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
Me, too. I thought our housing prices were just starting to catch up with the rest of the world...
Thanks for that, I love reading Warren B. The guy has a one-track mind, everything, all the time, without fail, turns to valuation. It's a remarkable and very unsettling thing he's trained himself to do.
The average price for a flat in the Santurtzi (Spain) and surrounding areas is about $400,000. Madrid is no different. I hope they will also analyze Spain.
Spec houses. No takers
What State?
"I sure wouldn't want to be holding a 30 year mortgage on a $250,000 house that'll drop $100,000 in value. Scary thought !"
We live in a small retirement community here on the Colorado River in Arizona. Two years ago 1/4 acre lots were going for 4-6 thousand dollars, ready for this, they are now $50,000.00+ with no let up in sight. It can't continue to sustain itself, the balloon has to pop.
They have been doing that for 200 years in Florida.
A year ago, a lawyer there told me to get an interest-only mortgage, and recommended a particular lender.
Now, he says, don't do it, it's too risky.
MA . The contractors are rolling in it...a lot from rehab and solicited contract (like my cuzz). They have increased the numbers of employees during the boom, but the damand for their services is significantly down; so they're building on spec to use available crew and cash. Even in a crash, though, they'll be able to sell these thing for about cost. I don't see a huge disaster coming. We common serfs aren't as stupid as the pointyheads figure. There has to be another repository for all that oustsanding mortgage debt, as far as I can figure...from my empirical, very unscientific servey.
Thanks. That's interesting. However, I differ in opinion. I see a pretty nasty crash coming. What I do see as up for grabs as how it will impact those areas that don't have a bubble. NYC is pretty tough and can absorb a dramatic drop. But can Flagstaff or Porland, Oregon?
It's a remarkable and very unsettling thing he's trained himself to do.
Good way of putting it.
Something else I've noticed since a couple years ago. Is the amount of homes and properties listed for sale that haven't sold. There are many, many houses that have been on the market for over two years around here still unsold. And I am noticing more and more people are trying to sell anything they have worth value. It is nothing to drive down most any street and see vehicles,boats,motorcycles everything up for sale. In amounts way out of the ordinary. Obviously many folks around here, at least (50 mile radius) are broke.
The story says that they're examining real estate markets around the world. Spain's probably on their list.
Thanks...I should've posted a list.
It's an interesting way of looking at the world -- judging the value of everything in absolute quantifiable terms.
A year ago, a lawyer there told me to get an interest-only mortgage, and recommended a particular lender.Now, he says, don't do it, it's too risky.
That's anecdotal, but telling nonetheless.
The Silicon Valley housing "bubble" was caused entirely by the dot.com fueled "bubble" in worker compensation. Stock options and easy money drove housing prices to unrealistic levels. When the industry down there collapsed, so did the housing values.
As long as governments make it difficult to build, supply will remain low and prices will remain high. In California we have some of the most restrictive housing regulations in the country. Furthermore, the US Census Bureau expects California state population to grow by 12 million (33%) in the next 25 years. With high demand and low supply, California real estate remains a good investment.
Physicists who ignore the laws of supply and demand in their analysis are looking through the wrong end of their telescopes.
District of Columbia should not be on the list. Federal Government cannot simply go out of business. Plus no building is allowed to be taller than the Washington Monument so that puts an artifical limit on how tall the buildings may be.
You're wrong. Simply put: Analysis that ignores the supply and demand function in money supply or takes into account the irrational behavior of consumers is just "hype."
Right now we're in the final stages of the bubble, even in hot spots like Manhattan.
It doesn't matter whether it has happened for 200 years or 2 millenia. The fact still remains that the current housing market firmness (particularly in Las Vegas in Nevada, and many areas in California and Florida) is significantly skewed. Profit selling may have happened for 200 years, and once the bubble bursts it may very well happen for 200 more, but the current situation will undergo a correction pretty soon. As we speak median prices in Miami (since you are talking about florida) have gone up 92% since 2002, and places like Cape Coral (Florida again) they have gone up 43% since last year! And much of this is due to speculators. Anyways, the realestate market has always been, and will always be, there. However the current situation will resolve itself very soon. And there will be a lot of Greater Fools left out there gasping air like a guppy out of water.
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