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New Nearly 100% chance IMO
I believe that there already is a bubble. Which makes it a rather bad risk that there will be one. :-)

What is fueling this one is low interest rates and easy loans. As a result people feel they have more buying power, and so are willing to bid up the price of property. Also a lot of people have refinanced, and while they are refinancing they get some cash and go out and spend it. (Hence fueling a big chunk of the consumer spending that has been propping up our economy.)

But where is the speculation behind a bubble coming from? It is from the other side. Banks bundle loans into bonds, and sell those to investors. Investors who are moving money out of stocks move them into those bonds. That provides lots of money to banks to lend again. Since banks actively want to make lots of loans, and have lots of money to do it with, they are in a position to offer very generous terms, completing the cycle.

So how could this fall apart?

The problem is that fairly soon interest rates hit an effective bottom and refinancings stop. At that point consumer spending is likely to slow and consumers will be in the same debt-heavy position as businesses. What this means is that everyone now needs money to make payments. If everyone wants money, and nobody wants to spend it, then you get deflation. You also get badly hurt businesses. Badly hurt businesses have to lay people off. People now cannot make their mortgage payments and want to sell their houses. But thanks to general deflation, the house prices have started to fall. So you get defaults, which dry up the supply of loans, and without those would-be buyers cannot spend as much, completing the cycle.

We just had trillions of dollars appear out of thin air and get the label of "real estate value". Just like the trillions that appeared out of thin air in the stock market, there is nothing to stop it from going back where it came from. The good times go, but the debt hangover stays with you. (And if we get serious deflation, that debt is going to really smart!)

Cheers,
Ben
"Career politicians are inherently untrustworthy; if it spends its life buzzing around the outhouse, it\ufffds probably a fly."
- [link|http://www.nationalinterest.org/issues/58/Mead.html|Walter Mead]
Expand Edited by ben_tilly April 20, 2003, 10:37:33 AM EDT
New Re: Nearly 100% chance IMO
Isn't this what happened in Japan, more or less, in the mid-80s to mid-90s?

-drl

(Dm - 2Am)(Rmn - 1/2gmn R + 1/2Fmn) = 0
New Yes
"good ideas and bad code build communities, the other three combinations do not"
- [link|http://archives.real-time.com/pipermail/cocoon-devel/2000-October/003023.html|Stefano Mazzocchi]
New Econ Laureate LRPD: Unintended consequences
     What's your thoughts on buying a place in this econ? - (inthane-chan) - (38)
         Re: What's your thoughts on buying a place in this econ? - (deSitter)
         Keep in mind... - (admin) - (5)
             Exactly what happened to me - (drewk) - (2)
                 One other thing though... - (admin) - (1)
                     Student loans are already a deduction. - (inthane-chan)
             Also, keep in mind property taxes. - (a6l6e6x) - (1)
                 Interesting facet of Michigan tax law: - (admin)
         What doe s Marysville look like for housing and how far is - (boxley) - (1)
             One big problem. - (inthane-chan)
         Beware the bubble - (marlowe) - (16)
             Less chance of a bubble in residential real estate - (drewk) - (11)
                 Seattle == Silicon Valley/2 - (inthane-chan) - (6)
                     We're looking to sell soon. - (Brandioch) - (5)
                         Hey, where do you work, anyways? - (inthane-chan) - (4)
                             One Convention Place -NT - (Brandioch) - (3)
                                 LMAO! - (inthane-chan) - (2)
                                     Week after is the soonest. - (Brandioch) - (1)
                                         Need contact info... - (inthane-chan)
                 Nearly 100% chance IMO - (ben_tilly) - (3)
                     Re: Nearly 100% chance IMO - (deSitter) - (2)
                         Yes -NT - (ben_tilly) - (1)
                             Econ Laureate LRPD: Unintended consequences -NT - (Ashton)
             Commented on that in my original post. - (inthane-chan) - (3)
                 Doesn't add up - (drewk) - (2)
                     The houses aren't what's causing it. - (inthane-chan) - (1)
                         OK, I get it. In the 70s that land would be 2 dozen lots. -NT - (drewk)
         You need to compare it to the alternatives. - (Another Scott) - (2)
             Something else re: condos - (drewk) - (1)
                 To add another twist: - (admin)
         Don't - (ben_tilly) - (2)
             Here's the trick: - (inthane-chan) - (1)
                 Quick questions to ask yourself. - (ben_tilly)
         Totally depends on when and where - (wharris2)
         Rent is a ripoff - (tuberculosis) - (4)
             Re: "mortgage payments are equity" - (a6l6e6x) - (2)
                 Thought about it - (tuberculosis) - (1)
                     No need for 20% down to avoid PMI. - (Another Scott)
             Don't forget to factor in: - (wharris2)

Go now (but sparingly) and keepeth this monstrous creation from leaving ruts in My green fields and tundras; aimeth thine albatross within the scriptured dinosaur tracks provided by Mammon.
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