Posted on 06/12/2005 11:48:33 PM PDT by snarks_when_bored
US bubble set to burst
7 June 2005
House prices are rising so fast in 22 US states that they have created a "bubble" that could burst in the middle of next year according to two physicists (physics/0506027). The same team previously predicted that the UK housing market would crash in mid-2004.
Bubbles are formed in markets when large numbers of investors - often taking their lead from traders - start to buy more and more stocks and shares, forcing prices to artificially high levels. Such bubbles can also form in the housing market. And like real bubbles, these financial bubbles often burst.
After the "new economy" bubble burst in 2000, the US Federal Reserve decided to cut interest rates to just 1% in an effort to kick-start the economy. However, such low rates have historically been associated with an increased demand for houses. Two years ago, Didier Sornette and Wei-Xing Zhou at the University of California at Los Angeles (UCLA) analysed the US housing market. They concluded that although house prices were increasing rapidly, there was no evidence for the faster-than-exponential growth that often leads to the growth of a bubble.
Now, Sornette and Zhou have revisited their calculations, taking into account the latest data on house prices. The physicists analysed quarterly average prices for the US as a whole as well as in the Northeast, mid-West, South and West, and also in all 50 states and the District of Columbia (DC). They then formulated models to fit the data and identified clear-cut signatures of fast growing bubbles in 22 states. Moreover, the models were able to predict the critical turning point at which these bubbles might burst – after which time the high prices may slowly start to come back down to more realistic levels or stabilise at their current levels.
The scientists performed a similar analysis for the UK in 2003. "In that paper we identified an unsustainable bubble in the UK housing market and predicted that the critical time might be around the end of 2003 or mid-2004," Sornette told PhysicsWeb. "The UK house price index has experienced a drop since July of 2004."
The UCLA physicists say they will now continue monitoring other housing markets around the world for potential signs of bubbles. "Our work may have broad economic consequences because the real-estate market has played such a major role in the US economy's recovery," says Sornette. "For instance, the total real-estate debt for private home owners in the US is now higher than the federal debt, which is about 8.5 trillion dollars!"
About the author
Belle Dumé is science writer at PhysicsWeb
I don't know anyone who has bought an apartment in the city for $200,000 in several years. From what I can tell, a decent place is now starting at around $600,000 and heading up to over $1 mil. That's a pretty standard 2 bedroom kind of place.
Ouch. How much of the price up there is land, though? And is it because of density and geography, or because of artificial limits on developing land created by NIMBYs/BANANAs/enviro-extremists?
You don't want to know how much $500k gets you, in the ATL 'burbs.
And they all want something on or close to water.
Leni
If this is true, Long Island is going to burst like Krakatoa!
Krakatoa? As in East of Java? So, they'll be coffee?
News reports out of Lawn Guy Land is distressing. All this weird suburban stuff.
No you misunderstood me. I was stating that you can spend about $200,000 more in NYC than say NJ and because of property tax differentials you would come out even.
Land??? HA! There is not much land for a 500K house. You get to look through your window and see your neighbor in the shower.
Yup.
I have a client that lives in Scarsdale that pay 60K per year in property taxes. His next door neighbor pays 120K.
The two-thirds of the GDP from consumer spending would shrink. If consumers dramatically decreased spending because of psychological factors, it would have all sorts of ramifications. Any business depending on consumers for survival would have to move fast to adjust. GM would probably be an early casualty if new cars sales collapsed. Similarly Lowes and Home Depot would take early hits. I'm sure there would be plenty of suffering to go around. The other downside potential is that Democrats might take the presidency in 2008 if the economic downturn preceeds the election and unemployment skyrockets.
Unlike stocks, I don't think housing prices will collapse overnight. Look for houses to stay on the market longer and hopefully a gradual drop in values. We still have the boomer retirement wave coming. That may be slowed by an economic downturn but it could flood the market with houses being sold by boomers as they prepare to move to their retirement homes. It's probably a time to carefully consider real estate purchases or possibly sell at what may be a peak.
Oh. sorry. Yeah, you are right on that count. But there is still a limited number of people who are hardcore city dwellers.
What the heck do physicists know about the housing market? Shouldn't the be out fudging cold fusion research, or something? ;o)
As Frank Costanza was wont to exclaim: "I'm back, bay-beeee!"
Coming in out of the cold: Cold fusion, for real
Jackson is expensive expensive, but so is Laramie (well, more than anyone outside Laramie would believe, but still a bargain if your from anywhere on the West or East Coasts)), A real estate agent told me that Laramie's price per sqare foot is the same as Denver. There just aren't enough houses to meet demand, and we are surrounded by ranchers who aren't selling their land for development..
That's exactly my point.
The bubble may not burst all that soon in coastal Florida with an average of 1000 people moving into the state EVERY DAY.And they all want something on or close to water.
Do you wear elbow pads when you go out? And do all of those folks own scuba gear?
That's insane. They clearly need to organize a property tax revolt.
This has happened before. In the Denver area (among others), people simply abandoned their homes and mortgages, walked away from them and left the bank and/or FHA holding the property, when this happened. In many cases this created huge deficiency judgments (essentially the difference between what the debtor owes and the price the lender is able to get for the property after foreclosure) that people tended to avoid by declaring bankruptcy.
Mortgage insurance could lessen the impact of some this, but many people have avoided mortgage insurance through creative financing involving wraparound second mortgages with higher or blended rates. Even where there is mortgage insurance, the risk is likely underfunded in markets such as California.
Moreover, an increasingly large number of people are taking advantage of loans with an interest-only option which means the principle isn't drawing down at all. This will translate into higher deficiency judgments.
And we have new bankruptcy rules. It seems to me that a debtor whose income is above the median for that state/area will not be able to entirely avoid a big deficiency judgment through Chapter 7 bankruptcy. The debtor will have to pay some of the judgment over time through Chapter 13. In short, they'll continue to pay for years for a property they no longer have the use and benefit of.
This could shape up to be a huge political battle pitting the vote-powerful middle class against the campaign contribution powerful mortgage lending industry, each one trying to shift the cost of the bubble burst onto the other. Sad experience teaches us that many times it is the everyday ordinarily prudent and cautious taxpayer who ends up footing the bill for the crazy gambling losses of the rest.
That's just skimming the surface of it. This could play out in surprising and ugly ways.
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