Appreciate or Depreciate?

A consortium argued about the state of the real estate market 's sustainability.

Reasons for a bubble burst were given such as:

the rapid rise "justified by the fundamentals. He compared it to the late-1990s stock market bubble and in the Japanese real estate market in the 1980s before prices they collapsed."

On the positive side, the article showed that

"while housing prices generally tracked close to the overall inflation rate for nearly 40 years starting in the mid-1950s, home values have grown about 40 percent in real terms since 1995."

Billionaire Sam Zell, the U.S.'s largest landlord, is bullish and shared his optimism of the real estate market in an online video.

The Online Magazine also has some other articles that  mentioned three reasons that there is not a bubble:
1. Low Interest Rates
2. Demand
3. Despite tests to the general economy, real estate has yet to be tested.

To be fair and balanced, Yale University economist Robert Shiller the Author who predicted the stock tech bubble, says that we are just as crazy for real estate.

My take on that argument is that you cannot compare real estate to stocks as we buy real estate for more than just its speculative value.

Comments

[billy]

Whatever the differences between stocks and real estate, valuations are ultimately rooted in certain fundamentals. There is a reason why I can't sell you rocks on the moon. A price rise in moon rocks doesn't make sense because of why? Because something is missing? what is this thing?

When real estate rises without the accompanying fundamentals, then a bubble is created. And bubbles, whether in the stock or real estate market, have one thing in common: speculation.

It will pop. We'll know more about it after this spring. We'll know when it will pop after the spring real estate session.

Good luck.

[Tim O'Keefe]

Billy I appreciate your comments In my mind it simply comes down to supply and demand.

In towns like LA, no supply.

In town like 29 Palms, CA lots of supply.

LA=higher prices than 29 Palms. (a God forsaken place in the middle of nowhere)

Add into the equation that a huge amount of people want to live in LA than 29 Palms, and you have demand.

Change one of those two variables and you can chabge the trend.

As mentioned above interest rates will do that. But as I have mentioned in similar articles, rates have a long way to before they get out of the historically low range.

Also, in your tone you imply a bubble by saying it will pop.

In the early 90's we popped here in LA when something catostrophic occured. Where I am in the South Bay, the job base (aerospace) was erased almost overnight.

From my fuzzy memory similar scenarios occurred in many parts of the country.

Taking into consideration that the economy is growing, it would be hard to see that we would experience a pop, let alone a bubble at all. I suspect at worst a soft landing as things even out.

Sans a 9/11 type scenario, real estate is a good short term buy. And in fact it is a pretty good long term buy in most areas of the Country. As I have mentioned before, I wish I would have kept what I had in the 80's and bought more in the 90's, and had the means to buy more in the 2000's.

These are really the only fundamentals are they not?

Your moon rock scenario is not too far removed from my 29 Palms scenario (in fact drive a few miles out of town and I bet you will find lots of moon rocks ;-)

[billy]

Supply and demand? Yeah. That is what everyone is saying isn't it? I mean it makes sense. Land is static and population is always growing.

It's strange though. Did the population just grow in the last three years or so? Was this growth so huge so as to dramatically affect house prices? Or did people just started dreaming about having their own home? No, the supply and demand has always been there. This time around, the only difference the the lack of underlying fundamentals: rising income, growth in employment, etc.

You say the economy is improving? Where did you get this idea? What the lowering of the unemployment rate? There are many variables which go into that figure, least of which are the people who no longer qualify for unemployment. Or could it be because we are spending more? Hahahaha. When you are spending at a record rate on borrowed money, then you are creating a bubble.

Really, my purpose is not to argue whether or not there is a bubble or what not. Whatever the case, if there is a bubble, i hope that it will be a soft landing.

For me, the combination of "creative loans", ARMs, low interest rates, crazy lending qualification standards, all encourage one thing: irresponsible spending.

What is the consequence of being irresponsible(exceedingly so) with money? Yeah, foreclosure, bankrupcy.

