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Source link: http://archive.mises.org/3566/housing-bubble-are-we-there-yet/

Housing Bubble: Are We There Yet?

May 8, 2005 by

Tyler Cowen wonders whether we are in a housing bubble.

    Housing can be lived in, most buyers have only one home, transaction costs are relatively high, and rarely are homes sold and resold in a matter of days. All those features militate against a housing bubble.
Japan and Hong Kong have in common with the US that people live in their homes. Also, citizens in these countries have transaction costs associated with home purchases and sales. Nonetheless, both experienced housing bubbles after their equity bubbles. The average home in Japan is now selling well off its peak value. As for homes rarely being sold and resold in a matter of days, known as “flipping”, that is becoming increasingly common, another indicator of a highly speculative market. Doug Noland, one of the more articulate analysts of the ongoing credit and housing bubble is interviewed at Welling&Co on the credit bubble at Back to Fear?. In the interview, he states that:
    [in] California, where home prices climbed 20% over the past year. That means that this year, mortgage credit there has an inflationary bias: More credit will be created simply because of the prices of the homes have gone up. Even if the number of transactions is flat this year with last, 15%-20% more credit will be created. And home prices have risen across the whole nation, which will feed more speculative excess, more transactions and more credit creation. Even Freddie Mac, which has been moaning about falling originations and fewer refinancings, estimates total mortgage credit growth of 11.9% this year (vs. a record $1.19 trillion, or 12.8% increase, in 2004). That is the dynamic that I’m not sure the Fed fully appreciates. Yet it is a key dynamic because all of this new mortgage credit is creating distorted spending patterns, and, especially, over-consumption. Yet the Fed doesn’t seem to have a problem with it. From what I’m reading, they seem to be expecting a natural slowdown in the growth of mortgage credit this year. But that’s just not the way that bubbles work. It won’t gently slow just because rates have risen a little bit. Inching rates up in baby steps isn’t going to curb mortgage borrowing, no way. Speculative psychology is so strong in housing, they’re really going to have to ratchet rates up.

Another of the more perceptive critics of Greenspan and his bubbles, William Fleckenstein, describes how the recently released Fed minutes reveal that they knew that there was a stock market bubble in 1999. One wonders, will the 2004-2005 minutes, to be released in 2009 and later, reveal a similar consciousness of the current housing mania? See Fed Sees Bubbles, by William Fleckenstein.

Economist Paul Kasriel, an Austrian in the private sector analyzes how Growth in Household Debt Is Concentrated in Mortgage Debt (see also: Kasriel, Households – Still Running on Empty!). According to Kasriel, mortgage debt is the funding of consumption through credit creation, which necessarily removes funds that would otherwise be available for productive investment

In The April 11th issue of the Daily Reckoning, Bill Bonner reports (and while you are there, check out the Mogambo’s column half way down while you are on the site)

    Half the new jobs created in California in the last two years are connected to residential real estate. Now, 10% of all private sector jobs in the state are connected to the house price bubble.
A bit more of this and we will achieved the state in which we can all get rich trading houses back and forth without the necessity of anyone having a job.

For more on the real estate bubble, see:


Stefan Karlsson May 8, 2005 at 4:08 pm

While some indicators have suggested that the housing boom has slowed, Fed statistics on commercial bank real estate lending suggests that it has if anything accelerated. Durig the latest 3 months (13 weeks), commercial bank real estate lending rose 4.0% or 17.1% at an annual rate, compared to a annual rate of 11.1% the preceding 39 weeks.

Ryan May 9, 2005 at 8:58 pm

If there is a bubble (big if), there is a lot of money to be made if someone is well versed in short sales. I’m not a man of great economic means, but I have positioned myself to reap the rewards of a decline in property values or increase in foreclosure rates. Low interest rate financing coupled with excessive lending will have the banks begging for a short sale if the real estate market declines.

ja kel May 10, 2005 at 12:53 pm

The problem with reaping the rewards of a decline in property values is know how low it will go & how long it will take. Sir John Templeton points out the most expensive real estate in ’29 was Greenwhich, CT. It lost 90% of its value in the Depression. I’d like to know how to make money on the short side as well.

Artisan May 10, 2005 at 3:33 pm

I’m thinking about buying a house myself for 3 years now. Let’s see, what should I do now…? I guess the real austrian answer is to use a lot of my own capital and only marginally use lended money, to get a modest home, despite those low rates? What might happen is the prices plummet after interests rates rose enough… Then the banks may have problems with all their bad debts, increasing through inflation. Perhaps they’ll even go bankrupt in a worse case scenario? The whole stock market could collapse then again. I d still have a roof over my head in that case, and wouldn’t care about my stocks. Isn’t that too pessimistic though? What do you think? (I could just as well buy a bigger house with a huge credit and trade my stocks against gold, right?)

Wade May 12, 2005 at 8:27 am

Question: What caused the depression in the 1930′s?

