Posted by Tom-FL on September 13, 2005 at 21:26:39:
I think this is it.
http://www.nationalcity.com/content/corporate/EconomicInsight/documents/finalreport.pdf
A Real Estate Bubble Sign? - Posted by Tokolos (FL)
Posted by Tokolos (FL) on September 11, 2005 at 24:18:15:
Prices have been soaring for seven years now on the coast. Just when you think prices on the coast can’t go any higher, they double again - in just two to three years!
Most people only see the last seven years, and they don’t know the big picture and the end truth… that for the last quarter of the 20th century (1975-2000), Florida home prices were flat, when you adjust for inflation.
It’s not hard to see how a regular home in a regular neighborhood where I live has doubled from $200,000 to $400,000 - as incomes have risen, the population here has risen, and mortgage rates have fallen. But is that zero-lot line home in the cookie-cutter neighborhood really going to double to $800,000? I realize that anything in real estate investing is possible. But two things concern me:
The first thing that concerns me is the basic economics. It’s reaching a point where most people can’t afford the median home. The second thing that concerns me is the strong belief that prices can’t fall. The Japanese thought the same thing in the late 1980s when their real estate bubble burst, and they’re still suffering.
Should I be worried?
Re: A Real Estate Bubble Sign? - Posted by worry
Posted by worry on September 11, 2005 at 18:19:31:
Yes, especially if you’ve overextended yourself by purchasing or borrowing on hyper-inflated properties or you’re counting on appreciation to bail you out of borderline properties.
The Japanese had a booming economy due to their successful exports. They were exporting way more than they were importing. They had so much excess money that they went out to buy up the world. Their own real estate prices soared through the roof. Yet it all crashed due to an overheating of their economy due to too many years of trade surpluses, rising international reserves, and an overbloated money supply. Why did all that money make them go bust? Too much money in the system brought in by trade surpluses led to too much available credit in the country. It was the capital inflows into the banks that led to Japan’s ultimate fall because credit bubbles ultimately wind up in deflation. As credit expanded, prices of homes inflated rapidly, and there was a positive wealth effect. But prices rose so much faster than actual incomes and eventually people could not pay the interest due on their assets and bankruptcies followed and credit contracted and home prices plunged.
The U.S. is having an opposite scenario with similar results. We are importing more than we are exporting. Our deficit is huge. We pay for the imports with paper dollars. What do the other countries do with those American dollars? They buy U.S. assets, U.S. Treasury bonds, Fannie Maes, U.S. corporate bonds, etc. or else their money would just sit there not earning much return. So there is a huge influx of extra money into the U.S. banking system, etc. This drives up our stock prices and our real estate prices and pushes down interest rates as more credit is available. So, similar to what happened in Japan, there is an initial wealth effect. Assets such as the stock market and the real estate market experience bubbles.
Likewise it will eventually result in economic overheating that ends in financial distress, bankruptcies, credit contraction, and deflation. At some point the U.S. will have to go into a huge economic readjustment because all credit bubbles eventually burst. The U.S. will choke on its own debt. We may have a few more years before that happens and maybe something will be done to ease or avoid the worst of the process. Japan’s bubble and the Asian bubble were bad but the bursting of the U.S. bubble will be enormous and will affect many other countries around the world since the economy has gone global. The whole global economy will pop. Think the 1929 Crash and the Great Depression. History has a funny way of repeating itself.
More on this subject in “The Dollar Crisis” by Robert Duncan.
Re: A Real Estate Bubble Sign? - Posted by John B. Corey Jr.
Posted by John B. Corey Jr. on September 11, 2005 at 09:59:30:
Tokolos,
I agree with the tone of your post.
If a person understand math they know that prices can not keep doubling unless incomes are doubling. At some point people run out of money. Even if all of FL was to be purchased by folks up north who have equity there will still be a limit. When you factor in that someone has to be the workers for the retirees on fixed income then we see that we will top out based on salaries.
Multiple markets have bumped into such limits in the past. Prices will stall or fall for a period. Then we will see a rise when prices are more affordable.
CA proves that prices do not have to be ‘reasonable’ compared to the median income. CA has certainly seen flat or falling prices in the last 10-20 years depending on which part of CA you are looking at.
