Tuesday, May 24, 2005

"The Biggest RE Bubble In World History"?

Even before the sales numbers were released today, economists were sounding alarm bells. Yale University economist Robert Shiller, "'I think this is actually the biggest [real estate] bubble in U.S. history and possibly even world history,' he said in a telephone interview yesterday (May 23rd)."

"Mark Zandi, chief economist with Economy.com, said he's worried about the vulnerability of the mortgage-backed securities industry, where hedge funds and other investors have made huge bets. That derivative industry funds many mortgages for home buyers, particularly for low-equity loans. Problems in the mortgage-backed securities market could result in a credit crunch for would-be home buyers."

Even Robert Freed of KB Homes, who has pocketed a few million recently, used the 'B' word. "It's not the bubble in housing. It's the bubble in underwriting."

It's all good for Steve Kalmbach of Pulte Homes. "You'd be surprised how far people are willing to drive to have their American dream."

"'If things continue on as they are for another year or even six months, the potential for price declines is that much greater and the risk to the economy is much more significant,' Zandi said."

47 Comments:

At 9:21 AM, Anonymous Anonymous said...

There is an increase in number of economists predicting low rates are here to stay...all they have to do is advertise it a bit in the news and guess what...ARM's will (again) become a birthday wish for many.

 
At 9:26 AM, Anonymous hellboy said...

And still prices continue to rise unabated. I don't know how much longer I can hold out. SF Bay Area prices continue to flog higher with no end in sight. This is getting depressing. Fortunately for me I just rented a place in mid peninsula for $2000( 3 b 2 b, 1300 sqft )which hopefully has prevented me from doing something stupid. I swear I was close to throwing in the towel!

 
At 9:29 AM, Anonymous Anonymous said...

Yes, I have been hearing that about interest rates as well.

Since people have been calling for rates to rise for the last year (and they have been flat to dropping), now that the mainstream view is that they will drop, THEY WILL PROBABLY START RISING.

Don't forget that there are a lot of speculators that are long/short treasuries depending on psychology.

Last year this time, sentiment was about 100% that treasuries would drop, which lead to large short positions. They ended up rising.

The most prominent proponent of rising treasuries is Bill Gross of PIMCO.

I think he is very bright.

He also makes his money by buying/selling treasuries, so you must take him with a grain of salt.

Last year he was one of the most vocal that rates would rise (they dropped).

So you never know.

 
At 9:32 AM, Blogger deb said...

I have had the same thought, hellboy. It is so very difficult to be moving against the herd right now. However, that should just strengthen our resolve that we are ultimately correct. I have to imagine that people sitting out every bubble in history from tulips to nasdaq have had this same feeling "what if it really IS different this time". It's not. History is repeating itself AGAIN!

This board definitely helps me keep sane. Thanks, Ben.

 
At 9:33 AM, Anonymous Anonymous said...

you doom and gloomers.

when will you wake up and grab your piece of the american dream?

 
At 9:36 AM, Blogger JLP said...

Ben,

Have you read anything as to what can be expected to happen if and when the bubble bursts? What will it mean in terms of the economy? Just curious as to what you have found.

JLP

AllThingsFinancial

 
At 9:40 AM, Blogger John Law said...

http://www.usatoday.com/money/perfi/housing/2005-05-23-real-clubs-usat_x.htm

Real estate investment clubs build up

begin the countdown

 
At 9:43 AM, Anonymous great caesar's ghost said...

Ah, the American dream of paying over 50% of net income on a POS tract house or shitshack condo conversion in a crack-infested neighborhood.

Yup, this slow and steady tortoise is really missing out as I see my rental housing expenses drop y/y and my various investment accounts rise a guaranteed 4-5%.

 
At 9:43 AM, Anonymous Anonymous said...

"when will you wake up and grab your piece of the american dream?"

When yours turns into a nightmare.

 
At 9:44 AM, Anonymous Anonymous said...

I wonder what our Congressmen and other higher-ups in government are doing with their real estate portfolios? No one (other than the honchos, perhaps) seems to know where the Caribbean money is coming from, and there seems to be a notion that the Caribbean money is keeping this party going. So, if we look at who is dumping their real estate holdings, could it give us a trail of any kind? A conspiracy theory, true, but I think it is possible.

