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

[LizardQueen]

What I do is keep track of the "for sale by owner" ads in the paper. People who are trying to sell in a flat or down market will often try to sell it themselves to avoid paying the hefty realtor fee so they don't take such a bath on the selling price.

The FSBO ads have been steadily increasing here in Vermont over the past few months.

LQ

[Woodman]

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[superiorslots]

Quote: 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.



30+ % of all loans taken out today are interest only with IO some placed on the L&R coast in the 60% range. Also most IO loans are not being taken out for 30 years but 3-5-8 year spans.

[pesto]

Laramie has the University of Wyoming, so people are always moving in and out..the rest of Wyoming is losing population, there aren't enough jobs..

[wtc911]

I've got three interest only loans on three different rental properties. The rates average 6.25%, fixed for thirty years. The rent roll is twice the payments so every month I write down the principal, which decreases the subsequent month's payment. By the time the traditional mortgage kicks in 70% of the principal will be gone and the remaining 30% will still be at 6.25%. At that point there will be no real incentive to pay down the principal and the overage will become revenue and I won't care if SS goes away.

As I said, any other use or form of interest only is a sucker's play.

[ASOC]

Alaska - prices are driven (in part) by the fact that the Gov't owns most of the land around here. That said, a 35+ yo 12x50 tralier on a rental lot can go for $40K or more.....insane is right.