Why There's No Such Thing As a Housing Bubble

It seems that wherever we go, everyone asks us the same question . . . “what’s going on in the Real Estate Market?” Opinions are all too readily available, particularly in the press and blog. One thing we noticed about the sources the news media quotes is that they are almost universally from Wall Street stock analysts and rarely from within the real estate industry.

In the process of conducting the research for this report, we noticed that none of the other reports contained actual analysis of pertinent data and facts. More typically we find musings and circular reasoning about business cycles, speculation about “speculators” etc., all peppered with anecdotal stories of historical boom and bust, peaks and troughs, as though they were substantive, informative, conclusive and otherwise inescapable.

This surprising lack of industry data caused us to independently collect actual data and develop our own comparative financial models to analyze the data, to identify facts, causes, trends and forecasts. This required the compiling of more than 20 databases including Federal Reserve Board Historical Data, National and Regional Mortgage Histories, FNMA & FDIC Home Loan Histories and Regional Home Sales Transaction Histories for Condominiums, Townhomes and Single Family Homes.

The Sky is Falling, the Sky is Falling! (The Bubble is Bursting!)

The concept that there is or was a “housing bubble” is simply the nonsensical and fancifully imaginative story of Wall Street Stock Analysts, who have been chanting this exact same “mantra” since the late 1990’s in an effort to divert investment activity back into the stock market.

They would have us believe that the public suddenly and simultaneously woke up/sobered up and realized/decided that home prices were just “over-inflated” and simply bailed-out, resulting in a “burst bubble!” The facts are, however, that upon detailed analysis of the principle factors affecting the housing market’s demand, we begin to see that the housing market is “responding” to external forces which have exerted artificial economic conditions upon it. The primary factors are, “supply” (the inventory of available homes) and “demand,” including the affordability of those homes (the buyer’s ability to pay.)

Additionally, it should be noted that the preponderance of commentaries on the “Housing Market” are authored by Stock Market Analysts with a myopic view that whatever is affecting the business and stock performance of Toll Brothers (TOL), Pulte (PHM), Lennar (LEN), DR Horton (DHI), Centex (CTX), and the like are the true indicators of the condition and future of the housing market. Indeed these publicly traded companies are likely to be the hardest hit, already taking hundreds of millions of dollars (most likely billions when the dust settles) in write-offs from the cancellation of their speculative land options. Additionally they have and are making substantial price adjustments to reduce the glut of speculative inventory upon which they now sit.

During the go-go days of the first half of the 2000’s, most of the builders also took a “take-no-prisoners” attitude toward their buyers. Further, many of them compelled purchasers to use their in-house mortgage companies who “shoe-horned” many buyers into homes and loans they really couldn’t afford. This rough and tumble business practice has made it psychologically easier for buyers to simply cancel their contracts and buy elsewhere!

So what is the “cause?” In order to apply logic and the law of causality (that every effect must have an antecedent cause) to the housing market we must fully understand the “effect” before we can even hope to identify the cause.

The State of Market Values – A Look at the Regional Data

Throughout this report we will be looking at all of the data (comparatively) from January 2004 through December 2006 in twelve quarterly segments. All data are based on “averages,” so there are transactions both above and below the average prices used for evaluation.

Northern Virginia home prices appreciated at an unprecedented rate during this period.

Single Family Home prices appreciated 33.2% in 2004 & 2005 before the 2006 adjustment of -7.03% for an average net increase of 26.2%. (Average Sold Price difference Q1-04:$552,985 to Q4-06:$697,839.)

Peak period, average price: $753,569 Sold Q3-05 & Settled Q4-05.

Townhome & Duplex prices appreciated nearly 38.4% in 2004 & 2005 before the 2006 adjustment of -5.3% for an average net increase of 33.13%. (Average Sold Price difference Q1-04: $348,044 to Q4-06: $463,344.) Peak period, average price: $489,035 Sold Q3-05 & Settled Q4-05

Condominium prices appreciated 31.8% in 2004 & 2005 before the 2006 adjustment of -7.7% for an average net increase of 24.07%. (Average Sold Price difference Q1-04: $258,604 to Q4-06: $320,870.) Peak period, average price: $340,569 Sold Q3-05 & Settled Q4-05

In all three home types, the common denominator is a market peak in Q3-05

. . . Interest Rates? (Have they gone through the roof?)

