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
Every county in New Jersey is being reassessed this year. I recently sold our home there and that tempered the bidding and offers (bought in 98 for 200k, listed for 340k, sold for 274k, property taxes pre-reassessment 7.1k).
Will assessments hasten a crash or slow things down? Beats me, but I'm glad I'm out of that market.
But then, I've also heard Warren B. has been "losing his shirt" (relatively speaking, anyway) betting on the Euro vs. the USD.
It's likely that the real estate market will fall somewhat in certain local markets. But I don't think that the fall will be that great -- probably 15% at most -- and I certainly don't think it'll affect 22 states. The housing bubble is different from NASDAQ. People typically only own one house. And they'll be inclined to wait out the market as long as they can meet the mortgage payment. So even if values fall, they won't be foreclosed on if they keep their payments up. Who really has to sell their house? People who get jobs in another city, or people who can't make their mortgage payment. If someone wants to trade up, but can't because the market has fallen slightly below their mortgage amount, they'll likely just stay put in their older, inferior house.
They will NEVER cut those taxes.
If the housing market takes a total dump tomorrow, those tax rates are here to stay.
Housing bubble burst in the U.K.? WTF?
I cannot think of a more insanely overpriced place than England (London in particular), and I live in NY. Any "bubble burst" could only have been a 1-2% decline at most, from "psychotic" to "ridiculous." For this they're patting themselves on the back?
Who are these guys again?
"Physicists? This is like being on a bad LSD trip watching A Clockwork Orange."
Next, I want to hear the Real Estate Agent's take on string theory, or quark spin........
Wyoming???? Maybe the Jackson Hole area, but not the rest of the state!
What the heck do physicists know about the housing market? Shouldn't the be out fudging cold fusion research, or something? ;o)
He's down to his last $48 billion.
Yeah, I know. That's correct news. He also backed away from the dot.com thing, sacrificing hundreds of millions on the upside.
His whole thing is "value" and not trends. He goes in with a cold and calculating eye and says, "what's it worth?" and applies a few very complex criteria. Unfortunately, the markets don't always act rationally...a fact that Soros exploits to the fullest and frustrates Buffett. To read how Buffett thinks, read anything by Ben Graham who was WB's teacher and mentor.
Hell, I can see the cost of health care bubbling and bubbling. Care to know what one, I say one! treatment of chemotheropy is charged by the infusion clinic??? $80,000 and you usually need about 6 of them to stay alive. So I think that that bubble in health care costs stems from - what?
"It's likely that the real estate market will fall somewhat in certain local markets. But I don't think that the fall will be that great -- probably 15% at most "
Maybe so, but think about it.....houses in my area are easily $500k+ which in my opinion, isn't sustainable.
If you believe the stats, and I do, most folks are buying on ARMs or interest only mortgages.......home equity loans seem to be de rigeur around here.
So, 15% of $500k? when these guys want to move, it's $75k that they need to cough up, assuming they can find someone to buy their house at $425k.
My point is that even if it's only 15%, that's enough to bring disaster to many many households, and push them to "walk away"......when that happens they'll slide much more than 15%, and that makes the problem worse. It only stops when the houses reach their "real" value....whatever that ends up being.... and people start buying again.
15% is enough to push things over the edge, in my opinion, and start this foreclosure cycle in any over-leveraged market.
Too many regulations, to many illegals not paying so they charge up the insudereds, too much overhead, way too much needless diagnostic testing, and on and on.
The ace in the hole for Fla is the comparative price of land vs. the northeast. We're just catching up, in terms of $ per acre, to New England and the DC area.
That's not to say that there aren't insane risks here and there. The new Trump condo tower in Tampa, which they just broke ground on, is already bought out and flipped 3 and 4 deep.
Now that's just stupid.
I don't know where you live, but in NY the entry fee is so high to real estate, on top of the deposit:
1.25% Mortgage Tax
Title Premiuim
Bank Fees
Tax Escrow
Attorney Fee
Its adds up a lot!
Yes, you are right on about those items! Add, that in this particular clinic (oconoligist) sp that the staff is pillfering funds as well. We share an accountant with this particular group and she has a big mouth.
but thank you Jesus we have the drugs to get rid of bad things these days :)
I bought a little (Under 1000Sqft.)condo. in Upstate, NY in 1997 and in 2005 the price of it has almost tripled. The houses around here are crazily high. Houses that went for under $200,000 are now over $600000. It is sick. And taxes, those are craZy also. My wife and I pay over $3000 dollars a year in taxes and we don't own any land....
Mathematically perfected economy is a SINGULAR prescription for true economy and full, unobstructed prosperity, without inflation; without deflation; without subversion of the value or cost of money or property; and without inherent, irreversible multiplication of debt in proportion to the circulation, or commerce which can be sustained by it. These of course are not only some of the most serious problems of the world, obstructing prosperity across a divided planet, and threatening the very existence of our commerce; These very iniquities are the instrument of perpetrating the collective, greatest crimes against humanity of all time. check it out you space invaders,, (this could be serious!)
http://www.perfecteconomy.com/
Right. We bought our first house as a bubble started in the northeast and traded up in the bubble. The housing prices seem to stabilize for years and don't go down much. If you can pay the mortgage, you can keep the house and wait 20 years for the next bubble.
I wish a bubble would come to Louisiana. We have been in the same house ten years and it hasn't appreciated a bit. The big 5 acre lot next door that was on the market nine years ago for 50 grand just sold for 380 grand. We talked about buying it and never did.
Housing bubbles scare me when people with iffy jobs buy a way big house, the biggest they can afford. If you have good job skills and the job market stays reasonable, you can ride it out, cursing all the way.
I used to do some collections for medical clinics and was shocked at the charges to the insurance companies. I don't do it anymore because I felt lower than dirt shaking down companies for obviously inflated bills. It was a complete joke and doctors were happy to get 50% on the dollar for the bills.
Health care should not be operated on wall street principals when you have a third party payer. Its a receipe for disaster.
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