Real Estate Bubble?

[38Chevy454]

Did "bubble" get defined in this thread? Rising prices and transaction volume does not constitute a bubble. Where is the debt component of the alleged bubble?

I define a bubble as unsustainable conditions. Examples such as prices rising higher than they can stay long term, or demand that is significantly above normal.
The problem is that knowledge of a bubble is best seen in hindsight.

 

[FlaGator]

I define a bubble as unsustainable conditions. Examples such as prices rising higher than they can stay long term, or demand that is significantly above normal.
The problem is that knowledge of a bubble is best seen in hindsight.

+1
Not every bubble is caused by debt, but easy money makes any bubble bigger, and more painful on the downside, than it would have otherwise been.

If someone is looking for a clear definition/metrics on what constitutes a bubble so they know how high it will go, and when to get out, good luck.

 

[Montecfo]

+1
Not every bubble is caused by debt, but easy money makes any bubble bigger, and more painful on the downside, than it would have otherwise been.

If someone is looking for a clear definition/metrics on what constitutes a bubble so they know how high it will go, and when to get out, good luck.

Of course in this case, credit has not been relaxed. Though rates are low they have been about this low for quite a number of years.

I think rapid home price rise in the US is always unsustainable given people have to qualify for loans based on income. I do not like the term "bubble" because in this case home price rise is based on fundamentals, not juiced via relaxed loan terms.

We have had below trend growth in home ownership for years. This is simply beginning to reverse that trend, and Covid has caused people to re-think where they want to live, while reducing people wanting to sell. But high prices and end of covid will bring more sellers.

 

[CaliKid]

Who cares if it's a "bubble" or not!? What does that matter?

I just bought a house but I sold my other house so it's a wash. That is, for personal residences I don't see why it matters. If you want to move you want to move.

If I were buying a rental property then maybe I would think twice as prices seem "high" but if the rents support it then still who cares what the market is or is not.

Seems like a lot of talk about nothing.

 

[ExFlyBoy5]

Who cares if it's a "bubble" or not!? What does that matter?...Seems like a lot of talk about nothing.

Or, it could be an issue. Values are at record high numbers in some areas. People get loans on these and let's say there is a bubble (or wildly over valued homes) or whatever you want to call it. Inflation gets ugly. Interest rates on a fixed 30 year mortgage creep up to 7% and home values crater. Lots of people are now upside down and well...

So, it can matter.

 

[NW-Bound]

I define a bubble as unsustainable conditions. Examples such as prices rising higher than they can stay long term, or demand that is significantly above normal.
The problem is that knowledge of a bubble is best seen in hindsight.

People say that houses in some markets command high prices because of demand. Sure, but is that demand real, or is it because of FOMO?

I have read that one way to verify is to use the rent in the same market. If you cannot buy a home with a mortgage, and rent it out to at least break even, then the demand is not real. If the rent is low compared to home prices, then it means that people there do not make enough to buy the homes nor to pay the rent, and high prices are not sustainable.

I recall the superhot home market in the metropolitan Phoenix in 2005-2007. A friend of my mother visited her from DC. The friend was buying a new home in Anthem (north of Phoenix, on the way to Sedona) to flip. She eventually ended up stopping payment, losing her down payment, and letting the bank foreclose it.

Back then, people justified the market by saying so many thousand peoples were moving to Phoenix each month, and they had to live somewhere, blah blah blah... There were stories of realtors and developers bringing in out-of-state speculators on buses, to let them view the new subdivisions and to buy, buy, buy...

I recall my mother told me that I and my siblings were not knowledgeable enough to take advantage of the situation despite being natives to the area. Instead we let "outsiders" come in to get all the good deals.

 

[NW-Bound]

During that housing bubble, I did not make money by flipping homes, but gained plenty by investing in copper, cement, and other commodity producers. From the bottom in 2003 (due to 9/11 and the dotcom bust) to the top in 2007, my portfolio grew 2.7x.

Of course I gave back some of it when the subprime market went bust taking along with it the whole world economy, but was still at 1.7x relative to 2003.

What a ride!

 

[Fermion]

I think there is also a feeling that the government is going to step in and protect people from defaults during a crash so why not take on risk?

 

[chassis]

I define a bubble as unsustainable conditions. Examples such as prices rising higher than they can stay long term, or demand that is significantly above normal.
The problem is that knowledge of a bubble is best seen in hindsight.

When things ebb and flow, is this also equivalent to a bubble in your view?

Consider rising sea levels. And also consider the tide. Tides ebb and flow. Yet according to some people, sea levels are rising. Two different phenomenon: rising sea levels and tides.

Are housing prices and sales volumes ebbing (rising faster than long term trend) and could they flow (decrease)? Is this a bubble in your mind?

Folks, expand the view to include transaction volume and inventory. Price alone is insufficient to understand the situation. Rising price on thin volume is a red flag for any asset, whether stocks, houses or chewing gum. Rising price on thin volume is not the case with single family homes at this time, as I see it.

The real estate market has rising prices, high transaction volume, low inventory and strong new inventory production (construction). To me it seems healthy, and the near term price increases reflect a strong market.

Above-trend price growth may be with us for some time (years) until supply and demand balance out. Nothing is constant, calm waters in economic sectors are not the norm.

