November 30, 2005
From the desk of Jane Galt:Bubble ethics?
Mark Kleiman says that you won't see stories on the housing bubble in your paper's real-estate section for the same reason you didn't see stories on the stock market bubble in financial papers: the sections need advertising dollars to support themselves.
Now maybe I'm biased--my employer predicted the stock market bubble, and has been loudly harassing readers about the housing bubble throughout the rich world for quite some time. And we sell plenty of advertising. But beyond that, I don't think this is quite true.
The problem with real estate and financial sections is not that they cater to the whims of advertisers; it's that they are extraordinarily vulnerable to survivor bias.
Bubbles generally become apparent to experts years before they pop. Contrary to popular opinion, many people on Wall Street knew that stock prices were irrational long before the bubble collapsed.
So why didn't they say so? Well, some of them wanted to sell fat IPOs to gullible suckers. But many of them did say so, only no one paid attention. The problem with newspapers isn't that they need advertisers; it's that they have incredibly short attention spans. Journalists tend to cover a beat for a few years, and then move onto the next thing; that's how you move up in a media organization. Thus, they tend to check expert's predictions against months, rather than years, of data. And in the short run, bearish experts were wrong.
It is a maxim of traders that "the market can stay irrational longer than you can stay solvent"; that is why few people on Wall Street tried to act on their knowlege that the stock market was overvalued by selling short. They knew it was going to bust, but they didn't know when, meaning that they couldn't be sure they'd be able to cover their short trades long enough to make a profit.
This problem afflicted bearish experts on the publicity side too. Inexperienced business journalists saw some guy claiming that the stock market was going to crash, and then watched the Nasdaq climbing to ever more dizzying heights. Who are you going to believe, him or your own eyes? Moreover, because the crash wasn't actually happening, it was very hard to cover: there's only so many times you can say "the bubble is going to crash and everyone is going to lose a bunch of moola" before your editor demands something fresh. ANd there were a lot of fresh stories about dotcom companies with record first-day pops.
Similarly, experts have been predicting the housing market's demise for quite some time. Journalists, who generally need a hard news "peg" to sell a story to their editor, have understandably overlooked this in pursuit of something that was actually happening right now.
Posted by Jane Galt at November 30, 2005 10:07 AM | TrackBack | Technorati inbound links"But many of them did say so..."
There are always people around predicting everything, some predict rises, some see falls.
And both groups are right too, the question is only: when ?
No need to debate the reasons why people predict this or that.
True, not much reason to debate predictions...
So here's another one. The real estate market is not a bubble. It has risen a bit faster than normal due to changes in the economy, but it isn't going to burst - its going to plateau.
Predictors are pretty elastic about their predictions. I bet the same people who called the tech stock bubble were also claiming the overall market was way too high. I remember someone telling me we weren't going to see 10000 again till after 2010. Well, with the DOW above 10000 for most of the time after 2000 I don't see any evidence of more than a mild correction. Similarly with housing. How bad is the overpricing?
A serious predictor would stick his neck out and say -- e.g. within 3 years the market will fall by at least 30% below today's levels and the longer it takes to fall, the higher will be the percentage drop when it does fall. After all if the housing market keeps shooting up and then finally drops a bit ten years from now, that would not constitute a bubble, although prognosticators will claim it was so.
You can buy stocks and bonds wherever you live in the country, or even the world. By contrast, you cannot buy a house in San Antonio, Texas and live in it in South Orange, New Jersey.
This is why talking about "the housing bubble" as a national economic phenomenon is sort of dumb. Housing markets are regional, and tend to reflect regional economies.
Having said that, I think the common practice of using second mortgages or 401(k) loans to pay off credit card debt IS nationwide, and truly scary.
We should make second mortgages less attractive by limiting the interest tax deduction to just one mortgage that is secured by any given residential property. You can pick the mortgage that qualifies -- interest on the others are not deductable.
As for 401(k) plans: Borrowing on them should be regulated by the Fed. They should be part of their monitary policy toolkit; regulated just as they now regulate the margin requirements for brokerage accounts.
