Last week, an old friend (and financial adviser) mentioned in passing that he feared the mid-Atlantic area might be in a housing bubble. Although I know housing prices seem to keep rising, I really don’t understand the implications of a housing bubble.
He said something about debt incurred by families who paid too much for houses, but I didn’t catch on.
Other than lowered valuations, what are the generally unanticipated implications of a 10-25 reduction in housing prices?
I don’t really know too much about it but one thing that strikes me as a potential problem is that people who have all this false/temporary equity in their homes might feel comfortable remortgaging or taking out loans against their mortgage.
Then when the bubble pops, they’ll be stuck with a boatload of debt and a house on the line.
One problem is that if a property’s value is less than the outstanding balance on the mortgage(s), and the owner is in financial trouble, he or she will be tempted to walk away, leaving the mortgage bank under-secured and probably stuck with a significant loss. If this happens frequently enough, mortgage banks can start to fail, leaving the economy in worse shape, and feeding the cycle.
I think Rooves hit on the bigger problem - people buy houses cheap, they go up in value, and the people borrow against the equity. Houses are being leveraged to a an unprecedented degree these days.
This makes the economy much more sensitive to interest rate changes and fluctuations in house value.
I think he is refering to something further down the future road than what has been currently offered.
I work in the financial services area as well and have done a lot of reading on subjects like this. One thought as to the housing bubble is the old rule of supply and demand. What I think your friend is refering to is that as the population ages and becomes ready to downsize their living accomodations there will be fewer people willing to buy their property at the current price level thus causing property values to fall.
Something like this is occuring in California right now because of government rules. A part of the California tax code on property taxes allows home owners to grandfather their home’s assessed value at the time of purchase. So what you have is 1,000’s of homes in California which are worth millions yet have an assessed value of a fraction of this.
Warren Buffet illustrated this quite well in two of his properties there. Each home is worth about the same and pretty much similar to each other (even in the same neighborhood). One home was purchased in the 1960’s while the other was purchased in the 1990’s. The property tax on the one purchased in the 60’s is about 1/10 the cost of the one purchased in the 90’s.
What you have now is a lot of people who would love to sell their homes because they do not need all the space they had while raising their families. They are paying artificially low property taxes yet if they sell they will have to purchase another home and begin paying 10-20 times more in property taxes.
Thus you have people wanting to sell their homes yet not being able to afford new housing because of property taxes. So they stay where they are because they can’t afford to move. This creates an artificial market because there are less properties for sale. Yet when these people die the property has to be transferred to someone who in turn will be resposible for the estate taxes and property taxes.
What is happening though as a “mega-trend” is that fewer and fewer people will be there as willing buyers as the baby boomer age. The baby boomers represent a population glut followed by smaller and smaller generations. The younger generations are not going to be able to afford the artificially inflated values and thus you have your bubble burst.
Wouldn’t the current “bubble” be directly proportionate to the stock market?
I was under the impression that when the stock market failed people moved their money into safer investments like reits, causing a bubble. When (and if) the stock market decides to rally, people will move their money out of real estate and the bubble will pop, values will fall. There will be fewer lenders and higher interest rates. Am I far off here?
I have never heard that REITs are considered a major cause of housing bubbles.
I think most money invested in Real Estate is not in REITS but in the home mortgage market…some quick Googling has revealed approximately $300 billion is held in REITs, a goodly sum, but that is dwarfed by the $2.9 trillion US mortgage market.
So most people can’t easily move the money they have invested in their homes out and into some other investment. Besides, housing prices in many parts of the country rose during the 90s, when the stock market was booming too.
It must be late, because I can’t help but point out that if you can predict the consequences of the housing bubble, they aren’t unseen.
What about your last statement contradicts itself?
Late in relation to time of day or late in relation to the lunar cycle?
I hate sarcasm
50,000 more immigrants come here each week, they gotta live somewhere.
When you increase your population so much, housing will continue to be in demand for a very very long time. I wouldnt worry about any bubble, no one wants to reduce immigration. We are headed towards 400 million people by 2050, and a billion by the end of the century.
There wont be any “bubble”, instead, expect crowded highways, crowded schools, lots of people seeking jobs, and continuing housing shortages.