The demand Doyle is talking about is being fueled by speculation. There is a lot of extra cash available in this country. In the late 90's, it chased stocks. Now it chases houses. This is a bubble, maybe not everywhere, but certainly in several metro areas.

Brandon:

Yes, a savings bubble.

What's the difference? Savings have to go somewhere. If not houses, then stocks or bonds or under the mattress. When the return on investing in housing is eclipsed by investing in something else, then the money will pull out of housing and that market will fall. That certainly sounds like a housing bubble to me.

where are people going to live?

the figure that defines true levels of new construction is how many people are moving (net) into the state. i read in florida they expect 70,000 families to move in, while there are 256,000 units being built.

I'm hearing stories that suggest housing prices have already peaked in certain markets. Some nice properties in San Diego have been unsold for a while - simply because no one is able or willing to pay the asking price. How long will they go unsold before the price falls? How many of these cases have to occur before speculators completely pull out and the bubble breaks?

cjm;

You also need to count the rate of house destruction, via fire, hurricane, abandonment, demolition, etc. I have no idea if that rate is significant, however.

I heard this concern from a commentator the other day that 1/4 of houses being purchased were for "speculation" (which I take to mean non-owner occupied, barring any evidence to the contrary). With roughly 1/4 of people renting rather than buying, I'd expect roughly 1/4 of sales to be to landlords rather than owner-occupants. I think people may be looking for evidence of a bubble that's not there.

There's also the interest rate factor to consider. Long term rates (like mortgage rates) are driven up by fear of inflation. If the Fed continues a policy of measured reductions in short term rates, long term rates will likely remain stable. They've actually been dropping recently. Real estate is very sensitive to long term rates. Two things could burst the "bubble" nationally. A strong bout of inflation or a serious recession.

OJ,

You are not understanding what is causing the current rise in home prices. This bubble is not fueled by people without homes seeking new ones. It's fueled by people with one or two or more homes buying new ones and seeking to re-sell them within a year, or even a few months. And they are financing them entirely through debt - interest only loans. This is the equivalent of buying stocks on margin and hoping the price goes up. When the bubble bursts, those people are going to lose their shirts and overal prices will fall as speculators desperately try to sell houses for whatever they can get.

Brandon:

yes. They'll sell them. There are 200 million people coming who'll need them in the next several decades.

aog: in florida at least, the rate of destruction is pretty signifigant :)

Brandon: So what? If someone who owns a house (or two or three...) buys another one (or two or three...) on speculation, and loses their shirt because they've misjudged the market, why should I care? You can't stop people from making bad investments. Of course, all the evidence is that buying a house right now is a spectacular investment.

OJ,

The 200 million people won't all be here in the next few years. So it will go down, a lot, before it goes back up. That's what a bubble is.

b,

I'm not telling you to care. I saying it's a bubble; and buying in at the top of the market in a bubble is not a spectacular investment.

Brandon:

A bubble is when a market makes periodic adjustments on its long trend upwards?

Oh, the humanities...

oj, what is your take on the dot.com crash of ought-two (2002), was that a correction or a bubble popping ? and if you say "correction" then when will pets.com (or innumerable other corrected companies) be recovering ?

your use of the word "correction" here, reminds me of the use of the word in "The Shining" :)

Bubble. No one was ever going to pay for stuff on the net when the next site they went to would give it to them for free. There was no there.

"No one was ever going to pay for stuff on the net when the next site they went to would give it to them for free."

Exactly. I got me a free book from this very site a few days ago. Thanks, oj!

darn, i thought i had you there :) shhhhhhh, i'm hunting rascally lawyers here

just read somethng very funny, apropos real estate:

"million dollar houses are not moving (selling) in berkley"

"they are moving pretty good in laguna"

With the dot.com bubble, price kept going up and p/e's kept going down. By the end, it was clear that everyone was trading on the greater fool theory: I know I'm a fool for buying this, but soon there will be an even greater fool to whom I can sell it at a profit.

This article is saying that housing sales continue to be strong in the face of lower effective prices (i.e., the mortgage rate is falling). On a million dollar 30 year mortgage, a 1% decrease in rates is a savings of about $611.00 per month, which is a nominal savings of $51,000 or an expected savings discounted to present value of $44,000 over the average seven year mortgage life.

OJ,

If the adjustment is large enough - yes.

Brandon:

Ah, then you're just misinformed about basic economics.

OJ,

Strange. I wouldn't have thought that my degree in economics would have worn off by now.

