OK, There May Be A Housing Bubble
I don't have access to the right kind of data to decide whether there is a housing bubble in the US, though a lot of people are writing about it.
In the Phoenix / Scottsdale area, housing values have really starting going up, up, up in the last 18 months, though whether this is just a catch-up to other desirable metropolitan areas (Phoenix real estate has been pretty sluggish for years, and way cheaper than other resort-type destinations) or a true bubble, I can't tell. Certainly speculation activity is way up, with a lot of homes being bought and renovated by investors, but again, I could argue that Scottsdale was behind other suburban markets in the whole tear-down thing.
So, to date, I have been unconvinced about the housing bubble, at least as it applied to our community. After all, demographics over the next 20-30 years are only going to support Scottsdale area real estate.
However, over the weekend I had a disturbing experience: At a social function, I heard a dentist enthusiastically telling a doctor that he needs to be buying condos and raw land. The dentist claimed to be flipping raw land parcels for 100% in less than 6 months.
For those who don't know, this is a big flashing red light. When doctors and dentists start trying to sell you on a particular type of investment, run away like they have the plague. At Harvard Business School, I had a great investment management class with a professor who has schooled many of the best in the business. If an investment we were analyzing turned out to be a real dog, he would ask us "who do you sell this to?" and the class would shout "doctors!" And, if the investment was really, really bad, to the point of being insane, the class would instead shout "dentists!" Marginal Revolution has another potential bubble indicator. Angry Bear has a lengthy analysis.
Postscript: By the way, just so you doctors and dentists won't feel like I am picking on you, we small business owners are considered to be almost as bad, which is I why I get so many boiler room calls.
Update: OK, in one of those great moments in timing, my wife just called me to say that one of the moms at school was trying to get other moms to invest with her in some condos, and should we join in? Eeeek!
Michael H.:
Hi Coyote
May 31, 2005, 12:47 pmWhat I think is most troublesome is that the big increase in the demand for housing is the rise in ARM and interest only loans. Basically, people are taking on more risk. Lenders are making loans that ordinarily would not seem sound. And I think it is reasonable to assume that the government will end up bailing out the big lenders if the housing market collapses. That's moral hazard and I think that's playing a big role in the housing boom.
GSR:
I would have to agree that the signs are pointing to increasing risk in real estate speculation/investment. I've toyed with purchasing several multi family properties here in southern NH but ultimately decided against it when I discovered that a. these homes were way overpriced and b. the properties were turning over fast (6 months to a year). Pretty good for the flipper, but at some point, those ridiculous increases in value will come to a crashing halt. Another negative sign is the lack of fixing up that was going on with the fixer uppers....these buyers and flippers aren't investors, they are speculators. I'm going to wait this one out.
May 31, 2005, 6:47 pmHalf Sigma:
Why doctors are clueless about investing
Warren of Coyote Blog writes: At Harvard Business School, I had a great investment management class with a professor who has schooled many of the best in the business. If an investment we were analyzing turned out to be
May 31, 2005, 8:15 pmEric:
Just as disturbing is that I was talking with a retired friend the other day and he is really excited about the investment prospects of purchasing tax liens on residential property. This has apparently been picking up steam the last few years as more and more people have gotten in a little too deep and have tax liens on their property. There is an investment market now in tax liens. That speaks volumes.
Another indicator is that the rental market is flat. Here in Sacramento, where home sale prices have been rising about 18% annually for the past 4 to 5 years you can easily find a house rental. There are houses on the rental market that go without residents for 6 months at a time, in fact. The market is saturated with housing. Basic economics tells you there is a problem when there is that much supply and yet the prices keep going up. My step-father, a banker, says that many mortgages are actually being made at interest rates that barely break even. Another indicator.
May 31, 2005, 8:36 pmMatt:
The renovate-and-resell crowd doesn't scream "BUBBLE!" to me. It's the "buy it today, do nothing, and expect to double your money when you sell it in a few months" crowd that tells me it'd be a good time to run screaming from the real estate market.