John Corey
Chelsea Private Equity LLC
Clarification … - Posted by Robert Campbell
Posted by Robert Campbell on September 11, 2005 at 11:37:19:
Hello John,
>>>>>>>>If a person understand math they know that prices can not keep doubling unless incomes are doubling.
Actually, just like with security values, there is “leveraged” P/E ratio for housing values that determines when asset prices - in this case houses - are above their fundamental (and sustainable) economic norms.
The P/E ratio for houses is calculated by dividing the median price of a home in a given area by the median household income. This ratio, of course, varied from one area to another, depending on historic preference of one area over another.
U.S. housing prices, for example, have carried an average P/E ratio of 2.8 since 1965.
In contrast, Southern California housing prices have exhibited an average P/E ratio of about 4.0 since 1965 … which is a significant premium compared to the historic 2.8 P/E ratio for the U.S. as a whole.
There could be areas that require incomes to double to sustain a doubling of housing prices (North Dakota, maybe - grin), but this is generally not the case for most areas in the United States.
These P/E ratios for any given housing market is a telling sign as to whether a bubble exists.
Robert Campbell
Re: Clarification … - Posted by John B. Corey Jr.
Posted by John B. Corey Jr. on September 11, 2005 at 12:27:53:
Great analysis.
The use of the P/E as you call is it common for the RE market in the UK (another place where I invest). Actually they use something slightly different but the principle is the same.
There is a historical relationship between income and prices. The ratio will vary in shorter segments of time but will tend to the norm when given a longer time cycle.
You can see it in another way. The Debt to Income ration and the salary vs. mortgage payment ratios are examples of how what someone makes drives what a lender will lend. If someone has a lot of equity they can buy a larger house. Most people are closer to 80% LTV or more when they buy so the market is driven by incomes and not by the use of cash when purchasing.
Robert, is there any particular place you are getting your data from to compute the ratio?
John Corey
Chelsea Private Equity LLC
Re: Clarification … - Posted by Jack
Posted by Jack on September 12, 2005 at 23:18:13:
The National City Bank data that has been sited a few times on this site is entirely based upon the Price/Income ratios that you referenced. It goes back 20 years and covers 100s of metropolitain areas. Though I am sure some corners are cut in the data processing.
Re: Clarification … - Posted by Robert Campbell
Posted by Robert Campbell on September 12, 2005 at 08:40:16:
Hi John,
>>>>>>Robert, is there any particular place you are getting your data from to compute the ratio?
Sorry, but this really isn’t something that I closely follow and keep current for different areas in the United States.
I do analysis on the Southern California housing market and write a Timing Letter for real estate investors. Along with other key trend indicators, I use the principle of “reversion to the mean” to give strategic market timing advice.
I find the subject matter fascinating.
Like me, it sounds like you follow the approach of data first, conclusions later.
Best wishes,
Robert Campbell
Re: Clarification … - Posted by whyK-CA
Posted by whyK-CA on September 12, 2005 at 10:54:05:
Robert,
Do you have any idea who migh compile regional median household income? I found 2003 inflation adjusted data from Census, but I could’t find 2004 non-inflation adjusted one (I assume that’s what you use.)
Thanks for your help in advance.
Thanks.
Re: Clarification … - Posted by John B. Corey Jr.
Posted by John B. Corey Jr. on September 12, 2005 at 10:46:11:
Robert,
You give me more credit than I deserve. I read a lot but I do not focus as clearly as you do on the indicators. I am definitely a numbers guy when it comes to investing. I would not say I spend much time on the marco side as I focus on the deal numbers and long time trends.
Would it be possible to get a sample of your letter? You have me very curious about what you do.
John Corey
Chelsea Private Equity LLC
Re: Clarification … - Posted by Robert Campbell
Posted by Robert Campbell on September 13, 2005 at 11:18:57:
I would love to know where to get that current data myself … because I don’t.
I know there is a non-government website that has it … and I’ve seen it and was impresses with it … but I can’t remember the URL.
If you or someone else can give you and I a good source for the current city-by-city median household income figures, I give them a free copy of my book Timing the Real Estate Market.
Any takers?
Robert Campbell
Re: Clarification … - Posted by Robert Campbell
Posted by Robert Campbell on September 13, 2005 at 11:10:52:
John,
Re: Getting a sample of issue of The Campbell Real Estate Timing Letter.
I sent you an email about your request. Please look for it.
Thank you for your interest in my work.
Robert Campbell