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May 01, 2005


Bill Haught

Friends more acquainted with your track record than I am tell me that you've been ringing this bell for years.

Have you an actual prediction, one that we can hold you to? A bubble ain't a bubble unless it bursts.

How long would housing prices have to stay this high, or let's say within 10% of current pricing levels, before you'd concede that you've made a mistake?

If you can't answer this question, your just fear-mongering and perhaps you should stop shouting from the rooftops about real estate prices.


This is not about prices only. It's more about loans/mortgages for desperate people who would not afford them in a real market. Having IO and ARM loans and they have a problem to pay them in the first years of loan - paying just an interest (or more interest than a principal for ARM). You have money or don't. You cannot go to Vegas or byu stocks with 100% financing. Banks are fine and they will be fine - they don't care about individual borrowers. Greed on both sides. I have 20% down easily, every day but why should I bid for a house with a guy with no down, no savings and maybe credit debts. This guy is doesn't care - he is escalating price to heavens because he is not using his money. And a lot of them doesn't care if they fail. Isn't it sick? Could you give me 100% financing for stock market to play a game? People without money broke the market and it will be broken for years to come. Thanks to American dream LOANS TO EVERYBODY.
Just check 30-yrs yield curve and preserve cash. It will be a good real estate market in a year or two.


The comment above challenging the credibility of the warnings that are coming is typical. There were authors of books in 1998 who were saying that the current stock market was not a bubble and could go on forever. The top TV shows were all pushing that nonsense.

So how about this for an interesting statistic?

About 83 percent of new home loans in the San Diego county area are interest-only, no-downpayment, loans. Tha'ts 8l3 percent!

And add this to that figure: New home starts were down 14 percent in March. That's the worst single-month drop in over 40 years! I suppose that could fuel the rise in prices of existing homes for a while. But the end of this insanity has to come eventually. They're going to run out of people who qualify for even these crazy loan terms. And then what?

I'm going to buy after the crash. A single income in Southern California just doesn't cut it.

Richard Zarback

I've also been surprised by the strength of the housing market. I guess it’s really not a question of if, but when housing will slow down and/or decline. Unlike the stock market, it will probably take several years for any excesses and a correction to run its course - and it is nearly impossible to time the top.

However, 5-6 years ago half the folks I knew were stock market gurus and now they are real estate barons. Margin calls suck...but this could be much worse.

Bob Oakley

I began working on computers nearly 50 years ago, have lived through several economic cycles and observed major technology evolutions. I would say I have a bit of experience and agree that much of history tends to repeat itsself. The current feeding frenzy and loans/mortgages for desperate people buying over-priced homes thereby "Fueling the Bubble" is an excess far more than in history.

I believe that we should value Dan's continuing prediction about the bubble and applaud him. The next economic cycle will hurt many. I for one would not wish to be involved nor invest in any bank that offers the interest-only, no-downpayment, loans of today.

Dan Gillmor

Bill, I was worrying in print about a tech stock bubble in 1997 or early 1998, I think. So I was very early, and anyone who bought then and sold before the bubble burst did very well indeed. But I didn't attempt to say when it would burst, just that it would.

I am convinced we're in another bubble now, and I have been saying this for several years. Again, if you bought when I raised the issue you've done well indeed. That doesn't make me wrong, though.

Just curious -- are you connected to the real estate industry in any way?

Joseph A. di Paolantonio


I've been reading your posts on the housing bubble for awhile, and had related my own experience with California real estate since moving here 20 years ago, as a trackback to an early article of yours. [I still get close to a dozen hits a day from that - Thank You.]

One thing I see in your articles is a a theme of journalistic responsibility, not so much investment risk. Sure there's a real estate bubble; like past real estate markets, I think it will deflate up to 35% - one day for five years or so. Speculators who guess wrong about the top will suffer, those who guess right will profit, as happened with the holland flower bulb or daffodil bubble, the recent stock market bubble, and every other get rich quick scheme.

But if your real point concerns journalistic responsibility, as it seems too, then I think you are pursuing a more realistic cause.

On the other side of the coin of journalistic responsibility on this front are recent articles by Consumers Union [Consumers Report] and Money magazine.

[subscription required for Consumers Report]

So, Dan, which is of greater concern to you: investment risks or journalistic responsibility?

Bill Haught

One of my many hats over the years involved the bleeding-edge of Wall Street financial engineering in the securitizations of mortgages.

However, Dan, you really haven't addressed the question.

It's not a bubble unless it bursts.