It is true that 30-Year Fixed Rate home loan mortgage rates have increased from 5.65% in January 2005 to about 5.875% today. If you say this is not a big change, you are right! There was a peak rate spike in July of 2006 to 6.875% but now we are back to ~6.0% which is historically very competitive. In fact, 30-year fixed rates have remained in this range since 2003 with a slight push upward in Q3-05. But, there is more telling evidence when we look at the historical data on Adjustable Rate Mortgages [ARM].

Throughout 2003 and 2004 ARM rates were about 2.0% lower than 30-Year Fixed. In 2005 this eroded to just 0.5% difference and today’s rates show less than 0.25% difference. Why have the ARM products risen so high? The answer is that these loans are indexed to short-term financial rates, which the Federal Reserve Board influences directly with their manipulation of the Federal Funds Rate (Discount Rate). These rates have been increased from 1.0% (July 2003) to 5.25% (July 2006) where it remains today. (Note that the current Fed Funds Rate of 5.25% is the highest rate since March of 2001.

It appears clear that the Fed’s rate hike in August, 2005 to 3.5% was the primary catalyst that spurred the shrinking demand for housing purchases. While most people would opt for the 30-year fixed loan (if rates are nearly identical), the ARMs were popular for buyers who just wanted lower monthly payments as well as those who wanted to qualify for larger loan amounts in the booming market. ARMs are also the favorite financing vehicle of speculators and “flippers” (no, not Bud’s pet porpoise) who wanted to buy-fix-and-flip properties quickly. We now see that in the ARM-world, rates have risen steadily from 3.5% to 6.0% since January of 2004. That’s a 71% rate increase in the last 3 years, which represents a 34% reduction of buying power (affordability) for those buyers using the ARM products for financing.

According to major lenders as well as FNMA and FDIC, ARM products comprise over 50% of newly originated home loans in our region. So it’s not difficult to see that since half the potential buyers have lost over 30% in buying power, demand has synchronistically been reduced, and home purchase prices have been steadily re-aligning with purchaser’s ability to pay.

In the third quarter of 2005 (Q3-05) we see that the external forces of the Federal Reserve Board’s policy decisions to manipulate interest rates manifested what we are calling the “housing affordability GASP.” (The sound one makes after being punched in the stomach . . . or wallet.)

While we can see the effects of the Fed on all industry and businesses, the “cost of money” factor becomes apparent at many different “critical points” for manufacturing, construction, transportation, distribution, services and retail, etc.

When GM and Ford’s sales are down, was there a “car-bubble?” Is there a “Google-bubble” since its selling for over 60-times more than it earns and 10-times its book value? Dow Jones up 2,000 points in 2006 . . . a “stock market bubble?”. . . Of course not!

Housing is no different than any other industry and should not be expected to be immune from external forces over which it has no control. For the housing market though, we can see that a “critical point” was realized in Q3-05. (Note that while the factors were brewing in the previous quarter(s), the critical point “manifestation” in the housing market actually occurred in Q3-05).

Fed Rate Hikes Create Home Price Yikes!

During Q3-05, ARM rates, subject to increases by the Fed, increased to nearly 5% and the Oil & Gas industry graced us with $3.00+/gallon gas (sort of frosting on the cake.)

Inventories of available homes had equalized with demand. But with home buyer’s affordability eroded by the Fed’s rate hikes, nearly half of the potential buyers necessarily headed for the side-lines.

With half of the homes remaining unsold and new properties being offered in the market, inventories quickly grew over and above the newly diminished absorption rate. Average “days-on-market” which had been measured in days or a few weeks, suddenly jumped over the “month” mark and has steadily grown to an average today of 3+months.

Seller’s expectations of holding out for a further appreciated price was no match for buyer’s inability to pay and prices had to begin to come down to “market-level.” But actual “asking (list) prices” continued to increase through the third quarter of 2006 (Q3-06) by nearly 20%. However, after price reductions and closing cost incentives, the actual net sales prices declined by about 24% from the increased list prices.