Karl Case and Robert Shiller define a bubble as "a situation in which excessive public expectations for future price increases cause prices to be temporarily elevated."2 Under this definition, an asset bubble can be said to exist when prices have risen faster than the underlying supply and demand fundamentals would suggest. The speculative element is a key feature of any asset bubble, as expectations of further price gains, rather than fundamental factors, begin to drive appreciation.

http://www.fdic.gov/bank/analytical/regional/ro20041q/na/infocus.html

Precisely. There's a housing shortage and one that likely can't be made up for decades.

there's no worse basis for a claim to expertise than a degree in the topic.

I wasn't claiming expertise. I was reacting to what I perceived as a gratuitous insult - that I was "misinformed about basic economics."

What would you call it when someone says massive demand meeting limited supply of a tangible asset and a human necessity has created a bubble?

its a simple thing to figure out:

how many new households are forming in a year

how many new units of housing are coming online

many of the house being purchased are sitting empty.

rents are falling in some places with the highest rates of price increase, which isn't sustainable.

what limits housing isn't houses, its land, and we have a lot of empty land in this country. i.e. supply isn't constrained.

i know a bubble when i see it and this most definitely is a bubble.

we should start a little "pool" to guess when it pops. oj can hold the money since he doesn't want to play.

cjm:

The difference is even easier to illustrate:

Mr. Schiller correctly called the dot.com mania a bubble, though the market in general obviousaly wasn't.

Now he says there's a housing bubble.

It seems certain that when the dot.com bubble burst he owned no dot.com stock.

It's equally certain that he hasn't sold his house and started renting.

stocks will go to a value of $0, a house won't.

some industry professionals are getting out of the market though, but only so they can come in later, cheaper.

vulture funds are forming.

anyone who has owned their house for a couple of years will be ok, but the speculators are going to get their asses handed to them on a platter.

but just as a forest fire enriches the earth, so will this bubble's popping stimulate wider home ownership (first time buyers will have many good deals available to them).

Many people are getting into the property management business. They are purchasing second and third homes and renting them out either by the room or to families. Even in the case of a bust, they can rent them out rather than sell. I have three friends with at least 3 homes each and they have no plan to sell any of them as they pay for themselves and will make up part of their retirement income. What other investement pays for itself while it appreciates in the long term? Certainly some areas are seeing a bubble unless there is localized ecomomic catastrophe that forces a population decline or a deep recession forcing downward pressure on rent, what is the risk?

renting them out is great, when possible. sometimes the rental market goes to hell and foreclosure rates explode; texas in the late 80's is a good example.

in the "hot" markets rents don't even come close to matching purchase costs, so what happens there over the next 5 years ?

buying right now is extremely risky bordering on the foolhardy. was gold at $790 or silver at $49 a good buy or a bad buy ? have they come back since ?

i am glad your friends are doing ok...when did they buy these properties ?

you can say houses are different than gold, or stocks, but in the end, all bubbles smell the same (like tulips :)

Texas had nothing to do with houses.

the crash in texas was about oil and oil services, but *that* had a knock-on affect that devastated housing. right now many many people are stretched to the limit financially, if their ability to carry all this debt is impacted negatively, an avalanche of foreclosures will follow.

oj, i know you know better than to extrapolate today out indefinitely.

cjm:

Yes, so if the basis of the American economy colla[pses as totally as Texas's oil economy did then housing prices will drop. That's not a bubble nor would housing values be the biggest problem.

i defer to the host of this blog :)

You accept that there's only Eric?

given that they used a body double in "Pretty Woman", I have no choice but to accept that Eric is the real person and "Julia" is the product of Hollywood chicanery. i can only imagine the horror Lyle Lovett experienced on his wedding night..."you were right honey, it was better to wait until we were married, eh, whah! NOOOOOOOOOOOOOOO"

cjm,
The homes were all purchased in the last 10 years. It can be difficult to get the rent to cover the entire cost of the mortgage unless you rent out rooms as one of my employees is doing with 3 homes. 5 bedrooms at $325-$400 month plus utilities and you only have to replace the occasional departure instead of having a totally empty property. I have considered reducing my $401k contribution to get into real estate, but I don't have nerve to pull the trigger. I keep expecting the market to take off and I want to be there when it does. I the meantime my $180k home purchased 4.5 years ago is worth $260k and I fear I've missed the boat.

patrick h: if you have missed this cycle, you will be ideally placed (with that cash pile) to start nicely on the next cycle. the transaction costs of real-estate are much higher than stocks, making it harder to make money after the "up side" of the cycle is past a certain point (and you can't sell r.e. short on the way down, either). after the foreclosures start happening en masse, you will feel better about having sat this one out. i will be unloading my house this summer, and plan on buying something in florida next year sometime.