Answer: Pop culture will tell you that this is a stupid question because everybody knows the stock market crash of 1929 caused the depression. That’s garbage. If you really go back and read the government reports you learn that the real reason was that Farmers were not able to pay their mortgages and defaulted on their loans, then the banks could not pay on the loans they got from the FED and the US government could not pay bond holders (most of them held by foreign countries). Then (this little fact blows people away every time, but you can look it up if you don’t believe me.) the US Government declared bankruptcy in 1933.

So someone please explain to me what is different this time.

If you borrow money that you can’t afford to pay back (a 3/27 30 year ARM) somebody is going to have to eat the cost. With the introduction of 40 year mortgages and interest only payments, the writing was on the wall that things were slowing down. If everything was status quo why would you have to mess with the formula?

And this one last thing… The time to get into an investment is before everyone is talking about it. As soon as it is on every magazine cover and spoken about on the radio or TV every week it’s a sure sign to get out. It’s not a question of “IF” there is a real-estate bubble, it is a question of “WHERE” the real-estate bubble is. That is if you are a home owner. If you want a loan for home what are the odds that Countrywide or any of the other national mortgage companies aren’t going to be burned by the bubble popping…? They are going to have to pass on the loss to everybody who applies for a loan after that. Orange County California real-estate goes up in flames … what are the odds that Pryor Oklahoma (a real small town in the middle of almost nowhere) isn’t going to feel the burn?

Think Big Picture and you get it. The past will always repeat it’s self to those who keep saying “This time it’s different.”

softwarengineer May 24, 2005 at 3:32 pm

You can make money during a housing bubble. Sell now and buy later. There could likely be more pressure on large home prices as baby boomers retire soon and sell their big ones for more fuel efficient ones.

I’ve been predicting no interest rate hikes for years and I was right. The real estate market was too fragile for that. Have you noticed the CPI is about half the actual inflation rate, excluding housing bubble increases? More smoke and mirrors to confuse us.

The problem is many fold though: wages for new jobs are about half what they were before 2000, US population explosions don’t add money (they take it away from households with more pieces sliced from the same pie) and we’ve let our industrial base slip into “assembled in USA”. The average household makes 1997 wages now.

Its embarrassing, so no one talks about it, especially the media.

Make money in real estate, buy after the bubble pops.


Hugh Manatee May 26, 2005 at 4:33 pm

Consider recent preparations taken to protect the federal government from fallout of a bust in real estate: greater oversight of Fannie Mae and Freddie Mac (beginning by dumping their greedy directors), frequent calls to limit their overblown portfolios (and therefore the government’s implicit liability), and passing new regulations making it more difficult to declare bankruptcy (and so dump foreclosures in the federal lap).

Gee, do you think they know something the rest of us don’t? Could “froth” possibly be Fedspeak for “tsunami”?

Ben June 2, 2005 at 4:40 pm

It seems to me the Fed has to keep increasing interest rates (beyond the June one) simply in order to force speculators to quit over-investing in real estate. Despite the recent comment by a Fed partcipant that we are in “the ninth inning” of the extended rate ratchetings.

Ben June 2, 2005 at 4:40 pm

It seems to me the Fed has to keep increasing interest rates (beyond the June one) simply in order to force speculators to quit over-investing in real estate. Despite the recent comment by a Fed partcipant that we are in “the ninth inning” of the extended rate ratchetings.

Doug June 18, 2005 at 11:56 pm

This article in the NY Times on Thursday,June 16th, is just one more piece of evidence of the pressure that is building sytemmically. I heard a speaker in April make the comment that one thing you look for is a startegy that will profit from the next wave, NOT the wave that is coming to a close. Fortunately, the financial system still allows many ways to do this.

There are managers who go long and short/ inverse index funds/ short only managers/ as well as tools that the individual investor can use. Some are easy to use and some are very complex. The emotional fortitude is probably the most difficult thing the investor has to deal with as they await the top to go over. Should be soon, but I have been saying that since 2003.

Jim Lippard July 6, 2005 at 7:54 pm

“Buy after the bubble pops” may not be good advice–if we follow Japan, we could see a decade of housing prices falling. It looks like it will probably happen faster in the U.S., but timing the bottom will be easier in hindsight than in advance.

Al July 18, 2005 at 11:04 am

Thanks for the great links and articles. I found another terrific, recent article by Dr. Steve Sjugerrud. He adds a really interesting perspective to the housing bubble debate.


Ross Brown September 21, 2005 at 9:21 am

If you want to know the measure of a bubble, the economic math is pretty straight forward and you can do it in a weekend. Go online to Rent.com and to Realtor.com and look up about 10 homes for rent in your zip code and look up 10 homes for sale in your zip code. Calculate the annual rental income per square foot and then calculate the annual mortgage cost per square foot (not an interest only mortgage, no cheating!).

Normally, the purchase price should run about 80% of the rental income, allowing for a free cash flow of 20% on the investment to pay for repairs, finding tenants, profit, etc.

