Housing Bubble Bursting?

[moh malekpour]

I've said before that it looks like the real cause of the bubble burst, in those places where it is bursting, seems to usually be a combination of speculation, over-appraisal, and outright fraud. In much of the country there does not seem to be a bubble burst at all... instead, it looks like a correction or cooling market. Since these markets are naturally cyclical, I wouldn't worry too much about that part of it. In only a few places, such as parts of Michigan is there an apparent bubble burst in places where there never was a hot run-up; and those seem to be caused by underlying economic problems. However, the real problem will be if the housing sector problems spill over into the larger economy to such an extent that they lead us into recession, or worse. It seems that I overlooked one particular problem that has led to some of the housing industry's current difficulties, which is new ways of investing and financing that were not common in the past, are little understood by the general public, or even by investors (for example, derivatives), and barely regulated, if regulated at all.

And, along with that...

It seems that I missed one of the causes, which is inept government regulation. Lack of regulation is some areas that probably should be regulated... way too much regulation in other (most) areas... and regulation that doesn't make sense in many areas of the housing market. More evidence comes from this opinion:

http://www.inman.com/hstory.aspx?ID=63875

No, the real cause was easy credit and availability of unlimited money to anyone who could talk. When plenty of money was moving around in the market, a drug dealer at the corner street could become a home speculator because no one was asking for credit or income and the profit from speculating was more than dealing drugs and a criminal could be turned to a loan agent as long as he could lie, manipulte and lure homeowners.
As the easy credit is tightening gradually, the bubble is bursting although the rates are still low. That easy credit is still out there in the market but it is not available to lending industory anymore. It is avaialble to big corporations that are borrowing, investing, hiring and buying back their stocks with it. Does money inflation mean economic prosperity? I don't think so.

 

[Steve Owen]

I'll stick with my original three, Moh. We had the same kind of unlimited money (not really unlimited, though) here in SW Missouri, but we didn't have the run-up and we don't have the bubble burst.

Speculation, pushed appraisals, and in some cases, fraud seem to be the common denominators in all the areas having bursts now... with speculation leading the way.

However, it is clear, from the things I mentioned that I didn't think about before that there are some new kinds of influences working in the real estate markets today, and within the last few years. For example, the internet:

http://www.inman.com/hstory.aspx?ID=63889

New companies such as Trulia and Zillow, while benefiting from a higher profile, face a particular challenge because they are unproven business models. They both seek industry ad dollars in one form or another. It must be difficult.

But, the more things change, the more they remain the same. The maxim before the dot com debacle was "this changes everything." It actually did not change any of the economic principles.

 

[Greg Bell]

The real crash will come when the Dollar deflates against all currencies to a point that confidence is shaken.All the wall street players will head for the door and we will have very nasty crash as assets are dumped to convert to
other currencies , or Gold , Silver Etc.At the same time many hard assets will be devalued as the dollar slips into Wall Paper status , should be fun.Buy beans and ammo........

 

[Steve Owen]

That would indeed cause a real crash... if it happens.

 

[moh malekpour]

Steve,
I am not denying your three but they are the symptoms not the cause. Take a look at a drug addiction analgoy. when drugs are freely available to kids, the enjoyment and pleasure is so strong that kids cannot resist them, however, there are some sporadic areas that might scape from it due to strong parents supervision, strong beliefs or just being so small market for perpetrors to bother with it. The solution to the problem is to find and eliminate the cause. Dancing around the symptoms might be a PR but doesn't solve the problem because they appear somewhere else.

 

[Steve Owen]

I could not disagree more. It is the government tightening of supply that has literally created our drug problem from almost nothing. The government and their laws are almost entirely responsible for the problems we see with drugs today. If they were freely available, then the monetary value of these recreational drugs would be very low because few people actually want them. It is a bad analogy that has no relationship whatsoever to the housing market except as general supply/demand economies exist.

