Asymmetrical Information

My failure to get in on the tech stock boom made look like a genius when the thing went bust (at least for a little while). Is it wrong for me to hope that as a long-time renter I'll again look like a genius (at least to those who purchase closest to the bubble's pop)?

I've always been amazed at how much more I can get for my renting dollar. I'm currently living in a fairly luxurious two bedroom apartment that I could not easily afford (or be approved for a mortgage on) to buy. Of course, I'm not building equity, but after the bubble, I'll take a fresh look at buying. [Note To Self: You've been saying this for 6 years.]

MB

P.S. Does anyone really ever hate to say I told you so? Ok, sure, sometimes we'd prefer that someone else say, "Hey, that's what [your name here]'s been saying all along" but that someone is almost never around and it falls to you, but, come on, you like it, don't you?

Jane,

Although the housing market is almost certainly in a bubble, I don't think its particularly clear that its set to burst. I'm inclined to venture that a long period of extremely slow growth for housing prices. The reason I suggest this is that housing tends to be a significantly less liquid market than equities and price discovery tends to be pretty expensive. As a result, even when the bubble bursts, how will people know?

In many places where the prices seem most out of control (like here in Northern VA), the regulatory environment has changed to make building new homes much more expensive. Supply of new homes has been articially limited by the government at the same time demand is increasing. Without a change in the supply situation, the prices are somewhat protected. I'm sure the market will soften a bit, but given the number of new jobs being created around here, it's hard to see anything drastic happening in the forseeable future.

Jane, Why isn't anyone noting that home ownership is at record levels (as percentage of homeowners) and credit is more available? 15 years ago, we were all very concerned about home ownership among minority groups. At the time, there was near zero accounting for it by discrimination. We had Jack Kemp trotting around with plans to privatize public housing and give tenants ownership, in hopes that having a stake would incent them to make the situation better. So, now we've managed the systemic fixes that make home ownership more available to more people. And yes, the demand has greatly outstripped the supply of homes. So prices go way up!

Look, I have a friend who between he and his girlfriend have 2 low wage jobs, and he hussles for night gigs at night, and they have 3 kids between them, and a big car payment, and all that. They managed to qualify for a $600K home loan. While they need to be very careful about incurring and managing such a debt, I see that as a triumph of credit liberalization that they can be potential home owners! Unfortunately though, limited supply and desirability of locations drives prices up for those of us who had prior access to credit. Sucks to be us ;-).

One of the interesting development is the biggest price increases are occurring in the close in suburbs where there is no land to build on.

But, if we really are in a new era of every higher oil prices these are exactly the areas that high gas prices would make most attractive.

Is the housing market anticipating the peak in oil production?

I'm waiting for that pop, if you ask me. Hopefully I'll have enough money for a down payment, and that I find a house that isn't actually one of them Mini Mansions. I'm too small for them things...

I'll tell you another bubble:
GOOG 277.10 market cap 77.36B P/E 81

In some of the heated markets, I've called many tops and have been consistently wrong. What I have seen, granted this is anecdotal, is that individuals in $1.5mm houses inherit money and trade up to $2.5 or cash out and move in to $.8mm houses. In either scenario their income would never have put them in position to purchase at those prices but their increased home equity or inheritance allowed them to do so.

There have been plenty of studies showing that current incomes make the run-up unsustainable but the run-up in prices and hundred of billions of inheritance dollars make me cautious about calling another top.

Without a change in the supply situation, the prices are somewhat protected. I'm sure the market will soften a bit, but given the number of new jobs being created around here, it's hard to see anything drastic happening in the forseeable future.

Chris,

Being a Northern Virginia home-owner, myself, I would like you to be right.

However, even taking into account the tax advantages of home ownership, the differential between owning and renting a home in Northern Virginia is quite large. The price differential is explainable by the assumption that people will continue to flow into the area at a very high rate, bidding up demand for housing, and causing (eventually) the rental rates to jump up to meet ownership prices.

But this doesn't have to be the case. For example,

A. If the Virginia State government continues its trend of screwing up, while Maryland becomes hyper-efficient, then the inflow to the area might get redirected to Montgomery instead of Fairfax.

B. A few London-style attacks on the DC area metro system.

C. The inflow may continue, but not at a level that meets over-inflated market expectations. This is, I think, the most likely reason why NoVa housing prices may take a serious tumble.

I don't believe in bubbles and I am particularly adverse to speaking of bubbles without defining what that means. Is it a bubble if it affects local areas (S.F., NY, San Diego, Boston) and not others (Houston, Memphis, St. Louis). The persistent comparison is to the .com "bubble" which affected the entire country. It is not clear to me that a bubble which pertains to locales and not the nation is truly a bubble as you describe.

Real estate bubbles are completely local. That said Los Angeles and San Fransisco are hugely bubbled.

A little early to stick a fork in this one, eh?

Renters seem inclined to hopefully vote with the Bubblista while homeowners and real estate speculators embrace Senior Status Quo. What else is new?

I don't doubt we're entering a period, perhaps an extended one, of softening prices and increased inventory--it's already happening where I live. I also suspect that home prices will remain stubbornly high in attractive regions of the country. Triumphal declarations of having heard an audible popping sound don't a trend make.

