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Bubble Update:

When the chief executive of Toll Brothers, one of the nation's largest homebuilding companies says this:

"In the hot markets, I wouldn't be surprised to see a 20 percent decline," Toll said at the Reuters Real Estate Summit in New York. "You've got a price going from $1 million to $800,000, I don't have a problem with that." "I don't think you're going to have a pop, which means I don't think you've got a bubble," added the head of the luxury home builder at the summit held at Reuters U.S. headquarters in New York. "But I do think you're going to have a correction as the markets unnaturally overheat because of speculation."

It's time to run for the hills.

speedwell:
Good idea. That's where my summer home is. (Heh.)
7.1.2005 1:07pm
Joe:
So I just moved to a coastal bubble area and from the moment I decided to rent even though I could probably (if barely) afford to buy, I've had to listen to a running battle in my head between the "you're an idiot" voices and the "you're a genius" voices. W/r/t my real estate decisions, stories like this have lately given the "genius" team a decided advantage - thanks for the post.
7.1.2005 1:12pm
Steve in CA (mail):
In my coastal bubble area (Southern California), a 20% drop would take home prices down to where they were one year ago. I don't think that would be a disaster, except for people who were counting on selling after one year. And they'd be victims of their own idiocy.
7.1.2005 1:16pm
Teresa (mail) (www):
ACK! We're just about to move... (it's a necessity not because we want a new house) I guess the effect of a correction depends on how long you plan on staying in the place you're buying. I figure if we can stay in the new place about 10 years - we'll miss the worst effects of the correction and be okay. Unfortunately, you never know what curves life will throw and there will be any number of people who get hammered by a downturn.

The problem is... when will the correction arrive? I've been hearing about how it's going to happen "any time now"... for the last 4 years! Since we're selling a house - we could rent for a while - but there's no telling if the grace period we have for not paying extra taxes, will be long enough to get us through to the point where the prices drop. And there's the added expense and hassle of moving more than once in a short period of time... So, we will buy and hope for the best.
7.1.2005 1:27pm
geoff manne (mail):
David:

Why should we put any stock whatever in what the CEO of Toll Brothers thinks? And where exactly does he provide any support for his prediction (it's not even clear to me that he makes much of a prediciton). He may have a marginal edge on, say, Greenspan in predicting the future of the housing market, but I'm not sure why we'd put much stock in anyone's macroeconomic predictions -- they've been pretty consistently faulty so far.
7.1.2005 3:00pm
Aultimer:
Geoff -

When a guy who knows the market says he can sell the same price-sensitive product for $800K that he's currently selling for $1M, it indicates that the market isn't in equilibrium.

Price decline isn't the only possible change toward equilibrium, but it is an obvious one.
7.1.2005 3:33pm
Teresa (mail) (www):
You know - blogs really rock! I have to thank the people who took time to email me and let me know about the tax laws on property. Looks like if we want to do it, renting is an option for us when we move - without worrying about being hit with extra taxes.
7.1.2005 4:22pm
Anthony (www):
I'd take the CEO of Toll Brothers pretty seriously on this, too. But look a little closer at the market. There are a lot of million-dollar properties - probably more than the market will support for very long. A 20% drop sounds reasonable, and the market for houses that expensive is already quite soft. But the market won't increase or decline evenly. What happens to the $500,000 house? Will it drop to $400,000? $450,000?

I'm not too worried - a 20% drop in my neighborhood would wipe out all the gains I've seen since, um, in the past 9 months. I plan to stay there a little longer, as I don't want to give my gains to Uncle Sam.
7.1.2005 5:25pm
Robert Cote (mail):
The thing people forget about housing bubbles popping is just how few end up with bubble gum in their beards. When the last person "in" pays a million only to see a theoretical 20% loss they still own a property that they could afford at 1 million and they just aren't going to sell anytime soon. The people that bought last year at $800k have had a year of living in a nice million dollar home and are still even. People who bought any longer than a year ago are still "up." Point being the number of people "exposed" to potentially large equity declines is small and those that through unfortunate circumstance are force to realize those losses are more than likely able to afford the speculative investment or weren't qualified in the first place.
7.1.2005 5:53pm
Wince and Nod (mail) (www):
That's true. I don't live in my mutual funds, and I didn't buy my house on speculation. It was larger and closer to the grandparents.

Yours,
Wince
7.1.2005 6:29pm
Robert Schwartz (mail):
Out here in flyover country, we haven't had much of a bubble, so we won't have much of a crash. Oh well.
7.1.2005 6:55pm
gab (mail):
The real problem happens (I'm not saying it's going to, only that it could) when the market pulls back 20%, and the guy who owns the house loses his job. The bank takes it back, but there's not enough equity in the house and the bank takes a loss. And when that scenario gets multiplied 1000 times, the banks tighten lending standards, and it becomes more difficult for borrowers to qualify. Then the market becomes illiquid, the 400,000 realtors, 500,000 kitchen remodelers, 1,000,000 people in building trades, etc. all have reduced income. And the vicious cycle spirals...

Not saying it will, but not saying it can't.
7.1.2005 7:36pm
Troy Hinrichs (mail):
Joe...

I ma glad to hear someone else say that. We also made a "family" move where housing prices have outstripped my 20% income increase! We are renting and hoping for a economic collapse with the "You're an idiot" "You're a genius" spectres on our shoulders. Funny how the "You're an idiot" spirits always either seem to be mortgage brokers, realtors or people who bought 4 years ago when a house in Riverside/San Berdoo county was only 149K and not 469K.

I always repeat the mantra. "Borrowing $470,000 interest only for 40 years is bad." Repeat that over and over.

And by the way -- there's a guy from ReMax every Saturday on Cavuto's business block -- I call him "Unfrozen Caveman Realtor" -- whom I always want to slug. He is the anti-David Bernstein. "Bubble? What bubble? I just bought 20 million dollar homes yesterday!"

Ack!
7.1.2005 10:41pm
Homeless in San Diego:
gab, the problem you mention is compounded (no pun intended) by the prevalence of interest-only mortages in overheated markets like California. After the honeymoon period, payments on the principal kick-in. That principal is amortized over a shorter period, so payments are going to be higher than they would be in a conventional loan. A trillion dollars worth of honeymoons expire next year and balloons from there.

I'd be interested to know how the new bankruptcy legislation affects the ability of people to hold onto their homes when they are unable to make their post-honeymoon mortgage payments.
7.2.2005 2:13am
Sameer Parekh (mail) (www):
It appears that many of you don't understand why this is a sign of a bubble. The CEO of Toll Brothers is predicted a 20% drop in home prices. As you say, that isn't very much. He's saying, yes there will be a slight 20% correction, therefore, we're not in a bubble.

The point is that when people are saying "we're not in a bubble," then we are. I'm sure you can expect more than a 20% drop when it pops.
7.2.2005 6:44pm