"10-28 A Housing Mega-Bubble No Doubt. It’s NOT DIFFERENT THIS TIME no matter how much we all want it to be.
- How do you know when you are in a real estate bubble? That’s fairly easy. Knowing when it will pop is the hard part.
- Air pocket between present, bubbled-out house prices driven by the “unorthodox, unfundamental, incremental demand using unorthodox capital” and fundamental, end-user, shelter-buyer affordability has never been larger.
- At peak bubble, all that it takes is a narrow and shallow stream of a few dumb money buyers to keep the prices of thousands of houses bubbled out, indefinitely. Most everybody else is just hanging on for the ride, unable to transact due to the unaffordability. Then one day market suddenly runs out of dumb money buyers, which is the Wile E. Coyote moment.
- SF Bay Area is not an example of a healthy, fundamentally-driven “housing market”, rather a stimulus-fueled commodities market.
- Just like in 2007/08, if the “unorthodox, unfundamental, incremental demand using unorthodox capital” suddenly went away, house prices would revert back to what end-user, fundamental, shelter buyers with traditional financing can afford, which is about half of what houses cost today.
- Why is everybody so sure that the current age of “unorthodox, unfundamental, incremental demand using unorthodox capital” is here to stay? They were all wrong in 2007.
- Housing bubbles don’t exist in isolation; when the known bubbles finally pop, it will take the rest with it.
- If everybody in the US had to buy real estate using the same amount down and fully documented 30-year fixed real estate loans, house prices could never detach from end-user, shelter-buyer, employment and income fundamentals in a city or region. There would be — could be — no bubbles. It’s when the “unorthodox, unfundamental, incremental demand using unorthdox capital” enters the market, prices quickly detach from end-user fundamentals and bubbles form swiftly, exactly like we saw from 2003 to 2007 and exactly what we are experiencing today.
- To believe this isn’t a bubble is to believe that all of the hot momo money from insti’s, high/biotech, flipper, flappers, fraudsters, and foreigners buying houses is fundamental and here to stay, which is exactly what everybody thought in 2006. Or, to believe that interest rates will keep falling 1% per year going forward, which would lend an element of support to prices.
- It’s not different this time. In fact, it’s exactly the same, including how everybody is absolute and resolute in their belief that house prices always go up and can’t experience another 2007-2010 type crash again.
Average household income: $180,000 yr
Loan Term: 30 year
Homeowners Ins: $1000
Prop Taxes: $14,500
Car Payment: $700
Credit Cards: $400
Result: Typical, end-user, shelter buyer can “afford” a $778k house
DOWNSIDE RISK: = $672k ($1.45mm – $778k), or 46%