Bubble, Bubble, Bubble, Bubble...

SF Chronicle: Homeowners find much to appreciate Homeowners find much to appreciate. Despite rising interest rates, sales and prices in the Bay Area rocket to new highs. How high? The annual increase in the median home price now tops the region's typical household income.

Mercury News: Home buyers 'flip'. Of the 1,882 houses and condos sold in the county in February, 4.5 percent -- about 84 homes -- had been purchased within the previous six months, according to DataQuick Information Systems. That's up from 3 percent in February 2004. The prior record for ``flipping'' in Santa Clara County was set in June 1989, when 3.5 percent of homes sold had been owned for less than six months.

This drunken binge is unreal. And when the music stops, the hangover will be massive.

What's most outrageous about it? I take for granted that people will bet everything, however foolishly, on what look like sure things, particularly when industries pretend that markets skyrocket forever -- after all, this real-estate run-up is increasingly being fueled by nothing-down and interest-only loans to people who in rational times would be shown the door by lenders.

And despite a few cautionary stories and the occasional cautionary quote in the gee-whiz-ain't-it-amazing coverage, the media are not beginning to cover this as it should be covered: as a clear and maybe imminent threat to the economy when rationality returns. Shades of the Internet bubble a few years ago, eh?

Soon enough, we'll be reading woe-filled stories -- a year or two from now, or whenever -- about those sad sacks who lost more than they had betting on what is surely turning into a suckers' play. Look elsewhere for sympathy when that happens.

Comments

[hey]

Just wondering, Dan, do you own a house?

[koreyel]

On a previous post you linked to a LA Times article that showed exactly how "interest only" loans have stoked this furious boom.

Before reading that article I didn't think there was a bubble.

After reading it... well... maybe someone should start thinking about a business to retrofit SUV's with toilets and sinks.

[K.G. Schneider]

Last night's local news (Bay Area) reported that 80% of new mortgages are ARMs. The SUV with a sink and toilet may not be a bad idea.

[Jack Krupansky]

In finance they call it "The Greater Fool Theory": you'll do just fine as long as a bigger fool comes along that you can unload your assets onto. The central problem is this: how many people actually consider themselves to be "fools"? I'll bet not many. So, that means that it's a no-brainer for all these self-declared non-fools to assume that there will always be fools when they need them.

Before we judge others too harshly, we should ask ourselves where we think we sit on the "Fool Scale" (0-10, 10 is wise, 0 is the most foolish fool), and then contemplate how a truly objective observer might rate us based on our opinions and our behavior. Sure, it'll feel good to be a "6" relative to all those 3's and 4's out there, but we should consider what foolishness even 7's and 8's might be vulnerable to.

The central problem with the media is this: at their core, they really have no credibility. If they say something that readers agree with, great, then they're considered sage geniuses. If they say something the reader disagrees with, then they're considered to be mindless baboons. There's simply no credibility in play when people consider the media.

My view is that the media should take the same stance as the Federal Reserve: it's not our job to either feed nor burst bubbles. It's a free market and each of us does retain personal responsibility at all times. There are people who blame the Fed for the housing "bubble", but I would note that the Fed had no real choice but to lower rates in response to the post-2000 "bust" and housing demand is strong even with the Fed *raising* the one interest rate that the Fed does control (fed funds rate).

-- Jack Krupansky

[Joe Buck]

The problem, Jack, is that the media are feeding the bubble, Dan's old employer in particular. Their breathless real estate coverage, all the stories about people making a mint, today's story about the flippers. Yes, this stuff is really happening, so they can argue that they are just reporting the news. But there's no context, and no memory.

[Erik Schmidt]

Well put, Jack. The Greater Fool Theory certainly explains the behavior of just about everyone during the Dot Com runup. Everyone knew the bubble would burst, but everyone was also convinced that they were smart enough to get out juuuust before everyone else.

As for your comment about personal responsibility, I've been pondering for some time the notion that people who deride the government for interfering too much are often the same people who cry foul when the government isn't there to bail them out. I wonder if Bush will take the fall for this bubble bursting.

