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What Real Estate Bubble?
Old 06-24-2005, 02:30 PM   #1
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What Real Estate Bubble?


Reprinted from NewsMax.com

Economist Calls Housing Boom 'Biggest Bubble in History'
Jim Myers, NewsMax.com
Friday, June 24, 2005
The current worldwide boom in residential real estate prices is "the biggest bubble in history," according to a disturbing new report in the Economist magazine.


Never before have home prices risen so fast, for so long, in so many countries including the United State, reveals a front-page story in the world's most respected financial periodical.

"Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000," The Economist reports. "What if the housing boom now turns to bust?

"Pain," the magazine says will result when the market "pops."

The figures detailing the bubble are daunting:


The total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – an increase equal to the combined GDPs of those nations.

The U.S. has experienced one of the largest increases in home prices over the past year, with the average cost of a home rising by 12.5 percent.

In Florida, California, Nevada, Hawaii, Maryland and Washington, D.C., the average price rose more than 20 percent. And in Palm Beach County, Fla., the median price of an existing home shot up 35 percent in just the past year.

Other countries have showed gains even higher than the U.S. in the last year, with prices rising by 23.6 percent in South Africa, 19 percent in Hong Kong and over 15 percent in Spain and France.

A recent report by the National Association of Realtors (NAR) showed that sales of existing homes in the U.S. soared to a record high 7.18 million in April.

But 23 percent of all American houses bought last year were for investment, not owner-occupation, showing that speculation in the real estate market is rampant. CNBC reports that in Miami, a hotbed of condominium building, an estimated 70% of condo buyers are investors/speculators, and not residents.

Due to various new forms of riskier mortgages, 42 percent of first-time buyers – and 25 percent of all buyers – made no down payment on their home purchase last year, the NAR disclosed, making them especially vulnerable to a downturn in resale prices.

In California, 60 percent of all new mortgages this year are interest-only or negative-amortization. These loans are gambles that prices will continue to rise.
Bigger Than the Dotcom Bubble

Noted stock investor Sir John Templeton described the 1990s tech boom as the "biggest bubble in history" before it crashed.

But that bubble appears to be superceded by the real estate boom.

The current real estate boom has seen prices go up more than 100 percent of many countries GDP -- a number that "is larger than the global stock market bubble in the late 1990s (an increase over five years of 80 percent of GDP) or America's stock market bubble in the late 1920s (55 percent of GDP)," The Economist notes.

"In other words, it looks like the biggest bubble in history."

The real estate boom in a few countries has already begun to fizzle.


According to one yardstick, average house prices have fallen by 7 percent in Australia since 2003, and in Sydney prices have tumbled by 16 percent.

Britain's real estate market has also cooled considerably. One index showed an increase of only 5.5 percent in prices during the first five months of this year, down from 20 percent growth in July 2004.


But in most countries – including the U.S. - home prices have risen since 1997 by much more in real terms (adjusting for inflation) than during any previous boom, even though for the month of May, the Commerce Department said the U.S. median sales price dropped 6.5 percent to $217,000 - perhaps the first signs of a cooling market in the U.S.

The boom in America has brought real gains more than three times larger than in previous housing booms in the 1970s and 1980s.

Great Depression Comparisons

One clear indication that residential real estate is overvalued is the relationship between home prices and rents.

The price of a home should reflect the future benefits of ownership, in the form of rental income for an investor or rent saved by an owner-occupier. When the price-to-rent ratio is high, property is overvalued.

House prices in relation to rent have hit all-time highs in the U.S., Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium.

In the U.S., the ratio is 35 percent above its 1975-2000 average. A drop in home prices is more likely today than after previous booms for three reasons, according to The Economist: Homes are more overvalued, inflation is much lower and many more people have been buying homes as an investment.

If prices begin to level off or drop, as they did in May, owner-occupiers will likely remain in their homes, but investors are more apt to sell, particularly if rents don't cover interest payments. That will increase the supply of homes for sale and further depress the market.


