Tuesday, October 24, 2017

Why people who write about real estate bubbles don't know what they are talking about this time.

Everyone wants to be the first person to call a bubble. But I can assure you - even though real estate has some crazy prices right now - we are not in a bubble. There simply just isn't enough activity to warrant a bubble. We have entered the simple concept of - supply and demand. And there is NO SUPPLY thanks to the low low low interest rate environment we went through for the last 10 years.

But, lets pretend and say we are in a full fledged bubble and a bunch of people get tossed out of their homes. There is an army of people who would jump on those houses and make the prices stabilize super quickly. I am 100% positive that I will never live through another housing crisis like we had in the recession. I am the most staunch housing bull you will ever meet. And even I thought about giving up my houses. Everyone has weaker knees then I do. So when a person like me thinks about giving up... I know the deep fear they instilled in most people.

The media basically exacerbated the crisis by whipping everyone up into a frenzy and got into peoples heads and told them their houses would NEVER be worth what they paid for them. Even people who could afford their houses jettisoned them because who wants to keep paying on a place they will never get a financial return on. And the media just whipped and whipped people into a panic by calling them suckers every single day. For 4 years even I felt like they could be right. The media basically forced a run on the bank via houses.

I kept my places because I've been through the rental trap. I couldn't figure out where these people were going to live. And now we know... maybe nowhere.

So, now because sales are looking super sickly, the media is going to glom on and make it seem like the bubble has burst. But I'm here to burst their bubble. A healthy economy needs about 1.5 million units just to keep up with population increases. Right now we are doing about 1.1 million units. Down from about 1.3 million units around the start of 2017. Housing starts have been falling all year because the easy land has been bought up and developed.

In the last chart below you will see the historical chart for housing starts. It goes back to before I was born. As you can see, every time we've entered the low end chart line of 1 million units - it's only been for a very short blip in time. See how everything looks like a V? This recession has cratered building for the longest period on record. I've lost count now but it might be something like 8/9 years. The previous were three years - max. Now we are in a bit of a hole. People haven't stopped making babies yet.

People can yell and scream that the prices are astronomic and the bubble is popping, but the last chart shows they are wrong. By a long shot. Just this morning I read an article about a burned out house in San Fransisco being listed for 800k. The author of the article even says the following: The hefty price tag shows the extent of the Bay Area housing bubble.

While they see a bubble - I see a deal. A one story house than HAS to be torn down planted next two two story houses. They aren't making new land in San Fransisco.

I honestly laugh every time I hear someone call housing a bubble. Because a lot of people are going to be butt hurt. We just haven't been building enough to keep up with population. That means prices will continue to skyrocket and even if there were a downdraft, you are not going to be able to repeat what happen in the housing crisis. Psychology is everything. People my age (genX) had never seen anything like that, but now that people have, and they've seen that prices recover - I just don't think you can reproduce the same kind of panic.


  1. I think bubble might be the wrong term, though the blowback of the next downturn in real estate assets might look "bubbly".

    In my area --which is far, far away from yours-- there are a number of things causing home prices increases, and some factors depressing the market.

    Price inflators:
    Building codes have changed profoundly in the Northeast over the past decade, requiring vastly higher insulation values in new residential buildings, with concomitant (often dramatically) higher new home prices.

    In the resale market, older homes should, by rights, be significantly cheaper, but they aren't since RE agents (IME) don't markedly differentiate between the "new code" homes, and the old ones. And while recently built houses' construction costs are, in actuality, much more "per pound", both buyers and sellers romanticize the allure of code-resistant grandfathered draft-boxes (at least until the first fuel bills start rolling in.) This is how homes built in 1779 often command prices not far out of line with those built five years ago. Where you live, this is probably less of an issue.

    Price depressants:
    Property taxes. My property taxes have quadrupled in fifteen years. Now, the state is trying to implement universal public school daycare (which will mean another big increase.) Young families with more than two neurons firing correctly are divining that they cannot afford to live here (and especially not in a new home.) It's also not attractive that the state continually tries to implement new massive carbon taxes.