I don't care about your internet bubble prognostications. You've been crying wolf about real estate prices for a very long time, and indeed, anyone following your advice would have stayed away from home purchases in the Bay Area at least since the new millennium (a fair translation of your advice, I think). Today, such a person would have significantly less net worth.

Are you simply scaremongering? Please state a benchmark by which we can test your prediction of an asset bubble burst in real estate.

If housing prices don't fall by more than 10% over the next three years? Five years?

At what point will you concede you've been wrong all along?

Do you owe your readers an apology for being wrong up to today? Will you owe your readers an apology in three years or five years?

Dan Gillmor

Bill, if prices don't fall by >10 percent sometime in the next five years I'll gladly say I was wrong. I owe no one an apology for urging caution in the meantime, not when I consider the market irrational. I'd owe an apology if I *didn't* say that I believed this to be the case.

I was wrong in the stock bubble, until I was right.

Joseph, I care about both.

dilbert dogbert

Someone said: Things that can't go on forever, don't, but they can go on for longer than your lifetime.
That sums up the problem of bubbles. It also expains the lack of short sellers in the market.

Bill Haught

... aren't we already 5 years into your recommendation, and haven't housing prices exploded by 50% since?

Prices would have to fall about 50% for people to lose what they've gained by ignoring the siren song of media scaremongers.


Bill, this is about people buying houses without money plus with IO loans - IO loans prepared for investors not for people WITHOUT MONEY.
And concering bubble - it doesn't need to be a bubble. For IO people is just enough a small economy slump and higher interest.
But I know everybody around me says that price of real estate will never go down.
So Bill, this is not about investing in RE - this is about an artifical environment for people who don't know what a word invewstor means...


As a real estate broker in Dallas in the 80's, I watched the market climb, soar, peak and dive. At that time of 18% interest and higher, the riskiest instruments were ARMs, but that was at the peak of interest rates and the people who got ARM loans were to covered as rates declined. There is no such safety margin for those who get adjustable loans when rates are at the nadir and climbing.

The big issue as the Dallas market unraveled was that real estate is illiquid. As the market cooled those who could hold their properties sat tight, but those who had to sell, had no choice but to cut, and then slash their prices in order to be free to move to their new job. Many realtors stayed solvent by managing rentals on properties that would not sell. It took the market 8 years to recover and it is now as robust as it was then.

We had a running joke at the time that the law of gravity had been repealed in California because of LA and the bay area's abilities to sustain their booms or avoid the busts that racked the rest of the country. It seemed that we had a crash & their values just stopped climbing. California's desirability has insulated it and attenuated its real estate cycles in the past, but it has also driven its prices and the resulting excesses higher.

Rik Gary

Seems noted "scaremongers" Warren Buffett and Charlie Munger at Berkshire Hathaway think we're in a housing bubble --with California smack in the middle of the soap dish. But what do they know about economics.

I guess since the housing market hasn't popped yet it never will....though I didn't realize until now there was an expriation date XYZ beyond which the laws of financial gravity no longer applied.

Thomas Hawk

Rates will go up and people will get squeezed.

By the way folks, there are now 2,580,000 pages that come up on Google when you type real estate bubble. Don't say you weren't warned.

Tread carefully if you dare play this game and make sure you understand the difference between recourse and non-recourse.


From the 1st Seattle Times article:

"The hard part is knowing where to start," he said."

Wrong. The hard part is knowing where (when) to quit. Like the stock-market bubble, it's easy to look like a genius in a bull market.

I am a real-estate investor. I own 2 investment properties. They each generate positive cash flow. Rents more than pay for the mortgages and expenses. Any appreciation is a bonus. If (when) speculators leave the market, I think it's cash flow that could end up determining, in part, how far prices could fall. When a property can generate income, investors will start looking at it again. For high-priced markets on the coasts, where rents haven't kept pace with prices, that could be a long way to fall.


Dan's hardly alone. The Economist, probably the best international newsmagazine, has called this market a bubble. They back it up with analysis, which I paraphrase below:

A investment market is in a bubble when the asset prices stop having any reasonable relationship to underlying fundamentals: this is ROI, return on investment.

The measure of underlying fundamentals in the real estate market are rental rates; the rental rates determine the return you can reasonably expect to get for your investment, as a productive asset (as opposed to a speculative asset).

In Bay Area California, rental rates for housing have been dropping, and are sharply down from their peak in the dotcom years. In other words, the fundamentals of housing as a productive asset started deteriorating before Dan made his prediction, and have continued to worsen.

