Comments on: Chart of the day, housing bubble edition A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: TFF Tue, 25 Sep 2012 00:26:30 +0000 QCIC, by some metrics the US housing market remains overpriced by about 20%. Calculate cumulative inflation over the next decade (or wage inflation, if you believe that is the stronger driver of real estate prices) and subtract 20% — Harpstein’s figure seems realistic.

Not that free markets are known for being predictable and orderly…

By: QCIC Thu, 20 Sep 2012 18:00:50 +0000 The idea that there were all these “defensive purchasers” out their is just post-hoc rationalization. Maybe among graduate degree holders, this might have been 10% of the market, but college graduates and below are not making this sophisticated of purchasing decisions in enough numbers to mention.

I think people mentioning it is more a function of the social circles people who write about economics run in than any actual behavior.

Also as mentioned your math was wrong. Remember the divide by 70 shortcut!

15% is a little overly pessimistic with the population growth the US has, but I would be surprised if it was only 2-3% a year.

By: IanF Wed, 19 Sep 2012 22:15:24 +0000 While a minor point, you might want to check the mechanics of your own compounding interest. A $260,000 house that increases in price 12% annually would be worth just over $800,000 in ten years. It would take compounding at 15% in order to reach the $1 million level you mention.

By: Eericsonjr Wed, 19 Sep 2012 20:55:29 +0000 Felix, you obviously were not paying attention circa 2004-2006 to what actual buyers were actually doing in places like Baltimore. Prices in that city–which is not known as one of the bubble zones–were absolutely driven by real estate investors, who by 1Q 2005 accounted for 2/3 of all sales. 0358

There, as most everywhere, much of that speculation was built upon mortgage fraud.

This is just a fact. Analyze it.

By: AdamJ23 Wed, 19 Sep 2012 20:05:14 +0000 An asset would approximately triple in value- not quadruple in 10 years at a 12% yearly appreciation rate. It takes about 12 years to quadruple in value at that rate.

By: Harpstein1 Wed, 19 Sep 2012 18:45:07 +0000 I would say people are still being incredibly optimistic on future returns. By 2022 I’d be surprised if the average house will have increased in price by more than 15% total.

By: brookside Wed, 19 Sep 2012 17:32:47 +0000 The NY Fed pretty much settle the question of the housing bubble in their September, 2011 Staff Report No. 514 ( f_reports/sr514.html). The mortgage companies allowed “investors” to use Alt-A loans to finance speculative house purchases which were largely concentrated in the “sand states” (CA, AZ, NV, and FL) where the bubble was the worst.

The all of the homeowner psychology/expectations arguments are just speculation and do not explain how the housing bubble was financed and why it was so much worse in the “sand states”.

By: AngryInCali Wed, 19 Sep 2012 17:31:28 +0000 I don’t think your argument over the definition of “speculate” is really useful. I think of speculation as betting on asset price increase as opposed to income flows.

If people took out excessive mortgages because they “knew” they could sell the house for a profit at any time their ability to pay the monthly interest was impaired, is that speculation? If people pay a lot more each month than equivalent rent, hoping to make it back when they sell, is that? Maybe not, but those actions were bad for the economy, just as the short-term flippers were.

The big distinction for housing, IMHO, is buyers who think of shelter as a disposable, and those who think of it as an investment asset class. Obviously, those Manhattanites who are worried about being priced out are not relying on their asset going up in value, but I think people who bought for strictly defensive purposes were small.

By: TFF Wed, 19 Sep 2012 12:43:21 +0000 Good article, Felix, but I would caution on one point:

“the average duration of a US mortgage, before it’s refinanced or the house is sold, is about 7.5 years”

This statistic is oft stated, but it should not be presumed to be a universal constant. When mortgage rates fall 2% every five years, with home values rising, people will regularly refinance. It would be insane for them not to do so. When mortgage rates rise 2% every five years, with home values falling, then refinancing activity will grind to a halt. Few people will have enough home equity to take cash out, and refinancing will mean an increase in borrowing costs.

I have a feeling that we’re about to see this statistic grossly violated, perhaps doubling or more. People are selling less frequently, and once mortgage rates stop falling they will also refinance less frequently.