US bubble set to burst - [physicists predict burst of housing bubble in 22 states]

PhysicsWeb ^ | June 7, 2005 | Belle Dumé

[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

[cajungirl]

Louisianians love new. Our house is 25 years old. I don't know why they paid so much for that land. It is five acres, ours is one. It is on the point out into the lake, we are on the lake but that lot has three sides on lake and huge trees. What they may not know is that in the big 100 yr floods that we have about every 10 years down here, the lot they have is 2/3 water. They also planned to build three houses on it but the neighborhood stopped them, they can only build one. So they overpaid. Houses here just don't appreciate like elsewhere.

[chris1]

When you are worth 40 million it does not seem that much. This guy made it in real estate he bought in the 70's. I asked him outright - how did you do it? what advice do you have for a guy like me? He sad the following:

1. Things are not same as they used to be in that it used to be easier to do deals without the interference of banks, gov't, title companies, agents, brokers, etc.

2. There was not as much demand for housing from immigrants and new arrivals; and

3. Too many people are fighting over the little crumbs that are left.

[snarks_when_bored]

Just for purposes of contemplation...

Nasdaq lifetime chart:

 

Toll Brothers Inc (home builders) lifetime chart:

[nuke rocketeer]

What's the impetus for the population growth in Laramie? I thought Wyoming was losing population with the closing of the Uranium mines,increasing automation of the coal mines, and the decline in agricultural activities.

I read an article a couple of years ago on how Wyoming, ND, SD, Neb., Iowa, Kansas, and Montana were losing population. They had a nighttime satellite photo from the early 70's next to one taken in 2002 and it really showed a huge decrease in the number of lights in those states.

[wtc911]

We just had an addition constructed. The County assessor was on site to inspect for the up-tick while the interior work was still being finished.

[Amalie]

Good graphic. Thanks. There are places like coastal Fla. that may seem ripe for readjustment, but there will also always be a premium on that kind of property. I think the bigger issue is the domino effect on other parts of the economy should the market correct itself. In all likelihood, the correction will be regional, not national, unless something upsets the Fed's applecart directly to precipitate the fall.

[ModelBreaker]

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.

And these secondary effecs are why the fed will move fast to lower interest rates should it look like prices are collapsing. So I agree with you. Prices may well stabilize. But they won't collapse.

[petercooper]

When are houses reassessed for property tax purposes? When an addition is done, or when sold, or is it on a regular time table like every other year or something. Thanks

[RichardW]

I just don't understand why anyone chooses to live in these high price areas with the traffic jams and all the commotion. I can buy a house where I live here in Texas; a very nice home for not much more than $100K. With acreage too. And I don't need to fight the traffic jams and tolerate the crime. I guess I'm getting old.

[redgolum]

Wouldn't lowering the rates just increase the bubble, and make the crash so much more worse?

I mean, interest rates are super low now, even with the fed increases. I don't see how lowering them would have much more of an effect.

[pfony1]

It's no surprise that "statisticians" masquerading as physicists feel equally qualified to masquerade as "economists".

As the saying goes, "There are lies, damn lies and statistics..."

Supply and demand explain prices. Statistical "correlations" do not.

[superiorslots]

Quote: Right now we're in the final stages of the bubble, even in hot spots like Manhattan.

..probably why Trump just sold that property in manhatten for what 1.5 billion to the chinese or japanese. He'll buy it back in 2 years for 750 million.

[superiorslots]

Quote: If the real estate market behaves similarly, there will be big trouble. But perhaps it won't be quite that bad.



The real estate bubble is worse on people than losing money in the stock market. For the most part If you lose money in the stock market that is "disposable" income. When you lose money on a house most people have a mortgage. If you bought the house for $300K on a interest only laon and the house drops to 225K you need to come up with $75K when the loan balloons

When I lost money back in 2000 on the stock market nobody was coming after me for the money I lost.

[snarks_when_bored]

Good points.

[wtc911]

When are houses reassessed for property tax purposes? When an addition is done, or when sold, or is it on a regular time table like every other year or something. Thanks...

-------------------------------------------

There is no recognized time-table for re-assessing existing, un-improved residential properties. You can be sure that any structural renovation or addition (including pool) that requires a building permit will trigger a visit from the Tax office. A sale does not automatically trigger a re-calculation of the assessed value.

[wtc911]

If you bought the house for $300K on a interest only laon and the house drops to 225K you need to come up with $75K when the loan balloons..................

HUH? First of all, an interest only loan is a sucker's play unless the property is an investment property that services the debt plus significant principal write down AND the rate is thirty year fixed. Anyone who signs a mortgage obligation with zero interest under any other terms is a fool...and we know what happens to a fool and his money.

Secondly, when the zero interest period elapses (typically ten years) a new monthly payment will be calculated on the remaining principal, no new appraisal is conducted. The owner does not have to come up with any cash, he need only be able to make the monthly payment.

[durasell]

If Trump knows anything, which is doubtful, he knows the prices on rents and the velocity of real estate sales. Both are stagnant. Offers for apartments, as recently reported in several sources, are now coming in BELOW asking price. If you think of it as a rollercoaster, we now at the top of the hill and edging over into the fall.

Count the number of "for sale" signs in any given neighborhood for a month. That number will either increase or remain static.

[taxed2death]

3 years ago... 2 acre lots at the end of my street were selling for $40,000.00

Now they're selling for $175,000.00

Yikes is right.