What Real Estate Bubble?

[laurence]

I stand corrected:

http://www.msnbc.msn.com/id/8544466/

so what's flawed in the logic of this article? Is this more of that hedonics thing I hear about?

[Patrick]

Originally Posted by Laurence

I stand corrected:

http://www.msnbc.msn.com/id/8544466/

so what's flawed in the logic of this article?* Is this more of that hedonics thing I hear about?

From the article:

"Take an average couple who have saved a year’s earnings to put down on their new average home. Last year, that down payment would have left them saddled with a $247,044 mortgage. But 25 years ago, a down payment of a year’s salary would be left the buyer of an average home with a mortgage of just $63,920.

Ah, the good old days. But take a closer look. Last year’s average home buyer financed their purchase with a 5.5 percent, 30-year fixed mortgage, leaving them with monthly payments of $1,403 — or about 2.7 paychecks of $528, the average weekly wage in 2004. But for our 1980 homebuyers, the $808 monthly payment on the average 30-year fixed mortgage — of 15 percent — would have burned through 3.4 paychecks, when weekly wages averaged $240.

In other words, after buying their house in 1980, Mr. and Mrs. Average Homebuyer were left with $54 a week (or about $123 in 2004 dollars) to pay for taxes, food, clothing, car payments — the works. By 2004, the family budget had $204 a week to spend after making the monthly mortgage payment."

It would seem the mortgage has quadrupled, but the wages have only doubled.* ** The difference in spendable income has to be because the interest rate is lower.* When the interest rate goes up, Average Joe and Jane won't have so much to spend on after-mortgage items, and may decide to buy a smaller house, or no house at all.* End of bubble.* Of course if interest rates stay low, everything's just ducky . . . .*

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[jimhcom]

The housing market bubble will not pop, but will graduly deflate in over the next few years, then slowly begin to inflate once again. Due to the influx of immigrants, who's culture is to have lager families, the population is growing expediently, and outpacing the growth of housing. People always need homes, and they will pay through the nose to get them. It is true the market has gotten ahead of itself, but inflation, (which is increasing at a much higher rate than anyone is admitting) and the growing labor shortage will cause wages to increase. Historicaly housing is a leading economic indicator. The danger in the economy is not a collapse, but not keeping up with increasing prices. The Powers That Be, have too much interest in paying off todays debts with tomorrows deflated dollars to allow this trend to end.

[justin]

Originally Posted by jimhcom

The housing market bubble will not pop, but will graduly deflate in over the next few years, then slowly begin to inflate once again. Due to the influx of immigrants, who's culture is to have lager families, the population is growing expediently, and outpacing the growth of housing. People always need homes, and they will pay through the nose to get them. It is true the market has gotten ahead of itself, but inflation, (which is increasing at a much higher rate than anyone is admitting) and the growing labor shortage will cause wages to increase. Historicaly housing is a leading economic indicator. The danger in the economy is not a collapse, but not keeping up with increasing prices. The Powers That Be, have too much interest in paying off todays debts with tomorrows deflated dollars to allow this trend to end.

I'm thinking there is a bubble. This sounds like 1999 dotcom talk. "People always need homes, and they will pay through the nose to get them." Unless the prices drop sharply, then they may not look like good investments anymore. The quoted text is rationalization that the increase in house prices is based on underlying rational behavior.

[bosco]

Originally Posted by Martha

The wished for situation sometimes is a bankruptcy. The only way the debtor can keep the house is to continue to pay on all the mortgages. The debtor ditches all other debt, like credit cards, and keeps the home debt.

correct me if I am wrong, but didn't the Republican right just ram a bill throught that prevents people from ditching their credit card debt in a bankruptcy? Seems like it was in the news a few monthse ago.

Bosco

[laurence]

Originally Posted by bosco

correct me if I am wrong, but didn't the Republican right just ram a bill throught that prevents people from ditching their credit card debt in a bankruptcy? Seems like it was in the news a few monthse ago.

Bosco

Only if your income is above the median, and then there are ways around it still.

[dougdo]

Originally Posted by wabmester

Of course, those who say we're in a housing bubble are right.* *The problem is that they've been right for years.* *Knowing when the bubble is going to pop is the hard part.* * Being right about bubbles too early can be more expensive than the aftermath of the bubble.

Good point but it misses something. I didn't sell stocks during the tech stock bubble because I thought the initial adjustment was just turburlence.

But what I missed was that it doesn't really matter where the peak of the bubble was, what mattered more was that at some point I had enough money in my brokerage account for a comfortable ER (more comfortable than what I had 4 years later at 37 when I did go ER). I had enough so that should've been the signal to sell and get out.*

Lesson learned: examine your values as well as your net worth.

[kcowan]

Back in April 2005, I did a forecast of the housing bubble bursting. Recently, I updated it when I came across a new forecast chart from Pimco (10/06).

Have a look at my web page discussing this. One and a half years later, the forecast is looking pretty accurate. Too bad we could not play housing futures back then...

[Brat]

Humm, forcasting is tough. I think the peak was 05. Assuming a 15 year cycle then housing prices should bottom about 2012. Using the current raw $ value, how far would you predict it could drop?

