I have long been puzzled by a very famous quote. Now Judge Roberts has clarified:
"It is my recollection," Mr. Roberts wrote, "that he actually said 'one small step for a man, one giant leap for mankind,' but the 'a' was somewhat garbled in transmission. Without the 'a,' the phrase makes no sense."
Among the more lucid comments on the issue of yes/no housing bubble, here.
No it is not a bubble- or rather only a bubble in a few places, and a few categories. The problem is that in some nice areas we are simply running out of land, often as a result of government restrictions on development. Fundamentals have changed, one such fundamental being that government restrictions on development are biting. In places like Texas, where there is not much restriction, prices remain stable at long term levels.
It would be useful to find out if that last statement -- "In places like Texas, where there is not much restriction, prices remain stable at long term levels. -- is generally true. I can already think of what appear to be exceptions like Las Vegas and Phoenix(?), where there appears to be plenty of land and yet there has been a sharp run-up in values. But I wouldn't be surprised if the correlation, if not causality, is there.
In any case, I wouldn't call it a bubble but a fundamental shift in values. And where else would such a new equilibrium of fundamentals first logically manifest itself but in California.
Sounds like it: Yes, Virginia, it's a bubble.
Jane, (as I commented on her blog,) I wouldn't be gloating quite so soon about having "told us so."
Your earlier posts -- you are a renter I gather? -- glide blissfully over one aspect of ownership which any renter outside of the NYC fantasy land would understand: a renter can be forced to move when the owner decides to move back-in, sells to the grand kids or simply sells to take their profit...or simply raises the rent.
What people buy with housing -- and it astonishes me that so many people in the "housing bubble" debate think that a house can or should be analyzed as a "buy versus rent" economic proposition -- is security of tenure. (At least to the degree allowed by Kelo etc etc.) Renters have little security and would be foolish, for example, to make those home improvements etc etc which even if "frivolous" make life more fun. Like planting some rose bushes, much less a new deck or spa and put the idea of an extra room totally out of your mind unless you have a thirty year lease. Buying provides security and allows people to modify their home to their own taste. Buying is extremely rational. Obviously, by economic definition, these "benefits of ownership" are worth a great deal - the marginal cost between rent and buying! Duh! Only a person who deep-down leans to an elitist, socialist mentality would say that all those home-buyers out there are wrong --- "...you shouldn't really be willing to pay more for a house than the present value of the cash flow it would take you to rent the same house." -- and some pointy-headed economists are correct about that marginal cost/benefit equation.
Does that mean that too-easy money is unwise public policy in that it entices people who may not be able to afford the higher mortgage obligation into over-borrowing? No that is an issue and a real one. But let's not be so glib about this bubble business. The higher marginal cost has real marginal benefits.
"It's the security, stupid!" And most people know it. That's why they try to become buyers.
Btw, Just for the record, I will say it yet again. I am not saying that there is no bubble. It's merely that most of the analysis seems a bit thin. There may indeed be in various local markets an excess of enthusiasm i.e. a bubble. When I look around at Seattle, I am astonished at the prices. Shocked, in fact. But then when I consider the vacant/developable property for sale, I see very very little. Moreover, traffic congestion seems to get worse by the month and we are doing nothing about that problem. So even in Seattle I just don't know. But I tend to doubt that we will have any sort of huge downward adjustment because of the very limited supply. Of course I am a homeowner.
From the Berkeley Daily Planet.
Foes of plans to create a new Oakland redevelopment district just south of the Berkeley border are holding a public meeting Sunday to confront a central feature of the proposal%u2014eminent domain.
Link thanks to Matthew Fox
The local anti-monorail jackals are at it, hysterically baying to drive a stake through the monorail. Here's one local pundit: Monorail's good news not great.
The monorail has less than three weeks to right itself. By Sept. 15, it must adopt a sensible survival plan or Mayor Greg Nickels says he'll try to kill it off.