[Rik Gary]

Does anyone have a comment on the recent USC Real Estate school's prediction about rent increases? They're pretty bullish at USC, and I was curious if anyone thought So Cal was in the same boat we are:

http://www.usc.edu/schools/sppd/lusk/press/item.php?id=548

My own view is this is a very optimistic forecast and is overstating demand.

[Roger]

Dan, while I share your antipathy for both the press and those people involved in speculation, what about the average person who just needs a place to live?

In 1999 my wife and I moved to Sonoma County where I had just accepted a job with a telecom equipment company. At that time we paid $250,000 for a small house on a half-acre in the country. It was our first home purchase, and the only way we were able to afford it was by being able to sell about $10k of stock from two previous employers.

We lived there until Nov 2004, despite me being laid off in 2002, we were able to keep the house through starting our own business and working our butts off 16 hours a day for two years.

When we finally realized that we couldn't keep up the hours anymore and that our savings were going to be totally gone, I was fortunate a job even further north in Mendocino County.

While the housing market up here isn't as insane as it is in the Bay Area, homes here are still ridiculously priced compared to the rest of the US.

We were able to sell our house in Sonoma County for $510k, put $100k down on a house in Mendocino County, but we still had to borrow $385k. The _only_ way we could do this was with an interest-only 5-year ARM.

However, we're paying more than the required interest-only payment, and based on my current salary we will have no problems paying a higher rate in 5 years if we have to continue with the ARM loan instead of refinancing.

The price bubble has me worried too, but for a bit of a reality check I'll relate to you some numbers from our recent trip to England.

The average salary in England is 25000 pounds. If you want to live anywhere near a major city - ie, where the jobs are, you're looking at average cost of over 160,000 pounds, which is roughly a 6-1 ratio for income to housing.

Compare that with my $60k per year salary, and my $385k mortgage, and you get almost the exact same ratio.

I understand that housing costs in continental europe are even higher.

So this problem doesn't just exist in the States, but across the developed world.

Food for thought.

[koreyel]

I am wondering how much flipping functions as a telltale for all bubbles.

In the history of all such "excessive exuberations," has anybody ever kept general stats on it?

Seems to me that'd be something a 7-, 8-, or 9- fool would really want to keep tabs on.

And seems to me that runaway speculation systems ought to have some similarities: whether tulips, stocks, real estate, or pyramid schemes.

[My deeply naughty thought for the day: Create a hybrid pyramid scheme in which flipping is possible. Whew...that's nasty...]

[Joe I.]

Until more dirt is added to the Earth if population continues to increase and land is locked up for environmental reasons etc...Real estate is always a good buy. Yes there are ups and downs especially in CA and NY but over the long run it is what has made more average people rich. Yes the ARM's are dumb unless you see fast (2year) and high appreciation, but over time one will look back at the current prices and they will look cheap. London, Paris, and Rome are far, far higher for the above mentioned reason.

[Bob Rosenberg]

Dan

Quite a lot of Californians are buying single family and condo units here in Phoenix -- not to live in -- as investment properties. It's making the RE market go *nuts* over here! Because of the rapid price escalation, locals are finding it difficult to buy something to live in.

I bought my condo ~3 years ago. Since then, it's doubled or tripled in value. It's not for sale. What could I buy?

[dilbert dogbert]

I think the reason the press does not cover bubble aspect of this story is that it is a slooow story. Like watching a very slow train wreck. It takes years to play out. More fun to write a quick story about the wreckage afterwards.

[RealEstateCafe]

Dan,

What a pleasure it was to inadvertently find your post via Google the day after buying your book, _We the People_ at conference at MIT conference on Grassroots use of Technology.

Do you think that increasing anxiety about the real estate bubble and lack of critical reporting by main stream press could actually help build a grassroots network of home buyers turned citizen journalists / roving real estate reporters?

I've made several recent posts to that effect on my own web site, and invite your readers, particularly those who have comments on the "foolish" nature of the current irrational exuberance, to view those comments and amusing graphics online at:

http://www.realestatecafe.com/real_estate_bubble/

PS. I am a relative newcomers to blogs, and have yet to learn how to use track back. Please forgive me if posting a URL in a comment field violates blogging etiquette.

[adam]

it seems so obvious...but why does everyone believe that real estate is a good speculative market? rent + appreciation = investment?!?! ack, come on people, a little simple logic and historical trends show this is a bad idea.