Living through a market bubble is a lesson in psychology. At the top of the NASDAQ bubble, the denial ran thick. It was a new era. So what if Cisco was being projected to have a higher market capitalization than the entire US GDP in a couple of years? The old ways no longer held. Messengers like Bill Fleckenstein who had been through the Nikkei bubble a decade earlier were mocked and insulted upon their warnings. Contrary opinions were brushed aside in favor of psychologically pleasing denials of reality.

Denial is important because it is a contrary indicator. The crude oil market bottomed in 1998 only a short time after The Economist ran a front cover article predicting $5 oil. James Glassman wrote his book Dow 36,000 in 1999. Jeff Bezos was named Time's Man of the Year only two months prior to the NASDAQ peak. What I've been searching for during the current housing bubble are similar signs of denial in the press. Unfortunately, all I've come across are a few articles here and there.


While data on the real estate market is much more difficult to find than on equities markets, there's been one clear change in the current market compared to just a few months ago: loss of liquidity. Liquidity vanishes at the tops of bubbles when there's nobody left to buy.

The real estate bubble has, I believe, popped.

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I have long maintained that

I have long maintained that there is not so much a housing bubble as a mortgage bubble. And that is definitely in the process of bursting.

The risk is not so much in owning a home as it is owning stocks linked to the mortgage and consumer finance markets -- mortgage lenders, mortgage insurers, sub-prime lenders, credit card companies, thrifts, etc. -- perhaps (but not likely) even reaching the major banks.

The question is therefore how broad, wide and deep the ripples will run through these industries, not whether your house will lose 40% of its value overnight.


Kip, I think you've left out

Kip, I think you've left out the risk to those who have purchased homes beyond what they can afford through no-doc, neg. amortization, adjustable rate mortgages who will be unable to refinance or sell their underwater homes... there have been a lot of unethical mortgage lenders and real estate brokers misleading (or failing to inform) ignorant purchasers about just what they're signing up for.

As for articles that express denial, there have been numerous examples posted and referenced at Ben Jones' Housing Bubble Blog.

Jonathan: Check out the


Check out the quotes from the March 25, 2005 New York Times in the comments on this entry on Jones' Housing Bubble Blog (and compare to the entry).

A couple quotes:

"South Florida,'’ he said, ‘’is working off of a totally new economic model than any of us have ever experienced in the past” according to a realtor who predicted that a land shortage will support higher prices indefinitely.”

"I just don’t think we have what it takes to prick the bubble… I don’t think prices are going to fall, and I don’t think they’re even going to be flat. ”
- Diane C. Swonk, chief economist at Mesirow Financial in Chicago, New York Times, Trading Places: Real Estate Instead of Dot-Coms, 3/25/05

JL, I don't disagree. But


I don't disagree. But the point is that those people don't NEED for the price of their homes to fall 40%; 5% can do quite nicely if you're using an I/O or adjustable rate mortgage. And like I said, woe to those who own stock in mortgage lenders when those people make themselves known.

My point was only that average home prices are simply not going to plummet the way the NASDAQ did.


I strongly recommend reading

I strongly recommend reading Searchlight Crusade. He has some excellent material on the housing bubble as well as warnings on how to avoid getting taken advantage of in a real estate deal. He'll make you look very differently at a lot of the mortgage deals that are available these days. :deal:

The article you linked to

The article you linked to just shows (I believe) that house prices and rents are compatible. Which is a different question from whether both of them are too high. Some of the wacko housing bubble extremists say that house prices are way out of line w/ rents, and they are wrong. But it may be that both have been driving high by speculation or whatever.

Anyway, I got my house appraised yesterday and will be selling it soon, so its a great time for the bubble to pop.

Patri: Could you elaborate

Could you elaborate on how speculation might be driving up rent? I'm not seeing it.

Speculation eventually

Speculation eventually drives rents DOWN not up. When most people speculate in real estate, they either hold it, fix it up and flip it, fix it up and rent it or just rent it. Most people need the cash flow (I will only focus on this segement), so they rent it. If the amount of speculators renting out their properties increases, the available supply of rentals increases. Assuming there is not a population surge of renters, the increase in supply will eventually lead to a drop in rent. This can be partially offset by savvy speculators who are able to sell their properties ahead of a slowdown to buyers who will occupy the residence. Another key component is the strength of the renter's rights in a particular area.

Is there a possibility that

Is there a possibility that the doom-and-gloom scenarios being tossed around by bubblists are are simply self-fulfilling?

If I think housing prices are going to fall dramatically in the coming months, I'll probably want to sell as fast as I can, but put off on buying. Given that a disproportionate amount of the liquidity of the market resulted from a relatively small number of buy-happy speculators, the minor fear-based shift in perspective could _itself_ cause the bubble-like effect you observe.

Even if we *aren't* in a bubble, the fact that we think we are may be enough.

A speculator can do all the

A speculator can do all the things you listed, and many do, but if you expect home prices to rise in the near-future you are less likely to rent the property because a lease is difficult to break and you may want to flip the property as soon as the price rises enough. As such, short-term speculators will not only buy property at inflated prices but will then hold it empty driving up rents (or, at the very least, not driving them down).

Now, you are right, long-term speculators will rent it because they do not perceive becoming short-term speculators within the next lease period.

Some of the wacko housing

Some of the wacko housing bubble extremists say that house prices are way out of line w/ rents, and they are wrong.

Can you back this or clarify your way out of line threshold? House/rent ratios for the major cities and metro areas are significantly higher than historical values. Here is a graph for LA:


You can check that when the ratio was slightly above the normalized 1982 ratio, there was a major nominal correction to housing prices. Unless there are some fundamentals factors that you think should be considered, house price/rents ratios have been a stalwart case of reversion to the mean. Anecdotally, my rent has increase 2%(not annually) over the past 3 years while similar comps have increased 75-100% within the same time period.

If you are arguing on a national scale, then I may agree with you since housing markets are regional in behavior.

Someone posted a historical

Someone posted a historical chart of housing prices denominated in gold instead of dollars. It is very illuminating in that the chart is cyclical with no upward trend at all. I think the Fed has caused the real estate markets to boom by buying treasury securities with fresh money. That created a cascading effect as investors moved their money into new asset classes to try to earn a higher return, and also the extra money injected by the Fed has to go somewhere, too. Bond prices go up, interest rates go down. Cost of borrowing dropped like a rock and now you have a bubble. People aren't saving that much (low interest rates), yet demand skyrocketing should of made interest rates go up.