Also, residential real estate investment in the U.S. is at a 40-year high, while the number of households is growing at its slowest pace in 40 years. This is bound to create excess supply.


"With prices looking overvalued in more states than ever in the past, average American prices may well fall for the first time since the Great Depression," according to The Economist.

And a rebound in the real estate market could take some time – when British home prices fell in the early 1990s, a decade passed before they returned to their previous peak, after adjusting for inflation.

Economy Will be Socked

Another troubling aspect is the effect a real estate downturn could have on the economy in general. Even a leveling of prices can lead to a sharp slowdown in consumer spending.

Consumer spending and residential construction have accounted for 90 percent of the total growth in the American GDP over the last four years, and more than 40 percent of all private-sector jobs created since 2001 have been in housing-related sectors, including construction and mortgage brokering.

The International Monetary Fund analyzed home prices in a number of countries from 1970 to 2001, and found 20 "busts" – when real prices fell by almost 30 percent. All but one of those busts led to a recession.

Japanese property prices have fallen for 14 years in a row, by 40 percent from their peak in 1991, and consumer spending has been weak, leading The Economist to conclude, "Americans who believe that house prices can only go up and pose no risk to their economy would be well advised to look overseas."




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Re: What Real Estate Bubble?
Old 06-25-2005, 12:00 AM   #2
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Re: What Real Estate Bubble?

Yep, cover page image of a brick falling and a major title House Prices After the Fall.


Good article. The Economist also said, for a long time before the .com/telecom crash that stocks were overvalued and would get a major, rude adjustment. I think they are right this time too. They really understand a lot. And the real estate issues will vary locally but are also national and even international in nautre.
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Re: What Real Estate Bubble?
Old 06-25-2005, 01:08 AM   #3
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Re: What Real Estate Bubble?

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.
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Re: What Real Estate Bubble?
Old 06-25-2005, 06:42 AM   #4
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Re: What Real Estate Bubble?

Quote:
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.

How true! Many very intelligent investors went bust by shorting the tech bubble in 1999
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Re: What Real Estate Bubble?
Old 06-25-2005, 07:08 AM   #5
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Re: What Real Estate Bubble?

Welocme to the bubble ride - you will never know when it will burst.
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Re: What Real Estate Bubble?
Old 06-25-2005, 11:15 PM   #6
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Re: What Real Estate Bubble?

One thing to take into consideration is the Economist deals with , not just the US Economey, but the world. A lot of articles in the recent past have been on the "RE bubble" in Europe, especialy Spain, where the price increases pale in comparison to the US.

THe Efficient Frontier in their Spring "blast", has an article about "Why you can't buy a house in San Fran". .. to sum it up , most folks sign up to the max on a 30 year mortgage. In high wage areas, you get the appearance of a "bubble". ..but the wage structure supports it. Trouble is the article uses only the 30 year mortgage stats and not the "new" interest rate only Mortgage that most are leaning to these days.

Going to be an interesting few years coming up. Mid term elections, Supreme Court nominations, and world politics, and events beyond the pay grade of most US politictians. (but not above the pay grade of the Lobbyist) Never mind the mind numbed electorite, thats up at 6 AM, .. hopefully home by 7pm from work, only to get up and do it agian.

Yes I'm jaded .. sorry for the rant. : ..C24
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Re: What Real Estate Bubble?
Old 06-26-2005, 08:19 AM   #7
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Re: What Real Estate Bubble?

If you're not cynical, you're just not paying attention...
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Re: What Real Estate Bubble?
Old 07-03-2005, 08:30 AM   #8
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Re: What Real Estate Bubble?

http://money.cnn.com/2005/07/01/real...reut/index.htm

Quote:
WASHINGTON (Reuters) - Whether it's a national bubble or just pockets of regional froth, an end to surge in home prices could inflict economic harm that would make the 2000 tech bust look tame in comparison.
Quote:
"The output loss associated with the typical housing price bust (about 8 percent of GDP) was twice as large as that associated with a typical equity price bust," the study said.
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Re: What Real Estate Bubble?
Old 07-03-2005, 11:27 AM   #9
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Re: What Real Estate Bubble?

