again)...NOT LIKELY.

Like I've said before, I look for opportunity...not despair. That probably best explains why I look @ a market, and see something different than a Bubble Thumper.

-Mike

Almost forgot...check out San Antonio for opportunity & positive cash flow.

 

[The Warrior Monk]

Like I've said before, I look for opportunity...not despair. That probably best explains why I look @ a market, and see something different than a Bubble Thumper.

I just observe the market; I'm not looking for either opportunity or despair. I just don't believe that the market can tear along at 10%-20% annual increases a year with flat salaries and home prices 5-6x people's income levels.