Can You See The Bubble? The Dangerous Disconnect Between Home Prices and Fundamentals

News Type: Event — Seeded on Thu Aug 23, 2007 7:30 AM EDT

Article Source: efinancedirectory.com

us-news, money, economics, real-estate, mortgage, income, sub-prime, bubble, housing-bubble, home-prices

Today's home prices can best be described as a recession in the making, but are most often referred to as a bubble. Prices have grown so much in the last decade that they are now completely disconnected from the fundamentals that have historically ruled the real estate market. Today's prices are not sustainable and the graphs and analysis below demonstrate why.

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6.8

3.4

{"commentId":969380,"authorDomain":"killfile"}

Killfile

The graphic in this story gives a really great visualization of the housing bubble.

{"commentId":969380,"threadId":"141426","contentId":"914642","authorDomain":"killfile"}

5 votes

#1 - Thu Aug 23, 2007 7:47 AM EDT

{"commentId":970251,"authorDomain":"emix"}

Evan Mix

The graphic of the Japanese housing boom in the 1980s is particularly enlightening.

{"commentId":970251,"threadId":"141426","contentId":"914642","authorDomain":"emix"}

2 votes

#1.1 - Thu Aug 23, 2007 1:57 PM EDT

{"commentId":969530,"authorDomain":"handshake"}

Handshake

Accurate and level-headed. I remain optimistic, hoping that the recent scare motivates banks to lend more cautiously. It's not just mortgages: credit in the U.S. is extremely easy to obtain in general. A negative net national savings rate cannot be beneficial in the long run.

{"commentId":969530,"threadId":"141426","contentId":"914642","authorDomain":"handshake"}

4 votes

#2 - Thu Aug 23, 2007 9:35 AM EDT

{"commentId":970284,"authorDomain":"MinnieApolis"}

MinnieApolis

I agree there is a bubble in home prices, especially in California. However I disagree that prices would ever fall to pre-bubble levels, or that this kind of price inflation is unprecented.
There is always some sector of the economy that serves to absorb inflation - kind of a "inflation sink" if you will. In the 60's the stock market was flat so inflation was absorbed by other sectors. In the 70's of course oil and other commodities exploded in price, probably due to the severing of the last tie between the dollar and gold. The stock market absorbed inflation in the 1990's, and real estate since the dot-com bubble burst.
Since the 1960's, prices have risen an average of 8-10 times. For example, gas was about 25 cents/gal in 1960 and 35 cents/gal in 1969. You could buy a house for $12,700 in 1960 and about $15,500 in 1969. So a modern price tag of say $125K or $150K is within a reasonable range.
What has changed is that in the 1960's just one income could afford to pay for that house. My father, bless him, could earn enough to keep a roof over our heads, some hamburgers on the table and and buy a couple savings bonds. NOW we need twice the work-hours, provided by the two-income family, to buy that house. Maybe if we had remained content to live in the modest-sized houses of an earlier generation, we could afford a home.
But we are spending every dollar we earn on things that advertising tells us we have to have or we are hopeless sticks in the mud. I'm getting off the subject now, sorry, but I have introduced some other factors to be considered in the equation, so take it away.

{"commentId":970284,"threadId":"141426","contentId":"914642","authorDomain":"MinnieApolis"}

1 vote

#3 - Thu Aug 23, 2007 2:06 PM EDT

{"commentId":970306,"authorDomain":"wharrison55"}

Bill Harrison

As a r.e. professional I can safely say that most of the "bubble" is concentrated in highly populated areas like here in DC, NY, FL and CA. Much of it was driven by nothing more than sheer speculation. As housing values rose, people cashed out of their existing homes and plowed the equity into new purchases thinking values would continue to appreciate by 25%/annum. I told several friends they were crazy to do that and now they wish they'd listened to me. I foresee a recession at the end of this year that will be short-lived and by this time next year the housing markets should begin recovering. Real estate always leads the way into and out of a recession. Over 40,000 people have lost their jobs in r.e. related businesses since the bubble burst and more job losses are on the way.

{"commentId":970306,"threadId":"141426","contentId":"914642","authorDomain":"wharrison55"}

1 vote

#3.1 - Thu Aug 23, 2007 2:13 PM EDT

{"commentId":970899,"authorDomain":"MinnieApolis"}

MinnieApolis

Thanks for that detail.
Your friends are probably wishing they'd listened to you, hey. We try to help, we try, but people always think and hope that when they play musical chairs, that they won't be the ones without a chair (or buyer).

{"commentId":970899,"threadId":"141426","contentId":"914642","authorDomain":"MinnieApolis"}

1 vote

#3.2 - Thu Aug 23, 2007 6:18 PM EDT

{"commentId":970962,"authorDomain":"wharrison55"}

Bill Harrison

Laura, I'm in commercial r.e. Roughly the same thing happened back when Congress changed the tax code in '86 which triggered the S&L crisis. Developers were putting up bldgs. with little need for them because investors could write it off on their taxes. Lenders were only too happy to make 100% LTV loans. Then Congress changed the law and kaboom!! Not only did a lot of S&Ls go down but developers and even some law firms as well.

{"commentId":970962,"threadId":"141426","contentId":"914642","authorDomain":"wharrison55"}

1 vote

#3.3 - Thu Aug 23, 2007 6:48 PM EDT

{"commentId":973375,"authorDomain":"MinnieApolis"}

MinnieApolis

What exaggerates the effect of this real estate softness is that everyone - the Fed, Bush, banking industry, housing construction - was depending on the home sales/construction sector to prop up the whole economy!
Now this leg is getting pushed out from under the economy and now watch it all go kablooey. Not necessarily a big market crash like 1929, no, but it is going to dry up capital and hurt millions of people.

{"commentId":973375,"threadId":"141426","contentId":"914642","authorDomain":"MinnieApolis"}

#4 - Fri Aug 24, 2007 6:06 PM EDT

{"commentId":973465,"authorDomain":"wharrison55"}

Bill Harrison

Laura, the r.e. industry has always been one of the bulwarks of the economy. Lots and lots of jobs associated therewith.

{"commentId":973465,"threadId":"141426","contentId":"914642","authorDomain":"wharrison55"}

#4.1 - Fri Aug 24, 2007 6:58 PM EDT

{"commentId":973627,"authorDomain":"MinnieApolis"}

MinnieApolis

BILL -
I THINK WE ALL KNOW THAT HOUSING HAS LONG BEEN A MAJOR PART OF THE ECONOMY.
WHAT I AM SAYING IS THAT LATELY IT HAS BEEN JUST ABOUT THE ONLY ACTIVE SECTOR OF THE ECONOMY.
OK?

{"commentId":973627,"threadId":"141426","contentId":"914642","authorDomain":"MinnieApolis"}

#4.2 - Fri Aug 24, 2007 8:30 PM EDT

{"commentId":974100,"authorDomain":"wharrison55"}

Bill Harrison

Uh, no.

{"commentId":974100,"threadId":"141426","contentId":"914642","authorDomain":"wharrison55"}

#4.3 - Sat Aug 25, 2007 4:58 AM EDT

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Can You See The Bubble? The Dangerous Disconnect Between Home Prices and Fundamentals

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