Some bubble, some burst.

Most places don't have a real estate bubble.

Of the 53 metro areas that do, a 1% decline is just not in the cards.
10% - 40% is more like it.

Michael--Be serious. What area do you predict could drop anywhere near 40%?

Manhattan if al Qaeda sets off a dirty bomb?

Las Vegas is up 30% this year alone. It can happen.

Between 2000 and 2003, according to U.S. Census Bureau estimates, new domestic residents accounted for a 25.9 percent increase in the population of Clark County.

Robert--

What's your feeling on the Twin Cities?

According to a yahoo biz article that somebody around here linked to, the Twin Cities are number 10 in a list of markets bound to pop. San Francisco is 7.

http://biz[dot]yahoo[dot]com/special/re05.html

(I spelled out the dots in url because brojudd doesn't like the url otherwise).

b:

Not overnight, if that's what you're thinking, but SoCal and Southern Florida are outrageously overpriced.
Boston and NJ-NYC are also far too high.

Since large corrections in real estate prices have occurred at many places and many times in the past, what causes you to believe that real estate prices cannot now drop ?

oj:

Well, that's certainly one input into the equation.

Actually, the population of Clark County, NV increased by 16.2% between 2000 - 2003.

Between 2000 - 2004, the population increased by 23%.

Now find out how many more housing units were built, and whether the vacant housing stock is larger or smaller than it was in 2000, by what percentage incomes have increased since 2000, and by what percentage housing prices have increased since 2000, and you'll begin to be able to assess whether current Vegas home prices seem to be sustainable.

However, I'll save you the trouble: The answer is no.

If they're lucky, they'll just get a soft market where prices remain flat, homes remain unsold for long periods of time, and owners are likely to take lowball bids.

housing stock hasn't increased enough to keep up and can't--thus prices go higher.

Michael: I don't believe real estate prices cannot drop. I just don't see how it can happen at anything approaching the numbers you're throwing around. And I don't say so gladly, since I live in Southern California and would like to buy a house soon.

There's just nowhere near enough supply to satisfy demand. I don't understand what your "outrageously overpriced" means in this context. "For Sale" signs become "Sold" signs within 1-2 weeks without exception. Houses listed for sale regularly note that work has been done without proper permits, and it's up to the buyer to clear it up. Within a few miles of where I live there are probably a dozen condominiums being built--obviously the developers don't think that the market is going to crash anytime soon.

That Pew poll shows that 70 million Mexicans would like to move to the States. If you start building now how long will it take to house them?

b:

Ten years ago home prices in Southern California had declined 20% - 40%, depending on whose numbers you like, over the course of five years.

Not only can it happen, it has happened where you're at, quite recently.

Demand is made up of two components: Organic demand, for necessary shelter, and speculative demand, for profit.

Organic demand is relatively inelastic.
Speculative demand is COMPLETELY elastic.

Thus, it's not enough to say that homes are selling like hotcakes, you must also know who's buying them.
According to a study by the National Association of Realtors, about 40% of residential real estate transactions in 2004 were sold to people who ALREADY owned one or more homes.

That means that the supply of homes on the market could easily double or triple in a very short time.

oj:

housing stock hasn't increased enough to keep up and can't--thus prices go higher.

Based on your research, or your fertile imagination ?

Those 70 million Mexicans aren't all coming next year, and when they do come, they won't be buying $ 700,000 SoCal homes.

If you'd like to argue that they will support the market values of starter homes, I'm receptive to that stance.

b:

Developers always keep building until there's a glut of unsold homes.

ALWAYS.

Their game is "hot potato" - ride the streak as long as it lasts, and hope that they've managed to unload most of their inventory before they have to discount.

Michael:

"Developers always keep builing until there's a glut of unsold homes."

I agree with this 100%. Which is why I won't believe there's any chance for prices to come down until I can drive around and see no new construction.

"Ten years ago home prices in Southern California had declined 20% - 40%, depending on whose numbers you like, over the course of five years."

Sounds fabulous. At that time the SoCal economy was a wreck from the post-Cold War slashes in military funding. Why would such an economic shock happen again anytime soon?

Also, can you point me to a plot of housing prices here over time that shows such a drop, because I can't find anything on google?

Michael:

With respect to the 20-40% price decline in Southern CA, do you mean houses (initially) costing $1 million sold for (say) $700,000? Or do you mean that houses costing $10 million sold for (say) $7 million?

I am quite sure you did not mean that houses costing $500,000 sold for $350,000.

Michael:

Where are the empty houses?

Michael:

Where in CA are homes 40% lower in cost than they were twenty years ago?

b:

http://www.ocalmanac.com/Economy/ec37.htm

Adding the effects of inflation, median home sales prices declined:

In San Diego by 21.5%
In Riverside/San Bernardino by 29%
In Orange County by 30%
In Los Angeles by 34%
In Ventura County by 37%

Of course, median home prices are a crude measure of comparison, and we'd have to dig deeper to compare like homes to like homes, but clearly declines in home values of 30% or more are possible.

The SoCal economy doesn't have to crater, it'll be enough if everyone who can qualify for a "no money down, interest only loan" buys a home, demand drops, home prices stop rising, and people start putting their second and third homes on the market, increasing supply into the teeth of declining demand.

Michael:

That chart refutes your own argument, far from a bubble bursting it reflects a very brief price adjustment followed by not just a return to past valuations but an easy eclipse of them. That's how healthy markets work.

jim hamlen:

Yes, that's exactly what happened - $ 500,000 homes sold for the equivalent of $ 350,000.

oj:

The point is that many people don't have ten years to wait to be made whole.