It was not until the current quarter (Q4-06) that average list prices began to decline to meet buyer’s affordability. From Q3-05 through Q3-06 we witnessed nearly half of the available properties were either withdrawn from the market, or converted into rental properties. This pattern has begun to ease the large inventories of competing homes and re-direct the trend toward balance of supply and demand.

What’s Next for 2007? – An Analysis, not a Guess!

Where is equilibrium and market balance, and when will it occur? We know of no credible source that knows precisely, but we can use the data compiled and results of our analysis to make a rational, educated assessment.

Using Q3-05’s data points to assess where the market was just before the “Gasp,” we see an across the board correlation of average home prices (Condos, Townhomes and Single Family) and the then available mortgage rates, specifically ARMs.

By imputing today’s ARM rates into Q3-05’s ARM rate payments and the “then average sold prices” we yield an Affordability Index [AI] differential of slightly over 13%. Subtract from that the declining “net sales prices” of today, we are still looking at some likely decline in “average” sales prices ranging from 0.7% for single family homes, 2.35% for townhomes and 6.85% for condos, which have had the least amount of price reductions. As a shorter answer: Today’s affordability is 13% less than it was in Q3-05, or about where average prices were in Q1-05 at today’s ARM rates.

Although “net sales prices” are very close to our “AI,” “high list prices” remain a barrier to “timely sales.” List prices for Single Family Homes are still 10.5% above the “AI,” Townhomes are 9.35% above the “AI,” and Condos are 14.09% above the “AI.”

It is likely we will witness market balance in the first or early-second quarter of 2007. We are very close today with sales prices near Q1-05 levels!

Regional job growth is robust, personal income is up and there is some growing speculation that the lower-than-expected consumer price index [CPI] numbers, issued December 15th may lead to the Fed easing rates at the March ‘07 FOMC meeting.

Conversely, other economic conditions and/or political events could result in higher rates, prolonging the journey to market balance into mid-late 2007, or beyond.

It’s also important to note that arrival at “market balance” will always remain somewhat of a moving target, but as we come into that range, the “normal” annual rates of appreciation will slowly return, although in the 7% to 10% range (not the 14%-20% that the last 5 years delivered.)

Disclosure: Author has no position in the above-mentioned stocks.

Comments

[Paul Meisel]

Interesting article -- for me the takeaway is this:

"With half of the homes remaining unsold and new properties being offered in the market, inventories quickly grew over and above the newly diminished absorption rate. Average “days-on-market” which had been measured in days or a few weeks, suddenly jumped over the “month” mark and has steadily grown to an average today of 3+months.

Seller’s expectations of holding out for a further appreciated price was no match for buyer’s inability to pay and prices had to begin to come down to “market-level.” But actual “asking (list) prices” continued to increase through the third quarter of 2006 (Q3-06) by nearly 20%. However, after price reductions and closing cost incentives, the actual net sales prices declined by about 24% from the increased list prices.

It was not until the current quarter (Q4-06) that average list prices began to decline to meet buyer’s affordability. From Q3-05 through Q3-06 we witnessed nearly half of the available properties were either withdrawn from the market, or converted into rental properties. This pattern has begun to ease the large inventories of competing homes and re-direct the trend toward balance of supply and demand."

However, I think a couple additional items need to be considered:
1) Real estate is a localized market. I assure you based on my own knowledge that conditions in Northern Ohio are considerably worse, and will take longer to recover.
2) The hangover of withdrawn properties will still exert downward pressure on the market for some time to come -- they will gradually re-emerge as the owners re-develop hope of a sale or change their expectations on price.

I am skeptical about macro-economic statistics generally, but they are significantly more difficult to apply in a market where the product has significant differentiation between competing products.

[Clay_Kime]

Paul:

Thanks for your comments. This report was prepared for the Northern Virginia (DC Metro) Area at the very end of 2006.

You are absolutely correct, that conditions elsewhere in the country may well be different now as likely they have been during the first half of the 2000's. Even prior to the housing slow-down in Virginia, we had a number of clients relocating from other states where the level of activity in their home states never approached that of our area, Ohio being one of those. Recovery will certainly look different in different markets but I believe it will resemble market balance of supply and affordability-driven demand on a local or regional basis.

