Bubble Bursting:

This Washington Post article is one of many signs I've noticed lately that the housing bubble is beginning to burst (as it previously did in Australia and England), as I predicted back in March. Inventories are growing in other metro areas, banks have run out of creative financing options (once you've allowed negative equity, no money down loans, where is there to go?), interest rates are rising, new home prices (a more consistent indicator than existing home prices) are down nationwide, insiders at big homebuilding companies like Toll Brothers and KB Homes are selling like mad...

With home builder stocks at record highs, investors with some speculative money to throw around should be buying January 2007 Puts on these stocks.

Justice Fuller:
Congratulations, David. I gather you have wanted this to happen for a while.
7.31.2005 6:47pm
David E Bernstein (mail):
As a renter (and future owner), I'm glad to see the bubble bursting, but as a citizen, I've grown very concerned that the longer the bubble continues, the uglier the economic fallout. Let's hope for a "soft landing."
7.31.2005 7:14pm
Cheburashka (mail):
As a renter (who's hopes for ownership depend on a really hard, hard crash - the kind of obliterating, miserable crash that puts me in a nice two-bedroom near the top of the building with an unobstructed view and convenient roof access) I hope for a hard, hard crash.

Screw the economy. A crash is the only way I'll ever be able to own my own home in Manhattan.
7.31.2005 7:42pm
Heh, Cheburashka, I wish I could feel the same (renter in Brooklyn, here). Of course, a hard, hard crash would probably tank my business, and I wouldn't be able to buy anyway.
7.31.2005 7:59pm
Terrence Berres (mail) (www):
Does this bode well or ill for the Supreme Court Justice bobblehead market?
7.31.2005 8:21pm
John Jenkins (mail):
If someone collects enough bobbleheads, when the crash comes that person could exchange them for some nice real estate.
7.31.2005 9:08pm
I'm moving in to a new apartment in san francisco tomorrow. As a renter. Buying the same place now would easily cost me 2-3 times what my monthly, rent-controlled, rent will be.

With the rental market so soft, it's obvious that demand for housing isn't driving the price increases, but that easy lending is.

How has it taken so long for people to realize we're in a bubble? I suppose the thing about bubbles is that they always last longer than you anticipate.

Now all I have to do is hold on to my job as the effects of the downturn reverberate throughout the economy. I read that 40% of job growth since the dotcom crash has been real estate and related services. The contraction is going to hurt everyone, which is why this is not a gleeful moment.

Still, it'll be nice to be able to buy a real house in San Francisco proper in 5 years or so.
7.31.2005 9:08pm
Dan1 (mail):
It seems like things will fall here in SF; the rents are mortgages are so far out of whack. But, like the commenter above, I know a dozen people who say "It'll be nice to be able to buy a real house in San Francisco proper in 5 years or so."

So, there's definitely a limit to how far things will fall: There's a whole lot of demand at somewhat lower prices.
7.31.2005 11:43pm
David Sucher (mail) (www):
I assume that the author of this post is a renter who would like to buy.

There may very well be a leveling-off; in fact it would be extraordinary if there isn't. But look at the history of housing bubbles in desirable markets -- things come down 5-10% and then level off for a half decade or so and then climb again. Such a history -- and that is the history in Seattle where I have lived through 3 raging bull housing markets -- should not give great encouragement to renters.
8.1.2005 12:44am
Anonymous Coward:
At what point does the behavior of lenders and realtors hit unconscionable? "Creative financing" can likely get people into trouble even if the housing prices remained constant or rose slightly if outpaced by rising interest rates, and I have never seen a single representative of the realtor groups even acknowledge the remote possibility of a bubble. The market is always "as strong as ever" and "rising", even when it obviously isn't.

What check does a buyer's agent have in order to make him loyal to his customer?
8.1.2005 8:21am
AppSocRes (mail):
Two years ago, when I was last in the Washington DC area, a comparison of apartment rentals with buying prices for similar quality condos in Northern Virginia, suggested that, exclusive of any presumed appreciation in condo value, the net return on a condo purchase was very close to zero or even negative. Factoring in appreciation in value, the return got up to about the same as you could expect from an easy-to-find CD.