After all, the former group, either by renovating or by tearing down old buildings and constructing new ones, are at least adding value to the property they're hoping to make a profit on. The latter are counting entirely on the Greater Fool Theory. When people with day jobs (such as doctors, dentists, and entrepreneurs) are betting their money on the GFT, it's a pretty sure sign that the supply of Greater Fools is about to dry up.
I'm not worried about people buying property to use. And while I think they've made a bad timing decision and will end up overpaying, I'm not worried about people buying property as an investment (that is, based on the expectation of earning an ongoing return from rent). It's the ones whose financial survival depends on seeing the end of the Greater Fool supply coming in advance, but who still don't see it...THEY scare me.
June 1, 2005, 12:34 amDamon:
I'll be the first to admit that the economics of real estate have baffled me for years. Perhaps I'm missing something that is blatantly obvious to others. Here in Oregon, housing prices have risen 10 to 12 percent a year for the past several years. I can't say for certain, but I don't believe that wages have risen at the same rate. It seems to me that at some point, the 'average' cost of a home will be cost more than the 'average' wage earner will be able to afford. Knowing that prices are determined by supply and demand, how is it that the price can continue to rise when the demand begins to fall?
June 1, 2005, 7:15 amHalf Sigma:
"It seems to me that at some point, the 'average' cost of a home will be cost more than the 'average' wage earner will be able to afford."
This has already happened, but with 70% of American households owning their home, they have enough money from selling the hold home to buy a new one.
June 1, 2005, 8:43 amAccidental Verbosity:
Toil and Trouble
Chan has written my post on the housing bubble so I don't have to. Seriously. The other day I saw this housing bubble post at Coyote Blog, which led me to this much-linked post by Will at Vodkapundit. I also checked his other links. Plungin...
June 2, 2005, 6:57 amPeaktalk:
WEEKEND LINKAGE
Here's some reading for the weekend: Dan Morgan at No Speedbumps takes on big-government conservatism, which for many Bush voters has become a major issue. Fjordman has lots of interesting stuff about political and immigration issues in Scandinavia. Ke...
June 3, 2005, 9:53 pmbattobot:
Hey guys,
here is a useful link that tracks how much media attention is on the housing bubble. It does a query every once in a while on news, and posts up how many articles mentions the word 'housing bubble'.
http://www.kenlet.com/archives/kenlet_indicies/index.html
Its great for getting a gauge on how 'frothy' people think things are getting. The idea is that if alot of people are scared of the bubble bursting, it should show up in the media. Only then will the bubble burst. If the index doesn't go up, then maybe the bubble has a ways to go.
June 14, 2005, 3:48 pmtechie:
I'm going to be selling my house soon and moving from a town in AZ (prices up 100% here in 2 years) to the Phoenix area. Should I rent for a while and see if the market will cool off?
Any good resources for me to research this?
June 22, 2005, 2:25 pmDave:
I think that the housing market and this boom cycle have been fueled by 1) The stock market meltdown and recession 2) 9/11 terrorist attacks and 3) illegal immigration. The recession caused investors to look for safe havens after being burned in certain investments (high tech, Enron, etc.). What better market to be in than one that has 'real' value. The terrorist attacks caused a stay at home mentality. We better just ugrade our own place (addition, kitchen and bathroom remodels, etc.) rather than go anywhere. Of course those people who felt least concerned about terrorism probably have their houses/properties in order and may well own a vacation house or second home (i.e. wealthy prosperous well compensated individuals or families). They would probably feel less threatened or less likely to turn their attention to remodeling and upgrades since they would do them when they felt like anyhow. If I had 5 acres with a 2 million house and pool and servant's house on the grounds with security, I'd feel pretty safe (and comfortable most probably).
July 9, 2005, 7:51 amAs more and more illegal aliens visit work and make the US their new home they consume things non durable, durable and real. This means appliances food cars tools building supplies and yes houses. Who wants to live in an apartment when the American Dream prescribes "Your Own Home"?