 
At 9:51 AM, Blogger dwr said...

"When yours turns into a nightmare."

Outstanding reply!!

 
At 10:06 AM, Anonymous Anonymous said...

The housingheads are getting desperate. See Anonynous 9:33

"Single-family homes sales rose 4.5 percent in April to a 6.28 million unit rate from a 6.01 million unit rate in March..."

Perhaps this is the very top as smart money is selling and existing RE. Meanwhile the speculators continue to buy.

The top is within sight. The bubble sentiment is becoming more pervasive. Any month now.

 
At 10:09 AM, Anonymous Anonymous said...

Bill Gross is now changing his tune. In his latest commentary, Bill Gross of PIMCO (perhaps the most influential bond trader in the world) comes very close to sounding bullish on long bonds. This is a rather amazing turnaround, since over the last couple of years he has been warning repeatedly about an interest rate meltdown.
"If we had to forecast (and we do), we believe a range of 3 - 4½% for 10-year nominal Treasuries will prevail during most of our secular timeframe..."
Long live the bubble.

 
At 10:10 AM, Blogger Ben Jones said...

JLP,
I don't know if anyone can predict what the shake-out will look like. The money creators have taken a huge gamble. We'll see what the Fed comments look like this afternoon.

 
At 10:13 AM, Anonymous boulderbo said...

"When yours turns into a nightmare"

excellent

can anyone comment on which government entity would end up with the responsibility for fannie/freddie in the event of a implosion of those entities. thanks.

 
At 10:18 AM, Anonymous Anonymous said...

Boulderbo, Homeland Security will take over. Its all part of The Plan.

 
At 10:23 AM, Anonymous Anonymous said...

Patriot Act I was first part of our govt superimposing themselves on our financial institions. Who knows what Patriot Act III or IV or X has in store.

 
At 10:25 AM, Anonymous Anonymous said...

I am curious how long you bubble doomsayers have been of this opinion? Are you all afraid that you missed the boat and hoping that it will come back in gfor you? You should have been out buying for the last two plus years and you might have a different opinion, but I suppose you were all too busy writing out the rent checks.
There are still bargain areas that have not run up yet, Dallas, Atlanta and others that I am sure you can find if you took the time to look. Until then, enjoy your apartments and the neighbors music at midnight...

 
At 10:30 AM, Blogger deb said...

The troll thing is gettng really old.

 
At 10:31 AM, Anonymous Anonymous said...

Hellloooo! people please wake up... again... who cares about the long term interest rate... speculators and people who are using "creative financing" take out ARMs and I/Os are linked directly to the short term rate!!!... and whether the long term goes up or down when greenspan raise the rate again this june, the short term rate will go up again...

 
At 10:44 AM, Anonymous Anonymous said...

" I am curious how long you bubble doomsayers have been of this opinion?"

Food, troll, food:

I was of the opinion that the rental market in SF was a bubble from 96 onward. Rents have since come down. I was of the opinion that the tech market was a bubble from 97 onward. If I recall, tech stocks have since come down. I am currently of the opinion that there is a severe housing bubble and that there is a google bubble.

Perhaps I'm wrong. Perhaps a depreciating, high-maintenance asset that has historically increased in value at just above the inflation rate has suddenly undergone a phase-shift and is now returning 20% per year. Until I can see why, however, I am inclined to doubt.

Cheerio,
prat

 
At 10:50 AM, Anonymous Anonymous said...

dwr

"When yours turns into a nightmare."

I know it has already been said, but that has to be the best comeback as of yet.

 
At 10:52 AM, Anonymous Anonymous said...

Prat, are SF rent higher today(2005) than they were in 1996? Are tech stocks higher today(2005) than they were in 1997? Are housing prices higher today(2005) than when you came to the conclusion that we are in a bubble? What makes you think goog is a bubble? If you actually followed your own advice you'd be 0/4.

 
At 10:54 AM, Anonymous Anonymous said...

'Envy' fuels real estate bubble talk

http://realestate.yahoo.com/realestate/story.html?s=n/inman/realestate/20050523/20050523701

 
At 11:04 AM, Anonymous Anonymous said...