I'm in Boston now, and the enormous fees for moving into an apartment (due to a relatively tight rental market) make a rental much less atttractive, but the return on investment -- excluding presumed appreciation and up-front rental fees -- still favors renting over buying.

All this said, bubbles depend on psychology, not economics, and home ownership as a sign of "having made it" is a fundamental part of American culture. I suspect that the housing/rental markets in this country will always irrationally over-price housing.

Renters -- like me -- can hope for a bust in the bubble that will enable us to afford a condo/home; but short of a new population-clearing plague of epic, medieval proportions our dreams are likely to remain unrealized.
8.1.2005 9:40am
David E Bernstein (mail):
David Sucher: Home prices are already down 15% in London and Sydney. And, if you read the earlier post I linked to, you'll see that at least locally, prices declined over 30% in the early 90s.
8.1.2005 9:48am
Mad Anthony (mail) (www):
I'm a renter in Baltimore, which has seen housing prices climb around 25% the last 3 years. I was hoping to buy a house this year, but have decided to wait until next year - and I'm wondering if I should wait longer.

I find myself torn - on one hand, the prices seem way too high, and there are way too many stupid financing vehicles (no-minimum payment ARM's and interest only) that are driving prices up artificially. On the other hand, people have to live somewhere, and in a place like Baltimore where anything near the city is built up and there isn't really a place to build new homes, supply isn't going to go up - so unless there is something that restricts demand (ie massive unemployement in the region or super-high interest rates), prices won't go down.

The other thing is that there is probably a pretty large number of people who are waiting out the market, so once prices start dropping there will be a bunch of new buyers who will start buying and drive prices up, or at least keep them from falling too much.

But maybe I'm just rationalizing because I really want to buy a house.
8.1.2005 10:24am
Keith Wright (mail):
I wouldn't necessarily recommend shorting builders, because new housing can still sell in some of the worst housing markets. They may have to drop their prices in crash, but chances are that the properties will still move. Maybe if they specialize in Condos. Condos get hit really hard in crashes, because now the buyers figure they can afford the houses, why get a condo.

And a housing crash is far from guaranteed. Think about it, how many people do you know that are speculating in real estate? Compare that to how many people you knew who were day trading tech stocks.
8.1.2005 10:39am
jallgor (mail):
All of the statistics are interesting but real estate will always be a highly localized phenomenon. In places like NYC the difference of a few blocks can completely change things. What's true for D.C. or Seattle won't necessarily be true for other places in the country. My prediction for NYC, for instance, is that there will be no crash (soft or hard) across the overall market because 1 bedrooms will continue to rise in price as people seek them out in previuosly uncharted neighborhoods. Higher priced places and townhouses will start to level off or decline as the market of people who can afford a 2 or 3 million dollar home starts to get thin. That's just my prediciton.
8.1.2005 10:42am
David E. Bernstein (mail):
Actually, I know several people speculating in real estate, more than I knew who traded tech stocks. And much of the homebuilder profits comes from fortuitously rising land values, not selling homes per se. Finally, I wouldn't short these stocks because stocks can behave oddly in the short term, but long term puts provide a nice comfort margin for the inevitable decline.
8.1.2005 10:48am
Even if you don't really believe in an imminent bursting of the housing bubble, shorting builders might be a good hedge if you're heavily invested in real estate. As someone who recently put down a deposit on a condo that's expected to be completed in January 2007, I should probably think about doing that.
8.1.2005 11:47am
Mark Brady:
The housing bubble has not yet burst in England. Prices are beginning to falter in some counties near London. Search the BBC News website at to keep abreast of developments. Many commentators doubt that prices will crash. I think it somewhat likely but it hasn't come to pass yet.
8.1.2005 12:29pm
David A. Smith (mail):
It is probably not a bubble, rather the normal slowdown that occurs in mid-summer. (I write about these issues frequently; see, for instance, hCresting Bubbles?.) There is an ideal window to sell a house — list in February, show in March, sign in April, close in May. People who miss it can hit a summer doldrums that lasts through the fall. And real estate is much less liquid than stocks ... the result is not a bubble bursting, but a slow plateauing.