And our government which is allowing more and more illegal aliens into this country as well as they allowed terrorists to infiltrate our borders are ultimately partly at fault for 9/11 and the continuing housing boom. There is a tipping point in interest rates where more buyers would effectively be priced out of the market. We haven't reached that point yet obviously and it will take higher rates to flush out the swelling in this market. I suppose that fewer homes might be sold if everyone owned one and was perfectly happy with their dwelling and accomodations. That surely doesn't seem to be any part of the American Dream though.
Tax liens are a safe way to profit in these roungh economic times. What better security to back your investment than the real property of someone else? If they don't redeem within the prescribed period according to most laws you can then proceed to deed. In - Deed! Course it would greatly help your cause if you were a real estate attorney licensed in your state.
Decanter:
Great article on the housing bubble! I particularly like the recommendation to flee the financial prognostications of doctors and dentists.
One of the best articles I've found concerning the housing bubble is by Dr. Steve Sjuggerud. He's written a few articles on the subject, and I appreciate his balanced perspective. Here is a link to an article by him.
http://www.investmentu.com/IUEL/2005/20050606.html
July 11, 2005, 9:28 amWicki:
I do not think that is reasonable to assume that the government should bail out the greedy, foolish lenders that are getting ridiculously rich from this frenzy. This taxpayer doesn’t want to reimburse the cost of a stupid speculator’s bad decision when the bubble explodes. I say we ask our government to turn their head when the lending industry asks for help. They were so smart when things were good; let them get themselves out of the mess they created.
July 14, 2005, 10:26 pmz:
I just purchased a house in Bend that is available for rent through http://www.houseforrentbendoregon.com. After looking in other real estate markets, I think Central Oregon will conitnue to grow in home equity at a much greater rate than CA and HI. Even with interest only loan and some money out of pocket month-to-month, I think appreciation will more than balance it out. The housing bubble in Oregon will come long after CA (which hasn't hit yet)!
August 19, 2005, 4:08 pmlest:
http://campedi.com/wwwboard/messages/2857.htm complimentwhosewondered
September 30, 2005, 8:18 pmPorky Burgers:
Wicki: Bend, Oregon will be hit twice as hard as California and it will happen at exactly the same time. Where do you think all the people moving to Bend come from? California. Where do you think they get the money to buy a place in Bend? From selling their house in California. California at least has some industry and non-housing-related jobs to fall back on. One-third of Bend builds houses; one-third sells houses (real estate agents) and the other third is looking for a job (and most of them will end up trying their hand at being either contractors or real estate agents). The minute the California real estate market tanks (and even you seem to expect that), people will stop moving to Bend and the whole house of cards is going to come tumbling down.
Bend isn't a suburb - it isn't even an exurb. Bend is a geographically isolated settlement. You have to drive at least 2 hours (and that's when the roads are clear and not snowed-in) just to get to a town with 100,000 people in it (Salem or Eugene). But just because Bend is in the middle of nowhere doesn't mean its economy and housing market aren't connected to the rest of the country, and especially California.
Another problem with Bend is that more than 60% of the population has moved there within the last 10 years. They don't have the roots there. The second things get bad they will MOTIVATE out of there like you won't believe.
October 28, 2005, 4:58 pmjay prabhu:
Housing bubble?
This housing market run up is much like the Japanese housing bubble cry many economists.
In reality the housing market in Japan is very different when compared to the United States and indeed to rest of the world.
The Japanese population is slowly dying out; there has been practically no growth in population in Japan. Further US housing prices are the lowest when compared to home size and purchasing power of the US consumer.
They forget to tell you that the Japanese population increased by only 4 million from 1990-2005 where as US population increased by 45 million in the same period.
Further the job growth in Japan is anemic whereas the US continues to add new jobs at a good pace.
Many of these doom and gloom gurus worry that homeowners have refinanced their homes and spent the money. A portion of the money definitely has been spent on vacations and consumer non-durables, but a larger portion would have gone for home improvements like energy efficient heating and air-conditioning, energy efficient windows and siding, roof systems etc. Further, some of this money could have been used to reduce high interest credit cards and for funding college education for kids- future consumers with higher incomes.
