If the real estate market behaves similarly, there will be big trouble. But perhaps it won't be quite that bad.
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
May I ask what state?
You make some good points. However, the data analyzed by the two physicists announce the presence of what they call 'faster-than-exponential growth' in the real estate markets they looked at. Faster-than-exponential growth is the mark of a bubble and is unsustainable by any physical process. Their success in predicting the decline of the U.K. housing market is no guarantee that they're going to be correct this time, but their current analysis certainly warrants attention, it seems to me. I haven't read their paper, though. If I can find some quiet time, I'm going to try to work through some of their paper in the next day or so.
"track record"?
You need more than one point to create a line.
"Track record" is too strong, you're correct. Let's say, their "previous successful prediction".
Sizing the US market by using a formulae for the exfoliating UK market and any other- is inane. Regardless, Buffet is fella to listen to after the fact- just try to follow him before the fact, see how that works for ya. The US housing market will continue to boom towards a sustained leveling; unless one or more, of three events happen- none of them good scenarios- then all bets are off.
I blame Greenspan... rates were ridiculously low for too long, I just hope we have a soft landing.
Greenspan's real legacy might be a real estate meltdown, like the early 90s -- but bigger.
The only thing keeping the prices up at this point is hype and a rapidly dwindling supply of greater fools.
Did anybody else read that definition of "bursting the bubble"? To reiterate, according to that paragraph, it means that prices would slowly retreat or else stabilize at their current levels, not that they would crash by 50% as some are breathlessly claiming.
If the real estate market behaves similarly, there will be big trouble. But perhaps it won't be quite that bad.
Just because the values drop doesn't mean they are going to adjust the assessments.
E=mc2Therefore, the U.S. bubble will burst. Makes complete sense to me.
You're ignoring higher-order terms...
Everything is relative :-)
No one in his right mind would call a large increase in price stabilizing at a high level a "bubble".
Everything is relative :-)
Yeah, that's what my Tennessee kinfolk used to say.
BTT 4L8R
"Maine, last to know, first to go."
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