I feel unfortunate about not owning a house in those 15 states during the price appreciation and fortunate now in the face of a possible big correction. However, the correction will likely have a ripple affect for the economy and the housing market of all other states - bummer.
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Re: What Real Estate Bubble?
Old 07-04-2005, 11:22 PM   #10
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Re: What Real Estate Bubble?

Isnt it high wages in certain areas that are driving up the prices? I dont think that helps that the no interest loans are becoming popular. I suppose folks in those "high wage areas" that arent high wage want a way to buy in at the inflated prices.

I have a hard time comparing this to the internet bubble. Housing is supported by supply and demand. Internet stocks were suported by a few ridiculous snake oil analysts convincing the sheep that the rules had changed.
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Re: What Real Estate Bubble?
Old 07-05-2005, 07:11 AM   #11
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Re: What Real Estate Bubble?

Quote:
Originally Posted by maddythebeagle
I dont think that helps that the no interest loans are becoming popular.
I like the concept, for a lot of reasons. Ironic how years ago I had to
do a bit of work in order to borrow for my various financial adventures.
Now, I haven't drawn a paycheck since June, 1998 and people want
to shower me with cash. Who da thunk it?

JG
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Re: What Real Estate Bubble?
Old 07-05-2005, 07:19 AM   #12
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Re: What Real Estate Bubble?

Where do you get no-interest mortgage loans? I have heard about interest-only loans.
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Re: What Real Estate Bubble?
Old 07-05-2005, 08:36 AM   #13
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Re: What Real Estate Bubble?

interest-only loans is what I meant
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Re: What Real Estate Bubble?
Old 07-05-2005, 10:39 AM   #14
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Re: What Real Estate Bubble?

I dont know if the statement is correct (and I dont feel like looking), but I heard a real estate investor say that there have never been any widespread 'big corrections' in real estate that compare with equities. Probably more or less true. I've seen a few 20-30% multi-year slides and some temporary 5-10% drops, but never seen anything like 2000 or 1929 in real estate...
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Re: What Real Estate Bubble?
Old 07-05-2005, 10:48 AM   #15
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Re: What Real Estate Bubble?

Quote:
Originally Posted by maddythebeagle
Isnt it high wages in certain areas that are driving up the prices? I dont think that helps that the no interest loans are becoming popular. I suppose folks in those "high wage areas" that arent high wage want a way to buy in at the inflated prices.

I have a hard time comparing this to the internet bubble. Housing is supported by supply and demand. Internet stocks were suported by a few ridiculous snake oil analysts convincing the sheep that the rules had changed.
I don't think it's high wages, at least not in our area.* Washington state was not on the top 15 list, but there certainly has been very rapid acceleration of prices on the west side of the state.* *

I think the housing price rise is driven by low interest rates, easily available financing and speculation.* *I suddenly see many, many for rent signs in our area.* Everyone with a few spare bucks bought a "rental house" even though the rent won't pay the mortgage (especially without tenants) they are counting the rising prices to make them a profit in a few months.

I wish I'd done it - but I keep thinking that whatever point I buy in at will end up being the top of the bubble, and I'm just not willing to take the risk.
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Re: What Real Estate Bubble?
Old 07-05-2005, 10:50 AM   #16
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Re: What Real Estate Bubble?

It sort of has at least a little to do with higher wages. Its a sellers/buyers thing. More buyers than sellers, you get price uplift. More sellers than buyers, a price slide. If there arent enough buyers making enough money to keep bidding the prices up, then the RE market stalls.

We're well past high gross income requirements in many of the fast rising parts of the country. As soon as almost nobody can afford a home with a 40 year mortgage or an interest only mortgage, then no buyers, then no sales, then a price slide.
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Re: What Real Estate Bubble?
Old 07-05-2005, 10:55 AM   #17
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Re: What Real Estate Bubble?

