Project

I'm collecting some links on what many people think is a real estate bubble. It is hard not to think that there might be a bubble when housing prices in my neighborhood are topping US$1,200,000 for a two bedroom house. Of course it is nice to think that it is not a bubble and that my house is making me more money than my job is, but really, how can that be?

My starting place for links is the Mises Economics Blog.

I think it will take several trips to bring the latest product from IKEA home. Where did I put that hex key?

Like Piranesi I've always been interested in ruins but the only ruins around here were the ww2 gun emplacements on the headlands. Even the Falstaff brewery (infamous in the early 80's as "the Vats" - a squatter colony) has been converted into office space. So I can only look on in amazement at the variety and scope of modern day ruins in Japan - the result of their bubble economy. The site is in Japanese, but does not need much explanation. Almost every photo series tells the story of a failed attempt at fun and enjoyment. Link: http://home.f01.itscom.net/spiral/research.html

"Strong demand and low interest rates through the early spring helped push the median price for a single-family home in the nine (SF Bay Area) counties to $622,000, according to the monthly study by DataQuick. That was 3 percent higher than the previous record of $605,000 set in March and 19.6 percent higher than one year ago." Source: www.sfgate.com

Hmmm...

Robert Kleinhenz, economist at the California Association of Realtors says this isn't a problem because low inventories will keep prices up. It is also a "foregone conclusion" that prices will go up. Where is he an economist again?

Meanwhile new buyers are facing average mortage payments of $2,659 a month. I'm wondering what the economists from The California Association of Mortgage Brokers are saying about this.

Stephen Roach from Morgan Stanley writes:

I continue to be struck by the eerie similarities between post-bubble patterns in Japan and America. Five years after the bursting of the US equity bubble, the Nasdaq continues to track the post-bubble Nikkei very closely. Is this merely a coincidence or, in fact, a visible manifestation of the long and drawn out perils of a post-bubble shakeout? ... Everyone -- from investors and recovering dotcomers to policymakers and politicians -- seems united in their conviction to dismiss this possibility as nothing short of blasphemy."

I've seen the mania around me. I'm wondering about how those who are using low APR adjustable rate mortgages could cope with interest rates of 8 or 10%. The rest of the article is definitely worth reading.

Dan Gillmor writes:

Just about everyone in the pictures is smiling. Perhaps this is truly reflective of the current reality. After all, speculation is being rewarded at the moment, as people buy and flip homes and land the way the day traders were buying and flipping stocks in 1999.

After this bubble deflates, I hope Fortune comes back with a cover story that shows how people feel when they lose everything.

It certainly smells like a bubble to me.

The Economist has an article about the global housing boom which has some interesting historical data and seeks to dispel the housing myth which states that "what goes up keeps going up".

They rely on historical data from around the world and point out that the ratio between housing prices and rent has risen and is substantially above historical levels and also that housing prices as compared to incomes have risen as well. The Economist does a good job of supplying data to back their assertions.

This has certainly become a more carefully watched trend over the past couple of months, but to me the most worrying trend is that towards riskier loans. The Economist states:

Interest-only mortgages are all the rage, along with so-called “negative amortisation loans” (the buyer pays less than the interest due and the unpaid principal and interest is added on to the loan). After an initial period, payments surge as principal repayment kicks in. In California, over 60% of all new mortgages this year are interest-only or negative-amortisation, up from 8% in 2002. The national figure is one-third. The new loans are essentially a gamble that prices will continue to rise rapidly, allowing the borrower to sell the home at a profit or refinance before any principal has to be repaid. Such loans are usually adjustable-rate mortgages (ARMs), which leave the borrower additionally exposed to higher interest rates. This year, ARMs have risen to 50% of all mortgages in those states with the biggest price rises.

It seems like the eventualities I was discussing a couple years back (see housing bubble stories here) have finally come to pass. A reader arrived here today wondering "How to finance my house loan when house price dropped". It is a difficult question. At a certain point when the money you owe is more than the house is worth no one is going to be happy about lending you money unless you have a good income stream or some other assets as collateral.

Many of the companies which were in the business of extending loans for the full value of the property with no income verification have imploded and lending standards are tightening. The entire "sub-prime" lending world has disappeared. This is happening at the same time as some of the teaser rate loans are undergoing their metamorphosis into instruments with a fairly high rate and correspondingly high monthly payments.

So the simple answer is talk to your lender. If it looks like you are going to go bankrupt or default on the loan they have some motivation to work things out with you. If they aren't willing to talk to you it is unlikely anybody else will be.