Bursting the Bursting the Bubble Myth
Chuck Ponzi August 6th, 2006
Another write weighs in on the subject of whether there is a housing bubble.
Jerry Bowyer from Renew America tells us:
A few weeks ago, BuzzCharts came across this headline: “80% Believe Housing Bubble.” Now, we don’t claim to know everything about the housing market, but we do know this: If 80 percent of people believe that an asset is grossly overvalued, it’s not. By definition, there’s no way the crowd can believe the crowd is wrong and be right in believing it.
His “fuzzy logic” is about as backwards as can be. If anything, if 80% of people believe something, it is most assuredly a self-fulfilling prophecy at the very least.
If I can, I will try to conjure up an image in your mind a more complex model of life than to simply state fabricated absolutes as Mr Bowyer with his concocted excel graphs that tell the lies of a million data points tortured beyond imagination.
Imagine housing as a gigantic cruise ship with the FED captain at the helm. It’s only known source of power is a gigantic lever labeled “thrust”. Unfortunately, there are no markings, no indicators as to the actual speed this thrust lever creates. While the captain is able to modify the speed by pushing or pulling this lever, he is in fact, unaware of exactly how much thrust he is putting into the ship. He also realizes that if he pushes it too much, he can run the risk of overheating the engines and burning up all of the fuel. On the other hand, if he pulls it too much, they won’t reach land in time to keep passengers satisfied. In fact, it might well be that the elusive “sweet spot” does not exist, or that it is constantly changing based on the output the engines exert.
Just the same, when the ship is buffeted by large waves, the captain must push the lever as much as possible to keep from capsizing. On the other hand, with a strong current from behind, the captain must ensure he pulls the lever back sufficiently or the boat could as well capsize from excessive speed.
The truly tricky spots are when the captain realizes that his speed is getting too high. If he eases up on the lever and if he pulls back too hard, the engines slow the ship too quickly. If he does not ease up enough, the ship’s speed could cause a catastrophe. On either side of these scenarios lies a perilous outcome.
This model, too, is too simple for reality.
Psychology, Sentiment, or whatever
Imagine if you will something from science fiction… the passengers also had control of the power in this cruise ship. Imagine that through their collective consciousness, they can affect the exertion on the ship, both in forward and reverse motion. This is also a component of our economy that Mr. Bowyer is either unaware of or simply fancies it “noise” in his graphs.
Believe me, if 80% feel that something will fail in the economy, it would take a miracle for it to not happen. That collective belief will keep people from buying; not wishing, not hoping, but FEARFUL of the unknown. And, as time goes by, that fear grows, gnawing at their insides. They hear of downsizings in the auto markets, outsourcing to China and India, increased inflation, higher prices in everything, and worst of all, housing is the most expensive anyone can remember; even after they account for their paycheck, which has not kept up with the cost of everything else. And, they have saved nothing for a rainy day.
This is the fear that grips America at the present time. This is the fear that will bring down housing in the United States. No, not fast at first, remember we are on an enormous ship with a great deal of forward momentum, but nothing, and I mean nothing can compare to the power of consumer fear. Stuffing dollar bills in their pockets cannot change their minds when they do not believe it will be there in 5 or 10 years. Irrational as some may believe it to be, it is real nonetheless because they BELIEVE it to be real.
So, Mr. Bonyer, you can continue to preach your non-bubble apologism, but for the rest of the US, we will continue to be concerned. As we well should be, many people will get hurt from this, and many, many more will be owing for the rest of their lives.
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“The House Party in SoCal is done…accept it or stay in denial and get burned.”
I bet you were equally as confident three years ago when you told all your friends that “no way” prices would go higher. I hope they didn’t listen to you.
P.S. — Anyone like me who bought in ‘96 has pretty much seen their home price triple. Just how far south do you see prices going, Nostradamus?
The last time the inventory of homes for sale was at that magnitude in SD was in the early 90’s…guess what happened then? NO, prices didn’t go up.
Actually, they have never been at that level, not even adjusting for population increases. bubbletracking blog has some great insights into the glut of inventory over time as it has grown. Will it go higher? I’m actually thinking that we’ll come off of the high number of listings later in the year through seller frustration or “waiting to get a jump on next year”, which unfortunately was what was said late last year and we had the “silent spring”. Unfortunately for many, I dont’ think we’ll see the heydey of 2004 and 2005 for a long, long time, perhaps 15 years or so.
You bought in ‘96? Then you just validated my point. Those who bought with suicide loans in the past 3 years or so in So Cal could find themselves in trouble. It doesn’t have to be the majority either. The comps are set at the margins in RE sales.
How much you say. I’d say 30 to 35% in nominal value from the peak in August 05. Could overshoot because panic might set in.
Of course if you bought in ‘96 you’ll be okay right? Unless of course you refied out several times to buy plasma screens and Hummers and vacations…then you might have a problem.
“How much you say. I’d say 30 to 35% in nominal value from the peak in August 05.”
