Real Estate Bubble

[PrincessPerky]

Re: Real Estate Bubble

Mr Housing Bubble

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

[cercis]

Re: Real Estate Bubble

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]

Re: Real Estate Bubble

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]

Re: Real Estate Bubble

Thanks for the great article Ray.

[cercis]

Re: Real Estate Bubble

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).

[PrincessPerky]

Re: Real Estate Bubble

See where my mother and ILs live 120 is NOT what they would expect, Mom is looking at moving closer to us (or her other kid) and is certain she will be able to find a cheaper house that size. I don't want to bust her err bubble, but it ain't happening if you want to avoid drug dealing neighbors.

Less of course the real estate drops dramaticaly and fast, but since I still owe most of the loan on this house I hope that doesn't happen anytime soon!

[jmjj215]

Re: Real Estate Bubble

Your boss expects house downsizing to afford gas? That seems a bit of a stretch to me. Wouldn't people (couldn't people) cut elsewhere first (drive more efficient vehicle, car pool, etc.)

[BAGAGT1]

Re: Real Estate Bubble

Your boss expects house downsizing to afford gas? That seems a bit of a stretch to me. Wouldn't people (couldn't people) cut elsewhere first (drive more efficient vehicle, car pool, etc.)

Ummm I was thinking natural gas for heating, I could be wrong though.

[cercis]

Re: Real Estate Bubble

No, he meant gasoline. We live in the subtropics, not a whole lot of need for heat here (thank goodness).

I guess he figures there will be a lot of "sale or be foreclosed out" situations (and honestly, I think he's right). There is little to no opportunity for carpooling here. There is no one large employers. Most employees in places live in different parts of the area. And the places that hire are not that close to each other. There is no public transportation (not "no usable transportation" no transportation at all).

They can't really drive a more efficient vehicle since they don't have the funds to buy a more efficient vehicle. Most of them are still paying on their current vehicle and probably owe more than it is worth.

I don't know what they'll do. Hope they have enough equity to pay a deposit on a smaller place? Move in with family, etc. I live in an area where you are more likely to see extended families in the same house, so I guess that will be an option.

[PrincessPerky]

Re: Real Estate Bubble

Carpooling or public transit is not really an option here either, the only bus line nearby is on a road 4 miles out, that would run to 3 miles away from DHs work, so 7 miles of walking, since work is only a little over 10 away I don't think it would help much!

Carpooling is another iffy thing, most of his coworkers do not start at the same time and anyway they would have to go 15 minutes out of their way for DH to get them. (or worse for DH to go get them)

[BAGAGT1]

Re: Real Estate Bubble

I would think there are other areas to cut back on before someone would seriously consider downsizing their home because of gasoline prices. Perhaps if the price of gas rose to $10 a gallon, but then chances are there would be a lot of unemployed people and that would be the reason for more home forclosures.

[jmjj215]

Re: Real Estate Bubble

Those were my thoughts also Bagagt1.

[cercis]

Re: Real Estate Bubble

I think, though, that a lot of people have already cut way back just to buy these homes in the first place. I know of at least 2 homes that the people pay 60% of their gross pay for the mortgage (I have no idea what they bring home, just their gross pay).

These are people that are already stretched too thin.

I think this is absolutely the bank's fault. Not that long ago you couldn't get a loan for more than 30% of your gross pay or 40% of your bring home pay. It's just immoral to have made loans this large. It's not like people can go out and get a second job either.

[meaghanchan]

Re: Real Estate Bubble

I don't think you can only blame the banks. They certainly should not be giving out loans people can't afford, but consumers, too, need to be careful, and need to do some basic math and see if they can afford the loan they're taking out. I think people are trusting banks too much to tell them what they can or can't afford.

[jmjj215]

Re: Real Estate Bubble

I think people are trusting banks too much to tell them what they can or can't afford.

I agree. "Borrower Beware" should be above every entrance to every bank to remind the consumers of this.