1. Interest rates.
I think they will stay within 1% of the current rates.
2. Mortgage companies
I think they will be pulling back big time on the 'novel' products.
3. Stock Market
Frankly I think it will be stagnant, which means it will do better than housing as an investment.
4. Momentum
Lost, bearish attitued in housing as an investment as flippers get clipped.

[brewer12345]

Anecdotally, lenders are already pulling back from the dumber products in the mortgage market. When the commode will really hit the windmill is when large numbers of these loans actually start going bad.

[wabmester]

Originally Posted by brewer12345

When the commode will really hit the windmill is when large numbers of these loans actually start going bad.

Heh. Even Fannie Mae is now saying we should hold on to our hats.

Those resets are going to have some interesting and difficult-to-predict impacts on consumers.

article

[JohnEyles]

Anyone care to opine how this bubble in home prices relates to commercial
real estate ?

I have a very specific reason for asking, which is that I wish to expand
my allocation in real estate (from 2% to 10%) and wondering if now is
a spectacularly bad time to do so. You might call this market timing,
but I call it simply not doing something that might be considered patently
stupid by a person who understands REITs at all.

[wabmester]

Originally Posted by JohnEyles

Anyone care to opine how this bubble in home prices relates to commercial real estate ?

Residential real estate investment tends to be a leading indicator for both business investment and commercial real estate investment. I give the commercial sector about six more months to live.

graph

Edited to add a pretty picture.

[honobob]

Originally Posted by JohnEyles

Anyone care to opine how this bubble in home prices relates to commercial
real estate ?

Well I quess the "bubble" has popped in the SF Bay area. The median home price in the nine Bay Area counties slipped 0.8 percent. A dramatic decrease from $616,000 to $611,000. Most are actually predicting 5% increase in each of the next two years for the City. A friend just sold a $1.6m duplex and is scrambling to identify a property for a 1031 exchange. She has made several bids but has been outbid each time. The 9 counties cover a large area with alot of unproven rural growth. There are two large luxury projects, One Rincon and The Infinity, that are under construction and selling out!

On the commercial side rents are showing strong growth and vacancies are being rapidly absorbed. After a short period of overbuilding ground is being broken for new office construction.

Honolulu is also experiencing heavy demand for office space.

[Sam]

Originally Posted by wab

Residential real estate investment tends to be a leading indicator for both business investment and commercial real estate investment. I give the commercial sector about six more months to live.

Are you saying that REITs will tank in 6 months? Not questioning your predition, just want to make sure I understand it correctly.

Originally Posted by honobob

Well I quess the "bubble" has popped in the SF Bay area. The median home price in the nine Bay Area counties slipped 0.8 percent. A dramatic decrease from $616,000 to $611,000. Most are actually predicting 5% increase in each of the next two years for the City. A friend just sold a $1.6m duplex and is scrambling to identify a property for a 1031 exchange. She has made several bids but has been outbid each time. The 9 counties cover a large area with alot of unproven rural growth. There are two large luxury projects, One Rincon and The Infinity, that are under construction and selling out!

It's amazing how strong the market is in the Bay area. I expected price to drop at least 5% by now. I'm not sure if I believe the 5% increase in each of the next years though. Holding price through 2007 is already amazing enough.

[dex]

I've been looking outside of Atlanta and this is what I have found.
1. Builders have cleared the land and put basic infrasture in but they are not building.
2. Builders are selling their existing inventory and only building new if it is contracted for.
3. Builders are giving "upgrade" bonuses on existing houses - can be used for upgrades or to lower the sale price
4. Builders are offering real estate agents 4% instead of 3% commissions
5. New homes have a lot of upgrades - they are in walk in condition
6. Builders have lowerd their prices

From what I can tell about the Atl market is that buyers are not out there buying or out there looking that much. I think the phsycology has changed somewhat in buyers mind. They now see real estate overpriced and not a sure bet to go up.

I just bought a house and got a 5% discount on the listed price (I didn't use an agent). Also, the listed price of the house I bought is 5% less than other similar homes in the subdivision.

Is this the bottom in Atlanta? I don't know but the builders are playing it smart by selling out the existing inventory before building again. It will put a floor under the price. As people look around, as I did, they will not have as much to choose from.

Each market is different. Atlanta has a lot of new jobs and people moving into the area. Also, Atlanta did not appreciate as fast as other areas of the nation.

Putting aside a recession, I think the bottom may be in this summer in the Atlanta area.

[wabmester]

Originally Posted by Sam

Are you saying that REITs will tank in 6 months? Not questioning your predition, just want to make sure I understand it correctly.

Personally, I wouldn't buy a REIT fund right now for two reasons: yields are very low, and a slowdown in housing is strongly associated with a downturn in the economy. When the economy slows down, commercial properties and malls get hurt. Apartment REITs might do well initially as rents are currently rising, but as house prices drop, rents should go flat or down.

Historically, the lag between residential and commercial cycles is 6-18 months. So, to finally answer your question, it wouldn't surprise me a bit to see REITs start to tank about six months from now.

It also wouldn't surprise me if this simplistic analysis was full of holes. For example, I'm still amazed at how well Australia's economy is doing even after their housing bubble popped.

[astromeria]

Originally Posted by dex

I just bought a house

Cool--congratulations! I hope you'll enjoy your new digs & neighborhood. I believe we have several posters from the Atlanta area, such as Tangomonster who just bought a new place too. Like you, she FIREd a few months ago and is still getting used to it.