The word ‘bubble’ is getting thrown around a lot these days, provoking thoughts of gloom and doom from the not-so-distant past.
Here is what wiki has to say:
A real estate bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It can be identified through rapid increases in valuations of real property such as housing until they reach unsustainable levels and then decline.
http://en.wikipedia.org/wiki/Real_estate_bubble
But that definition describes the value of any product in a free enterprise system – all prices go up and down with supply and demand.
People who insist on describing today’s real estate market as a ‘bubble’ are trying to imply that rising prices will cause a crash like the last one. Because the media has trained us to prefer hysteria and chaos, we start believing another crash is coming.
Just because prices are going up rapidly DOES NOT mean we will have another crash like the last one.
We need more than just rising prices – we need loads of properties being dumped at any price to burst a bubble. Otherwise, you just have a lot of people stuck in their homes, which isn’t a bad thing – not bad enough for them to sell at any price.
Once we top out, look for prices to meander, not crash. The banks learned their lesson – they will let deadbeats live for free before dumping any more houses, and investors who are receiving solid-and-improving rents won’t be in a hurry either.
Our current tax system promotes dying with your house, so it’s likely that the baby boomers will ride it out too, unless they really need the money.
It’s unlikely that we will have another ‘crash’, but it’s probable that you will be stuck with your house for a long time – like it or not!
Buyer beware – get good help!
The last bubble burst due to exotic financing – giving mortgages to people with little or no qualifying and no skin in the game. When times got tough, it was easier for them to bail out, and the banks dumped everything for whatever the market would bear.
How will we know if the next bubble will burst?
SIGNS OF HOUSING BUBBLE ABOUT TO BURST:
•Easy or no mortgage qualifying.
•No down payments required.
•Bank presidents selling $17 million in stocks every five days while telling people that everything was fine (Angelo Mozilo).
•Economic depression setting in.
•Natural disaster throwing people out of work.
•Man-made disaster throwing people out of work.
•Big investor groups who are bulk dumping.
•Baby boomers flooding the supply.
The current bear case is “too many cash buyers”, which I find ironic.
@Booty Juice
“The current bear case is ‘too many cash buyers’, which I find ironic.”
Indeed, but I think it begs the question of how that cash came to be. Did the cash come from the sale of assets or savings? Or did the cash come from more financing and leverage?
Ok, I should have said it begs the “questions”.
Soros stated:
Under normal conditions misconceptions are self-correcting, and the markets tend toward some kind of equilibrium. Occasionally, a misconception is reinforced by a trend prevailing in reality, and that is when a boom-bust process gets under way. Eventually the gap between reality and its false interpretation becomes unsustainable, and the bubble bursts.
He was talking about stocks, but the same applies to virtually any market — including housing. The question of bubbles ultimately comes down to sustainability.
Are current market conditions sustainable?
Are current market conditions sustainable?
I think they are, only because we just need 300 sales per month, out of 300,000 people.
The sales are definitely sustainable, prices I’m not so sure. I will tackle that one tomorrow.
I think a good portion of the cash buyers are pulling funds from the stock market in order to purchase the properties. The stock market has increased quite a bit since 2009 lows and this has left a number of people sitting on some nice returns.
If the stock market does not continue to increase going forward or only treads water (i.e. side ways) we may not see so many cash buyers purchasing property. This is just my viewpoint on the situation.