10:52 Anon, Prat was calling the beginning of those bubbles, not the end of them. In the end, he will be 4/4 I am sure.

Prat, great post!

P

 
At 11:09 AM, Anonymous Anonymous said...

11:04, do you practice "faith based" investing also? In the 'reality based' world, Prat is 0/4. Yet, your faith tells you he/she will be correct eventually. A broken clock is correct twice everyday....

--IAC

 
At 11:14 AM, Anonymous Anonymous said...

"'Envy' fuels real estate bubble talk

http://realestate.yahoo.com/realestate/story.html?s=n/inman/realestate/20050523/20050523701"

Read all the way to the bottom for contact information and his credibility is out the window.

This guy is so wrong it makes me want to vomit.

 
At 11:22 AM, Blogger Chuck Starkweather said...

When the dumbest person you know speaks of an investment, in this case, buying property, as a sure thing, then you know you're coming close to the bursting stage. It's near my friends. I say in 4-6 months, even the robots in the mainstream will be sweating about this bubble.

 
At 11:24 AM, Blogger Chuck Starkweather said...

When the dumbest person you know speaks of an investment, in this case buying property as a sure thing, then you know you're coming close to the bursting stage. It's near my friends. I say in 4-6 months, even the robots in the mainstream will be sweating about this bubble.

 
At 11:31 AM, Anonymous Anonymous said...

'Envy' fuels real estate bubble talk

I agree. People like Warren Buffett cannot afford a median price home so they say there is a bubble.

 
At 11:31 AM, Anonymous Anonymous said...

I believe the appreciation is unrelated to value and some adjustment will occur in the future. Thats why I return to this site frequently. But for contrarian sake, what could account for some portion of the appreciation?
1. Is the housing stock changing? The average size of houses has increased. Seems this could be discounted by looking at the previous new supply in past depreciating markets.
2. What is the percentage of second homes? Is truely greater today than before? Tucker Adams, economist in Denver (http://www.rockymountainnews.com/drmn/real_estate/article/0,1299,DRMN_414_3800653,00.html) points to population growth as an underlying factor of demand.

 
At 11:35 AM, Anonymous Anonymous said...

11:14 AM,

that's pretty funny...

 
At 11:37 AM, Blogger Tulkinghorn said...

If/when this bubble bursts the depth of suffering will be greatly intensified, for many, by the recent changes to bankruptcy law.

The poor latecomers will be foreclosed on and then will then work for years to pay off their deficiencies.

It will be like the soup nazi: No chapter 7 for you!

 
At 11:45 AM, Anonymous Loren said...

What could account for higher house prices? Bigger? Vacation homes?

As far as I can tell there are only two ways to afford more house(s), one is to devote more of your income to it, the other is to make more money so you can devote more money to it. The rest of the factors are irrelevant. Bigger houses? More demand? It doesn't matter if you can't afford it.

Things don't come about by wanting them to. I don't buy the bigger, better, more people want them idea past what people can afford. If housing really was reflecting a different preference mix you would not be seeing all these 0% down interest only scams. You'd see people working harder, making bigger down payments and giving up things like cars and vacations in order to have a bigger house.

I don't care how people spend their own money. I you want to be house poor in a really big house have at it. It's the increasingly risky financing and the way it's permating our banks and financial institutions that has me worried.

 
At 12:16 PM, Anonymous bbh said...

"I am curious how long you bubble doomsayers have been of this opinion?"

A 'ment from a moderate doomsayer... I concluded that the R.E. market was in a bubble around April/May of last year. Why? Because my $185,000 (in early 2001) pad in Vegas had ballooned to somewhere in the neighborhood of $400K. I felt very uneasy about the market, and decided it was time to unload. I had heard that houses were selling within a few days just a month earlier, but the market had slowed in matter of couple weeks. I ended up selling the house in September for $399K. I thought I got out just in time for a slow down. Lo and behold, Pulte Homes reduces prices, and the market has been stagnant ever since.

