[quote=harvey]It’s an odd phenomenon but certainly not a clear indication of a general San Diego real-estate bubble.[/quote]
Agreed. A “hot market” is not the same as a “bubble.” It depends on your definition of bubble, I guess… but via the definition I use and that I think is most commonplace, bubbles are pretty rare events.
The way I think of it is that bubbles have two defining features:
– Extreme overvaluation
– Widespread euphoria and overconfidence (and conversely, a complete lack of concern/dismissiveness towards risk)
In this sense, the mid-2000s was a classic bubble. Valuation reached 3.5 standard deviations above historical median — just massive overvaluation. And we all remember how frothing-at-the-mouth bullish everyone was. Everyone knew you were a total idiot if you didn’t buy a house, dooming all your descendants to a lifetime of penury and servitude to the enlightened home owning class. (The more circumspect acknowledged that housing might just stop going up double digits every year, and might flatten out for a few years… that was about the closest you got to risk awareness).
Totally different now. Valuations are high for sure — but not at bubble levels. More coming on this soon, but they’d have to rise another 18% in excess of rents/incomes to hit the 2 standard deviation threshold that I’ve often referenced (with credit to Grantham/GMO). And 40% to hit the bubble peak. And that’s without accounting for the mitigating effect of low interest rates, which I do think is a real thing, should the rates stay low in the years to come.
As far as euphoria, I don’t see that either. Except maybe from gzz (I kid, I kid ;-). Seriously, there is nothing like the kind of hubris, self-delusion, and FOMO that was on display in the mid-aughts. In fact there is a lot of skepticism… and not just here on pigg.
So I declare this (still) not a bubble. It’s a hot market that has gotten pretty overpriced — that’s certainly a fact that all market participants should consider! But it’s something different than a bubble. And something a lot less scary, because that overvaluation can be worked off without things going to hell in a handbasket.