Is it possible these housing bubble forecasters and gurus are really stockbrokers and analysts hoping you will sell your home and invest in stocks and bonds so that they can earn a commission. Wonder what they plan to do with their bonus earned in January 2006; will they buy stocks and bonds or homes? We shall know soon.
Read the full article at http://www.NoFeeMLS.com
January 13, 2006, 5:32 pmRandall Wilson:
Medical profession aside, it is typically a good intidator that a market is overinflated when every novice is advising that it is time to buy in. How many people were saying Buy Yahoo just days before the crash? In most markets, if everybody is doing something, your greates return will be realized from doing the opposite.
-Randy
February 14, 2006, 9:21 pmhttp://www.4mysales.com
Bend, Oregon Housing Bubble:
Bend, Oregon Housing Bubble Blog: http://bendoregonbubble.blogspot.com/
March 6, 2006, 7:27 pmPete:
Well I am renting and on the sidelines in Scottsdale, Arizona ready to buy on the dip! I will wait till it's the right time to buy!
March 19, 2006, 3:29 pmalan thomas:
Those of you worried about a housing bubble, should be aware of the Syracuse Home Equity Protection scheme. This protects against losses in the event that house prices fall. A similar scheme is available for other areas. Take a look at http://www.livepropertyservices.com which covers most parts of the US and Canada.
March 21, 2006, 7:45 amJonathan:
Lest-
Bend pulls just as many people from HI, WA, valley areas of Oregon and Idaho. While I agree that the Bend market may tank around the same time as CA., you're missing the retired demographic and telecommuters. Your overestimated 60% population increase does not take into account the number of people moving into the area to be near thier parents/kids. i.e. My parents just moved out here from VA. And large % of our friends have the same situation. (I assume you're making your observations outside of Bend.)
In terms of locality to a major metropolis you are correct in the observation of isolation. But Bend can attribute industry growth to the fact it sits at a major frieght rail hub going north and south a major trucking thoughroughfare and decent sized airport. One only has to look at the industrial parks around Bend and Redmond to see the growth.
You make your observations and I'll make mine as a resident. Currently, the only MOTIVATing I see is incoming...
March 23, 2006, 5:00 pmarcticblueice:
U.S. Real Estate Bubble Burst in 2006 - U.S. Economy: New Home Sales Fall, Residential Inventory at Record Level. Polls show that consumer confidence has dropped significantly. The housing crash has the economy collapsing. The real estate propaganda is pouring out from the media and even the white house as "they" downplay the housing bubble that has burst. Most people do not really own anything in America. Almost everyone I know is just making payments on things that the banks really own such as a home and a car. Americans spend more than they earn and many people who purchased a home between 2001&2006 are in for a really rude awakening. The "artificial equity" game is over people. Housing Bubble Meets Pin. Total collapse of the American economy is looming as home equity debt, bankruptcy, foreclosure and personal insolvency skyrocket in a debt-ridden country. Americans have relied on the false sense of well-being created by the federal government. The illusion of prosperity was devised after 9-11-2001 to spend our way out of recession.
Three obvious indicators revealing the inevitable recession or depression are the growing inventory of houses that continue to pile up throughout the nation, houses are on the market for much longer and are discounted in order for them to be sold. U.S. consumer debt has now increased to more than 2.16 billion dollars. This record debt is largely from Americans living beyond their ability to pay for things they do not need. It is a fact, that Americans spend more than they earn.
In the beginning of 2005, the prophecy of the residential real estate bubble bursting was revealed to this godless, materialistic, backslidden and unrepentant nation. John 8:50 And I seek not mine own glory: there is one that seeketh and judgeth.
