Housing Bubble Bursting?

[moh malekpour]

A compelling interview in proving the existence of housing bubble with senior UCLA professor.
This is a convincing argument against those who were insisting from the beginning of this thread that there was no housing bubble in the market and therefore, there would be no housing bubble burst. Although, some of them have capitulated to a bitter reality of the housing bubble burst recently after watching the evidence of subprime meltdown and the flood of foreclosures that are coming to the market but if there are still some who don't believe that there was no housing bubble and there is no bubble burst and this is just a market correction, this interview might be a good lesson to learn about the market fundamentals
http://www.pbs.org/now/politics/thornberg.html

 

[MARK JOLLIFF]

Excellant article and I agree. However there will be areas where prices will gradually taper off or remain stable IMHO. These areas will be in the minority though. Really grateful that I'm able to do as he suggests at the end of article where he says you should be able to pay your mortgage and have money left over to invest. This is true for me only because I was lucky enough to buy 9 years ago not because I'm smart or prudent!

 

[George Hatch]

I wonder how Mike Simpson is doing?

 

[Greg Bell]

This weekend the lead front page story on the Wall Street Journal is "Ripple Effect: Economists See Housing Slump Enduring Longer. Downturn is expected to keep growth tepid; retailers feel the pinch".

The points made in this most excellent and interesting article are not new to those who have followed closely the housing recession and its effects on the economy: the housing recession is not bottoming out; the glut of unsold home is massive and rising given lower demand and foreclosures; demand will be further hurt by rising mortgage rates and the credit crunch in the subprime market; home prices are falling and they will fall even more; the effects of this housing recession on the broader economy come from the fall in employment in housing and in related sectors (mortgage finance, furniture, consumer durables, etc.) and from the negative wealth effect - and related fall in mortgage equity withdrawal - on private consumption and retail spending.

The last quote in the article is "They are living in dreamland" and was made by a participant in a recent distressed home auction with reference to the deluded expectations of home sellers to receive unrealistically high prices for their now lower-valued properties.

The same - "they are living in dreamland" - could be said of the now much smaller number of folks who are still clinging to the view that the housing recession has bottomed out and that it will not have any effect on the broader economy. Even Chairman Bernanke and the Fed admitted this week that housing has not bottomed out and will remain weak for a while.

 

[Randolph Kinney]

Good article Moh. I like the definition of bubble:

A real estate bubble, or any asset bubble is not a situation where you hear a pop. Everyone always associates bubble with a pop. They think, gee, if there's a bubble, there must be a pop! coming at the end. That's not what a bubble is. A bubble is when the price of an asset becomes misaligned with the fundamentals that truly determine the price of that asset.

 

[Brad Ellis]

UCLA has been patently wrong about the relationship between rental incomes and housing prices for years now.

They adopted Shiller's appraoch but even Shiller admitted at last year's PMS that rents were following prices upward and showed his graphs backing up the assertion.

And of course you would like this definition of a bubble- it suits your sensibilities and mirros what you have claimed. So, this is truly convenient for you.

But for me, and for so many exonomists I could not name them all, parts of this markets are in a correction- that is what happens when you get over priced assets.

He is not in tune with the other economists who say that bubbles burst, they do not just leak.

But knock yourselves out.

Of course, if you DO adopt the premise that housing prices ought to move in somewhat linear fashion to rental prices, I would have to assume that you are doing an income approach on every appraisal you do.

I'd be extremely surprised if you were doing that.

Brad

 

[Randolph Kinney]

Gee Brad, you appear to be very "touchy" and sensitive this morning.

No one really cares that you disagree. You can have your opinion and that's okay.

Some people agree with Moh's article, some don't. That does not change reality for the real estate markets.

 

[Terrel L. Shields]

The same - "they are living in dreamland" - ...that the housing recession has bottomed out and that it will not have any effect on the broader economy. Even Chairman Bernanke and the Fed admitted ...housing has not bottomed out and will remain ...

This puppy will be long lived and basically I think that is a good thing. A

pop! coming at the end

is not a good thing. The market will continue to go down slowly hopefully and while that extends the pain, it means the anguish for the losers will be less dramatic.

 

[Brad Ellis]

Randolph,

At yesterday's PMC, there were four economists/analyists providing differing views of the market.

Most pesimistic was Mark Zandi of S+P/Economy.com who claims prices were down 4% and had another 6% to go.

Most optimistic (do not recall the name) said we had essentially bottomed and painted a fairly rosy picture of the economy.

Most accurate (and he has been for a few years now) is Eric Fox of Veros. He did not present a national picture but did hone in specific markets from most pessimistic to most optomistic. Of great interest to me was the picture for CA that had only one market going down further- Sacramento at about 5%.

All were pessimistic about FL in which they identified numerous troubled markets. Fox's list of the worst 10 had 6 FL cities.

Not one used the term bubble and only Zandi used the word correction.

There was an audience participation poll in which about half thought the market would bottom in 2008 and the others split between this year an 2009 or later.

But perhaps most interesting of all was MGIC's analysis of how the OFHEO and NAR data reflected actual performance. The charts and graphs showed clearly that neither was much better than the other and all agreed that the data was reliable, accurate and usable for projections.

So, if you are correct about NAR cooking the books, it sure has slipped by some of the top economists.

Brad

 

[Randolph Kinney]

Brad,

Lets hear it for economists and their predictions, especially the NAR economist(s). How many in that group accurately foretold the number of foreclosures and market decline in, for example, California?

If the NAR data was so reliable and accurate, then most economists and other forecasters would be using it. There would be no need of additional data or sources of data, such as the S&P / Case-Shiller Index. I suspect that after this market correction continues through 2008, there will be consequences for those organizations supplying data and analysis used as the basis of forecasting. The focus will be on those organizations that got it right. NAR is being ignored, as it should be, because of their past forecasts and data manipulation.

The term "bubble" as it may be used by various people or groups does not mean anything except in the context that they have defined. The absence of the term "bubble" does not deny the context used to describe market conditions and trends. Your comment about all those economists not using the word "bubble" is like having an invisible elephant in a small room; there is much talk about what it is in the room with them but all ignore the fact that there is an elephant although being described in words other than elephant.