Thursday, January 28, 2010

Yes, Virginia, there is still a housing bubble

Dean Baker, the first economist I'm aware of to spot the housing bubble (although he was still a year-and-a-half behind me), says we've still got a housing bubble and the government isn't helping people by encouraging mortgage lending:
Housing economist Dean Baker, the co-director of the Center for Economic and Policy Research, laid out his case at a risk conference last week for why we still have a housing bubble. Adjusted for inflation, home prices are still 15-20% higher than they were in the mid-1990s. “There’s no plausible fundamental explanation for that,” he says.

Why? Simple, he says: Economic fundamentals are all going in the other direction. Rental apartment vacancies are reaching record highs. Many segments of the housing market are still oversupplied. And the core demographic in the country—the baby boomers—are reaching the age where they’re more likely to downsize, buying less house in the years to come. ...

“As a matter of policy I can’t see that we want people to buy a house in 2009 that’s 10-20% higher than it would sell for in 2011,” he says. “In so far as the FHA was encouraging people to buy homes in bubble markets that were not deflated, that’s not good for the FHA and you didn’t help the homeowner. We didn’t do those people a favor.”
Again, encouraging people to buy houses at inflated prices is harmful to home buyers. It's harmful when banks do it and it's harmful when the government does it. When it's done with low down payments (such as the FHA's 3.5%), it's risky to the entire economy because many people can easily end up underwater.

21 comments:

  1. Again, encouraging people to buy houses at inflated prices is harmful to home buyers. Of course, but it's helpful for home sellers, and ,more importantly to the PTB, their lenders. -Jim A

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  2. Prices are 15-20% higher, but mortgage rates are 20-25% lower, and since most buyers are financing damn near the entire cost, the mortgage rate is a huge factor in the actual cost of buying the house.

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  3. While there may be a bubble nationally, it apparently doesnt apply to DC, because Dean Baker, the man who sold in 2004 and rented just BOUGHT a place in DC proper!

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  4. Yes, there will be buyers and sellers and mortgage rates to equal each other out, but if just one party in this transaction is being weighed down by debt, all parties will transact at a lower price level. So it goes, any level of debt default will cause the paradigm to shift to the next lower price level. Just as we have seen over the last two years. The system is fragile. I think the word "bubble" is being abused by the Oligarchy/Plutocracy, in that any asset that is not US dollars is currently being called a "bubble" by the news media -- precious metals, commodities, RE, China, India, etc. Maybe call it "overvalued" instead.

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  5. Don't waste your money, RENT don't buy! The "peace" of mind that comes with renting is worth far more than telling your friends you own a house. I especially get a kick out of people who live in an apartment and then buy a condo which is essentially another apartment with title. You still share common space, hear noises and park in assigned parking spaces. What improves when one moves out of an apartment and into ownership of a condo. Whoopeee you get to paint the walls!!!!!

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  6. "What improves when one moves out of an apartment and into ownership of a condo. Whoopeee you get to paint the walls!!!!!"

    No you get to pay taxes, interest, condo fees and constantly have to put up with new rules that appear out of nowhere. You dont get to have ANY of that renting at a complex!!!

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  7. Saying "rent don't buy" is the same silly generalization as "buy don't rent". Neither is always true and there are some nice benefits to both. It all depends on the financial details and the buyer's particular preferences.

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  8. No you get to pay taxes, interest, condo fees"

    Right, because those arent built into the rents or anyhting.

    "and constantly have to put up with new rules that appear out of nowhere. You dont get to have ANY of that renting at a complex!!!"

    Yep no rules imposed on renters - no rules whatsoever. Im gonna go buy 57 dogs and put them in my apt - im sure management wont care cuz, you know, theres no rules and all...

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  9. Well the MAIN advantage of buying a condo would be fixing a large portion of your housing costs. Of course purchasing costs twice the rent, and rents are flat or falling, that's a pretty stupid idea. But in a normal market it's POSSIBLE to come out ahead. But of course the value of your condo is MUCH more dependent on the behavior of your neighbors than a house. And usually common areas depreciate more quickly than a stand alone house does. - Jim A.

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  10. "Im gonna go buy 57 dogs and put them in my apt"

    You must be from West Virginia. That kind of behavior is unacceptable around here!

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  11. unacceptable to whom - theres no rules in apts remember???

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  12. In a condo you get these awesome "special assessments". For us it was a sudden assessment for $12000 due in a few months. THAT never happened to me renting.

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  13. Special assessments, like all CAM fees are passed on to renters, just spread out over time instead of lump sum. Either way, renters end up paying them.

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  14. Unless you HAVE to buy for whatever reason then it makes no sens eto jump in unless you see rates at all time lows for the next 5-7 years, which after Boom Boom Bernanke got confirmed, may well be a possibility. Yeah, just buy.

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  15. getyourselfconnected said...
    Unless you HAVE to buy for whatever reason then it makes no sens eto jump in unless you see rates at all time lows for the next 5-7 years, which after Boom Boom Bernanke got confirmed, may well be a possibility. Yeah, just buy.


    So I guess you think Dean Baker is an idiot huh?

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  16. "Right, because those arent built into the rents or anyhting."

    They arent at the moment. A one bedroom condo would cost you $2500 a month with $600 in condo fees. You could rent at an apartment complex for $900.


    "Yep no rules imposed on renters - no rules whatsoever."

    I didnt say there arent rules. I said you dont have to put up with rules CHANGING while living there. My friend had to get rid of his 9 year old dog, cause one day the new condo rule was "no pets". Had he rented, the rules wouldnt have changed mid contract and he could have simply moved after the contract expired....good luck selling your condo right now.

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  17. hmmmm....Baker states that "There's no plausible fundamental explanation..." for home prices to be above mid-1990's prices.

    Another member of the nonpartisan fan club!

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  18. "While there may be a bubble nationally, it apparently doesnt apply to DC..."

    Yeah...right. DC is more bubbly than anywhere across the nation, except may be NY.

    Buying in this market is stupidity unless you don't love your hard-earned money being thrown in a black hole. By the way, another advantage of renting is - it keeps you mobile.

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  19. "spider said...
    "While there may be a bubble nationally, it apparently doesnt apply to DC..."

    Yeah...right. DC is more bubbly than anywhere across the nation, except may be NY."

    So then why did Baker buy in DC Spider???

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  20. "So then why did Baker buy in DC???"

    Because he can afford to buy the home he wants rather than rent one that he does not. The decision to rent or buy is not like choosing to buy or lease that new 7-series BMW on the car lot. It's more like choosing to buy a brand new car or reasonably priced used car that doesn't depreciate astronomically once you drive it off the lot. The latter may be the more prudent financial decision, but come on--it's an '04 Kia.

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  21. Good point! So many people bought homes they are less than thrilled about. Ask Pussy because he's living with that pain.

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