Is the real estate bubble about to burst?
 

A while ago Robert Campbell warned us (further down the forum) that it looks like there could be a bubble in housing prices - and that bubble will burst. Here's his earlier post....

http://www.sowpub.com/cgi-bin/forum/webbbs_config.pl?read=13231

I just came across a recent article from The Economist magazine - saying the same thing. In the 2nd last paragraph of their article, The Economist says:

This survey will conclude that the latest housing boom has inflated bubbles in several countries, notably America, Australia, Britain, Ireland, the Netherlands and Spain. Within the next year or so those bubbles are likely to burst, leading to falls in average real house prices of 15-20% in America and 30% or more elsewhere over the next few years, in line with average price declines during past housing-market busts. This time, however, with inflation so low, house prices will fall more sharply in money terms than they did in the past. In Britain as a whole, for example, average nominal house prices are likely to drop by 20-25%, and in London by much more. Significant numbers of owners may be left with homes worth less than their mortgages—especially as the proportion of owner-occupiers with mortgages exceeding 80% of the value of their homes is higher now than it was in the previous bust in the early 1990s.

This could be something to be concerned about if you are a property investor....

I've linked to the full article below....

(There are also related articles on the links on the right of the article, under the heading "Related Items: In This Survey".)

- Dien


"House of cards" - from The Economist magazine

Real Estate Bubble Filled With Bucks Not Air
 

Dien,

In my opinion one should not be too worried about what the Economist has to say. I mean did the Economist actually predict the dot com burst or before that the dot com rise?

When I say predict I mean express an opinion long before there was any evidence of its truth.

The real estate rise is not comparative to the dot com rise. The dot com "bubble" was based on a addictive assumption of future profits that led to manic demand.

Real estate interest rates are greatly related to at least in the US to treasury bonds. Very stable.

People are not buying houses or refinancing based on future expectations of lower rates. People are buying and refinancing because rates are low right NOW. They receive an immediate benefit.

If rates rise then yes things might slow down but that is the normal ups and down of any normal market. A normal market is one based on real demand. Real demand is based on a benefit received at the moment of it's transaction. Economist call it Present Value theory.

A bubble and its subsequent burst are based on an artifical rise in demand then a huge correction back to reality.




Surefire Ways For The Baby Boomer To Make Money Using Only Pen And Paper

Even a stopped clock is right twice a day
 

> Dien,

> In my opinion one should not be too worried
> about what the Economist has to say. I mean
> did the Economist actually predict the dot
> com burst or before that the dot com rise?

> When I say predict I mean express an opinion
> long before there was any evidence of its
> truth.

The Economist may not have said anything about the DotCom bust before it happened without evidence. And that being the case, I would take this message from them a little more seriously. Because based on their past actions they don't write about stuff unless they have evidence of it. Thus, if they are writing about a busted real estate bubble, it is because they have evidence that suggests that.

> The real estate rise is not comparative to
> the dot com rise. The dot com
> "bubble" was based on a addictive
> assumption of future profits that led to
> manic demand.

That is what excesive real estate price rises are also based on.

> Real estate interest rates are greatly
> related to at least in the US to treasury
> bonds. Very stable.

> People are not buying houses or refinancing
> based on future expectations of lower rates.
> People are buying and refinancing because
> rates are low right NOW. They receive an
> immediate benefit.

They are also doing so because the value of their house has risen due to inflated demand. Together with a lower interest rate they can borrow more money for the same loan payments. But it also means IF rates rise a fraction their payments rise accordingly and they will be left with no income safety net.

> If rates rise then yes things might slow
> down but that is the normal ups and down of
> any normal market. A normal market is one
> based on real demand. Real demand is based
> on a benefit received at the moment of it's
> transaction. Economist call it Present Value
> theory.

> A bubble and its subsequent burst are based
> on an artifical rise in demand then a huge
> correction back to reality.

In Australia, the ratio of home-buyership to renting has, for the last thirty years, roughly been 75% buying and 25% renting. Even with the Government giving money to people who wanted to buy their first home. Even with rises and falls in the interest rate.

In my neck of the woods I personally know people whose house was valued at $200,000 a few years ago and it is now valued at $600,000. That is manic demand in action.

