A friend of mine wrote me this...

You gotta watch out for the housing bubble. The real estate problem is definetely coming. It happened in Houston a few years back and it is going to happen in the south soon. Real Estate prices are simply over inflated and when the value starts to drop a lot of people are going to have a $250,000 dollar mortgage on a house worth $150,000. Of course when people start walking away if you have cash you may be able to buy out right from the banks for a cheap price.

Anyone hear of this or have concerns about it?

All I know is that housing prices in and around Raleigh are insane and have been for about ten years. Hopefully your report will come true so that I can afford to buy a house.

Well, there is always a risk that the real estate market is going to go down and leave you with a mortgage for more than the price of your house. In the past, however, the general trend for real estate is to stop going up in value durring slow periods for the economy. The market moves much slower and with much more hesitation than the stock market.

Tony can probably lend some insight into what banks go through to make sure you will be able to afford your house payment. They may make it nearly impossible to get loans at times, they do like to make sure you'll have the ability to pay them back.

Matthew

Another aspect of the housing bubble has to do with a sudden burst of selling in a (relatively) small area. For example, say you have a large number of workers for a particular industry centered in one geographic area. A downturn in this industry could cause a lot of jobs to be outsourced, downsized, whatever term you wish to use. Those people can no longer afford the mortgages for those houses, and they all go on the market at once. No one wants to buy them because of the inflated price and lack of jobs in the area...

As Paul points out the general consesus in the stock market and other economic communities is that any "bursting" of the housing bubble is going to be localized events. It's very unlikely that all of the sudden all real estate in the U.S. is going to lose value dramatically. That would only happen if the U.S. suddenly became a very undesirable place to live compared to the rest of the world. What may happen though is that real estate buyers will become less common as interest rates go back up, this will cause some loss in real estate prices but it's not likely to be dramatic enough to causes houses to lose $100,000 in value.

In the Bay Area, where supply radically outstripped demand during the Internet boom, housing prices soared. Unsurprisingly, they've now fallen back down somewhat. In Houston, when oil prices collapsed in the '80s, the energy business fell to pieces, and lots of folks lost their jobs. No jobs, no mortage payments, no housing market.

I bought my house in 1999. In the four years since then it's appreciated by almost 25% in value, if you believe my property taxes or the recent appraisal I got when I refinanced. When I bought my house, very few houses were for sale, and the ones on the market didn't last very long. These days, 60-90 days on the market is much more common, and many more houses are for sale. That implies the demand has eased, but yet the value is still higher. What gives? The only theory I've got is related to the extended buying power that comes from lower interest rates. If you buy the theory, then the price of a house will automatically adjust up and down to match the buying power of people in the market for that sort of house.

My recent refinancing cut my mortgage payments by nearly 20% from their former rate, which was itself cheaper than the rate when I first bought. The value is up 25% from when I bought. I see a correlation here. If mortage rates go back up by three points, I expect the value of my house will fall back to what I paid for it. And, if that does happen, I won't panic.

Now, let's assume I want to upgrade to a house that's exactly twice the cost. Assuming my theory is right, is it better to do the house upgrade now, when I've got "bubble equity" to convert into a downpayment, or is it better to wait for rates to rise and the cost of bigger houses to drop? Assuming everything scales linearly (almost certainly not true), then the value of a double-sized house would fall twice as much as the value of my current house. That would say it's better to wait and buy later.

Does this logic add up?

Does this logic add up?

1) Not unless you really believe that the only appreciation you're seeing is because of the intrest rates, which is definitly a minority viewpoint.

2) Depreciation - More house, more depreciation, less income tax. Or at least that's the theory. (How real estate appreciates and depreciates at the same time is one of those things I understand, but have a had time believing in)

3) What else are you going to do with the money. If you're gonna spend it on portable MP3 players and fast shiny cars, then spending it on bigger house will leave you much better off in the long run. However, you'd be even better off staying in the same house, and investing in rental property, gettng all the appreciation/depreciation benefits while having someone else pay most of the mortgage payment on it.

Matthew

I have a friend that does nothing all day but listen to talk radio. He is convinced that this will happen all across the US. I think I believe it.

I bought a condo 3 years ago for $83,000. I sold it this year for $155,000. The only reason I sold it was to get the cash out of it and I could move back in with my parents for a while. I have been looking at houses since, and prices are still going up. They're so high now, that I could have dumped my condo for closer to 200,000. I don't know what the hell is going on, but I am waiting for the bubble to burst now so I can afford a house.

robricc, that's a great turnaround for only 3 years. what state do you live in?

That was in Pomona, NY.

Same here. I was looking at buying a house a little while back but it is just impossible out here for one person with my kind of income, and now it's even worse. There isn't anything here for less than $250k (unless you want to live in a 500 sq. ft. shack in a field, and even they go for $200k ). So, I stay in my apartment and wait. In the meantime throwing ~ $17k a year out the window; eesh, I hate to think about that.

Here's a similarly equipped unit in the same complex as mine on Realtor.com:
http://www.realtor.com/Prop/1030774219

I should have held-out and sold now, but you never know what the market is going to do.

So, I stay in my apartment and wait. In the meantime throwing ~ $17k a year out the window

Living with my parents again sucks. What doesn't suck is not having to rent a place. I would have a real hard time doing what you're doing a paying someone elses mortgage.

Yeah. I probably should've done what I originally had in mind; that is, stay with my parents for a year or two and save for a down payment on a house. I could've saved $30k in two years, no problem. Too late now, I'm in a 15 month lease. Anyway, I like my freedom.

I don't know what the hell is going on, but I am waiting for the bubble to burst now so I can afford a house.

Interest rates keep going down, making money "cheaper". Once the economy starts/continues to recover, interest rates will be nudged upwards, but if Alan has anything to do with it, prices overall aren't going to go down. Our economy depends on inflation.

Matthew

Its insane down here in Orange County. My brother bought a condo about 5 years ago for $96,000 -- he just sold it last month for $315,000.

Sell now, rent until the bubble collapses, and then buy.

Sell now, rent until the bubble collapses, and then buy.

At least here in Houston, we haven't seem the same kind of inflation as other parts of the country. My house has gone up 20% in four years whereas Rob's condo doubled in three years. That would say that there's more bubble there than here.

I haven't done the mortgage math on a house for 2X the cost, but given that I'm doing a 15-year flat rate mortgage right now, I could shift to a 30-year loan for the bigger house and, particularly with the joint income of my fiancee (wife, by then), the bigger house wouldn't be too much strain on the budget.

(And, needless to say, I'd be miserable living in an apartment again. I love having a freestanding house without anybody else's stereo keeping me up at night. The right answer, at least here where there's less of a bubble effect, is probably to ignore what the market is doing and just do whatever I would have wanted to do in the first place. If I lived in the Bay Area, this would all be completely different.)