Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
Saturday, January 28, 2006
When Did You First Suspect There Was A Bubble?
A reader wants to know when you decided there was a housing bubble. "When did you first begin to suspect a housing bubble and how have your opinions of the bubble changed since reading this blog?"
"I moved to my beach neighborhood in 1995 and thought things were starting to get a little wacky in 1998-99. I haven't done much traveling, but I think I have seen enough of other parts of the country to sense that what was around me just wasn't a real good value. I was way early about the stock market too, though."
"How has this blog changed me? In the discovery that there is a lot of 'grass roots' info out there that all is not well in real estate, which you don't see on Bubblevision TV."
I felt homes were over-priced in Austin, Texas, around 1999. But I thought it was froth from the tech boom and didn't make much of it. It was in the fall of 2004, when prices in California, Las Vegas and Florida kept going up each month by 20% or greater, that I started thinking of it in terms of being a financial mania.
ReplyDeleteI have learned as much about real estate and mania psychology from the posters here as anyone. My thanks to all the contributors for a very interesting education.
First off... I live in Miami, and the local bubble kicked off both earlier and more visibly.
ReplyDeleteAnyway... I was a renter in 1996 and began looking for a house to buy. I low-balled and got my house for 30% below asking. As my friends started buying, I realized that we'd gotten an amazing price. At first, it was just a game my wife and I played... i.e., how awesome did we do. But 3 years later the price per square foot had doubled in my neighborhood.
The next bit of the puzzle was my neighbor across the street. He didn't need to sell, but wanted a slightly larger house. So we sat down and did the comps. He came up with a high-ball figure. Then he juiced it up another 5%. Then he put it on the market and sold it in a week. That freaked me out. It implied that my house had gone up about 200% in less than 5 years.
The next indication came while visiting my in-laws near West-Palm. I played with my son for 2 hours by the pool. The entire time, 6-10 elderly ladies gossiped about condominiums they had bought, condominiums they were going to buy, and how it was the surest, easiest money in the world.
Finally, Ed Leamer, of UCLA, gave a cogent explanation of P/E values for homes. To me it was plain to see that the rich old ladies in Palm Beach had no idea what the "value" of their properties was. Indeed, they had no intention of renting, just flipping. To them, the fact that prices had risen meant that prices would rise. South Florida was in a pure bubble. It was @ 2004.
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ReplyDeleteI started to search for a home to buy around June 2004. One or two months into the process, I realized that prices were out of line compared to income and rents. That I was competing with buyers who brought no money down, and used ARM or interest only loans.
ReplyDeleteSo I'd say I realized there was a bubble in August 2004.
foobeca:
ReplyDeleteHelp Me! What do you mean: Rent in SLC covers the mortgage payments??
Rents in CA do not cover the mortgage Payment??
Thanks I like your post I am looking to buy in SLC. I live in CA and would like a summer home in SLC.
You Stated:
"The income/payment and rent/payment ratio is a little out of whack in SLC, but not like it is in CA. At least the rent would cover the interest part of the mortgage payment."
In 2003, when my wife started pushing to upgrade to a new home here in Vegas.
ReplyDeleteWe looked around saw that prices had increased 40-50% since 2001. I thought, what the heck is going on here??? I then started researching the "bubble" issue.
One yr later-2004 (when prices had increased another 50% +), we decided to sell, become debt free, invest more, and rent/wait it out for the fall.
Friends thought we were absolutely crazy!!!
Looking back now, we probably got out just a little early (July 2004), but we sold very quickly, got what we asked, etc. I honestly believe it was the best decision we have ever made.
Now renting cheaply, debt free, money socked away, etc.
I'll add this to the question; in addition to your personal revelation, when should the Fed and lending regulators have realized there was trouble brewing and acted on it?
ReplyDelete2000-2001. I went out to Redwood City a few times each year on business and talked with fellow employees about housing. People drove 2 hours just to get to work, and even then tiny little bungalows in the area were selling for $500k+. I shudder to think what they are "worth" now.