What puzzles me is why some think the Mayor will try to do something dramatic when he doesn't have the political support much less the legal authority. There is a very strong core of support for the monorail and the SMP has a multi-million dollar source of funds to take battles of survival to court. There is no legal basis for any higher governmental authority to simply kill it. In fact any fair observer would conclude that while the SMP may have problems -- it does -- the problems are not the result of fraud, corruption etc but simply insufficient revenue, which is not against the law. Compared objectively to other large public works, the SMP is not doing badly, only two years into its project.
A wise opponent would let the monorail die by itself if that is to happen (i.e. let a real local consensus emerge) rather than be perceived as bullying and hurrying the monorail into the grave and indirectly making an issue out of one's own lackluster transportation planning. The wise opponent would kill it with love. Why this silly deadline of September 15? The problem has been brewing for a while and it will take more than 3 weeks to fix it. In fact, such a hurried schedule raises the question of where was City Hall when the problem was developing? The same City Hall which is at the center of political gridlock between the city and the state on repairing the viaduct..
I pay careful attention to the NYT's Floyd Norris. But I don't get the logic in today's column on Easy Credit in Mortgages May Backfire.
But if and when a fall comes, watch the volume of home sales, particularly of existing homes. In the early 1980's recession, annual sales of existing homes fell 50 percent, to two million homes...
The most expensive areas, and the ones that have risen the most in the last five years, are concentrated on the coasts, and are presumably the most vulnerable if prices do start to fall.
OK. I got that: the initial indicator.
When that does happen, watch the volume of sales of existing homes. If it falls rapidly, that will be an indication that not much has changed, and the damage is likely to be limited.
Huh? Sales volume declines rapidly and that is OK?
But if sales volume stays high, that could indicate that the mortgage innovations are hurting. Then we could see rising numbers of foreclosures as homeowners discover they cannot sell their homes for what they owe but also cannot pay their suddenly higher monthly mortgage bills. (italics added)
Why would there be large number of foreclosures if sales volume is high? Why would high sales even with declining prices be a sign of worry? It would seem to be just the opposite i.e. while house prices may have hit a peak and are declining, there are still plenty of buyers out there and that a decline of, say, even ten percent brings them to the table.
Or does Norris simply mean houses for sale, rather than houses sold? If he does, shame on his copy editor.
Some interesting comments but the big issue is the last paragraph in which Norris posists that "sales volume" stays high while "...we could see rising numbers of foreclosures..." I think the two cannot coexist. You cannot have high sales volume while people can't sell their houses. You can have many house on the market with few sales. But by definition, if you have high sles volume you have many sales. It's a minor but critical matter of language.
You have probably all heard this news about Kelo but it is so outrageous in its result that it bears repeating.
A New London Low
Now New London is claiming that the affected homeowners were living on city land for the duration of the lawsuit and owe back rent. It's a new definition of chutzpah: Confiscate land and charge back rent for the years the owners fought confiscation.
And the new, higher prices are the more accurate ones?
There is yet another twist to the "housing bubble" question and it is consistent with my own strong "environmental" bent. The gist is that historically, in a "cowboy economy" (thank you Ken Boulding!) we had no sense that there were any limits to growth. Now we do. The hysteria over "peak oil" is the strongest and most recent manifestation. We know we are living on "spaceship earth" (thank you Bucky Fuller!) and not on a limitless plain in which we could pollute one spot and just move on. There is no there there to move to. This is it.
So maybe, all along, we had been under-valuing houses? Maybe the current surge in prices reflects something closer to their "true" value? Follow me? I will spell it out in more detail if I need to. But Is suspect most readers here get it.
It seems that quite a few people -- read the comments to the post just prior to this one -- are convinced that we are heading for a housing crash.
So my several-part question:
1. Do you own a house?
2. If so, are you planning to sell it?
3. And then buy back into the market after the crash?
What I am trying to tease-out is the degree to which people are willing to act on their firmly held beliefs.
