Awhile ago,
There is a vast gulf between “This is a terrible idea, we shouldn’t be doing it,” and “bad things are going to happen soon.” Unfortunately, the first one isn’t the most marketable message. And so it’s very easy to slide into the latter, because nobody pays attention to the former. It’s the difference between “Smoking increases your risk of lung cancer, heart disease, and asthma, while also generally decreasing lung performance,” and “Smoking’s gonna kill you”. The accuracy of the first one is uncontested, but the second is much more gripping.
The truth is one of my grandfathers lived into his 90’s while smoking and drinking fairly regularly, as I understand it. I wasn’t terribly close to him, so I’m fuzzy on the details. Pointing to a man who died in his 90’s and saying “see, it was the pipe that did him in” isn’t terribly scary to a smoking teenager.
But just because the bubble hasn’t burst, and my grandfather lasted as long as he did does not mean that the practices in question aren’t bad ideas, and don’t increase our risk of catastrophe, personal or economic. But how to convey this risk in a fashion that people will understand before the sky does fall (as happens occasionally) is a tricky question. Maybe they do understand, and are fine with that, but somehow I doubt if a catastrophe does come to pass, they will accept the consequences with the same quiet equanimity that they indulged in their risk.
The “bubble” (other than select areas, I don’t really think there is one) will probably never burst. Far more likely is prices stagnate for up to a decade, much as they have in Sydney, for example.
To elaborate, I believe housing bubbles rarely *do* burst. People are more likely to just not sell for longer periods of time..
Overall, housing prices don’t fly up and down at the speed we see in more liquid investments, like stocks. When you look at aggregate country-wide statistics you rarely see housing prices fall (Japan is a bright exception to that general rule). But individual properties can experience dramatic reductions in value when the people who bought them paid far more than the fundamentals can support. There are plenty of stupid people who fall for a sales pitch during boom times and pay too much. Metropolitan areas can and do experience double-digit declines in median prices when employment falls and speculators dump their properties.
The presence of moderate or high consumer inflation in a post-gold-standard economy typically masks a decline in housing prices. Housing prices that look “stable” during a 5 or 10 year period are actually falling when you take inflation and incomes into account. My income will probably double during the next 10 years. If local home prices stagnate for the next 10 years I’ll be able to afford twice as much house in 2015 as I can afford now.
Plus, we’re currently experiencing lifetime low mortgage rates in the US. If mortgage rates rise 2, 3, or 4 points people simply won’t be able to afford housing at current prices. Prices will have to fall. But, maybe interest rates will stay put or even go down. Nobody really knows what rates will be next year.
While it seems reasonable that outlier houses have significant reductions in price, I haven’t seen specific data on how much and how often that happens. Certainly even in non-bubble situations individual houses, when it’s necessary to turn them around very quickly, go for less than the person initially paid for it.
Your point about inflation is mostly true, though I would argue that due to the downward pressures on inflation, partiularly with incredibly cheap goods coming in from China, make significant inflation unlikely. But of course, even a 3% average inflation per year would have a measureable effect on home prices.
Remember, though, that the real value of a home has always been from the shelter it provides, NOT speculation, in all but unusual cases. *Most* of the value from a home, even in cases of sustained housing pride gains, comes from this–over the long term, the average 10% on the S+P 500 beats real estate, unless you account for the value that comes from living in it, or renting it or something along those lines.
I do not believe what people do in california and other outlier places, that is, buying with ARMs and with loan payments that don’t even cover the interest payments on their principal are sustainable in any fashion. But if someone intents to be in the home for a bit and pays 20% down on a fixed rate mortgage, it’s pretty hard to really lose.
“I do not believe what people do in california and other outlier places, that is, buying with ARMs and with loan payments that don’t even cover the interest payments on their principal are sustainable in any fashion.”
That’s an outlier even in california. Norm for california is mortgage some of your other property, pay 20%. This is from a limited sample size of what my fiancee sees every day as a loan coordinator.
I guess speaking about how the housing bubble might cause a recession when it bursts doesn’t bring home the individual costs that a bubble-blowing family might incur. And, yes, it is all too easy to exaggerate the doom and gloom. Most people do just fine during a recession, and then the recession ends and growth returns. We could spend our entire lives worrying about the next recession.
Regardless of whether we experience an overall recession as the bubble bursts, many of the families that stretched themselves to buy housing at unrealistic prices using exotic mortgage products are going to feel some pain and might lose their homes during the next 3-5 years. I didn’t want to become one of the pain-feelers, so I was happy to delay buying a larger house with Tod until later. I hope those friends and family of mine who did purchase a house (or a larger house, or a vacation home) this year will escape financial trouble when housing values stop rising and fall for a few years.
You are right, it is all about risk. People who want to buy their first home are risking a lot when they buy during a cyclical boom when everybody else is also buying. It would make more sense for them to wait until the next downturn and buy then. But if they do buy now, can afford their payments, use a fixed-rate mortgage, and don’t lose their job during the next downturn, they’ll probably be fine.
Two-thirds of tobacco smokers do not die of a smoking-related illness.
From my real estate friends in Atlanta, they think that the bubble will burst in selected markets, primarily the upper-upper class. In other words, there’s going to be a lot of unoccupied, brand new $1million+ homes in Atlanta very soon.
I always thought that people discussing the housing bubble were generally discussing whether to get investment property. I haven’t seen any real sign that the bubble is going to burst, only that it’s not a good place to invest if you’re expecting growth.
At least here in socal, there are enough foreign nationals to prop prices up for inflation to catch up. Irvine is still miraculously hot due to all of the Koreans and newly rich Chinese moving into the nice school district. One of the people I’ve heard about personally also offers sub prime loans to them, since they’re a low risk demographic who cannot qualify normally (no citizenship)
Given some of your focus on public transportation and the like, what are your thoughts on oil/gas and all that? Mainly asking because of the NYT Magazine article on the topic of unsustainable pumping rates (http://www.nytimes.com/2005/08/21/magazine/21OIL.html), though there is an interesting rebuttal up in the Op/Ed section (http://www.nytimes.com/2005/08/23/opinion/23tierney.html).
My feeling? There will be a crunch for oil, but I don’t really think it’ll last long-term — but what will happen is more pick-up in the alternatives, be they other forms of oil (e.g., more expensive to produce tar sands, or whatever it is), alternatives, or higher efficiencies — at least for cars. The chemical industry… there, I’m not sure what they can do, and that’s really more what worries me. (In part, because I don’t know much.)
Of course, it’s not like I have anything to do with the industry, or do much more than read about it. But… there’s been a lot to read about recently, most of it rather doubtful on the possibility of ever-increasing production. Which means something, somewhere, needs to give — either higher prices, or less demand. Or both, since the first can lead to the second pretty quickly.
So Tierney may be right to bet in the longer term the price won’t be as high as Matthew Simmons is predicting, but it’ll probably hit pretty darn high somewhere in the middle. And what’ll happen then is a Darn Good Question… and makes for a good reason, in my mind, for the US to invest more in R&D along those lines, which I don’t think we’re doing. Argh.