ReplyDeletePeople lived in APARTMENTS 2 hours away. I asked myself, "Gee, this is a great place, but how the hell can people put up with these prices?"
when I heard that California was increasing so rapdily. a year later I read an article about people camping out to buy homes in a subdivision, that's what erased all doubt.
ReplyDeleteMid 2004 in San Diego, I felt that something was really wrong. I had been looking at buying, and things that my realtor said to me to try to ease my concerns made zero financial sense. One suggestion was just renting the property out and letting someone else cover the mortgage payment. I knew rental prices in the area were much lower and there was no way that I could have covered my costs. I started doing some research.
ReplyDeleteAt first, I thought the price run ups were happening in just a few major cities across the country. I realized that prices in some very unlikely places were going up parabolically. When a couple of friends living in the San Joaquin Valley told me that their homes had more than doubled in value, and I KNEW that things were out of control. When people are buying up places like Bakersfield, Visalia, Fresno, and Merced, a financial mania has to be at hand!
Eventually I found Patrick's site. It was a relief to see that there were a few out there that felt that buying isn't always a good idea. I started reading Ben's original site last January. The information you have all shared here is invaluable. Thanks so much everyone and thanks especially to you Ben. I will be much better prepared to buy when it is actually the right time to consider it again.
I thought the peak was near in Phoenix in late Nov. 2004 (I was about a year early), when the housing development around my home was completed and a bunch of "for rent" signs popped up. I posted this on az.general on Usenet on Nov. 28, 2004:
ReplyDelete"> What makes you think prices are peaked?
The reasons I already gave--rampant speculation, huge increase in
foreclosures and auctions, increasing interest rates, and the huge amount of construction. Add to that the fact that everybody is
jumping into it because the market is so ridiculous--that's a sure
sign that the end is near. It could be a year or two off, but I doubt
it's much more than that. There's a huge supply of available homes,
and it's getting bigger."
I guess that was pretty accurate.
I first noticed the build-up of the bubble in 2003.
ReplyDeleteI first noticed the imminent bursting of the bubble in May 2005.
I am in the silly valley.
When Did You First Suspect There Was A Bubble?
ReplyDelete2003. That's when the "nomral" RE cycle looked to us to be peaking. But it just shot up from there.
We first realized something was up in Aug. 2001 when we moved back to San Diego. We found several places to rent, one nice one in Carlsbad had 5 beds, nice neighborhood, but was $500 more than other similar rentals in the area. When I called the owner to inquire about a reduction, she actually said "we can't go less than this, our mortgage payment is $100 more than we are asking!" That is not my problem as a renter and her mortgage payment has nothing to do with the rental market. I told her I didn't give a hoot what her mortgage payment was and that she could sit on that property - we rented elsewhere for $600 less per month. When owners cannot collect enough rent to cover their mortgage, that spells trouble to me. It has only gotten worse, there are many owners currently renting at a loss, doesn't bode well for the market.
ReplyDeleteI lived in SV as an engineer during the dot.bomb and, as many know, that event really nuked the Bay Area economy and job market.
ReplyDeleteHowever, when RE prices began to rise in 2001, I figured that it was due to those fortunate enough to have cashed out of the dot.bomb before the big crash. There was a lot of easy cash from those stock sales sloshing about the BA looking for a new home.
When RE prices continued to rise in 02-04 I became increasingly suspicious that a new bubble was forming, especially with the declining local job market- Offshoring became the new mantra and many skilled SV tech professionals were thrown out of work only to be replaced be someone in India or China.
I noticed that credit was cheap and 100% IO neg-am loans started becoming very popular. I would go to parties and hear "investors" with little education boasting about their new real estate "portfolios" going up 100%+ a year.
Based on the news I was following, I decided in late 2004 that the market was nearing a top- It was time to sell and lock in my profits. By the time the house was ready for sale in the spring of 2005, I was anxious that I might miss the S.S. Bubble Boat, but the market was still on fire and the house sold for well over my seven-figure asking price in a few days- Pay day.
I then moved into a home that I already owned outright in Napa Valley. I purchased it with a lowball offer in 1993.
I discovered Ben's great blog just after I sold my SV house and it's been nice reading how this thing is going to play out.