Another question which deserves some attention is the source of the sense of scarcity which motivate people into bidding wars. In Seattle, that is (and/or) has been fairly common in the mid-range houses. Why do people feel this sense of scarcity? Could it be there that are some good reasons? Like 'peak oil' for example and a limited supply of close-in single-family housing which does not require extensive driving? Sitting in Seattle, the huge run-up in prices -- and btw, this is the third such run-up in my memory -- doesn't seem totally bizarre at all. Our region has severe limits to the supply of land, hemmed-in as we are by rugged mountains and the Puget Sound. So when I look at the "housing bubble" in the context of Seattle, I am more amazed that anyone is crying catastrophe than otherwise.
Many years ago I remember speaking with a planner. he was one of the seniors in the bureaucracy in which I worked. And I remember him saying something like "Our problem is too much land. We can always just expand. That's one of the reasons Seattle is so sloppy. No need to be neat." I was a bit shocked at that perspective. Too much land? But as I thought of that remark over the years, I see its intelligence and also that times indeed have changed.
Bubbles and the real price of housing discusses Robert Shiller's ideas. And it all seems to suggest that because there is long term stability, then rapid short term changes are somehow against the rules, suspect, a sign of decadence and, ironically, a "market imperfection." Yes, a great many right-wing bloggers seem to think that the vast number of American consumers who are bidding up house prices are wrong. At least that's what I tease out of both the substance and the politics of this issue. (i.e. There are 2 interesting questions around this issue -- What is really happening? How are people lining up on the issue?)
I am puzzled. The very chart which is used to demonstrate this point --
-- also shows a dramatic increase in housing prices in the early 1940s which did not lead to any sort of crash. Who is to say that our house prices will not also level off at some new and much higher equilibrium? Why need there be a collapse?
Professor Shiller opines, sorta. But he is willing to stretch out the time frame during which the bubble will happen for so many decades that the fears becomes meaningless for you and I living in the here and now.
And Shiller still isn't sure.
What I would like to hear is a "pro-bubble" argument which factors-in two secular, local Seattle conditions which both tend to limit the supply of urban land over the fairly long term:
1. A firm political consensus for "growth management" which will not change & hence unleash a lot of land for at least the next generation or so. (Even if there is land to be found.)
2. Total inability to deal with traffic congestion which is having a centralizing force, making "in city" properties (where one can minimize travel) more and more valuable.
When you take into account these trends -- both firmly rooted in our local culture -- do you still get a bubble? I tend to think not -- we have "price support" for real property investment. But I would like to hear a pro-bubble advocate take these two trends into account and explain why we are in danger of a 40% decline.
"There was a 'Boy Named Sue' quality to being a libertarian or conservative at Harvard," said Mr. Norquist, referring to the Johnny Cash song and Shel Silverstein poem ("Well, I grew up quick and I grew up mean,/ My fist got hard and my wits got keen.") Conservatives at Harvard, he suggested, learned to be "tougher than anyone else." Unlike students on the left, he said, they were constantly being challenged.
"There was this cowardice of the center to criticize the left," Mr. Norquist said. "Somebody would make some left-wing comment and no one would challenge it, whereas if you made some right-wing comment, you'd get 20 questions. We grew up and we built tougher, smarter, better advocates on the right than the left did. You see this all the time: The left gets frustrated if somebody asks a second question."
We were clear about what was wrong with the SMP: It was the finance plan, not the system itself. A major Fortune 500 engineering firm was ready to build the 14-mile route, a route that had been forged after hundreds of public meetings and city council scrutiny. Unfortunately, the SMP had overestimated its tax base by about 30 percent—leading to a 30 percent revenue shortfall. The money wasn't there. Thus, the junk bond plan.
Big news in Seattle is that the people who have always feared (for god knows what reason) the monorail are now on the rampage urging that it is Time for a Mercy Killing.
Although (Mayor) Nickels is ratcheting up the pressure, it's not enough. It's time for him and other Seattle leaders to realize that no one else is going to do the dirty deed. It's time for Nickels, the City Council, Seattle legislators, and the voters to stop kissing the monorail to death. It's time to use the "brave man's" sword and be done with it.
I find this so odd. Don't the opponents realize that a hasty, intemperate and over-reaching (legally) attempt by the Mayor and Council to kill the monorail will have precisely the opposite effect?
I'd be careful what I wished for.