Since prices rose about 40 percent from Aug 03 to Aug 05 you are only talking about giving back two years of a ten year boom. Even if you only look at the true boom part as five years, you’re still only talking about giving back two years. How much harm is that going to do to anyone but the most recent buyers who had to really stretch and use exotic loan products to buy their home?
And how much re-fi do you think someone could have done who’s seen their home price triple. I mean, do you think there’s a lot of people who bought in ‘96 who have taken out a million dollars of equity? That seems nuts. I don’t have a Hummer or a plasma screen. I bought a digital camera and a mountain bike — does that count?
You say panic could set in and drive prices down even more than 35 percent. In LA proper, prices went down 50 percent from ‘89 to ‘96 (and then approximately tripled since.) There was an earthquake, riots, fires and the virtual end of the aerospace industry, but I don’t think there was any panic.
If this really is a bubble (it’s not) then it’s certainly a much bigger “bubble” than the price rise of the late ’80s, so logically, wouldn’t the burst be bigger than the 50 percent drop we saw the last time? It seems to me that you like to say you’re a bear but that you’re really a bull in bear’s clothing. To say that after the greatest housing boom in U.S. history we’re going to give back 30-35 percent, well, that’s nothing, that’s just a normal market correction because maybe things got a little carried away at the end by some young people who weren’t old enough the last time around to understand that home prices are set in a market and can go down.
If you haven’t bought a house and feel home prices will drop by a third, I suppose it might make sense for you to wait. But if interest rates rise by a third in the meantime (very possible, that’d only mean a couple points) then your payments will stay the same anyway!
It seems to me you need to figure out which side you’re on. Either look at this as a Japan-level bubble that will send housing prices down 60-70 percent or see it as a short-duration bump on the road to ever greater equity. My parents bought a home in SoCal in 1964 for $16,000 that’s worth about $585,000 today. That’s about a 36-fold increase. So the million-dollar house today could cost $36,000,000 in 30 to 40 years. That looks insane but that’s how prices work. So wouldn’t just about anyone be better buying today for one million if they can hang on and make the payments than wait and pay $36 million tomorrow?
I’m definitely not a housing bull by any means. I will clarify my statement. At least 30 to 35% in “nominal” terms on a “nationwide basis”. That means the bubbly areas like So Cal will experience higher declines unless something intervenes..such as the Gov’t.
“And how much re-fi do you think someone could have done who’s seen their home price triple. I mean, do you think there’s a lot of people who bought in ‘96 who have taken out a million dollars of equity? That seems nuts. I don’t have a Hummer or a plasma screen. I bought a digital camera and a mountain bike — does that count?”
Yes, I do think there are a lot of people in SoCal that did exactly that. They bought houses in the Inland Empire, Arizona, Florida, etc. They’re speculators or the perjorative “flippers”.
I think Realist/Anon is a paid shill for the RE industrial complex.
He is here posting quite long comments that barely make sense, with contradicting cliches.
See the discussion on this topic here:
http://piggington.com/are_hous.....overt_publ
Realist/Anon:
while you are there go ahead and read the bubble primer.
“Yes, I do think there are a lot of people in SoCal that did exactly that. They bought houses in the Inland Empire, Arizona, Florida, etc. They’re speculators or the perjorative “flippers”.”
I was thinking of owner-occupied homes. You are right that there are probably people who took all the equity to buy another property and so on. But by now the speculators have already fled the market (ask any real estate agent or read about it online) and prices still have not dropped.
“I was thinking of owner-occupied homes. You are right that there are probably people who took all the equity to buy another property and so on. But by now the speculators have already fled the market (ask any real estate agent or read about it online) and prices still have not dropped.”
No, only the smart money has left the RE market. The dumb money is still in it thinking that there will be a softlanding and the 20% / year appreciation engine will resume in 2007. That’s why the price’s haven’t fallen drastically yet. There are already price declines in SD county. Seriously, do you think that the schumcks making $50K a year signed up to buy a 600K house using an I/O because they weren’t “speculating” on appreciation??? Wait until the first wave of resets in I/O’s start, which is not far off. You’ll see the foreclosures spike even more than they have in the past couple of months.
Anon Who’s Pro Housing Price Increase:
You say that the prices tripled…ok great. Please remember that price increases and decreases are based on their “present” values.
For sake of example, let’s say you bought your house for $200K…it triples to $600K.
Then it loses 50% and goes to 300K. The loss, while not affecting you, will devastate many buyers who bought in the recent years. Why is that so difficult to understand and accept?
You can’t compare someone who bought a house 20 years ago to someone who bought a house 2-3 years ago during a stupid out-of-control housing boom.
The foundation for price increases simply is not there…the reasons for the increases are not “economically” justified and are not healthy….much in the same way where someone goes on a crash diet…you lose the weight but it’s not the proper way to do it.
Still..many of you advocates of housing STILL have not answered questions I posed many treads ago..
How do you propose that people afford housing these days when the average monthly mortgage is going to be well over 3K/month??
