Housing Bubble


Bubble Deflation

Why the bubble willl burst?

1) Higher Interest Rates

2) Record levels of debt

3) Low savings rate

4) Poor economy

5) Rental rates vs House prices

6) Record unemployment : While statistics have you believe that the number of workers seeking unemployment benefits is dropping, that is happening due to workers losing their eligiblity to draw down further unemployment benefits. With several millions of jobs transferred overseas and several hundreds of thousands of jobs permanently lost after the dot com bust, it is almost impossible for the employment situation to be what it was, a few years ago.


1) The bubble is regional. (If the rise in prices is nation wide, there is no reason to believe that any deflation will be limited to a small region)

2) Limited land : Most people believe that a CEO and his board could print stock certificates out of thin air and sell them to the gullible public and that unlike stock, the supply of land is limited. While the supply of land is limited, there is ample land in most areas (except in the downtown areas), for most people. Further land is almost always available in the suburbs or within a few miles of the city. There is no reason, why houses in areas very far from the city, should command astronomical prices

3) The amount of land is shrinking due to environmental regulations : A large portion of the rise in house prices took place between 2000 and 2005, during the term of an administration that would rather be caught dead, than enforce environmental laws.

4) Immigrants : Despite popular belief, facts do not support the myth that recent immigrants are responsible for the housing boom. Most immigrants work for years and try to get their immigration details sorted out, before they plan to buy a house (if they can afford to buy one, that is...)

5) For the housing market to collapse, there should be a large external stimulus or shock : False. The collapse can be kicked off by fairly small events. All it takes, is one seller in a single block to sell his/her home below what is widely propagated as the market value and the domino effect is set into motion.

Why the bubble may not burst

1) Overzealous administration : The administration may be willing to pour in more money to keep the bubble going, as this may potentially be the only legacy of this administration and an election issue for Jeb Bush

2) Greenspan : With Alan Greenspan in his last term, he would like to leave on a high note, rather than have two-thirds of the population think that he was responsible for the utter collapse in their standard of living.

3) Trade deficit : Foreign nations continue to buy our bonds, because their chief economists may be under the misguided notion, that it is better to finance our debt than to lose us as their primary market.

What are the signs to look for? (based on previous bubbles)

1) Old homes are on the market longer
2) Home builders offer free upgrades
3) Home builders quietly offer discounts to select buyers
4) Home builders old "closeout events"
5) Quality of earnings (profits) decline
6) Revenues decline
7) Prices are in a downward spiral until they reach 40-50% below their current levels
8) Foreclosure rate rises
9) Number of personal bankruptcies rise
10) There is a pressure on the prices of homes at the high end
11) There is a pressure on the pricces of homes at the low end
12) Number of new home permits issued, begins to decrease.
13) Revenues at home improvement stores, begin to trend downwards on an year over year basis
14) Decline in employment in the construction industry