Wednesday, December 28, 2005

The Housing Bubble Myth: A Construct of the Left?

Everywhere you look today, it seems like people are talking about a "housing bubble". The MSM has been hyping this story for several years now, and while the market is definitely slowing down, there is no real evidence that the "bubble" is about to burst. wrote an interesting piece in July of this year that goes into great detail on why there is no housing bubble to burst. The following month Neil Barsky, managing partner of Alson Capital Partners, LLC., wrote another myth-busting piece in the Wall Street Journal (here via Nations Building News Online) that illustrates why past and current housing markets differ, and why the "bubble" won't burst anytime soon. In fact, he warns of a shortage of housing.

Despite these strong and convincing arguments, there are many who are convinced that the housing market is way over inflated, and is due for a major 'correction' soon. Their reasons for such a belief are many, but I can't help but notice that many seem to also hold generally liberal political views. I have no doubt that there are many conservatives who agree that a housing bubble is real and about to burst, but my suspicions are that that group is quite a small subset of the housing bubble crowd. I would go further and argue that these conservative 'bubblers' are probably the analytical type who's view is that the easy access to mortgage loans seemingly without regard for credit worthiness has 'artificially' brought too many buyers into the market, pushing up home prices to unsustainable levels. No doubt there is some truth to that viewpoint, but I believe that segment of the housing market is a significant minority.

The bigger question, and the real focus of this post is the apparent political component to this important debate.

Their position goes essentially like this: First, the GOP, led by GWB and Alan Greenspan made access to credit very easy by lowering short term interest rates, and more importantly, by pumping lots of liquidity into the economy, which made borrowing and buying more available to people who would not have had access to mortgages in the past due to credit and/or income issues. Second, after these people bought into the market with low or no-interest loans, assuming that the market would continue to appreciate, the GOP-controlled Congress changed bankruptcy laws to make personal bankruptcy more difficult, and consequently foreclosure easier. Couple this with the false perception of a poor economy and rising unemployment rates, and you have the beginnings of a "bubble".

Then, as rates began to rise (note the evil Alan Greenspan again) from their historical lows, many of the people with adjustable loans found that they could not make the payments, and also, now that credit began to tighten, could not refinance their loans, could not declare bankruptcy, and were foreclosed. This allowed evil, rich Republicans to buy these foreclosed properties at a giant discount, then sell them later for quick profit. Our friends at the illustrate this point clearly.

Unfortunately, the facts just don't bear this scenario out. Yes, bankruptcy laws have changed, and yes, rates are rising slightly, but are still very low. More importantly, the economy is very solid. Add in the opinions of the experts (above and below) along with the fact that regional economic conditions are far more indicative of healthy or not-so-healthy housing market, and it becomes clear that the only thing bursting is the MYTH of a housing bubble.

Regarding regional situations, I live in one of the hottest real estate markets in the country: San Diego County California, and know it well from a buyer's perspective. I bought my first house here in 1996 at the bottom of the last housing bubble crash. In the years prior, the economy in San Diego was heavily influenced by military spending. There was (and still is) a large Navy and Marine presence, and the large industrial economy was mostly defense-related. In the very large scale-back of defense spending and base closings following the fall of the Soviet Union and the end of the Cold War, San Diego, as were many other markets, was hit very hard, and the recession of the early 1990's put the housing market here on its heels. Foreclosures were everywhere, as defense workers moved elsewhere to find jobs, they had bigger mortgages than their homes were worth, and many just walked away from them.

It was sad, and I couldn't bring myself to profit from their misfortune. I ended up buying a new, 2,400 square foot home for $169,000 that had stood unoccupied for more than a year. It was so bad then that the original builder of the tract had even gone bankrupt. There is no doubt that there was a housing bubble here then, and equally no doubt in my mind that now. I still own that house today, and it is worth about $680,000 based on a search today.

