December 25, 2005

Don't believe a housing bubble can happen here? NY Times Sunday: Take it from Japan, bubbles hurt


Not all bubbles are the same, but I believe they do share some common characteristics, namely:

1) easy credit
2) buying on the expectation of future gains
3) leverage
4) panic buying - buy now or get 'priced out of the market'
5) rampant speculation
6) believing past performance DOES guarantee future returns
7) the shoe-shine guy gets in

The Japan housing bubble experience is amazing - an incredible rise followed by a spectacular fall. Phoenix is a perfect example here - up 55% in one year solely due to speculation. And likely down 30% in the following two, just to get back to where it started.

Here's a few quotes from this excellent read (hat-tip to HP reader Adrian):

With housing prices in the United States looking wobbly after years of spectacular gains, it may be helpful to look at the last major economy to have a real estate bubble pop: Japan. What Americans see may scare them, but they may also learn ways to ease the pain.

Their experiences contain many warnings. One is to shun the sort of temptations that appear in red-hot real estate markets, particularly the use of risky or exotic loans to borrow beyond one's means. Another is to avoid property that may be hard to unload when the market cools.

Most of all, economists say, Japan's experience teaches the need to be skeptical of that fundamental myth behind all asset bubbles: that prices will keep rising forever. Like their United States counterparts today, too many Japanese homebuyers overextended their debt, buying property that cost more than they could rationally afford because they assumed that values would only rise. When prices dropped, many buyers were financially battered or even wiped out.

52 comments:

Joe A said...

Love the chart from The Economist. This is what makes the current price inflation so scary: it's not like past housing booms in the US, or even like the Japanese boom in the 1980s. The rules have changes this time, thanks to negative amortization mortgages, 100% financing, etc. Price increases have been much larger and steeper than they have in the past. We know that prices will fall in real terms, but don't really know when this will happen.

keith said...

It's the level of leverage that dictates the size of the resulting bubble. With the NASDAQ, we were only talking about 50% leverage ($1000 in your account would give you access to 500 in margin or leverage).

With housing, we're talking on a 5% down loan getting 19 TIMES that in leverage ($5000 down on $100k loan gives you $95,000 in leverage)

And with the invention of no-down, interest-only, negative-ammoritization, combined with record low rates, humanity has created what I think may be the bubble of all bubbles - one that will be talked about 200 years from now.

Seriously.

And we'll go back to 20% down, and 5 times leverage on housing.

Anonymous said...

"The collapse of the bubble robbed us of our freedom to choose where we can live."

To me this sums up perfectly the real danger that lurks for homeowners in the future. A decline in home values will cause many to be "suck" in a home because they are unable or unwilling to sell at a lower price. The young single crowd won't be able to trade in their condo for a house once they get married, growing families won't be able to move to a bigger house, retirees (baby boomers) won't be able move to warmer climates...and so on.

It is sad that so many have sacrificed their financial freedom to the real estate gods for the unsustainable promise of constant price application of their asset. In a very real sense “homeowners” are simply renters that sign a 30 or 40 year lease with their landlord – Fannie Mae or Freddie Mac – both quasi-government corporations.

Philip John said...

"In a very real sense “homeowners” are simply renters that sign a 30 or 40 year lease with their landlord – Fannie Mae or Freddie Mac – both quasi-government corporations."

yeah - but they own the asset at the end of that lease.

Its not as bad as that - people will still be able to move, it might just take a few years to shake it out. Once the baby boomers start retiring and sell those houses to get disposable income, who do you think is going to be buying?

Us. If they want to sell, they will need to do so at a reasonable price that we can afford.

The wealth is currently concentrated in the older generation, that will shift and prices will drop or stagnate until they reach affordable levels.

If its cheaper to rent, move to where you want to and rent. If you invest your money in an appreciating asset and give it 10 years, you will be buying the house you want.

Phil

ECOBUILDER said...

Hope you all had Merry Cristmas.

Folks, I can tell for sure that some air will get out out overheated markets (SF, etc, etc.)

But FED NEVER LET THE WHOLE BUBBLE BURST ! NEVER !!!

They don't have a choice - INFLATE OR DIE. Whole US economy is based on house bubble: financial and construction industries, retailers, you name it.

Bursting bubble means US GDP going down, then all foreigners stop investing in US economy and run for real assets, not paper. What that means? HYPERINFLATION.

Recall Greenspan's words when somebody asked him "what to to if housing bubble deflate?" He sad something like " Then we'll inflate a new one". It's a bubbling economy, guys.

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