I also agree that at some point, hopefully not at the same point, we will see the withdrawn properties re-introduced as active listings. Additionally, some of these are the residences of those who cancelled their "new construction" contracts, so they are no longer under any pressure to sell. Many also were converted to rentals which puts those properties out of market reach for 1 to 3 years, depending on the lease term.

I would also like to note that the title "Why There's No Such Thing as a Housing Bubble" was unilaterally authored by the editors of Seeking Alpha. It was not my title. But the horse is out of the gate now. C'est la Vie!

Regards,

Clay

[abr common]

Its too bad that the disclosure at the end of this rant does not include the fact that "Clay Kime" is a "REMAX Realtor” (a fact only curious readers could unearth by clicking on his name at the top of the page).

Clay attempts in this article to pull off the classic magician’s trick, “Look at my right hand here…don’t pay any attention to my left hand!” He does this by saturating his long-winded prose with selected “numbers” and “terms” that he “emphasizes” using “quotations” to “try” and “convince” the “reader” that “Wall Street” is “driving” the “myth” of a “housing” “bubble” in order to create interest in the stock market.

How silly.

So the authors “point” here is to draw attention to the fact that home prices have reached early 2005 levels? My question for him is, “So what?”

To understand the housing situation in this country, you have to take a bigger picture than what the author wants you to see. He wants you to look at 2004-2006 (that is his stated time reference for his “analysis”). What he doesn’t want you to see, is that since the dot com crash, in January of 2001 the Fed aggressively cut interest rates to support the economy. In one year, the Fed Funds Rate went from 6% to 1.75%, eventually hitting bottom two years later (2003) at 1%. This created the age of easy lending, where as long as you had a pulse, you could borrow money for almost nothing. Out of this came liquidity we have never seen and set fire to the mortgage and housing market, pushing up home prices far faster and higher than ever before.

Also adding fuel to the fire was the creation just a few decades ago of the securitization market. No longer did banks and lenders have to hold their loans on their balance sheet, they could package them up and sell them off to the highest bidder.

Rates at an all time low + endless supply of cash courtesy of securitization market = record home prices bonanza!

Oh but wait, we forgot one thing….credit! See, no one cared anymore who they were lending to. The M.O. became “originate loans, originate loans, originate loans, we don’t care about credit, just get them to sign the loan.” Now rates are higher, and it’s estimated that 1/5 of the loans that bought these houses at near record high prices are now at risk of default like never before. Ah the joys of subprime lending!

So the borrowers can’t pay, the foreclosures add up, (empty homes), the builders, like the last guys to the party, have tons of new homes to sell (empty homes) and the musical chairs ponzi scheme of the recent house boom is starting to wobble as people notice that their homes may not go up 15% in price every year.

What do you do?

Well, if you are a “realtor” like Clay at REMAX, you better get out there quick and convince everyone that it’s a great time to buy a home or you are out of a job!

Good work Clay, try to keep the myth going for a little longer. I wonder, do you feel any remorse for the people you put into houses at record high prices that they can’t afford? I am sure this “article” of yours is of great “comfort” to the “masses” as they put their “keys” into their “mailboxes” and walk away from their homes in foreclosure.

[Clay_Kime]

Alex, Alex, Alex:

This was and is a "report" (please excuse the quotation marks, it's my style not an attempt at subtrifuge). It is a report from the foxholes on the front lines of the real estate market, not an ivory tower. It reports the conditions as we see them and makes no recommendations whatsoever. Your left-handed comments that there is an undisclosed conflict of interest and that I deliberately mis-lead the readers is unfounded, and quite frankly, offensive (as I'm sure it was intended to be.)

Bizarrely, we are in agreement about the effects of interest rates on the housing market. Interest rates have a direct correlation to "affordability.&q... This was the focus of the report. Please read it again.

The report's conclusion that equalibrium in our market will likely be realized when prices retreat to Q1-05 levels may be wrong. We'll just have to see. But the conclusion about affordability converging on Q1-05 prices was set forth with the methodology used to reach that conclusion, namely our affordability index. Again, that "affordability index" is based on "interest rates." You are welcome to disagree with that conclusion, but you are not welcome to be nasty about it. Try some professionalism.