So no, I'm not bitter, I benefitted from this market. However, I also consider myself fairly knowledgeable investment-wise (after all, it's my field), and I made my decision largely from an objective viewpoint. Interest rates were rising, the prices had shot up $100-150K in a mater of months for an average house, and the fundamentals began to stop making sense. A 15-degree incline had suddenly shot to a 65-degree cliff on the HPI. I lost my shirt on the tech bubble of similar ascent (I got in late), and I felt I learned from that. What I learned then is that there has to be a foundation built on fundamentals in EVERYTHING, and there wasn't one here.

I'll sit on my profit until this thing pops with a slow leak, then a burst.

 
At 12:41 PM, Anonymous Anonymous said...

My wife and I sold our Condo almost two years ago, because I thought things were nuts then. We live in a southern college town, we have watched college kids move into $300-$400,000.00 homes that their parents bought for them while in school. The plan is simple, sell when junior graduates. Sell the house at a handsome profit. Pay off college exspences and live happily ever after. My timing may have been off but I know what is heading our way and it ain't good. No matter what the talking heads say. You can put lipstick on a pig but you still have a pig...

 
At 12:42 PM, Anonymous Anonymous said...

Kudos to "moderate doomsayer" from "I am curious".

In your market it looks like you did a great job of market timing and made out with a nice profit. My somewhat exagerated Point was that all markets need to be looked at as unique, just as stocks do, and the broad brush doomsayers are doing themselves great harm by not looking at opportunities that are still available in specific markets in parts of the country besides S.F, Las Vegas and Miami, and the other usual suspects.

 
At 12:46 PM, Anonymous Anonymous said...

an anecdote:

last year I met a fellow at a party; we got talking about the stock market and this guy tells me he lost $200k in the tech bubble pop

well, last Sunday I ran into him again..

Guess what? He's selling his house in Colorado and MOVING TO JUPITER, FL to buy houses there! He says the market there has much farther to go (up).

I recommended he take a look at this blog, but, of course, I could tell he thinks I'm crazy.

..I rest my case...lol

..DenverKen

 
At 1:00 PM, Anonymous Andy said...

[Yale University economist Robert Shiller, "'I think this is actually the biggest [real estate] bubble in U.S. history and possibly even world history]

OK, it’s official Shiller has lost the plot.

I agree that this is a huge bubble, but to say that we're in a bigger bubble than Japan was? Now I think he's just saying whatever he can to get into the media and get people to buy his book.

 
At 1:02 PM, Blogger John Law said...

( I lost my shirt on the tech bubble of similar ascent (I got in late), and I felt I learned from that. What I learned then is that there has to be a foundation built on fundamentals in EVERYTHING, and there wasn't one here.)

bravo to you for learning from your mistakes!

 
At 1:21 PM, Anonymous bbh said...

"My somewhat exagerated Point was that all markets need to be looked at as unique"

I agree, I think certain markets are really bad, majority are not great, and some are still okay. I have been looking into a variety of markets, and I think today there are relative bargains such as Salt Lake City, Dallas, Houston, and some that look to be exposed to the risk of only mild declines, such as St. Louis and Nashville. Denver and Phoenix are risky but not off the charts, and any major cities in CA, FL, and east coast are critical from a regression standpoint.

Let's look at couple of recent stats:

1) Inventory is up, average days on the market is up, but price is also up. This doesn't appear to make much sense, but actually it makes a lot of sense from the psyche of the market today. Median Sales Price is based solely on houses that have been SOLD. It means the sellers are still being stubborn with the prices, believing the market is still going up. It also means that there are fools who are still buying at those prices. However, there are a lot less people buying at these prices, which explains why the sell time and inventory is way up. Median Price isn't up because demand is outstripping supplies, folks, price is up because sellers won't budge. When that happens, we get the three traits above.

2) I noticed today that ARM rates and 30-year fixed rates are only about 1/2 point off. So much for ARM financing now. See, with Fed rates going up and long-term rates standing pat, the rates between 3- & 5-year ARMS have been squeezed together. It is no longer affordable to get ARMS anymore. The only hope you have of affording a home in areas like SoCal are IO loans. Think about this: A reasonable 3bd/2ba, 1500sf, 7500sf lot home 20-30 miles outside LA will run you about $500K. If you put 20% down, a 30yr fixed will cost about $2,750. A 5-yr ARM - $2,630. Not much difference there. Let's see, an average Joe, who makes $60K, probably brings home $3500, maybe $4000 if he's not paying into a 401K. Well, he can't afford this "average" house even with a regular ARM, so, he gets into a 5-yr fixed IO with negative amortization (so he can afford it by not paying tax/insurance right away), which brings his payment down to $1,700. Well, now he can afford it.