 

[OldShooter]

FWIW, here is quite a good video with Eugene Fama and Richard Thaler discussing market efficiency and bubbles. IIRC Fama's position is that there is no such thing as a bubble. https://review.chicagobooth.edu/economics/2016/video/are-markets-efficient

 

[dheb]

Low supply right now. Banks can't foreclose on people behind on their mortgages and landlords can't evict renters for non-payment. When those two restrictions lift later this year, I bet we see supply of homes on the market jump.

 

[2cheap2eat]

I have a few rental properties and stopped looking for more at this point. Buyers are offering way above asking, often the same day or day after a property is listed!

Not sure if it's a bubble, but prices will come down when new home builds catch-up, interest rates go up another point or two, and banks tighten lending standards further.

 

[48Fire]

Who cares if it's a "bubble" or not!? What does that matter?

I just bought a house but I sold my other house so it's a wash. That is, for personal residences I don't see why it matters. If you want to move you want to move.

If I were buying a rental property then maybe I would think twice as prices seem "high" but if the rents support it then still who cares what the market is or is not.

Seems like a lot of talk about nothing.

Bubbles only matter when they pop. It's kind of like the old game of musical chairs - it's great until the music stops and you can't find a chair.

If the bubble pops, and then you try to sell a house under water, you'll painfully feel why it matters. When we bought a short sale house, the engineer owner was laid off and $150,000 under water.

 

[Joylush]

I was at a presentation by a Realtor discussing our local market. Like many, it is really hopping. Home values going up $15k every two weeks, limited inventory, offers with no contingencies going $50k over asking on first bid. The realtor discussed her thoughts on why-Covid making our rural market more desirable, etc.

I asked-if people are moving here they must be leaving somewhere. Supply and Demand what it is, that means the market is down somewhere. Where?

She claimed the market was up everywhere, but insisted she expected no imminent crash and we weren't in a bubble. How's that work?

What area are you speaking of?

 

[HokieHill]

Here's a take from John Mauldin on why this may not be a bubble....

See link - I think this is a good read. Sorry if repost.

https://www.mauldineconomics.com/frontlinethoughts/tiny-housing-bubbles

 

[Gearhead Jim]

I can't differentiate between a bubble and a rising market, but...

My wife and I had moved to LA in 1969 for our respective jobs, got married there, and then I got transferred to near Chicago in 1972. It wasn't until 1979 that we had the opportunity to transfer back to LA. We decided that we didn't want to raise our kids there, but also thought that LA housing prices were crazy high compared to when we had left, and were ripe for a fall.

If we had bought a decent house in LA in 1979, we'd be able sell it today and buy the entire county in Illinois where we still live. So just because houses seem crazy high, doesn't mean they will come crashing down.

 

[gooddog]

Our home in California has gone up roughly 30% in the last year. Our home in Florida has gone up 50% in the last nine months. Both are in prime areas. Noticed price appreciation seems a bit less inland a bit. Maybe those who hit it big in bit coin or the stock market have $ to spend?

 

[Keim]

What area are you speaking of?

A unique rural section of North Idaho/Eastern Washington

 

[Fermion]

A unique rural section of North Idaho/Eastern Washington

I was looking at getting a lot on Priest lake..omg...7 figure + for just a lot.

 

[Keim]

I was looking at getting a lot on Priest lake..omg...7 figure + for just a lot.

Any lake in the area... Fuhgedaboutit.

 

[jeffmete]

We live in Michigan across the lake from Chicago. Real estate agent said our real estate being driven by Chicago area people moving in. Most seem to be second homes, not primary.

 

[jazz4cash]

People say that houses in some markets command high prices because of demand. Sure, but is that demand real, or is it because of FOMO?

I have read that one way to verify is to use the rent in the same market. If you cannot buy a home with a mortgage, and rent it out to at least break even, then the demand is not real. If the rent is low compared to home prices, then it means that people there do not make enough to buy the homes nor to pay the rent, and high prices are not sustainable.

I think that only works in some markets. Here in the DC market, it has almost never been possible to collect enough rent to cover a mortgage payment. Most investors need the write-off and a few years of rent hikes to be cash flow positive.

 

[GoodLife59]

I would generally agree that a crash doesn’t seem imminent. However I would expect we would see the all-cash, over asking, no inspection offers to start diminishing significantly sometime in the next 6-8 months. Demand is high and it will attract new supply. Also, as Covid diminishes and people begin to feel truly safer, urban markets will have listings at relatively attractive prices. Let’s see what happens.

 

[SecondCor521]

Who cares if it's a "bubble" or not!? What does that matter?

Apparently a lot of people on this thread, including me.

Seems like a lot of talk about nothing.

People discussing topics on a discussion board? The nerve!

I'm pretty sure there is an "Ignore thread" tool somewhere if it upsets you so. Kind of like the "Ignore poster" tool.

 

[ncbill]

Is that a 25% raise in the assessed value, or the tax bill. They are very loosely related here. If my assessed value went up 25% and everybody else's did to, and the individual taxing jurisdictions do not raise their dollar needs, my tax dollars stay the same. Only when those taxing bodies do raise their needs, or my assessed value rises faster than the others do my tax dollars increase.

Yeah, they'll drop the rate initially to soften the blow then raise it back gradually, so I'll pay ~10% more the first year, ~15% second year, then ~25% more by year 3.