I agree about the bubbles being local - here in Omaha, we really don't have much of one (perhaps a slight bubble in the upper end and the west side of town, but it's uneven and even that is small). Also, this ridiculous idea of people getting huge mortgages when they have very little income isn't happening here - the mortgage brokers seem to have good sense about when and when not to loan, and when to talk very frankly about risks.

In many places where the prices seem most out of control (like here in Northern VA), the regulatory environment has changed to make building new homes much more expensive. Supply of new homes has been articially limited by the government at the same time demand is increasing. Without a change in the supply situation, the prices are somewhat protected. I'm sure the market will soften a bit, but given the number of new jobs being created around here, it's hard to see anything drastic happening in the forseeable future.

When does the scarcity and/or price of housing become a limiting factor on job creation? I had an opportunity to talk to a woman doing recruiting for a medical research position at Stanford. She said that she no longer bothered to speak with people who didn't already live on the peninsula because Stanford could not pay enough to make up the difference in the cost of owning a house. Stanford would have trouble relocating its medical research somewhere else, but surely the government could start moving jobs elsewhere.

small bubble. 1) when it bursts, it won't be like the "dot-coms"; it will be a burst of less than 50 percent, and not in all locales. 2) New houses have gotten bigger on average in the past 10 years. This accounts for some of the price inflation.

Michael Cain et al,

I am in the same boat as your Stanford friend. We can't hire people to come into N. Va (Fairfax county) to work if they are not already here. They are put off by the $800K 2500 sq ft houses or if they want to get the price down a 2 hour commute each way. My retiring military friends just laugh at me when I try to get them up here. They can get jobs no-problem, but the government sets the pay-levels around here and they are not high enough to compensate for the high cost of living. One guy I know turned down $95K/year in N Va for a $80K/year job in San Antonio. He bought a 3500 sq ft house for $290K and has a 15 minute commute. In N Va he would have needed at least $700K and live with an hour commute! His net (after taxes and mortgage) is actually higher in Texas even with the $15K pay difference!

Worse, for my company, people are cashing out and taking their skills to a non-bubble areas. I have been here a year and am actively looking to move out - hopefully to Texas. My home appreciated more than my company paid me last year! With $350-400K equity I can leave and buy a house in a good neighborhood with cash in a non-bubble area. No house payment - period. Economically there is just no reason to stay, and not much other reasons (DC is just another big city, I have seen many and they all about the same).

No anyone hiring in Texas? :)

Buffpilot: That sounds like the way a market is supposed to work. A necessary resource (house sites in this case) is rare and expensive in NVA, so the business is relocated to someplace where the resource is dirt cheap. (Excuse me, but I had to slip that in.)

Of course, the trouble is that much of the businesses around there work for the government, which is pretty much immune to market forces. I can only think of one recent case of the federal government moving anything out of the DC area - that's a Social Security Administration headquarters, which became Senator Byrd's pork barrel for West Virginia...

I'm sort of surprised by this data, because the last time I looked into housing price history there was a genuine increase in price (in constant dollars) one time in the last 100 years; the period 1946 - 1955 more or less. A huge amount of pent up demand coincided with the leading edge of the 'baby boom', leading to genuine increases in the price of housing.

It's worth noting that the latest run up in housing prices is found world wide; it's in parts of England, Australia, Canada, US, Germany and France as well as parts of China. Loose fiat money policies have had the usual effects; see White's book "Fiat Money in France" on the history of the Assignat, or the history of John Law's Mississippi Bubble which arguably led to the South Seas Bubble for further details.

In a few years the name of "Alan Greenspan" may be an epithet...

20% of people in San Diego are spending 50% or more of their income to pay their mortgages. 40% of loans taken out in San Diego are INTEREST ONLY. Need we say more?

Michael:

Housing issues, and transportation for that matter, in the SF Bay Area is a matter of political emasculation. For example, ending rent control and doing away with the massive anti-landlord legislation in SF would ease up the pressure tremendously, and rent control et al. is only maintained by socialist fanatics who could be effectively countered. But they won't be, because for some reason people around here *enjoy* allowing insane collectivists to hold onto the moral high ground.

Jane, I wouldn't be gloating quite so soon about having "told us so."
Your prior posts -- you are a renter I gather? -- glide blissfully over one aspect of ownerhsip which any renter outside of the NYC fantasyland should understand: a renter can be forced to move when the owner decides to move back-in, sells to the grandkids or simply sells to take their profit.

What people buy with housing -- and it astonishes me that so many people think that a house is a "buy versus rent" economic proposition -- is security of tenure. (At least to the degree allowed by Kelo etc etc.) Renters have little security and would be foolish to make those home improvements etc etc which make life more fun. Buying provides security.

"It's the security, stupid!"

What kind of security is involved when people are taking ARMs? When interest rates go up, how many of the folks in San Diego fantasyland aren't going to be able to make their new payments? 16% of the purchases around here (and up to 30% in Las Vegas) are 'investment' properties. It's a big house o' cards out in here in the Southwest with all of Los Angeles, Phoenix, San Diego and Las Vegas feeding off of each other... Security? I should buy for "security of tenure"? No thanks!

Robert Prechter in his latest books suggests now is not a good time to buy real estate. He asserts that it would be better to wait a few years, and buy when you can get what you want for a lower price...as in, "pennies on the dollar".

History suggests he may have something there...

"History suggests he may have something there..."

What history? Are there only renters here?

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