I’m in Aliso Viejo. The current ratio is purchase is 170.5% of rental income per sf.

Now, you might be tempted to saw, “Hey, what about the increase in value of the home that adds to that return calculation, just like I don’t value stocks based on EPS only, but on having big Mo (momentum) in the house?”

That is the definition of speculation, of which excess speculation creates bubbles. All the geniuses who didn’t learn in 1999 from the stock market are in for a schooling.

I work as an exec at a local software company and can afford to buy. I am, however, renting and stearing clear of this market.

Pete March 28, 2006 at 9:24 pm

With the latest rise in interest rates from the Fed and more to come, the bubble is sure to burst soon, surely it’s just a matter of time.

PS. I’d like to make a call for submissions, I invite everyone to contribute:


I want this to be a one-stop shop for the hard facts relating to the bubble. If you have some interesting info, links, ideas, anything – please share them and they will form part of this page.

Please bookmark and check back often.

Housing Bubble Facts and Figures

Sherry May 10, 2006 at 5:55 pm

I live in Orange County and you are unfortunately very correct. Money has become everyone here’s God! When you start driving people out of an area like South Orange County because of something they did 20 years ago and have never re-visited because they might bring down housing prices you know you have a problem.
I am amazed at what is going on here, but unfortunately watching most of the TV programs there is no end insight, unless we do have the bubble burst. That would then hopefully drive prices down like it did when the oil business went bust in Texas and make housing affordable for the average family be they single, have children etc… It is very disheartening to watch even my own brother’s wife hope my mom will die soon so that they can get their share. Most everyone has become greedy and more than abit heartless.

The Real Estate License Professor May 18, 2006 at 6:02 pm

I have been hearing so much about this housing boom bubble and how it will burst. I will tell you one thing that I have sure noticed. A lot of people are getting their real estate licenses. Our website The Real Estate License Professor helps future realtors realize their career goals and I tell you we have helped a lot of these people lately. I am not sure if this will affect supply or demand having so many “middle men” selling but it sure is a sign that real estate is hot. I hope it stays that way.

Neil Simmons June 22, 2007 at 2:13 am

I work in Bangkok and for those of you who remember back in 1997 there was the mother of bubbles. People were stuck with bubble gum on their faces for years. However, prices have now not only reached but surpassed the pre-bubble bursting levels of mid-1997. In the long term prices will always go up.

tim August 7, 2007 at 5:27 am

It is true that house prices always go up in the long term, but the consideration is… “Have they gone up as much as other things, like money in the bank, or equity markets.

matt August 7, 2007 at 5:31 am

It’s certainly difficult to know when the right time to buy is, especially if everything is high; property prices, equity markets, gold all high at the same time. It’s not only property that has a bubble that can burst, everything that people invest in can burst, and at least with property you still own land and brick and mortar.

Jim Lippard September 20, 2007 at 10:28 pm

Now that it’s September 2007, we can look back at any economist who was skeptical that there was a housing bubble and realize they didn’t know what they were talking about.

Chris Heath December 7, 2007 at 5:36 am

There will always be a high potential for a housing bubble in the states due to the amount of space available for housing whereas somewhere like Hong Kong will grow in demand more quickly and with stability.

Alex February 5, 2008 at 6:28 am

There is definitely some serious slowing down happening right now.

Lyn Smith March 13, 2008 at 11:35 pm

Yes, the bubble has certainly hit !!

Peter Bland May 22, 2008 at 2:38 am

With new record high oil prices being reached almost every day, it’s going to have a big impact on real estate

Peter Bland May 22, 2008 at 2:40 am

Things are going to get a lot worse in coming years with such high oil prices

Frankie Taulman March 22, 2010 at 8:05 am

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bangkok luxury hotels June 29, 2010 at 3:01 am

Thanks  for posting this nice article.  I hope Bangkok and the rest of Thailand stays united despite political differences. I love this country and the Thai people.

Rob Smeed July 13, 2011 at 1:22 am

The past few years haven’t been so great, so I would say that the bubble did burst. People are now looking at alternative ways to make their property attractive, like renewable energies.

Dave Cook July 28, 2011 at 10:07 am

What with the global recession in 2009, I think it is unlikely that the housing sector will improve much over the coming few years.

Sue Clark August 19, 2011 at 7:43 am

Been there, done that, and going back for some more!

solarwow September 2, 2011 at 2:51 am

I think it’s more like a long, ongoing, neverending leak. A very, very slow flat tire.

surreysolar September 6, 2011 at 5:01 am

The way the global economy has been going for the past few years (and still is!) I don’t expect to see a housing bubble for a long time.

Amy November 18, 2011 at 6:19 pm

I just saw a TV news this morning that there are a lot of empty houses in GA. The original owner could not pay the mortgage and let them go. These houses are really good price (but really bad condition), like 4BR 1500sqf for 50K. It may better to use these properties for something than just wait for the economy get better.

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