Defining Bubbles

Wednesday, March 16, 2005 | 06:40 AM

The Nattering Nabob has a very pithy (and astute) observation of what makes a bubble:

Manias share four common characteristics:

• A feeding frenzy sends prices parabolic.

• The public jumps in with both feet.

• Valuations detach from economic reality.

• Rationalizations abound for why valuations are reasonable and the trend will continue.

There are several reasons I have been reluctant to call the Real Estate market a bubble -- yet.

- The market is regional; San Francisco, NY and Boston do not = the entire US;
- Its an illiquid market, and properties take a while to sell (as opposed to being flipped intraday);
- Most buyers care little about purchase price -- they are concerned with monthly carrying costs. Insurance and Taxes have remained fairly stable;
- 40 year low interest rates allows people to buy more expensive homes, so long as they can afford the monthly nut.

I do expect the hottest areas to fall by as much as 30%, if rates keep rising (as many expect they will) . . .  Is that a bubble popping -- or merely a retracement of outsized gains?

Wednesday, March 16, 2005 | 06:40 AM | Permalink | Comments (5) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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Point 1: I just read an article about a flipper in Wisconsin. I don't believe the "it's regional" hooha. The low rates we are getting in NY tri state area are the same (or quite close) rates folks in the flyover states are getting. If they can bubble here, they can bubble there. Maybe prices don't move to the same degree, but the low rates are certainly causing price distortions.

Point 2: In the hottest markets this doesn't seem to be true. Sometimes properties are flipped multiple times before contruction. This I would agree may be regional activity and it may not be intraday but it's getting darn close in some cases.

Point 3: I see this quite differently. When all prices do is go up this isn't a bad perspective to take. However, to focus on monthly payment as opposed to a true value doesn't make sense if you've grossly overpaid. And given the low to no down payments many of today's buyers put up, they're really just glorified renters. When the going gets tough they'll hand over the keys. It'll become Countrywide Real Estate Company.

Point 4: See above.

I'm glad I didn't see it on your list because I love the idiocy of the bullish argument of "They ain't makin' any more of it" - just what Japanese homebuyers were squawking in the late '80s-early 90's. And they live on an island!

This ends ugly.

Posted by: Andy Nardone | Mar 16, 2005 8:57:26 AM

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