Please read this in today’s news:
http://www.msnbc.msn.com/id/14251743/
All I know is that everything within half a mile of Anaheim Stadium (light industrial and medium-level motels) has been torn down and replaced by construction fences pumping CONDOS! CONDOS! CONDOS!
Same with a couple plots of land near Anaheim City Hall which have been vacant (or interim parking lots) since I moved downtown. Hope they get some of them finished before things hit bottom; I wouldn’t like to have to drive to work past half-completed ruins for the next five years.
I’m waiting for some Indian tribe (a dozen strong) to come out of the woodwork claiming “This Has Always Been Our Tribal Land, NOW WHERE’S OUR CASINO?”
Condoflips & Casinos. That’s The New Economy for you. Even the traditional Arabs’ Raid & Pillage economy makes more sense.
Anyone like me who bought in ‘96 has pretty much seen their home price triple. Just how far south do you see prices going, Nostradamus?
“Man, Man,
Your time is sand,
Your ways are ships upon the sea;
I am the Eyes of Nostradamus –
All your ways are known to me…”
60-70% drop; that’s what happened in the last crash. From gut reactions to Zillow graphs, a realistic prices would be about half that of current bubble-pricing, and a drop always overshoots before it bounces back. I expect a bottoming-out near 1997 prices.
“60-70% drop; that’s what happened in the last crash.”
wow, that’s quite a drop. and i don’t think what you say is accurate: i’ve read a ton on housing in SoCal and nothing i’ve ever read had the last crash bottoming at more than 50 percent. when do you see this bottom happening? ‘07, ‘08, beyond? do you think this will happen even if rates don’t hit 10 percent? A 60-70 percent drop, if hitting all the “bubble” areas of the country, well, that’d probably be worse than the ‘73 recession. Do you really think we’re in for that?
Personally, I think we’ll see a 25-30% correction (real, not necessarily nominal, although with stagnant wages, it might be closer). I did some analysis on an earlier post titled “trees cannot grow to the sky”. That’s framed, of course by a number of other potential issues that could increase or decrease that dip.
Forecasting is tricky business, at higher ends, the drop could be 70%. At the lower end it could be 15% with a median drop of 30%, so there are a number of factors that you have to consider… median numbers will never be as dramatic as individual areas (think pets.com vs. Lehman brothers) Some areas and price points are simply more volatile.
Well, let’s say there is a 30% drop from the current median price in LA ($615,000) so the price falls to $430,000. Even at this price point who can afford a home? Very few!
The median household income in LA is only $56,000. These families can afford at best a $200-220k home and that too with 20% down. Given that most families in LA are saddled with debt burdens and that the cost of living is so high here I would say they could afford more like $150-200k. Prices will have to fall 65-75% for that to happen. This kind of crash is simply unprecedented. There is a better chance of a 8.5 earthquake than that happening.
I guess in any case we will know more by the end of this year
Wow. Was that the best the uberbulls could muster…pussies.
I don’t know who’s funnier, realist (obviously spoofing the nonsensical RE bull arguments) or those who respond as if his posts are serious. I really laughed out loud when I saw
“23,000 homes on the market simply shows the popularity of real esate. Sales are down because the number of sales are cyclical, and they will rise once the cycle moves to the upside, which will be any day now.”
Ummmm… can anybody state this with a straight face? No, he’s just funnin’ y’all!
If I can be politically incorrect for a moment (actually, for the remainder of my years as life is too short for foolishness like political correctness), has anyone else considered that the real estate sales industry tends to be dominated by women? That is, the buying decision is primarily made by women and the sales force is primarily female. Would I be tarred and feathered if I suggested that perhaps this has something to do with the fundamental disconnect between common sense economics or a cost-benefit analysis and buying decisions?
well i certainly hope you let your wife make the important decisions if you’re that big an idiot.
watch these 2 videos, it’s hilarious that these bufoons are still peddling these ridiculous nonsensical interest only rubbish…
http://video.google.com/videop.....0658117814
http://video.google.com/videop.....4581111753
Seriously though, the blonde seems really impressed
Where do you guys find this stuff?? LOL.
Personally, I think Mr Bowyer has a couple bought-to-flip condos he’s trying to unload…
a little dated but still a good read:
http://www.economist.com/opini.....id=4079027
“The same thing happened with the so-called “Dot-Com Bubble” — the bears kept saying, “Prices can’t last,” or “It’s a mania” but the bears were wrong there too.”
Ask Time Warner. Or, you know, anyone who was paying attention at the turn of the century.
“23,000 homes on the market simply shows the popularity of real esate.”
If the number of available homes goes up, it shows precisely the opposite.
“Anyone like me who bought in ‘96 has pretty much seen their home price triple. Just how far south do you see prices going, Nostradamus?”
Also known as: ‘anyone like me who bought stock in ‘28 has pretty much see their share price triple’ syndrome.
The bulls and FBs are getting hysterical…