It also seems to have offended you that we noted that the vast majority of the sources quoted by the media are stock market analysts in connection with the housing market. But sometimes the truth hurts. It has been this way since the late 1990's so eventually they had to be right. I could forecast that a blizzard is going to hit Atlanta and, given enough time, I would eventually be able to say "see I told you so." I could forecast a major price correction in the stock market when record earnings are no longer sustainable and, given enough time, I would be right.

You did reach the pinnacle of offensiveness though, in your closing, by accusing me of putting people into houses that they could not afford, a thing I have never done nor would ever do. Where in the banana peels did you get that? What darkness lies within you to make such an unfounded and scurrilous charge? Isn't that "libel?"

Perhaps you should be banned from this blog. There are published rules of conduct.

In closing, please consider Prozac. I understand it has helped many.

Clay Kime, REALTOR(R)
RE/MAX Preferred Properties
380 Maple Ave. W.
Vienna, VA 22180
PlanToMove.com

[Mr Mister]

Alex, you busted his bubble big time. Clearly, Mr Kime has no shame in hiding his intentions to confuse prospective home-buyers into buying a home. I would to, if I was a shameless realtor.

Mr Kime, I am amused by your disclosure that you have 'no position in the above-mentioned stocks'. You are funny, NOT.

MM

[ThomasPhillips]

Alex: thanks for pointing out the conflict of interest.

As someone who lives in an area that has not yet been effected seriously by the bubble-collapse, I was planning on buying this year. However for the last two months I've been looking at homes and talking to mortgage brokers, realtors, etc. and I've determined that I want to wait it out and see what happens. Both the mortgage brokers and realtors seem to be spouting happy-talk. The mortgage brokers that I've talked to have been more than willing to get me into a financial situation which would be very tight to say the least. And the realtors seem to be acting in concert with various brokers which again seems like a conflict of interest - often realtors will recommend mortage brokers which makes me think there is in some kind of collusion. Perhaps there needs to be some kind of wall of separation between the two groups?

The last time I bought a home was in 1990. Things seem to have changed a lot since then. Various mortgage lenders seem quite willing (and even encouraging) to let me get into a situation where 33% of my gross income goes for mortgage payments, property tax and insurance. They'll tell me that I can easily afford a home in the $330K range, but when I look into the details they're pushing ARMs, interest only and other exotic mortgages. If I do the traditional fixed 6% 30 year mortgage and use the traditional 25% limit for housing it looks more like the homes I can afford are in the $250K range - that's a big difference. I'm not finding any homes in the area where I want to buy that are in that range (and I think I make a pretty decent salary - definitely above the average for my area).

The other thing that bothers me about the current prices is that when I bought in 1990 the ratio of house price to my income was around 1.6. Now if I were to buy my same house again today that ratio would be more like 3. In the area of town where I'd like to buy now it would be more like 3.5. That's telling me that there are less buyers able to afford to buy a home at these levels. A 10 to 20% price decline would actually be very healthy for the housing market at this point: it would allow more buyers back into the market. Realtors should be the first people to realize this. Of course it means that the next year or so will be lean for them, but certainly most of them should have saved up during the boom years since there's no way those growth levels were sustainable (?)

Given that something like 18 subprime mortgage companies have gone under in the last couple of months I expect that qualification standards are (hopefully) tightening. That will weed some people out of the market (probably about 25-30% if we consider the levels of subprime lending in the last couple of years). I'm hoping that will lead to some moderation of prices over the next year or so.

Bottom Line: as a potential real estate buyer it seems to me that it pays to wait at this point and not to jump into a market that's been overheated by lax lending standards over the last few years. I want to wait for more of the corruption to be shaken out of the whole process. Given that less potential buyers will be available due to tightening standards and the rising foreclosure rate it seems to me that next year will be a much better time to buy. I'm in no hurry. Bring on a 20% correction (and I say that as a homeowner).

[Clay_Kime]

Thomas:

I'm sorry Alex convined you that there was or is some conflict of interest. This is just a report, not a recommendation to buy, sell, stay, wait, rent, or do something or do nothing.

