Asymmetrical Information

So, quoting from the article:

The Economist’s latest house-price index shows that since 1997 prices have soared by more than 85% in America, 100% in France, 112% in Australia, 150% in Spain, 166% in Britain and a whopping 208% in Ireland. And hot urban markets, such as London and New York, have far outstripped their national averages.

And yet the article concentrates on the potential problems to the American economy, when prices here have actually risen by less than in the other countries. (Then again, we have lower density, though the lower density areas haven't had the sort of price increases.)

I'd also point out that the housing bubble is concentrated in a few cities. Northern VA/DC and Boston are particularly unsustainable, but there are vast swathes of the country where it's debatable whether it's a bubble at all.

If one could imagine a P/E ratio for housing, my guess is that it would be lower than the average for the DOW.

Sorry, I have to take ownership of this whole bubble-not-bursting thing. The failure of the bubble to burst is entirely my fault.

You see, for many years I have been postponing buying an apartment or house because I kept hearing that the market was at its high. So year after year, I continued to rent, watching the price of a decent one-bedroom in Midtown go from the high $100,000s to around $500,000. Sure, I occasionally went apartment-hunting, but the less my dollars could buy, the more I decided to wait. So I waited and continued to hoard cash.

Of course, I reazlied in retrospect that this waiting, fearing that I was buying at the high, was a mistake, but having made it I was determined not to make another (i.e., actually buying at the high). Then, about a year ago, I realized that the bubble was actually waiting for me to invest in a house before bursting. That made sense.

It was consistent with many other decisions in my life -- e.g., purchasing Lucent and Intel in the fall of 1999; leaving a lucrative job at an investment adviser because it was in a drawdown, only to have it bounce back and quadruple its AUM; breaking up with a woman only to realize that she was the one; and buying a double-breast tuxedo, thinking it would never go out of style.

Now, of course, knowing what I know, I certainly don't want to buy a house, but I suspect eventually I will, and the bubble will burst, and friends and family counting on the value of their homes for their retirement will resent me. But I'm sitting on a lot of cash, and it's either that or putting more money back in the stock market. You don't want me to do that, do you?

Double-brest tuxedos went out of style?

I moved into the SF bay area in 1970, and watched
the housing "bubble" there. Watched being the operative word, since I never did catch up to the down payment requirement. I kept saying, "This is nuts, the prices can't stay up like this forever."

There's been a few minor "retrenchments" in the ensuing 35 years, but, in general, Bay Area housing prices are still nuts.

Question is, why? Simple answer: lots and lots of people want to live there - the weather is great, leisure and recreational opportunities abound, and there is plenty of economic opportunity.

The US is in the same shape, relative to most of the rest of the world, weather not withstanding. So, lots and lots of people want to live here.

The "housing bubble" will burst when the immigration rate/desire moderates, and not before.

IANOE, but that's my story and I'm sticking to it.

BTW, I moved to Portland and bought a house 25 years ago - it's now worth about 3 times what I paid for it in constant dollars.

eamil is human readable - aloud.

Question is, why? Simple answer: lots and lots of people want to live there - the weather is great, leisure and recreational opportunities abound, and there is plenty of economic opportunity.

Yes. To add to that, the San Francisco area has lots of environmentally-minded, anti-sprawl, and in generally regulatory-minded people who make construction and building difficult. To be sure, these serve various useful purposes, but certainly they increase housing prices as well.

House prices have increased most rapidly (and are highest in general) in left-leaning areas. Now, this is a correlation, and one can imagine reasons for causation to flow in multiple directions. (For example, an area where a middle-class person cannot easily afford a home is one where a middle-class person may feel poor, and thus vote Democratic. As well, an area where a middle-class person can easily afford a home may be one where he feels well off and free to vote on the basis of cultural and other issues rather than pocketbook.)

John, so why would a middle-class wage owner voting his or her pocketbook vote Democrat?

markm: False consciousness. People really think that the Democrats' policies benefit "the poor", and tend to vote that way.

There's no data (at least in the newspaper articles) about the composition of those newly-started houses. Are they in the bubble cities, the perenially expensive cities, or in the more affordable non-coastal areas? What price levels are they aiming for? That would tell me more about the potential for bursting the bubble than does just the raw statistic that housing starts have jumped.