Many more such posts at
8.1.2005 12:54pm
I'm not sure you can extrapolate from national statistics for local markets. My expectation is that on average there is more speculative behavior than there should be and that there will be a plateau effect nationally with some downturns in local markets, on a neighborhood by neighborhood basis. What does this mean for D.C.? Its hard to tell.

In D.C., my feeling is that condos--especially those in established neighborhoods that haven't changed much in the last few years (Adams Moran and DuPont, for example)--and suburban property in Arlington and parts of Baltimore are probably the most overpriced. However, some price increases in D.C. are the result of a real recovery in D.C., which was in very bad shape 10 years ago. Much housing stock is behing rehabilitated and large neighborhoods w/ great architecture and housing stock near downtown that were once off limits have completely changed in the last 5 years. At the same time, infastructure problems with D.C. have made living centrally in the District more desirable. Its hard to disaggregate these effects from actual speculative behavior. But the bottom line is that some of the price movement in D.C. reflects a real change in the health of the city.
8.1.2005 1:41pm
Jam (mail):
I have been expecting the bubble to burst for some time now. Property taxes is a huge issue in Texas. I cannot wait for the bubble to burst so that I'll be able to continue to afford my own house. It is time that the wastefull politicians and the idiots willing to pay whatever price for a house (expecting to reap great profits later) get back down to reality.

Abolish the Federal Reserve!
8.1.2005 2:05pm
Bruce Hayden (mail) (www):
My view is that there is a bubble in some markets in this country, but not in most. In a recent Fortune article on speculation, Texas, for example, was mentioned as a potential boom market. But, then again, much of that state has the problem that land is not really all that scarce there. Not like, for example, San Francisco.

How would you identify a bubble market? I would look at two related things. First, the proportion of income being spent on a purchased house, and secondly the relationship between buying and renting. Add in whether or not there are serious barriers to future expansion. If there aren't, then I think that ultimately supply is going to catch up to demand, and those who paid too much are going to crash.

So, I got somewhere around a 25% appreciation in my house in Phoenix last year between the time I started to get it back, and when I finally resold it, a period of maybe 5 months. But what is driving prices there is that true demand is outrunning supply, esp. of new housing. In short, the builders just can't build houses fast enough. But as prices keep increasing, demand will slacken at some point, and the builders will be able to catch up. And then I think it likely that there will be at least a minor crash, or at least, retrenchment. But all those people who have bought multiple houses on speculation, and aren't covering their mortgages through rent, are the ones who will really get hurt.

Contrast this though is the situation in, for example, San Francisco or New York City. They can't really build new houses in either location. And, thus, I suspect, you are less likely to get a crash.
8.1.2005 2:42pm
analytika (mail):
Naming this thread "bubble bursting" is not only alarmist, it downright misrepresents the main article to which you link.

The WP points out that "inventories are up 50%", which means, an increase from next to nothing, to somewhat more than next to nothing; and that the days a property stays on the market before an accepted offer is "up" from 14 days a year ago to 16 days -- both of which are historically low numbers.

Not a bubble burst. Not even a bubble deflate.

The correction will come. When it does, it will be an earthquake. Not a small uptick or downtick of a statistic.
8.1.2005 3:29pm
If you listen to Zwicky, the lenders are doing us all a favor, and it is those silly borrowers who are screwing everything up. Only corporations should be able to declare bankruptcy. Let them eat negative interest!
8.1.2005 3:42pm
Jam (mail):
The Feds keep printing money (inflation, an increase of the money supply), and keeping interest rates low. This means that purchasing power is decreasing while the low interest rates is "suckering" people into debt spending. House prices (not values) keep going up because of inflation and the demand generated by the low interest rates. Where is the commesurate wage increases? No where so there is no savings. People are trying to use housing as a means to generate capital. Many of us keep making adjustments in spending just to be able to keep with property tax increases (due to the higher valuations).