I have no idea in what region you are, but your reasoning is sound and I hope it works affirmatively for you.

We also recommend lenders from time to time. But, we always recommend "direct lenders" for precisely the reasons you outlined. With loan origination and underwriting done under the same roof, their stricter and supervised lending guidelines should well protect you as they protect their institution. While there are rational uses of ARMs, interest only and other derivitave products, I agree with you that this is a sector of products that has been abused for longer term financing requirements. If one knows that they are going to move in 4-5 years, a 5-year ARM may be a good choice. I think interest only loans are terrible for the buyer from just about every angle.

Regards,

Clay

[t ton]

" There are lies, damn lies and statistics." Will Rodgers, I believe.

Mr Kime fails to take into consideration economic rents, Why would someone pay 2-3 times more monthly to buy a house than to rent the same? Also, he fails to take into consideration the buyers who felt they had to buy now, because they might not be able to afford to buy in the future. The lenders who helped them buy more than they could afford, with a loan containing a future payment they thought they would never have to pay. They would either refinance or flip. Those lenders have now either gone out of business or tightened their standards, making this marginal pool of buyers no longer available. Like the tulip mania, when the manic buying stops, things revert to the mean. The only problem is, they tend to overshoot to the downside first. If property has gone up 50% in your area, I would expect it to go down 50% and more. In the early 1990's I had a prime California property go from an appriased $800,000 to a $560,000 asking price with no offers.

I think this time will be worse.

[Clay_Kime]

Dear t ton:

As mentioned in resposes to other comments above, this is just a report. All the things you mentioned are valid factors and theories, but how would you quantify them for objective analysis? Consumer confidence is also a significant factor. It's real, it has an impact, but how do you measure it? Rent vs. Buy decisions are not universal.

This report is focused on the common denominators which surfaced from the data. It is not a "topical" report; That is that we did not set out to assemble arguements to support a pre-conceived notion. We went in searh of facts not similarities of trend lines and bell-curves with events in 1952 or other historical periods.

I am in complete agreement with your observation that there was a significant amount of irresponsibility with some borrowers and their lenders. The bank's substitute trustee will likely visit them. But again, I ask, how can one identify good loans from bad loans? Some will still be able to pay heir mortgage from a bad loan and others may not be able to meet their obligations from a good loan. Unfortunately, the measure of this factor will have to wait until the forclosures unfold.

Lastly, and again, The title for this report was concocted by Seeking Alpha, not me.

Sorry you didn't otherwise like the report.

Best of good fortune.

Clay

[Paul Meisel]

Boy, there sure is a lot of excitement about this. The biggest takeaway should be, it depends on where you are and what you are looking at.

I had dinner last Friday with the principal of a fairly large regional builder. While we ate, two local realtors came by to chat, separately.

One told me how great things are. Another told me that its slow, slow, slow. They work for the same agency.

The builder told me he is down 75% from last year, and he has no reason to lie to me (I am not in the business, but could probably check his facts easy enough). I have heard brokers quote 30%-50% down.

If you are buying primarily for investment purposes, it is a good time to steal something from a desperate seller. If you want a particular property or type of property, it depends how motivated the sellers are. And if you just need a suitable place to live, it depends on whether that property can be purchased at a price that represents value to YOU.

Or if you already have a place to live and don't need anything, then its all academic -- about projecting the direction of the economy and the stock prices in related industries. You don't have to read a lot of blogs to realize that macroeconomic forecasting may be more reputable than fortune telling and weather forecasting but is fraught with many of the same difficulties.

Perhaps the greatest benefit of this forum is the opportunity to express diversity of opinion.

[justjakeinjersey]

Another opinion on the housing bubble... er, boom.

The End fo the Great American Housing Boom

[Augustus]

Mr. Alex Prozak sure is shifted into blovator mode.
The article is really a pretty good balanced picture of reality.
My home is just as useful to me today as it was two years ago,
and just as useful as it was twenty years ago.
I don't need an appraisal to tell me whether I like it or not.
People don't buy homes for the same purpose they buy into the stock market.
I bought my home to personally USE it. I'm doing that quite happily.

