Real Estate Bubble

[robby]

Do you think there is a real estate bubble? It seems everyone thinks there is, but everyone continues to buy so I'm a little confused. If there is a real estate bubble forming, what will happen when it bursts?

[cercis]

When it bursts people who are upside down on their home loans will find themselves in a very serious situation.

People are continuing to buy because lenders are now doing interest only loans on 100% of the purchase price. These people and lenders are banking on the house selling for more than they bought it when it comes time to sell, or that they will get a job that pays significantly more and be able to afford to refinance when the balloon payment comes due.

What we will see when it bursts is a large number of homes for low prices and a lot of people filing bankruptcy. We'll see the gov't asked to bail out the idiot lenders who created the issue by lending too much.

[robby]

If this is true, wouldn't it be better to wait to buy instead of buying now?

[34saving]

I think most markets will see the air slowly come out of the bubble as opposed to the bubble bursting. I think one obvious impact will be a strong decline in the number of houses switching hands. I'm glad I don't make my living as a realtor. I'm also very scared of the interest only loans cercis talked about. A 5% interest only to a 7.5% interest only means a 50% increase in mortgage payments and you're still not paying any principle!

[34saving]

You might want to check out this article. It's about the "bubble sitters"
http://biz.yahoo.com/brn/050825/17205.html

[robby]

Any prediction of how far in the future this will happen? The next year? 5 years? Tomorrow?

[cercis]

I've thought about waiting, but I don't want to throw money away on rent meanwhile. Plus I want a home I can control, no carpet (allergies), something other than white walls. More energy efficient appliances, etc.

I'm just going to have to shop very carefully.

Of course, I don't live in an area that is experiencing the bubble. We do have a small bubble starting because of the ease of getting loans and loans you can't afford.

[cercis]

Robby, it's just not something most people can predict at all. We can guess, but no one knows.

It will happen when more people are working low wage jobs or have no jobs at all. When a lot of people can no longer make their mortgage payments and foreclosures increase (which they actually are, my friend does foreclosure and her law firm is hiring a new person every month).

[VJW]

As I posted in another thread:

Annually, more than 2 million housing units are being constructed, whereas the number of households is only growing by 1.4 million.

It can’t last.

#

[CRFSaver]

In the DC area, an area that is supposed to be immune from the bubble bursting (due to a stable economy ie. federal govt and growing private industry) they are starting to see appreciation slow down and in some places prices go backwards.

[fiffer010]

So we know that it is probablly going to happen... but do we know when?

[jmjj215]

I'm not in the market for a home right now. But I may very well be next year. We're heading to Dallas where prices are still very reasonable (suburbs of Dallas). I can't imagine I would put off buying a home because I thought there was a bubble - not b/c I think that you necessarily "throw money away" when you rent - but because I just can't imagine NOT buying a home as if I were waiting for a stock to go down or something...just my feelings though

Hopefully we buy at the bottom, it skyrockets up over 15 years, we sell and move to the country and retire, sipping lemonade in rockers on our (very large) porch.

[jmjj215]

Originally Posted by fiffer010

So we know that it is probablly going to happen... but do we know when?

As mentioned earlier, nobody knows when. Do you realize how much money you could make if you did know? (And others believed that you knew).

[robby]

Are there tools or formulas that show what areas are more likely to be in a bubble?

[moneyrant]

If you can't afford it, don't buy it.

[PrincessPerky]

Mr Housing Bubble

This guy doesn't know when but he seems to be making money on it

[cercis]

Originally Posted by moneyrant

If you can't afford it, don't buy it.

That's what we believe, but many people find themselves in a situation where they can't afford to rent or buy, but because there are so many creative financing options they are allowed to buy. They figure that they can't afford either, why not? Plus, they think they'll get raises and suddenly be able to afford the house payments and pay extra on the principal.

The problem is that people buying these houses can't see that they are contributing to the problem and even when they can, they don't see any other choice. They have to live somewhere and rent payments are higher than the mortgage payments they've been offered.

[rchiang]

Here's the best way I can break down the situation about the housing
bubble (or any other asset bubble in general):

1) Are we in a bubble?

There are a couple of ways to look at this:

a) Historical

Look at the history of real estate bubbles and see if you see
any common trends (the Florida Real Estate Craze being a common
example). See why those people lost big money and see if those
same situations are being set up again. If you want to see some
real craziness, look at the S&L scandals in the 80's and see
what that did to housing prices (as well as the housing
construction industry) in Texas.

b) Technical

Use any traditional measure for real estate investing. Are those
measure out of line with historical averages? Look at average
monthly payments, renting cost vs. owning cost history, interest
rates, maximum mortagages allowed, etc. A lot of those measures
are significantly out of line.

2) If this is a bubble, why hasn't it popped yet?

Okay, we just lived through a stock market bubble. Can you explain why
it popped? Even looking backwards, can you explain how and why it
happened? I certainly can't. I can say something like "All these
dotcoms aren't making money, so they'll go under when they run out of
cash". But I certainly couldn't predict when they would be unable
to issue stock or take venture capital (i.e. when they could no longer
get "free" money to continue operations).

Even some of the brightest brains applying complicated mathematical models
can't detect a bubble with absolute certainty.

http://ideas.repec.org/p/fip/fedgfe/2005-04.html

Look at any graph from any bubble period (dotcom bubble, Japan Nikkei
index, RCA stock in 1929). Now, use a piece of paper to cover up the
graph before the peak. Move that piece of paper left and right.
Can you tell when the peak will occur?

2) Let's assume we're in a bubble, what should I do?

Unlike stocks and tulips, housing cannot be sold easily for a quick
profit (once you take into account the lender/seller/mortgage fees).

a) How do I take advantage of this?

This article does the best overall presentation of why you might
want to sell:

http://money.cnn.com/2005/07/22/pf/cash_out_0508/

As you can see, it's not easy to safely make money out of a real
estate bubble without some sacrifices (moving or downsizing).

b) How long do I need to wait?

While stocks and other easy-to-sell assets have crashed quickly
and been over with, real estate is a bit trickier. Japan's
real estate boom took about 15-18 years. It's bust has been 15
years and counting. Waiting 30 years is great if you plan on
living 1000 years, but not so great for the rest of us.

There are a lot of reasons for housing to crash: foreclosures,
rising interest rates, panicked sellers. But again, detecting
the end of the bubble is hard.

c) So, when should I buy?

Buy when you can absolutely afford it (e.g. fixed rate mortage
that takes up 25-35% of your income). Buy when you can put down
a good down payment. Buy when the thought of this house dropping
another 10-20% in price doesn't bother you because you've got a
home.

For investing, buy when you can afford to take over the monthly
payments for as long as it takes you to find a new renter. More
than that and those monthly payments might start to hurt.

In the meantime, continuing to save will get you towards that goal.

I know this is a long article, but I hope it was worth the reading.

-Ray

[jmjj215]

Thanks for the great article Ray.

[cercis]

That was a good article and it sums up our feelings pretty well.

We plan to buy because we want to be here for several years and it is a better option than renting.

We are in an area where prices are not that high yet. They're high, but in line with what you expect - $120k for a 3-4 bedroom in fair condition. $200-300k for new construction on a golf course (not for us, thanks much). But my boss thinks gas prices will bring housing prices down as people downsize to afford gas (we probably bring home twice the median household income for this area and we don't feel that we can afford more than $120k, so I don't know how these people are doing it).