So we will have one of two developments in markets such as LA: either people get wise to this and stop buying something they can't afford, or nearly all our loans will be IO's which will prolong the bubble for a bit longer until it all comes crashing down.

 
At 1:46 PM, Anonymous Anonymous said...

(SF rent higher today(2005) than they were in 1996)

Not in real terms. And certainly not relative to the cost of purchasing a house. Of course prices have come down! Do you live in the bay area?

(Are tech stocks higher today(2005) than they were in 1997?)

Sure, its up. But not as much considering inflation. I got in in 2002. I happened to work at BofA, and saw the capitulation on the street after 9/11, and thought it might be a good time to invest. _shrug_ I'm not much for market timing, but that seemed obvious to me.

(Are housing prices higher today(2005) than when you came to the conclusion that we are in a bubble?)

Absolutely. Which is why I am selling my real-estate holdings, which previously were a tax shelter.

(What makes you think goog is a bubble?)

I worked there last summer. I declined full time employment because I thought the stock options were overpriced at a $75 strike price (!!!). In retrospect, I obviously blew that call from a short term perspective. But I still maintain, in the long run, google is extraordinarily overvalued.

(If you actually followed your own advice you'd be 0/4.)

_smile_

I'll be alright. Stiff upper lip, and all that. Please, don't lose sleep over me.

Cheerio,
prat

 
At 1:54 PM, Anonymous HHM said...

Are there IO loans with low teaser rates that have no pre-payment penalties?

I'm planning on buying a house with cash, but I'd do martgage for 1-3 yrs if it had a low rate and no pre-pay penalty.

 
At 3:22 PM, Anonymous goran said...

(are SF rent higher today(2005) than they were in 1996? Are tech stocks higher today(2005) than they were in 1997? Are housing prices higher today(2005) than when you came to the conclusion that we are in a bubble? )

1. SF rents---2005 vs 1996

Residential rents are higher, but not by very much. Rents more than doubled from 1996-2000, then fell 50% or more. I leased an office in SF in 1995 for $20 sf. 5yr lease. When my lease was expiring in 2000, the building was commanding $76 sf. I sold my company instead. Today, the same building is $22 sf. So up 10% since 1995. But if you had purchased that building in 98,99,00,01 when rents were artificially high, you would be in sorry shape today.

2) Tech stocks--2005 vs 1997

Most tech stocks have fallen 50-90% since 2000, but many of them are still above where they were in 1997, but not by much. But most people didn't buy tech stocks prior to 1997. They bought them during the mania so they are definitely underwater unless they sold them already. And many went bankrupt.

MSFT: still down over 50% from 2000 highs
INTC: still down 65% from highs and, until 3 weeks ago, was below 1997 levels
AMAT: still down 70% from highs
HPQ: still down 67% from highs and below '97 levels

and so on and so on...

The point is: buying into a frenzy is a surefire way to lose money unless you are very, very nimble. And with RE, which is terribly illiquid, being nimble is not enough.

 
At 3:27 PM, Anonymous boulderbo said...

hhm,

as i read the sheets today, 5/1 io money is trading about 4.25% which will be 200 basis points below prime (at least) fixed for five years, i think we call that an inverted curve. and any fannie/freddie product will not have prepayment penalties

 
At 3:52 PM, Anonymous Anonymous said...

yes, everybody just go and buy a house or two, what the heck everybody else does it now.
the prozac guy said it is is still better than rent; make sure though you have enought prozac supply, because in the next recession you may not have a job to pay for the pills and lenders will bang on your door untill they will throw you out; oh, BTW for some 6+ month it is very cold in Boston so make sure you have warm cloths..

 
At 7:19 AM, Anonymous Anonymous said...

When you have "neighborhood junkies" (Wall Street Jnl 5/25/05) in Baltimore being hired to renovate properties by speculators, who are then selling at huge profits to yuppie outsiders -sometimes sight unseen,
THAT COULD BE A BUBBLE

 

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