Let it not be forgotten that there were "experts" saying the stock market was in a bubble when the Dow was at 3000, 5000, and 7000. Nobody, or at least extremely few people, knows anything.
My prediction is that the housing bubble will burst, unless, of course, it doesn't.
housing is in a bubble that will end if we return to baseline levels of interest rates and other factors that are forcing prices higher.
while I see interest rates rising significantly (on a relative, not absolute, basis) this will only serve to cut off the top of the growth curve or maybe reduce prices somewhat. it is desperately unlikely that my preferred policy prescriptions will be followed, namely a roll back of anti-growth and development regulations, laws, and policies that serve to increase the value of existing homes by decreasing the supply of new homes close to desireable areas.
telecommuting may decrease desire to live in large centers somewhat, power law effects will still be observed as it is difficult and uncomfortable for most people to pursue professional careers remotely, while recent court rulings have mad it so that you have to pay the taxes where your employer is, rather than where you are. this makes telecommuting from montana to NYC much less attractive.
what will be interesting is the medium/long term trend in housing prices as the older affluent generation (damn boomers) retires and dies off. predicting the demographics effects their retreat from the market (housing and stock) will have is an excercise I leave to the reader (or at least someone with more data and sleep than I have).
Other comments are great, just not addressing some specific issues that the housing market faces but that the stock market didn't face in 2000.
So, Jane? Bubble or not?
For now I think RE will act more like a balloon, deflating for a while in a fairly controlled fashion. Becasue this market is regional, some places will be fairly unaffected and others drastically hit -- mostly the places that have seen the fastest price increases in the past 5-10 years. And maybe in a few years I'll be able to take advantage of it if that happens. ;-)
Mark Kleinman? The "Bush is Drinking" guy? LOL, like I'm going *there* for economic info.
Um. There's already been a ton of stories in real estate sections about a possible housing bubble.
What's the true worth of a house?
For a stock, formulas exist. In principle, a stock is worth the present value of its future earnings stream. Or, it's worth 20 times earnings. Or, twice book value. In an exteme bubble, one can sometimes see that the price of a stock is far above any reasonable estimate of its value.
A building is worth what it costs to build -- $25/squaqr foot or $100/square foot or whatever. But, what's the land worth? That's supply-and-demand. In the area south of San Francisco, a lot may be worth $1 to $2 million or more, regardless of its size. Quarter acre lots in Menlo Park are just as costly as acre lots in Atherton.
David et al,
The land is everything. I live in Fairfax county VA (just out side DC). My quarter acre lot is worth at least $300K (just the dirt). There are 1950 style ramblers being bought for $400-500K, then bulldozed, just to get at the third-half acre they sit on. Then a 5000 square foot, $1.5M+ McMansion is built (with all the ramblers around it). Slowly the entire town is being replaced.
Everyone here says that prices will plateau, not drop. I have been here 15 months and have seen a 15-20% increase in my housing value. I'm selling and moving to Texas where I will use my equity to buy a much better home, with a mortgage/salary ratio
Preveiw is your friend..what I meant to say:
David et al,
The land is everything. I live in Fairfax county VA (just out side DC). My quarter acre lot is worth at least $300K (just the dirt). There are 1950 style ramblers being bought for $400-500K, then bulldozed, just to get at the third-half acre they sit on. Then a 5000 square foot, $1.5M+ McMansion is built (with all the ramblers around it). Slowly the entire town is being replaced.
Everyone here says that prices will plateau, not drop. I have been here 15 months and have seen a 15-20% increase in my housing value. I'm selling and moving to Texas where I will use my equity to buy a much better home, with a mortgage/salary ratio
A building is worth what it costs to build -- $25/squaqr foot or $100/square foot or whatever.
Unless you're starting new construction, in which case full costs will be borne, a building only has intrinsic "worth" for tax purposes. Worth thereafter is a function of the market's opinion on such structures.
I think you're wrong about this. I live in Boston and the Globe pumps the real estate market all the time. A few days before the Globe finally admiited the market was softening, it had an article that opened with "Can you think of a better investment than real estate? We can't."
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