This is another case of the dog chasing its tail. When you see prices going up at a rate well above the interest and equity weighed rate, then a strange thing happens. This creates a speculative market situation. Why are people paying these inflated prices? Answer: Because the prices are going up at these rates. Why are the prices going up at these rates? Answer: Because people are paying those prices to cash in on the price increases. A residential property can have two possible highest and best uses: 1. As a place to live. 2. As a vehicle of speculation. Why is this a problem? Answer: Take Japan for example. The same thing happened there in the late 1980’s and grid locked the economy. Interest rates in Japan have been zero (0) for years because there is negative equity in billions of dollars worth of property and if they charge interest the owners will dump them and bankrupt the banking system. I read a report that said Japan had two choices. 1. Maintain the present situation for one to two generations until negative equity turns back in to positive equity. 2. Bankrupt the economy and start from scratch.
There is an excellent article over on stratfor.com, but you have to be a subscriber to read it.
I've seen the bubble burst in various areas. At present, the bubble has not burst nationwide. Give us another attack similar to 9/11 or, worse, a small nuke smuggled into a port. That may well push us over the edge. If people are afraid to live in a major city, the markets will fall.
Heck, I thought one-half of 'em had moved to Sherman or Denton last time I was through there. Never knew Van Alstyne was a real town before. If I had not been to Houston, I would have thought they had all packed up and moved to North Texas.
Seriously, I believe the bubble will be acute regionally and nationally just an overall downward trend, hopefully for most people's sake. The issues may be surprising. Water problems in the West will limit the ability to provide water for residences and will hurt the farm economy by depriving them of irrigation water...a la Klamath Valley. A bitter cold winter, especially if it starts early and depletes gas storage will make the pipeline bottleneck worse. Even in the face of good gas supply, deliverability is low because demand has increased but enviromentalists and NIMBYites are stopping construction of larger pipelines needed to deliver peak amounts of gas. A hot summer in California (and the past two were mild) will also still be felt there. War in Iraq, a real possiblity may actually lower oil prices or may offend so many Arabs we are embargoed again. Unlike the late 70's we do not have the North Sea and Alaskan maximum flows to offset a shortfall. Energy prices, imho, are a real key to this laboring economy.