More on the Housing Bubble

I do not recall exactly the first time MA argued with me that the US (and much of the rest of the world) was experiencing a housing bubble, but I think it was back in February or March, 2005. At the time, I suggested that if we were in a bubble that was about to burst, he should sell his house, and rent accommodations.

I don't know whether he followed my advice, but he did keep a relentless stream of e-mails coming my way. (for example, this one about Ed Leamer's analysis of the housing markets). Each new item had more evidence and/or arguments that housing markets in many areas have become overheated due to cheap and flimsy mortgages and due to irrational expectations of continued house price inflation.

And now the mainstream media [MSM] is beginning to carry the story of the deflating bubble with more prominence [reg req'd]:

A real estate slowdown that began in a handful of cities this summer has spread to almost every hot housing market in the country, including New York.

More sellers are putting their homes on the market, houses are selling less quickly and prices are no longer increasing as rapidly as they were in the spring, according to local data and interviews with brokers.

I still do not think the bubble is going to burst with a bang. I am not even confident that housing prices in most markets will fall by much, if at all. But it certainly does look as if there has been a great slowdown in the growth of demand in many markets.

This view seems similar to that of Bill Gross [thanks to (who else?) MA for the link]:

1) Housing prices will cool/stop going up very much/even go down in some cities, WHEN...

a. Interest rates rise to a high enough level to make the purchase of a new home a burden instead of a boon for first time buyers.
b. Mild regulatory pressure begins to reduce the amount of funny-money lending.
c. Speculators sniff the beginning of the end. [He details at his site why he thinks these conditions are being met.]

2) Home equitization should retreat shortly thereafter.

3) Consumption/the U.S. economy will then weaken when the house ATM starts running out of fresh new $25,000/$50,000/$100,000 home equity loan dollar bills.

4) The Fed will cut interest rates in order to start the game all over again.

If you're just moving to town, this might be a good time to try to rent for a year or two.