I can tell you that the bubble has burst in NoVa, or at least it's slowing down. I bought in a rather nice location in March of this year and as of now... similar units are still selling at the price I paid for mine. So there's one data point for you.

Sorry, I have to take ownership of this whole bubble-not-bursting thing. The failure of the bubble to burst is entirely my fault.

No way, friend. It's all me. I'm keeping the bubble alive by refusing to sell my house in upstate New York, which is now worth three times what I paid for it in 2000.

Just wait til I put my house on the market...the bubble will burst, the markets will crash and Paris Hilton will be selling apples on a street corner. Just you wait.

It would be okay if Paris Hilton is selling Apples, but she better not try selling Dells...

And here I thought it was us. Oh well.

Neil: prices not moving for a few months might be a slowdown, but it ain't a *pop*. A former boss, wo had to move from Connecticut to Seattle for work, took a $50K loss on his Conn. house - THAT sounded more like *pop* to me.

John, so why would a middle-class wage owner voting his or her pocketbook vote Democrat?

Because if housing is really expensive (and so are other things), then middle-class people trying to buy a home can feel poor. The richer states tend to vote Democratic, the poorer states Republican, but within states, the richer people still are more likely to vote Republican and the poorer Democratic. (Even with recent shifts.) What determines a state's political leanings is how the middle class votes. When the middle class feels part of the American Dream, that a comfortable life is within their rich, they seem to be more likely to vote Republican. When they feel poorer, then class warfare resonates more. The greater income inequality, the better Democrats do as well.

middlebrowser-

Then, about a year ago, I realized that the bubble was actually waiting for me to invest in a house before bursting. That made sense.

[...]

I certainly don't want to buy a house, but I suspect eventually I will, and the bubble will burst, and friends and family counting on the value of their homes for their retirement will resent me. But I'm sitting on a lot of cash, and it's either that or putting more money back in the stock market. You don't want me to do that, do you?

I could have wrote your post...

I rented and saved all through the "go-go" late 90's, convinced that the all the different bubbles brewing would burst. I even got lucky and moved almost 70% of my portfolio to 'cash' between Sep 1999~ Feb. 2000- I was actively looking to buy a house, but even then I thought excess stock profits and cheap Fed money were skewing prices.

I sat on my cash thru 9/11, which I thought(hoped?) would spur a decline- only to watch double digit increases in real estate here in Columbus for the next 2 years. I finally bought back into the market with the start of the war in 2003(with almost half concentrated in FSESX-Fidelity Select Energy Services).

I paid 'cash' for my new condo 3 months ago...

The bubble is definitely over... :o)

My unscientific assessment: It's gonna burst/has burst. Why? I got married this summer and my wife and I bought a house. Sorry, y'all are screwed. My bad.

Of course, owning a house in VA (within commuting distance of DC) is sort of a hedge for a small-government conservative like me. The more bloated the federal government gets, the more people live and work in DC, and the more my house is worth. Now, who said I'm not an optimist?

John, so why would a middle-class wage owner voting his or her pocketbook vote Democrat?

Because they rely more on wages than on investment income and capital gains for their income. Look at the choice the Republican-led Congress is making between taxes affecting investment vs. the AMT, which is set to hit a lot of middle-class families with large mortgages and many children.

the AMT, which is set to hit a lot of middle-class families with large mortgages and many children.

But generally only families which are middle-class in states with high state taxes, expensive housing, and (especially) high costs of living. The vast majority of families hit exceed greatly the median household income in the United States. In other words, they are wealthy in dollar terms, but live in very expensive areas and are only middle class in real terms. There has been a rapid expansion in the percentage of households with household income of $75,000 to $100,000 having to pay AMT, from 2-3% in 2000 to almost 15% in 2005; that's certainly middle class in expensive areas, but fairly well off in poorer areas.

I assume it comes as no surprise that the people worst affected are mostly represented by Democrats already, as mentioned. Democrats are screaming that these people are middle class, but normally tax relief that only affects the top quartile of households (and only some portion of that) would be attacked by Democrats as tax relief for "the rich." (If you look at the Census statistics, $75,000 is just about the threshold for the top 25% of household incomes.)

In Massachusetts's case, I imagine that their continuing decling population is both affected by their housing bubble and will solve it.

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