One of three things will happen. Either rental rates will sharply rise, the speculative market will collapse, or they will slowly converge with housing prices stagnating while rents rise. In each of the three cases, you're financially much further ahead renting rather than buying, even after figuring in the U.S. homeownership subsidy (income tax deductible).

We know from history what happens to markets when people are allowed to invest in a very leveraged fashion; the stock market crash of '29 is the most famous example. The real estate market in the U.S. is now bubbling with the same kind of crazy highly leveraged financing. Unlike previous real estate cool-downs, this one comes with the kind of financial underpinnings that cause crashes. It will be ugly.

It's clear there's no prudent reason to invest in housing now, especially in the Bay Area. Some may want to bet on when the bubble's going to pop, but that's gambling, not investment. It's responsible journalism, not fear-mongering, to point this out as Dan has done.

Dan deserves a lot of credit for calling this one early; it's only in the last year that the rest of the world has recognized the problem.

George Kelly

As an add-on to tdoehne's comments, consider yesterday's Kathleen Pender's San Francisco Chronicle column "Housing cost skews Bay Area inflation figures"

Daniel Conover

Yes, Dan, apologize for urging people -- particularly those without a lot of capital -- to use caution and remember the business cycle. Wha-huh?

Hey, is it vastly over-simplifying to say that housing markets that see property values increase much faster than wages will eventually get out-of-whack?


Yes, it's over-simplifying. The housing market can see property values increase because there's a large influx of people, even though wages don't rise. Then it won't be out of whack; there's an increase in demand with no increase in supply.

In the Bay Area, population has dropped. The computer industry is offshoring, or moving operations to more affordable parts of the U.S. Demand has dropped, as reflected in housing rental rates (down 40-50% from dotcom era peaks).

Kathleen Pender's article was a bit muddled; she wants to count investing in a house as part of the cost of living. Yes, many people do a substantial part of their investing and saving by buying a house. They combine investing with payment for part of their living costs, and get a tax break to boot -- but that doesn't make it anything but an investment decision. Housing is a lousy investment in the Bay Area right now, but should we count that investment as a cost of living just because combining housing living costs and investment is common and customary?

The Seattle Times articles were more informative; they made two points that most articles on this topic don't. First, may of the people 'burned' by the dotcom bust have stampeded into housing investment -- it is a herd phenomenon. Second, ordinary people are quitting their jobs to become the real estate equivalent of "day traders". Both are warning signs for an alert investor.

Joe I.

Dan I agree this is a short term pop, which will correct, but until more dirt is added to the earth and no one cares about environmental land restrictions real estate has ALWAYS been the driving force for wealth globally. Long term of course but every time there was a bubble if one purchased and held they still made money. What is overpriced today will someday be a nest egg over the long term. Someday our children will think we had it good at these prices.

Dylan Salisbury

Dan, I have a comment on the last line of your post:

"But this kind of risk could put these people in the financial hole forever, if the bubble bursts now and they find themselves under water on a nothing-down loan."

I think the logic of a nothing-down homebuyer in today's market is rather rational, made even more rational by the bubble:

If housing prices continue to rise, the buyer may be able to flip the property and pocket tens or even hundreds of thousands of dollars in profit.

If prices fall, the buyer may be able to walk away from the property. The buyer will lose his or her credit rating, but not necessarily much cash. It's the lender(s) that will take the financial loss. (Even if the mortgage does not allow the buyer to "walk away" with no penalty the buyer may just disappear and sink into the cash economy.)

Think about it this way: Is putting your credit rating at risk worth a shot at a six-figure gain? For lots of prospective buyers, especially those with limited savings, the answer is a clear yes!

This implies that lenders are a big part of fueling the bubble, and the lenders offering the zero-down loans may be the last ones left holding the bag, in terms of concrete financial losses.

Dan Gillmor

Dylan, check out the new bankruptcy laws. I don't think it'll be as easy to walk away from debt as it was in the past.

john F

Good post,
I was going to mention that the new bankruptcy law will make it more difficult to for the average homeowner to walk away from their house when the remaining mortgage balance > house value, but you beat me to it!

When you say "Bill, if prices don't fall by >10 percent sometime in the next five years I'll gladly say I was wrong."... is that 10% after indexing for inflation, or just a 10% in raw, uncorrected price?

Along that line, also check out the article "US Home Prices, does bust always follow boom" (at for an interesting discussion. Note footnote 9 and 10 are reversed.

john F

...and if you are a total geek, read
"2000-2003 Real Estate Bubble in the UK but not in the USA", at

Actually, Sornete's book "Why Stock Markets Crash" (or something like that) has a pretty interesting take on bubbles.

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