The bubble will pop when I buy a rental property, and I'd rather have a root-canal than be a landlord...

So I guess that means we're safe!! :P
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Re: What Real Estate Bubble?
Old 07-05-2005, 12:23 PM   #18
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Re: What Real Estate Bubble?

Quote:
Originally Posted by Notth
I dont know if the statement is correct (and I dont feel like looking), but I heard a real estate investor say that there have never been any widespread 'big corrections' in real estate that compare with equities.* Probably more or less true.* I've seen a few 20-30% multi-year slides and some temporary 5-10% drops, but never seen anything like 2000 or 1929 in real estate...
Oahu, 1990-2000, seemed pretty widespread and we tracked our home's value through that decade with actual offers & appraisals. Our 1989 $277K single-family home purchase screamed up to $425K by early 1990, ran right back down to $250K by 1996, and scraped bottom for the next five years before the current recovery. Today we could sell for $550K. So at -41% & +125% peak to peak I guess it's still a bit shy of the NASDAQ. Total performance works out to 98% over 16 years and that doesn't include the sweat equity, new roof, new carpet, kitchen refurb, enclosed lanai, complete landscaping overhaul, etc.

Some of that was fueled by Japanese investment and squelched by a round of military base closings plus new military housing development. There was also a horrific overbuilding excess inventory overhang to work through. At one point people were walking away from $500K Makaha beachfront condos and dropping the keys in the mailbox. It got bad enough for the military "Homeowner Assistance Program" to start bailing buying people out of their folly investments.

In 1996 FIL & I looked at a home for sale two doors up the street. In the 20/20 retroscope it was a screaming steal that was doing everything but jump up & down shouting "Buy me!" The numbers were workable but all we could do was whine "Geez, not another rental, how will we ever find the time to go to work?" and "What if the market drops another 10-20%?" Meanwhile friends of ours up the street took out a 100% mortgage, biting their lips the whole time, to buy their $130K 2BR condo. Both properties are up about 150% and I'm sure they've refinanced four or five times by now.

We'll be ready next time, and this time we really mean it!
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Re: What Real Estate Bubble?
Old 07-05-2005, 01:29 PM   #19
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Re: What Real Estate Bubble?

Quote:
Originally Posted by Notth
I dont know if the statement is correct (and I dont feel like looking), but I heard a real estate investor say that there have never been any widespread 'big corrections' in real estate that compare with equities.* Probably more or less true.* I've seen a few 20-30% multi-year slides and some temporary 5-10% drops, but never seen anything like 2000 or 1929 in real estate...
I do not feel like looking it up either, but I think it is probably 'correct'. We had a major adjustment in Houston that was the worst on record and prices slid by about 50% over a few years, but remember that most people are very leveraged on homeownership and the real change in equity is much worse than stock. Also, housing is not as liquid as stocks and so do not adjust as quickly... people will hold on to their real estate waiting for the price to increase...

An example... my sister was in a house that was underwater... she said they wanted to move, but did not see paying to leave the house... they would wait for the house to appreciate and then sell... I said, the house you want to buy will be going up also and it is starting at a higher amount, so the best thing to do is sell now and buy now and make it up on the new house.... she did and is happy she did...
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Re: What Real Estate Bubble?
Old 07-05-2005, 01:50 PM   #20
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Re: What Real Estate Bubble?

When the oil patch hit the skids in the 80's - our duplex 27k in 1977 fell from 84k in 1984 based on identical duplexes in the neighborhood to selling in the low 30's - went in a divorce action 1999 for 75k after for sale by owner(me) for 60k in 1993.

Houston, New Orleans, and burbs - had plenty of RE horror stories. A friend of ours bought a house in Slidell - had been rented - 40k and the previous record of sale was 85k in year I don't remember.

Location, location, location - heh, heh.
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