I'm looking forward to some lowball REO plays next year. Maybe I'll get something nice for <50 cents on the dollar? If not, no worries here, I'm going to be enjoying a nice glass of Napa cabernet in the meantime.
Keep up the great work, Ben.
Someone pointed out that the Economist was the only one reporting on the bubble. They're known to be influenced by the Austrian school of economics.
ReplyDeleteThe Mises institute has this video on the history and workings of the Federal Reserve from and Austrian Economist's perspective. It's about 45 minutes long so grab a cup of joe and prepare to have your mind blown.
In SF, I could see a bit of "bubble" here and there driven by dotcom detritus in the late 90's to '01.
ReplyDeleteIn '02 and '03, it was still apparent but seemingly localized to specific areas or even neighborhoods, and prices overall barely took a breather in the rup to the Iraq invasion.
By spring and into the mid-year of 2004, it was hard to miss, as it was spurred on by the "threat" that the Fed's soon-to-be raising stance would send mortgage rates higher. Realtors(tm) pushed that line consistently.
Some around here have said Easy Al began his "measured" increases about a year too late.
I can't disagree with that.
I felt several years ago that housing was over-priced. I'd say in 2001-2002... when I first started considering a purchase while I was in the San Francisco East Bay (Walnut Creek).
ReplyDeleteI moved away from coastal CA in mid 2003 for a job. I moved back to the same area near the end of 2004. Houses were 25%-35% higher in price, and people without the income to buy in 2002 were suddenly buying.
ReplyDelete(This followed the dotcom bubble and a previous 5 year run up in house prices, and the local market had been flat to slightly down since 2001.)
route66 said at 10:05 AM
ReplyDeleteNo one will ever do it, but reporters should be held accountable for their shoddy work.
You make a fundamental mistake in assigning to reporters a greater role than they occupy. Reporters of general consumption media are paid on their entertainment value that helps drive ad revenue, everything else is strictly gravy. Trusting a reporter to comment sagaciously on financial matters is akin to handing your wallet to a clown at a gypsy circus.
No one but yourself is responsible for making astute observations about the financial world and taking action upon your conclusions and hypotheses. Ceding responsibility is simply asking to get fleeced. You yourself within one year, without any special investigative, reportorial, or financial training, asked more penetrating questions than all the commentators in the mass media outlets combined over a period of many years. What does that tell you about reporters?
Remember this when the market is around its bottom, and the same outlets who supported a "RE always goes up" message are supporting a "RE is for chumps" message. It is easy to say you'll buy when blood is running in the streets, but as nearly everyone here will agree, it is quite difficult to take action against the grain. Today, those of us who are renting to wait out the bubble are buying cash with which to purchase more reasonably priced assets in the future. Make no mistake though, you will need to bring lots and lots of cash to the table to buy in the future, as lending standards by then will swing in the other direction away from ludicrously lax to ridiculously restrictive.
my brother(who reads this blog) was looking to buy a few months ago. I told him I thought there was a housing bubble. I don't think he thought so until he read this blog. plus, he's from the east and I think he would have figured out on his own that something was wrong with home prices.
ReplyDeleterent2home,
ReplyDeleteI can see anything that gets through to the server. I looked back and this is the first post from you on this thread. So if you posted here and can't see it, you did something that prevented it from getting through. We all do that from time to time.
If you posted on another thread and can't see it, try rebooting.
I suspected it was a bubble back in 2003. Been looking for a three bedroom house with a dated 30-40 year old interior to rehab and turn for profit or hold onto for myself if the numbers weren't quite "right" yet but would be in the next several years. I am in the flooring business and had been doing a lot of work in a certain subdivision/area. Seemed like a good area to take a shot at being a homeowner. Okay schools, area kind of blue collar but clean, and had a history of gang problems in the past but seemed like that problem had been solved. Ranches were in the $140,000 range to start. Looked like a good risk. Put all my ducks in a row to make it happen and then consulted an RE agent customer of mine.
ReplyDeleteShe floored me. Those $140's were now $200's+! Unrehabbed. In Aurora, Illinois? Boulder Hill? Land of the illegal alien? The numbers didn't add up to me.