 

[moh malekpour]

Lets not to get into drugs addiction politics. There is another forum for that and we can argue forever and not to get a consensus but I hope you agree that the addiction is a symptom not a cause and no matter what the cause is, availability or not availability, it should be identified and eliminated.
To say speculation, pushed appraisals and fraud were the cause of bubble and bubble burst in some areas and SW Missouri didn’t get them because those three were not there is a simplistic reasoning. Are you saying that there was no appraiser who would inflate values or no person who would speculate on properties or no one who would commit crime in SW Missouri? Is there any moral and ethical superiority in SW Missouri in comparison to the areas that got bubble and bubble burst? I am trying to identify the cause and your three are not the common denominator of the cause if your answer to my questions are no, however, your three are very disturbing symptoms as the defaults and foreclosures are the continuation of those symptoms.

 

[George Hatch]

I think the overeasy credit has enabled more would-be homeowners nationwide to realize those goals, including some buyers who are unqualified to service those loans for any length of time. That has contributed to the effective demand nationwide for residential properties, but I don't think it created shortages in the market and the attendant hyper competition. Some of these "stable" areas saw no significant pricing increases, others saw only minor and moderate increases. I don't think most analysts are concerned about the areas where the current prices, when compared to the long term trends, are now gassed by an extra 10% or 15%.

If the median SFR price in an area is in the $120,000 range, I don't think havoc will ensue if that market adjusts back to $100,000 as a result of tightened credit underwriting and higher interest rates. Most $15/hr households could eventually recover from a $20,000 loss or make do with $200/month higher payments. And there are still a lot of areas in the U.S. with long term price trends that would indicate to a "stabilized" median of $100,000 or less.


I think it was the investors and speculators, working in some of the metro areas that led to the hyper competition that resulted in the disconnect between pricing and local wage/population trends. The speculator element only got big in certain areas; areas where they weren't a factor didn't participate in the oversized runup.

As the "short term investment element" withdraws from the RE markets I think the pricing is adjusting to reflect that reduced level of demand on those areas. Those adjustments are minimal in the areas with little specuvestor activity and they'll be greater in the areas where there was more such activity.

 

[Steve Owen]

What I'm saying is that SW Missouri had virtually the same kinds of financing available that was available in Florida, California, and Las Vegas. Therefore, easy financing is obviously not the cause. That is not simplistic reasoning... ignoring it is.

A more apt analysis would be that easy financing was a catalyst. The cause was primarily speculation.

Is SW Missouri more morally and ethically superior to those other areas? That might depend on what you use for a scale. I would say yes, but then, if you look at the number of incest cases here, you might disagree. There are speculators, appraisers who push value, and fraud in Joplin. The primary difference is in numbers. Most of the real estate agents I run into on a daily basis are honest. Most of the buyers and sellers of real estate base their purchases on economic realities, not on speculation for the next big wave. Most appraisers will at least resist the urge to inflate. And, most of the banking and local mortgage community are not involved in fraud. The primary difference in this scenario and many of the bubble burst places is that in those places many more players in the market were there as speculators, flippers, and fraudulent actors.

 

[Steve Owen]

The stock market indices (DOW, S & P) are now back to the levels they were in 2000, before the decline, correction, or bubble busting, whatever you would like to call it. Now, inflation adjusted, it appears to me that the stock market may not correlate well with the economy at present or future.

FYI, the DOW reached $14k today. The above is a mis-characterization, IMO. I heard on the radio today that the $14k compares with a low point of about $7.2k just six years ago... shortly after the DOT com debacle. Almost double! There is no way that inflation over the last six or seven years can account for that.

Not only that, but every other major index, with the exception of NASDAQ is at record or near record highs. What happened to NASDAQ is that all of those dot com stocks, many of which are no longer around, pushed it to near $5k before the bust. I doubt if it will be anywhere near $5k anytime soon.

Will the good news on this front continue? Right now, unemployment is low, wages are rising, output and profits in most sectors look good. What could upset this rosy picture? Only one thing I can think of... government action (probably in the form of higher taxes).

Still, I like to say that I don't have any better crystal ball than anyone else. I would not rule out the possibility of recession because I don't know what will happen next.

http://www.inman.com/hstory.aspx?ID=63897

Too little to late?

As I've said before, maybe the housing cooling/crash/bubble burst or whatever you want to call it is a good thing. Markets need to correct.