But to get back to the people who believe in the "bubble", it is that envy drives much of their enthusiasm for a housing 'bubble'. As writes, envy and and a strong need for "equality" is the driving force behind much of the leftist agenda. Many people are angry that so many have gotten rich (on paper anyway) from the recent strong appreciation in housing prices. They believe that it is unfair that many are left out of the housing market since prices have risen faster than incomes. They seem to actually relish the idea of a 'bubble', and are even hoping for a crash to 'show those rich people' that they are not so rich after all. It is really the classic liberal cause; If somebody is getting rich, then somebody is getting poor as a result. Too bad these people don't understand the concept of wealth creation.

Their anger toward anyone who disagrees with their view is becoming as vicious as the anger directed at those of us who remain unconvinced of anthropomorphic global warming. Consider this respected financial columnist from a San Diego area paper who recently wrote that a . Be sure to read the comments from readers and see if you don't agree that it is unwise to rile these people up. In fact, Mr. Chamberlin, who, by the way I have read and followed for years and highly respect, wrote a follow-up piece wherein he described the vitriol sent his way over the original column. Be sure not to miss the comments to that column as well.

Is there a housing bubble? No, the facts don't support it. Will housing prices rise or fall? They are softening somewhat here in San Diego, and time-to-market is lengthening, but I do not believe a crash in prices is coming since the data I have seen does not support such a conclusion. But there certainly seems to be many who are hoping for such a crash, and, not surprisingly, many of these people have a political agenda aligned with the Left.



Lou Minatti said...

They are softening somewhat here in San Diego, and time-to-market is lengthening, but I do not believe a crash in prices is coming since the data I have seen does not support such a conclusion.

When middle-class people are priced out of a housing market, there is a bubble. When even well-off people can't afford a house unless they use a stupid option ARM, there is a bubble. When RE speculators run the local market and they cannot charge rents that are high enough even to cover their mortgage cost, there is a bubble.

The fact is, people inside a bubble cannot usually see that there is a bubble. People naive enough to believe there is no bubble in SoCal should prepare anyway. You're about to get wacked by a 40-50% decline.

And spare me the political nonsense. It has nothing to do with politics, and everything to do with common sense.

James Z. Smith said...

Thanks for your comments, Lou.

Actually, it has a lot to do with politics, at least as far as the many of those gleefully proclaiming the "bubble is burst". Base on what I can see on the internet, guys like you are the ones most excited about being "right" about a bubble, and hoping that these 'rich' people get their just rewards.

Prices in RE are set mostly by supply and demand, of course, and here in San Diego there continues to be a supply problem long-term. Much of the area is 'built-out' and the voters have recently enacted legislation to severely restrict contruction in the undeveloped "back country". The population is growing, the local economy is booming, and the affordability index has been below 50% for many years.

Just because prices here seem out of whack to elsewhere is not proof of a bubble. Housing prices, like politics, is and always will be local.


James T Allison said...

I disagree with both points. I don't think there is a severe bubble, but I agree with Greenspan that there may be a "correction" in several extremely hot markets. The nice thing about real estate versus the stock market is that a housing crash is more of a slowly falling set of prices, and seldom does it hurt those who plan properly for it. As Mr. Smith points out in his original post, he made out wonderfully in the San Diego market, and those who sold at a loss in 1996 could have been way ahead in 2005 had they managed to keep the house.

I am fortunate enough here in the Pacific Northwest to have a strong housing market, and an economy that is still coming back from the 2001-2003 plunge. I am not worried about a bubble bursting here, because there are new jobs being created, and people need to live somewhere, and they seem to still be buying houses.

Mr. Smith's idea of the housing bubble being a "liberal" view does not hold water here in this "blue" state, where most real estate experts believe that there is no chance of a bubble bursting the local housing market. I think it is more an issue of pointing a finger at a set of political ideas that you disagree with than any real left or right leaning by the bubble-believers versus non-bubble believers.