You don't want to call it a "bubble", fine.

Right now real estate values in many markets are vastly overheated, the current prices will not hold, and many people will get hurt, some of whom undoubtedly deserve it.

To be nonchalantly dismissive by pointing out that people who hold on for a decade won't lose money is a startling misreading of human nature and of modern American culture.

Michael:

Homeowners do.

Michael: Let's look at those numbers:

Here is the percent change each year for LA county:
2004 9.8
2003 21.5
2002 18.5
2001 15.4
2000 8.5
1999 3.8
1998 8.6
1997 2.1
1996 -3.9
1995 -4.9
1994 -3.2
1993 -7.3
1992 -3.6
1991 3.0
1990 -1.3
1989 20.1
1988 22.0
1987 8.3
1986 8.5
1985 2.9
1984 2.3
1983 -0.6

So 1988-89 were a couple of very hot years, followed by a flat year, then a small growth year (a rebound effect of those who thought things would keep going up?), followed by 5 years of slight price declines. By "bubble bursting" I usually think of the stock market from a few years ago, where the 1-year drop was just tremendous, but these numbers look nothing like that. Granted adding up these 5 years gets you to a 20% drop, but how much would you spend on rent during that time? I'm not disputing that there are people taking out completely reckless mortgages right now (you obviously have to be aware of what you can actually afford), but it seems to me that hoping for a major price correction to come along in a probably futile attempt to "time" the market is pretty reckless, too.

Thanks to the lapsed MN property tax "circuit breaker" law, most homes in MN must now be assessed at full market value.

The house I bought in a Minneapolis burb in 1995 for $160K is now valued at $400K by the county property tax assessor.

If this is a bubble, it can't burst fast enough.

oj:

No, they don't.

According to Consumer Reports, the average homeowner moves every five to seven years, so in a long, slow decline, more than half of all households who owned at the peak are going to feel the pain, and a significant number of households are going to sell for less than they paid.

The non-average homeowner, with multiple properties in these hot markets, is going to get scalded, perhaps ruined.

b:

You'd spend less on rent during those five years than you would on mortgage payments, and you don't end up with negative equity in your home.
However, trying to market-time the purchase of a primary residence is, in most cases, more trouble than it's worth.
Purchasing is mainly a lifestyle choice, anyway.

The case for buying investment property is much more complicated.

Michael:

They won't move if the value of their house is down. They'll wait a year.

Speculators getting ruined is no big deal.

it's amazing to me how obtuse some of you cats can be... one of the sharpest tools in your tool belt not only explains in clear language the basics of supply and demand, but also cites authoritative references and you refuse to give him his due.

you really are the 2+2=5 crowd.

i bet i'll make more money shorting construction and real estate stocks and shorting bonds in the next five years than mr. moneybags obc will make being long his energy stocks...

Michael:

You argue as if real estate markets stood in splendid isolation from the rest of the surrounding economies. What would you have recommended all those clever Southern Californian renters invest in instead--pet.com?

Any city that relies heavily on one economic venture will see its real estate market reflect the ebb and flow of the fortunes of that activity. Resource-based cities will lose property values if the resource industry constricts. Government towns will suffer house price declines when the bureaucracy is cut. It seems to me that your argument is more that people shouldn't buy in cities given over to the blacksmith industry than that houses generally are poor investments. Are you suggesting the 53 major cities you think have housing bubbles all have poor general economic prospects?

lb:

I donm't think Ms Steen is a conservative, but, regardless, her numbers show the absurdity of bubble bursting talk.

oj: piffle

Okay, the piffle of such talk.

You argue as if real estate markets stood in splendid isolation from the rest of the surrounding economies. What would you have recommended all those clever Southern Californian renters invest in instead--pet.com?

No, Phoenix. Or Dallas. BTW, the renters aren't investing, the landlords are. When renters can't afford the rent, they move. Buyers too. You're seeing a migration from the coasts to the middle, driven largely by housing costs.

Now, as far as the renters-speculators go, they are so far ahead of the market that there is a glut of rental properties in many markets, which is actually supressing rents. Good for the renters, but bad for the investors if they can't flip the property in a few years. A true real-estate investor would factor in the cashflow side of the equation to determine a fair price.

You are right about the real estate market's interconnectedness to the surrounding economy, which will actually tend to exacerbate any slump. The recent housing boom has generated an additional 1% increase in GDP growth. So even if real estate goes back to a historically average rate of appreciation, we will see a 1% drop in GDP growth. If it flattens or even goes mildly negative the effect will be much more dramatic.

Brian,
From what I've read, the Twin Cities are moderately in bubble territory. An article this week rated the markets by the percent they are overvalued, Mpls was 37th, I think.

Where are the next 200 million Americans going to live?

With their parents.

It doesn't matter that there is huge demand, houses won't get built unless they can be sold, and they won't be sold at prices that potential buyers can't afford. You won't see 100 year mortgages here, we don't let people make financial obligations for their unborn grandchildren. In the long run prices (or more accurately, the cost to service mortgage debt) cannot outgrow income.

It doesn't matter that there is huge demand

Good one!

Unless mortgage rates go over about 9% in the next 18 months, any burst is likely to be slow - you know, the way most of us open a can of Pepsi that has been dropped.

Of course, in Southern CA they just rip that little wedge at highway speed, so they get fizzed a bit. :>)

Of course, then you have most of that can of Pepsi, but, unlike the housing market, it doesn't refill itself and add a few extra ounces almost immediately.