As to the credit problem situation - I'm wondering if anyone did a credit check on
Mr. Prozak before they made him an asset based margin loan? Does he have enough income or other assets to make immediate repayment of that margin loan without an asset sale?

So, sure there can be some unfortunate home sales. However, everyone moving
out of one home will need to move into another. There are very few housing markets
where there is an absolute real excess of sitting vacant homes. The reality is very much as described in the article. So what if my house is only worth as much toady as it was in 2005?

[Paul Meisel]

I think your comment "My house is just as useful to me as it was two years ago" is at the heart of the matter for 75% of homeowners. If you paid a little too much, or got a great deal, will not be particularly significant if you live in the home for 10 or 20 years.

The people who are concerned and upset fall into several different categories:
- Those whose employment circumstances require frequent relocation and depend on being able to sell with some appreciation (sorry for your luck)
- Those who have been buying and flipping as an investment strategy (sorry for your bad judgment)
- Those who got trapped in a financing bind (bad judgment? unscrupulous advisors? how does one tell?)
- Those who depend upon appreciation and a fluid real estate market for their income (developers, some realtors -- hazard of the profession, and the strong will survive)

My house has appreciated about 25% in ten years of ownership. Not great, but I bought it to live in. I have no immediate plan to sell, either -- who knows what the market will be then. One house I looked at then has doubled, but it took a large (50% of the homes value) investment to improve it, and then it sat on the market for over a year, so the return doesn't look that good.

All real estate is local, and each local situation reflects its own realities. Sometimes those realities include speculation, which will always bring some of the speculators to a bad ending. I sympathize with those who are "forced" into it by career situations -- for most others it is self-inflicted.

[abr common]

c meng,

2 things:

1) your comment: "People don't buy homes for the same purpose they buy into the stock market." - please read a newspaper at least once a year. It will keep you from making embarrassingly silly comments like this.

2) when you graduate from reading newspapers, you can start to read official reports like the ones the US census puts out (showing vacancies at record highs) that will keep you from making even more silly comments like this one: "There are very few housing markets where there is an absolute real excess of sitting vacant homes"

No need to thank me for the free advice, I just want you to become smarter, or at least sound smarter. You are welcome.

[Paul Meisel]

I have been reading newspapers since 1962, sometimes two or three a day, and I have a graduate degree from a top school and studied under outstanding faculty.

I agree with C Meng, and think the issue here is having some long term understanding, rather than getting your information from the present day's media. They are not necessarily stupid, but few have long term perspective. Their typical idea of news would be to confirm global warming every May and to decide that trends have changed every October.

Geoff, I am agreement with your observation of the long-term return on real estate. The folks who are upset by their current situation bought high in hopes of selling higher soon..... values in real estate can fluctuate like everything else.

Disclosure: I own a house. I think I'll be here for awhile. My wife is a realtor. I have an MBA concentrating in corporate finance, accounting, and operations research from Carnegie Mellon. I appreciate debate but I am really tired of people who think that this is the first time that we have been through a price cycle in housing or anything else. They don't need newspapers. They should go to the library and read some old books. Also, I am tired and grouchy.

[GeoffConsidine]

This is an interesting discussion---more for the issue of disclosure, perhaps, than the actual topic. This is why SeekingAlpha introduced their 'stamp of approval'--their certification. Contributors who are SA-certified promise to reveal any interests they have in the investments they write about. In this case, this is an interesting issue. My feeling is that it would be best if the author had disclosed that he is a realtor, whether or not he is certified. The real point here is that all articles should be treated with caution until you read further--and clicking through to see who or what the author represents is always a good idea. This is the real take-away.

On the topic of this article, I do wonder why so few people touting the housing market fail to point out the long-run rates of return on real estate. They fall somewhere between stocks and bonds. Further, the most accepted measure of pricing levels is the ratio of rents to costs of ownership, as one response above points out--and rents are very low by this measure, which means that housing prices are high. Also, as a general reference, I would suggest that interested parties look at writings by Robert Schiller on the current market for real estate in a true historical context.

Disclosure: the author of this comment owns a home and has no plans to sell.