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
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."
Sornette and Zhou have a track record. Caution wouldn't be imprudent, it would seem.
Maybe then I'll be able to buy something more than a shack for a half million in LA.
We analyze the quarterly average sale prices of new houses sold in the USA as a whole, in the northeast, midwest, south, and west of the USA, in each of the 50 states and the District of Columbia of the USA, to determine whether they have grown faster-than-exponential which we take as the diagnostic of a bubble. We find that 22 states (mostly Northeast and West) exhibit clear-cut signatures of a fast growing bubble. From the analysis of the S&P 500 Home Index, we conclude that the turning point of the bubble will probably occur around mid-2006.
That will piss off all those states who are getting gigantic raises in revenues from the huge property tax income.
That will piss off all those states who are getting gigantic raises in revenues from the huge property tax income.
Yep...
(I almost pinged you, but then figured that you'd notice the post. You're usually around at these hours.)
Yep, had to pick up someone at LAX, then a 20 minute problem I helped with an older person neighbor took some 2 hours and now I am winding down.
Since the bubble of 2000 we are still seeing layoffs of thousands of jobs and constant corporate bankruptcies nearly 5 years after the fact. But housing valuations keep rising. Seems to me that if and or when the supposed housing bubble bursts that valuations could drop drastically. But then if that were to occur, wouldn't it make sense that we'd see a complete collapse of our financial base in this nation ?. what would be the effects ?. Bankrupt Banks ?,Bankrupt Realtors ?, & then I'm probably only touching the surface of the problem. If the bubble bursts like the corporate bubble has I envision today's Housing valuations could be cut in half maybe more. 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 !
Physicists? This is like being on a bad LSD trip watching A Clockwork Orange.These are...the days of our lives...
Actually it always amazes me how the masses rush in at the crest of a wave ....reminds me of the stock-market bubble when people were rushing to buy stocks (at ridiculous PE ratios) and laughing at me when i told them they were heading for dire straits. The only people who listened were this college bud i was investing with (we got out at the top) and one of my professors.
This whole housing thing, and how people are behaving, is very similar. And the people who will suffer are the same ones that took the brunt in the stock market adjustment ....the 'normal' dudes who buy at the top somehow expecting prices to continue climbing (when a kindergarten kid could easily tell them something was fishy .....seriously, tell a young kid the situation and listen to the answer).
The greater fool theory continues to chug on, and soon many will be left holding insane interest only mortgages and wearing a rather sizeable 'dunce' cap.
Also read "The Next Great Bubble Boom" by Harry S. Dent.
FWIW, these are the 22 alleged "clearly bubbling" markets:
Alaska
California
Connecticut
Delaware
Florida
Hawaii
Massachusetts
Maryland
Maine
Montana
North Dakota
New Hampshire
New Jersey
New Mexico
Nevada
New York
Pennsylvania
Rhode Island
Vermont
Virginia
[Washington DC]
Wyoming
These are the 8 alleged "recently bubbling" markets:
Arizona
Idaho
Illinois
Minnesota
Oregon
Washington
West Virginia
Wisconsin
PS. How North Dakota could have a housing bubble is beyond me....
Hell, scare enough people with this kind of talk and it's rather a self-fulfilling prophesy.
Will there be an adjustment? I wouldn't doubt it, but then there always are. The last adjustment in the L.A. area occurred in the late 80s early 90s.
Is it time for another? Perhaps... sooner or later.
I'm tired of hearing about the bubble that is just about to break. It's been just about to break for two or three years now. There is a thread about the bubble break about once a week for the last , who knows how long. So, I guess if it breaks, it breaks. Not the end of life in the US. I'm sure we will go on hating liberals and winning elections. What else can we do?
No mention of the rising cost of healthcare bubble, or the underfunding of pensions bubble?
My cousin, a truck driver, just completed building his half-million dollar home. He did it by selling his last place for $380,000. He put a grand-total of $80,000 into that first house, using savings and sweat-equity for the remainder. That first place was paid-off when he sold. He owes less than $80,000 on the new mansion. He, and a lot of other well-housed folks I know, are in real great shape to ride out this 'disaster'.
Me? I owe $50,000 on a place valued at about $350,000. It's a rural farmhouse that, despite the significant niceness on the inside, looks like it ain't been reshingled since it was built in 1800. I pay taxes based on a value of $130,000. If I finished it, the town would triple my taxes. If properties are devalued significantly, maybe I can fix it up without having to move out? And it would be nice to see a slowdown in the building of McMansions on every pasture here. Spec houses. No takers......the smart money is waiting for the downturn: you don't gotta be no freakin' rocket scientist!
You'll get a chance to do something extremely intelligent with your money in the next few years.
Perhaps that's going to be next year...
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