Interest rates are just one aspect. How about income? $600k for a three bedroom home? WHO can afford that for any length of time? The repayments are HUGE. One tiny glitch in the income and those buyers are sunk, real quick.

For about six months I've "reckoned" it was time to "get out" of real estate because of the downturn. I got Robert Campbell's book, "Timing The Real Estate Market" and am now doubley sure that NOW is the time to get out.

In a few months here we will have a dozen or so "developments" all completed. Instant over-supply. Rents have ceased going up by 20% and 25% and are now back to the usual $5 or $10 a week rise. Real estate agents don't have waiting lists any more. And more and more articles are appearing which say or hint at the end of the real estate bubble.

The appearance of articles should be enough to scare most people because of the reality the media creates. Even if nothing was wrong, the media saying it is all tumbling down is enough to begin the collapse. The fact we have crazy-high prices makes it worse. My observations - while not scientific - coupled with the analysed data (thanks to Robert Campbell's book) tell me the articles are right, but slow. That is, the bubble has already burst it's just that most people do not realize it just yet.

Frankly I would rather believe what my eyes tell me. The data doesn't fib. It just reports what's happening. And what's happening is not good right now.

But hey. Don't take my word for it. Get Robert's book and go through the data. And if you don't believe what those numbers tell you, pay close attention to rent increases and the like. We've now started getting stories about how hard it is for people to buy at these inflated prices; how hard it is to even move because the inflated prices suck most of your money out of you; how hard it is to pay the taxes in these inflated prices. In other words... how tough it is for people financially. Again, not scientific, just observation. More fuel to the fire.

I guess in a year or so we will know who is right when it becomes obvious to everyone.

Michael Ross

Re: Is the real estate bubble about to burst?
 

Hi Dien,

Thank you for sharing the most current real estate story from the Economist.

An important thing to keep in mind about real estate - or any market for that matter - is that it is always most dangerous when it looks the easiest.

Tom Watson, Sr., the brilliant founder of IBM, recognized this same danger in business. Watson warned that during good economic times, there is a tendency to get blindsided by prosperity and ignore any signs of trouble.

There was (or is) a flipside to Watson's advice: Just like booms are a time for caution, recessions are a time for boldness.

Clearly, the same principles that Tom Watson would apply to running a good business can also be directly applied to wise real estate investment: sell when it's hot and buy when it's not.

And to Michael Ross, I am very pleased to know that you were impressed with my book and that you now have a way to more scientifically analyze real estate markets and trends. As we both know, objective analysis will always trump casual judgement.

Robert Campbell

I said the same thing
 

Hi,

You wrote:
> A while ago Robert Campbell warned us
> (further down the forum) that it looks like
> there could be a bubble in housing prices -
> and that bubble will burst.

I've said the same thing several times, on several forums. Back in March I posted:

http://www.sowpub.com/cgi-bin/forum/webbbs_config.pl?read=12375

On September 18, 2002 I posted:

http://www.sowpub.com/cgi-bin/forum/webbbs_config.pl?read=10038

FWIW, I stay immersed in news and current events.

Best,

- Boyd

Real Estate Bubble Filled With Debt Not Bucks
 

Hi,

Due to shortages it is possible to have prices on those items purchased with cash rising, while, due to debt saturation, prices of those items purchased with debt are dropping...

Best,

- Boyd

Please explain ...
 

Hi Boyd,

It's not clear to me what you are saying.

Robert Campbell

Six-course Hungarian dinner
 

Hi,

I read a lot, and some of what I read is contradictory, some is wrong, and some I don't know enough to understand.

But it's a lot of pages a day. It feels like eating a six-course Hungarian dinner. After eating a large dinner I always 'burp' (pardon me) at some point. If I'm polite I'll camouflage it with a napkin. If I'm impolite I'll let 'er rip in front of G-d and everyone.

My previous message is an example of one that I let loose in public.

Best,

- Boyd

Boyd, sorry didn't mean not to give you credit! Consider yourself credited... :) (DNO)
 

There isn't "ONE" real estate market...
 

Real estate is not like the stock market. There is not "One" market.

The market in Austin is very different than the market in San Antonio. Which is very different from the market in L.A., vs. the market in central-inland California.

True, there are factors (like interest rates) that can have an affect on multiple markets. But overall, it's much more linked to the local economy, in my experience.