Then I noticed that the newer, nicer apartment complexes all had big move-in specials and even guys wearing sandwich boards trying to drum up renters to stop in and check them out. Saw a brand new apartment complex in a much nicer suburb (Geneva) with three bedrooms for under $900. Why would anyone spend close to (2005) $300,000 for a three bedroom, 40 year old house with a Spanish Inquisition(red velvet & black wrought iron),Hippie Dippy(flourescent yellow/green/orange w/ macramae),Stagflation Flashback (Avocado Green-Harvest Gold-Burnt Copper), or Maui Wowee (Bamboo & Grass) interior in a suburb with gang fights going on in the front yard and horrible schools when the average household income is $57,000?
Additional clues:
"I couldn't afford to buy the house I am living in if I had to buy it today." Heard that a dozen times at least.
Everyone has a 2nd mortgage.
Amazing number of $12,000 Viking ranges in ho-hum houses I work in. I remember when that was quite a bit of money!
Granite everywhere! At $100+ a foot.
Most friends driving cars that cost what their wife makes a year. How? Went to the dealership and found out. "Financing on your used truck with no money down is 2.9%. Would you like 4, 5, or 6 years? Would you like to roll over the upside-down balance on your existing car loan?"
Friend wanted to drop everything and move to Sacramento to sell RE.
The clincher was when I realized that the feeling in my gut was the same when I found out ten years ago that all of those people I thought were doing so well (and made me feel like crap in the process) were all living on credit cards and ended up filing bankruptcy on $25,000 to $70,000.
Here we go again.
In 2000 I rented a 3b/2b for $800/mo. The landlord had it appraised, and I had to let the appraiser in. I figured it couldn't be worth more than $135,000. He told me it would be about 170 to 180. That surprised me.
ReplyDeleteAbout the same year, in a nearby town, my friend told me that a new house being built in his development would be selling for about 250,000 (!!!), and the next-door neighbor somehow made money by moving from house to house every two years.
In 2002, I bought a property in another city, telling the realtor that I was very concerned about a bubble. I assumed it might have something to do with the 9/11 'nesting instinct' that had been on the news. I got the property for about 7 to 8% off the listing price.
Probably 2002 or 2003, one of my Bay Area friends is talking about buying property in Las Vegas because it is a booming place. I told him that sounded stupid.
2004 is when I really began to realize there was a bubble. A relative is looking at buying expensive properties.. A really stupid Bay Area friend is talking about buying a condo instead of renting. He said "real estate never goes down." I tried to explain about interest rate fluctuations. He buys, I/O ARM 100%.
My Vegas-lovin' Bay Area friend also buys a SFR, but 7-yr fixed ARM and 20%-down. Relative loses money by backing out on a stupid deal.
As 2004 ends, I am seeing madness everywhere. Around March 2005, the NY Times runs an article on condos, and I go looking for housing bubble on the Internet.
My mind is blown by the revelation of I/O, ARMs, loose lending, and all the rest. Another relative sells in mid-2005, I tell him not to re-buy and to rent. He does, but also because he couldn't qualify thru a bank for a decent mortgage.
I've heard this sound for a while, but now I can clearly recognize it. I look down and see real estate is in the craper the handle has been pushed and I await to see the water getting sucked down into the sewer. Coconutz!
ReplyDeleteIn the future it will be written that the housing bubbble finally peaked in April, 2005, at the moment that a homebuyer agreed to feed the squirrels as a condition of purchasing a 2BR 699K SF home. They ended up paying $815,000 -- or $116,000 over the asking price.
ReplyDeleteRIP.
In the future it will be written that the housing bubbble finally peaked in April, 2005, at the moment that a homebuyer agreed to feed the squirrels as a condition of purchasing a 2BR 699K SF home. They ended up paying $815,000 -- or $116,000 over the asking price.
ReplyDeleteRIP.
Early 2002, confirmed late 2003.
ReplyDeleteFor me, one immeasurable benefit of the bubble has been opening my eyes to the real world of macroeconomics, etc. I'd always considered myself fairly well-informed, and I truly did not have a clue. God help the rest of the world that still doesn't...