The downward spiral of the United States of America: There is plenty of irrefutable evidence on the residential real estate bubble that has come to light. The facts, the greed, the real estate fraud, the indictments, the fines, the convictions, the incarcerations, the record consumer debt, the shattered dreams, the bankruptcies and the foreclosures continue to climb. Millions of citizens of this great nation have chosen to become slaves to debt stemming from "artificial equity" being spent on things that people just cannot afford. Real estate appraisal & mortgage fraud along with poor judgement influenced by media propaganda and driven by historic low interest rates are responsible for a destructive economic downward spiral by creating an insatiable housing "frenzy" that has now ended. This housing bubble could not exist if the rules in mortgage lending were kept in place. For decades, the house pricing standard for qualified homebuyers was limited to 2.5 times your annual income. Today, I have read about folks who qualify for up to 12 times their annual income for an interest only "no doc" home loan. In some states this practice is unlawful and is referred to as predatory lending. The best indicator of the "housing bust" is the growing inventory of houses that continue to pile up throughout the nation. American poverty has incresed for the fourth straight year.
2 Timothy 3:1-5 This know also, that in the last days perilous times shall come. For men shall be lovers of their own selves, covetous, boasters, proud, blasphemers, disobedient to parents, unthankful, unholy, Without natural affection, trucebreakers, false accusers, incontinent, fierce, despisers of those that are good, Traitors, heady, highminded, lovers of pleasures more than lovers of God; Having a form of godliness, but denying the power thereof: from such turn away.
March 25, 2006, 9:00 pmA few thousand years ago the bible states when the Israelites chose to forsake the Lord and his laws, the Lord then allowed for their enemies to conquer & enslave the rebellious nation until they repented. Americans have placed material lust such as their house and car before God. The Word of God clearly says in Romans 13:8 Owe no man anything. There is nothing to misunderstand about that. If you do not have the cash to satisfy your material lust then don't buy it. Do not forsake the Lord and his laws or you will reap the consequences of your disobedience. For there is no respect of persons with God. Our living God of Israel will judge this faithless and perverse nation that has willfully forsaken our Lord and his commandments. The time is fulfilled, and the kingdom of God is at hand: repent ye, and believe the gospel. Watch therefore: for ye know not what hour your Lord doth come. Be not deceived; God is not mocked: for whatsoever a man soweth, that shall he also reap. For the Lord our God is God of gods, and Lord of lords.
The "fractured states of america" used to be known as a nation of "industry". Now most things are made in Communist China and sold here at retailers like Wal-Mart. The only jobs created in large numbers are in the retail or food industry for 6-7 dollars an hour. GM just announced the closure of 12 plants and the "forced retirement" of nearly 130,000 americans. This was all forecasted with the passing of the North American Free Trade Agreement (NAFTA) in 1994 under the convicted and impeached former President Bill Clinton. Now George Bush has passed (Central American Free Trade Agreement (CAFTA) in 2005 that will cost more american jobs. On April 20th in 2005 George Bush signed into law the new bankruptcy laws that went into effect October 17, 2005 to make sure all the americans who dove into debt in the housing bubble would not be able to walk away from their debt.
The only hope for this nation is to repent to our living God of Israel and accept Jesus Christ as their personal savior. This broken nation without borders is flooded with illegal aliens who now are in the streets protesting legislation to make entering the United States illegally a felony. The "homeland" is not safe and the porous borders of America allow millions of criminals to walk right in. America has been invaded without a single shot ever being fired. The middle class has been eradicated and the United States is now building a "caste" system of debt ridden citizens.
The Democrats and Republicans are worthless and have a common agenda of building their own wealth.
This has become obvious with how the average american no longer has a voice that matters in this failed debt-ridden government who just raised their own debt limit to just under 9 trillion dollars. You will only find peace through Jesus Christ our Lord & King. Repent for the kingdom of God is at hand.
lest:
Alan Thomas -
Observations coming from inside Bend.
Bend's big chance is to become big enough to be an "inland empire" for the other towns in Central/Eastern Oregon.
Unfortunately most of Oregon's economy is for shit nowadays other than real estate. But if it's going to happen at all in Central/Eastern Oregon, it'll happen in Bend, I'll give you that.
There is a reason, though, that people on the Oregon Trail went THROUGH this area on their way to Western Oregon. Scenery can't be eaten.
April 16, 2006, 1:29 am