    Government manipulation of the real estate market, whether intentionally through artificial interest rate depression, or at the margins, through code changes and multiple tiers of ever increasing taxation (property, energy, sales, use, etc.,) are having ever greater negative knock on effects to the real estate market. Some of these disincentives are local, but they're becoming ever more nationally ubiquitous, as local and regional entities become more and more desperate for new revenue streams.

    The ever increasing burdens that government places on property owners will eventually cause a backlash. Whether that will appear much different from a bubble "bursting" remains to be seen.


  2. I can definitely see what you are saying there. In my city before the recession hit hard they used to mandate new construction that had over so many units (I think 40) were forced to put in an object of art. No foolies. Like a sculpture or some shit. It actually used to be a rule where you couldn't get a project started unless you had some sort of object de art on the property. This is the insane crap governments do to manipulate housing and they should all stop.

    Having said that......if we are in a bubble right now. Gawd save us. During the recession where NO houses were being sold ... about a half a million units a year were being built. We are only doing double that now. Roughly. From the time I've been alive the population has probably doubled, and I only expect that to happen again by the time I'm dead. People are going to need places to live. And I agree, it remains to be seen how this plays out. People have a deep seated need to have a place they can call their own. I'm not sure which impulse wins. I'm guessing people will get fed up before they all decide to live in housing blocks.

    Welcome to the blog Krusty. And thanks for using an anon nym.

  3. Oh and thanks for pointing out the lack of disparity with existing/new home prices. It's something I noticed butI didn't really think about until you pointed it out. But even here, new homes are selling for about as much as existing. And historically that is really not normal. New homes always cost more because they are - new.

    Normally I might brush that off to commodity prices but I know lumber is at a 16 year high right now. It will be interesting to see if that trend continues. I mean, hell, everyone would buy new if there were no cost difference.

  4. I'm here quite often. I was the one of the folks who commented on your waffle shooters. ;-)

    Before we transplanted ourselves to our current home, we looked at homes in our new area for nearly 5 years (only 3-4 times a year, due to distance.)

    Some of the things we did not find in homes built in the 1940's (in comparison to those built since the 1990's):
    -- grounded electrical systems (2-prong vs. 3-prong receptacles),
    -- insulation (to speak of),
    -- efficient heating systems,
    -- air-conditioning,
    -- ground fault receptacles or breakers,
    -- adequate electrical service panels and feeds,
    -- single pane vs. multi pane windows,
    -- 2x4 vs 2x6 construction,
    -- whole-house reliable, noise free telephony,
    -- wired smoke/CO detection systems,
    -- and so on...

    We visited many homes that were missing many of these modern features. We bought the best we could find. I'm still upgrading, although some things just can't be changed, after the fact (2x4 construction, central AC). However if you want to live in a certain neighborhood, you bite the bullet and perform as many home upgrades as possible, later.

    Unless you're independently wealthy and lucky enough be able to find, hire, and then wait (and wait) for multiple tradesman to do everything correctly for you, it still takes money, intrepidity, a willingness to get sore and dirty, and the knowledge of how to correctly perform construction projects yourself. This is not something I'm generally seeing in younger folks, any more.

    Also, I'm noticing that many people I know and meet(and not just the young ones) have a major problem with delaying gratification. That might explain all the junk debt that's floating around, and young buyers' inability to raise adequate down payments.

    For example, I upgraded and sold a house to a pregnant young couple who had no money to put down, yet qualified for a state-offered, special, first-time home-buyer loan. They even financed their closing costs (which were astronomical.) Their yard is always full of recreational vehicles of all shapes and sizes. I know what marginal jobs they both have, and I'm surprised that they're able to continue to hold onto the home.

    Gawd save us, indeed. I won't be stacked and packed in my lifetime, but the next generation seems not just willing, but eager, to do it.