Differences Between The Tech Bubble and the Real Estate Bubble

[no_such_reality]

Five Years.

Hmm, crystal ball time… August 2011 … I see interest rates… hmmm, little fuzzy, interest rates… fuzzy.

Will they be forced to sell, maybe, maybe not. The current 6 month T-bill is above 20 year average. Ibor is near average too.

[DaCounselor]

“I would like to ammend my statement to say, “I believe that the buyers will be forced into foreclosure in 5 years, unless interest rates are back to 5% AND they can qualify for that $780K loan for a house which will at that time probably be valued at $480K. So in all likelihood, they will be forced into foreclosure”. Does this satisfy you?”
___________________

It doesn’t – and here is why: almost the entire hypothesis is based on numbers that are simply being pulled out of thin air. In addition, there is simply no way to know what the personal financial situation of each homeowner is going to be. Every gloom and doom prediction is fatally flawed by these problems. The variety of scenarios that may play out in each individual household over the next five years is immense. I won’t even waste my time to hazard guesses as to these unknowns.

As for the earlier post, the class act who calls me a “fool” and makes this discussion personal, that is just indicative of someone who does not want to listen to opposing opinions. Now I did indeed feel like a fool in ’89, when I bought a property for $155,000 at the apex of the housing run-up, only to watch the market tank over the next 5 years. My timing could not have been worse. Understanding from family experience that all investments are best measured over the long haul, I held on and am now sitting on a property worth – well, let’s just say a whole helluva lot more than $155K.

I am certainly not saying all is well in real estate. Inventory is dramatically higher, buyers are on the sidelines, sellers are reducing prices and there seems to be a general feeling of waiting for the other shoe to drop. I think sale prices are going to end up down 15-20%, depending on the micro-area, where there will be support from the buyers on the sidelines. So long as there is no significant spike in mortgage rates and the SD economy does not tank, there is no reason to believe there will be a massive implosion in values. Mortgage rates are up, but in my mind relatively insignificantly when considering 17 straight upward modifications by the FED. The FED has already indicated that they are at or nearing the end of their anticipated increases. So if mortgage rates have increased minimally in relation to the ongoing Fed raises, I am guessing that when the Fed lays off the mortgage rates will stabilize, not skyrocket as some on this forum have assured me. And again, the critical component is each homeowner’s personal financial situation, which is impossible to know or predict.

All I’m doing here on this forum is responding to what I believe to be a “sky is falling” mentality and trying to create some balance by interjecting my 2 cents. If opinions that do not fall in line with “the sky is falling” are not welcome, I (The Fool) will happily spend my time elsewhere.

[PerryChase]

Dacounselor, please stay with us…. otherwise the conversation will be quite boring.

My feeling is that market psychology will play into this a lot in the years to come.

Economically there’s no reason for houses to be so expensive. I remember reading a book a while ago predicting that in the future housing will be owned by large equity firms and that people could treat housing like a commodity. Workers could easily move and take the best job anywhere that’s best suited for them. This would drastically improve productivity. Obviously RE is still a highly inefficient market with lots of barriers.

[qcomer]

Hi DaCounselor,

Welcome to the board and ignore childish name calling as I believe we are mature enough for that kind of stuff. Your comments are most appreciated.

I disagree with your comment that stats supporting housing collapse are taken out of “thin air”. I think you need to understand the concept of economic models, how cyclical assets work and how many times economists have been able to predict with high accuracy about asset bubbles without knowing about specifics of each individual but by working with the average/median stats.

I agree with you that we don’t know about the personal finances of each and every individual in SD but this is not how economists model and predict future recessions/booms. To build any model they have to play with median/average since both tend to be good measures of whole population sample. Now, take a look at the median income to median home prices ratio for SD for last few years that Rich posted and compare that to the historical average. Also check the rent to housing price ratios. These numbers don’t tell me that in general an average SanDiegan is much more leveraged than before to live in his American Dream house.

Now to foreclosures. For Fed, the rate hikes are tied to slower economic growth as Bernanke said last time. Unfortunately, this time the easy credit supply forwarded to US consumer was funded by huge foreign investments which is going to cool off and so low mortgage rates of past are very unlikely. Also, odds are 8/10 that Fed will push economy into recession as they raise rates too high. Recession will also strike because US consumer can no longer trust on the increase on housing equity to keep drawing money from it. With a looming recession and no let up in interest rates, combined with income to housing prices ratios that show how extremely leveraged an averge SanDiegan is, I am going to bet on high foreclosure rates next year.

Investing is all about educating yourself and putting your money with the odds and the odds are stacked in favour of a housing down turn. To me, paying current inflated prices for SD homes with huge risk potential is simply not wise.

The long term view on housing is equally strange to me. In the long term even though your 150K house is worth helluva lot more now, it still doesn’t change the fact that you paid helluva lot more than what you could have. Since housing moves in cycles, all that matters is when you enter (buy first home) and exit the market.

[KingKong]

Hi Powayseller,

Thanks for the nice post. I just saw it today.

I am still around but did not get much time to contribute.

I surely flattered by your appreciation.

Back to the jungles 🙂

[powayseller]

KingKong, I’m so glad you’re back, and it’s fun reading our threads from last year. Are you coming to our meet-up? I was wrong on the timing of this; the price drops in housing and stocks are taking longer than I thought.

[surveyor]

Long Term View of Housing

“The long term view on housing is equally strange to me. In the long term even though your 150K house is worth helluva lot more now, it still doesn’t change the fact that you paid helluva lot more than what you could have. Since housing moves in cycles, all that matters is when you enter (buy first home) and exit the market.”

I think the point DaCounselor is trying to make is that yes one can enter at arguably a bad point in the market, but that if one hangs on, in the long term real estate mistakes tend to work out. Time is your ally in the real estate realm. There are many homebuyers who buy based on their circumstances, which is arguably more important to them than market timing.

[BuyerWillEPB]

It’s true that my involuntary homelessness has biased me towards the “sky is falling” camp. However, I always try to consider and respect various opinions like Dacounselor. This is how to find strengths and weaknesses in your own argument. I hope to hear more.

[KingKong]

When and where is the meetup?

Hi Powayseller, I missed last one. I will be interested in attending this one if possible. My son has soccer matches on Saturday so the timing might be important.

[powayseller]

Nov 18, 4pm, Today’s Pizza in Sorrento Valley.

[Author]

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