More on "The Bubble"

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.

Comments

[QuietStorm]

You are focussing on the supply of properties in Seattle but ignoring ( at least in this post) the demand side. The software industry, for example, doesn't need Puget Sound to make its products. Relocation to, say, Portland would not be out of the question. I don't see this particular scenario as very likely but no one ever does. Bubbles are often pricked by some relatively minor event that serves only to reverse the herd behavior that is the real sustenance of the phenomenon.

[David Sucher]

Yes I am focussing on supply. True. I am saying that there is a limited supply out into the medium distance future (20 years) because of human institutions. So?

I guess I miss the point.

[Brian Miller]

I think his point is that a collapse in the local economy-and the accompanying decline in new (or existing0 residents, could prick the bubble by reducing the supply of people willing and able to pay higher prices.

Of course, that doesn't happen very often (Houston in the earlyu 80s comes to mind), and the current force of easy money and speculation has meant the Bay Area, for one, has seen even more price appreciation. If the "easy money" goes away-and the pressure from speculators (which are a big part of many markets right now)vanishes, you could see a big correction. Could.

[David Sucher]

Uh...yeah, a collapse in a local economy is definitely something which could put a bit of a crimp in housing prices. No question. Of course that's not what the discussion of housing prices involves. We can always think of some set of circumstances which can trigger bad things. Al quaeda setting off an atomic device in a major city would also be bad for house prices for a while. So would bubonic plague killing off half of the American population.

So what do you do with scenarios like that? I don't get how one plans one life around potential catasotrophe. To me they are simply far too remote to bring down to my personal decision about whether to buy a house or to do the "economically rational" thing (supposedly) and rent.

[quietStorm]

It wouldn't take anything resembling a catastrophe or a collapse if (and I'm not saying that is the case) we are truly in a bubble. Maybe just a particularly bad winter or scares about avian flu or who knows what? Bubbles are sustained by herd behavior and you only have to turn a few head of the herd to reverse such things.

What was the catastrophe that popped the stock market bubble of the late 90s? Nothing really. Bubbles often are supported by strong underlying fundamentals and their existence does not prevent or even slow the demise.

[dustin]

I happen to think that the supply side of the equation is playing a huge role in the increase in property values. I'd even add one more supply-related issue that I've noticed when I visit homes that are for sale. It seems that so many of the homes have had recent and major improvements. For example, it is easy to find homes in Ballard that are selling for $100K more this year than 5 years ago. The catch is that often the owners have recently put tens of thousands of dollars into improving their homes. So when I read something that says, "the homes in Ballard are selling for 20% more this year", I always discount this number in my mind by saying "yeah, but the homes are also 10% nicer!"

[bob]

Do you know anything about economics and business cycles? You should read as much as you can before early next year. Things like liquidity, how the federal reserve works, bullwhip, bond pricing, inflation, marginal costs, psychology of business transactions, what it means that Yuan is being revalued, oil prices, and finally the really big idea; what is value, what is cash flow and how are the two related? It will not take a major shock like people on the blog think. Simply put people are over extended on credit and rates are only going up from here. The speculators and those too blinded by fear of missing out drove prices too high and now we wait for the fall out. We have failed to invest in capital projects that build long term wealth because of real estate and now we will see what waits us. It won't be pretty. Read the above mentioned topics and you too will think/know that 2006 will be tough and 2007 will be ugly (in 2007 lots of ARMS become flexible). Sleep well you debt holders; Asia salutes you.

[dissenting]

You can discount your factors by focusing on the disconnect between real estate prices and the cost of rent. If government growth restrictions and traffic were causing the rise in prices by restricting supply, then you should also see a proportional rise in rent. If it is a bubble, then rent should not rise so quickly. As I understand it, rent in most areas with rapid real estate price growth has not risen dramatically.

I don't think anyone is "pro-bubble."

[Brian Miller]

Well, the Asian bond holders may "salute us" But the Chinese middle class is not that large, and 100 million migrant workers will not be happy when we (the United States in particular) can no longer buy their plastic, poorly designed "stuff" at Wal Mart. They are as dependent-for the moment only-on the "imblanace" as we are. (Not denying that we will be in a far worse situation). You are already seeing scattered unrest in many more remote Chinese cities and counties. Throw in two decades of toxic goo and loss of arable soil, and I'm not moving to China any time soon.

But, maybe we're wrong. The Onion has a hilarious column "Fundamentalists reject gravity in favorite of Intelligen Falling." Maybe we need to just elect Rick Santorum or "Dr." James Dobson President, burn a few feminists and gays at the stake, adopt Leviticus, and wait for "Holy Economics" to take care of us :( :)