Again, I hope we get through all of this without any issues. This real estate boom saved us from the recession of the market crash and 9/11. What will save us from a real estate crash?

What two words point me to a bubble? Irresponsible and speculative spending.

When everyone and his pet bunny are giving the same financial advice (buy real estate, it can only go up,... deja vu tech boom?), I know right away something scary is about to happen.

[Andy]

On the supply and demand arguement, it seems that everyone assumes that the demand for houses is high and will only get higher. It also seems to be conventional wisdom that people don't and won't sell houses the way they sold off stocks becuase 'you have to live somewhere'.

The problem is that arguement may no longer be true. According to the National Association of Realtors over a third of all home purchases last year were second homes, mostly for investment the remainder as vacation homes. With 23% of the homes sold in 2004 being sold to investors who never intend to live in them, it would not take much of a swing in real estate ROI to see a large chunk of that demand dry up.

As another poster points out, if the price increase is just supply and demand, what has changed in the demand between Jan '04 and Jan '05 that caused a 20% rise in prices? Were homes greatly undervalued in 2002 and 2003? Have median household incomes risen 20% in that time? Has California had more than the usual 1.5% population increase since Jan 04? Has LA become that much better a place to live and everywhere else that much worse in just the last few months? Have the number of new houses being built decreased between Jan 04 and Ja 05? The answer to all of these is NO. So where has enough extra demand come from to push prices up at five times the rate of inflation? The only place I can see it coming from is the 14.4% increase NAR reports in houses sold for investment purposes.

This brings us to the 'you have to live somewhere' point I've heard given as the reason that people don't sell houses like they sell stock. All of those investment properties, almost a quater of all sales in 2004 could be sold tomorrow without one single person having to move house.

Of course this doesn't mean that there is a bubble, nor does it mean there will be a crash, all it means is that a lot of common arguements for why there CAN'T be bubble or a crash may not be as sound as many people seem to think.

[bbh]

Unfortunately, Tim, there just may be a huge trend that would change your supply/demand cycle in L.A. Soon, and maybe that time has come, there will not be a 'huge' demand to move to L.A., because most consumers will be priced out of the market. A recent report came out that in L.A. area, housing affordability fell from 23% to 16% in 1 year. That means all those people who wanted to "move" to LA will no longer want to. Demand drys up.

One of the major consumer in that "demand" you talk about is from investors. When investors stop buying because they perceive it to no longer be profitable, they get out. When a quarter of all purchases are by investors and they want to get out, that creates supply in bundles. When supply is in bundle at prices deemed too high, demand decreases. When demand decreases, prices come down. R.E. ARE like stocks when consumers are investors. In stocks or R.E., investors are only interested in one thing: profit.

Add to that the other 75% who bought their houses, large % of them really out of their price range through "creative" financing, and even a slight decrease in prices have noticeable impact.

Do you really think LA prices dipped 50% in the 90's just because a single industry had significant job losses that probably affected 20,000 households? Then think what a 1-2% increases in the ARM rate of 33% of new homeowners would do, not to mention all those who bought their Mercedes with HELOCs.

I'm a moderate who is generally bullish, but this thing is going to pop. Maybe not 70% dip or catastrophic, as doomsayers suggest, but probably enough where those who bought houses within the past 2 years will see losses.

[Stephane Grenier]

Actually, I think we'll get a decline in prices based on interest rate increases alone! I've recently written an article about this recently at: http://www.followsteph.com/News/Howinterestratescandrasti.html
which shows the graph of how interest rates can greatly affect the affordability mortgage prices.

So for example, if you want to keep a monthly payment of $1000/mth, and if interest rates climb up 2-3%, you are looking at a 20-30% drop in mortgage affordability! In detail, if you have an interest rate of 5% and you can only afford $1000/mth mortgage payments, then you can afford a mortgage of up to $186,281.62. If interest rates climb to 7%, then this number drastically drops to $150,307.57, a $36k difference, or about 20% drop in price!

Regards,
Stephane Grenier
http://www.followsteph.com