Fiat money is a ponzi scheme, (like SocSec) and will collapse of it own weight.
8.1.2005 4:33pm
chitrader (mail):
Am I the only one who finds fault with the statement "I remember Boston in 1982 to 1989, when [prices] went up 25 percent a year for six years, and then in one year [they] fell 87 percent." (Emphasis mine) So a house that listed in 1989 for $1 million the next year sold for $130,000? That seems very unlikely to me.
8.1.2005 5:43pm
James Ellis (mail):
Be careful what you wish for: one of the elements propping up the residential market is attractive financing. Nobody really expects home prices to drop by 25% or more. A 50% drop is extremely unlikely. On the other hand, interest rates could increase 50 to 75% and still be in the single digits--thus it could cost significantly more to purchase the same home "post-crash" than right now.

Also, the real benefit of home ownership is leverage. It's tough to get into large investments with such small down payments. Your equity can grow much faster than the rate of appreciation. Renters who are trying to stay out of the market are well-advised to seek out the opportunity to make leveraged investments in other sectors.
8.1.2005 7:28pm
Ted (www):
I noticed that, too, chitrader. Typical press innumeracy.

Bubble deflation will vary widely from geographic region to geographic region, even within DC. The infrastructure for the DC area is such that there's always going to be huge demand for the more desireable central locations. The government's not getting any smaller, and only so many people want to commute for an hour each way. When interest rates rise, prices will go down to reflect what people can afford, but that indicates something gentler than an "87% decrease" and probably no worse than 15%.
8.1.2005 7:29pm
And unfortunatley, a 15% drop only puts us back to last year's prices. If you couldn't afford one then, you're problably not that much closer now. If I want a real price drop I need to be thinking more about Indianapolis and less about staying on the central coast of California.
8.1.2005 8:49pm
The 30% number in DC is about right, but the bottom was mid 90s. At the worst of that dip, I saw townhouses in my Falls Church neighborhood go from 200K to 150K in a handful of years.
8.2.2005 10:01am
Steve in CA (mail):
Actually, the Wall Street Journal had a story last week (can't find it online right now) about how in Australia, the bubble didn't "burst," it deflated gradually. Home prices stopped growing, but the bottom didn't fall out.

Remember, just because there's a bubble, doesn't mean it has to burst.
8.2.2005 3:47pm
Richard Cook (mail):
I think that people wishing for a BIG crash in places like S.F., Boston, etc. will permanently be out of luck. Desirable locations will always be desirable regardless of the market condition. S.F. will always have those views, etc. It seems that those places have a built in cushion for catastrophic falls.
8.2.2005 5:37pm
Californio (mail):
Highly unlikely any great deals will come about from a deflating bubble. Also, the factors contributing for deflation should also reduce if not eliminate the financing likely to be used by those seeking to buy such "deals". Note: if you own real estate now in a hot market, sale and waiting to jump back in (timing) will likely result in a large increase in your tax basis for property taxes. (California in particular)
8.2.2005 9:38pm
Eh Nonymous (mail) (www):
Am I the only one here who thinks that Terrence's comment, above, was the most urgent question yet asked in this thread?

Terrence Berres wrote:
Does this bode well or ill for the Supreme Court Justice bobblehead market?
8.3.2005 11:17am
Rick Cendo (mail) (www):
Man, I am SO happy I happened upon this posting yesterday. It got me thinking and I decided to sell my Beazer homes yesterday and book a 102% profit. I still have Standard Pacific and DHI, which are getting killed today. But the Beazer sale cut my exposure by more than half. THANKS GUYS!!!!
8.5.2005 1:33pm