Real Estate Bubble Debate

Will price corrections revive slumping market?

After a series of front page stories on the real estate bubble in the Boston Globe this year, their parent company, The New York Times, put this headline on page one today: "Slowing Is Seen in Housing Prices in Hot Markets."  Citing statistics about slowing sales, rising inventories, and flattening prices in Boston and elsewhere...

The question remains whether all of this represents a momentary cooling off of some overheated housing markets, or it presages a more pronounced downturn that would end a decade-long boom.

Some economists and commentators have for years predicted the bursting of a real estate bubble, and previous slowdowns have turned out to be relatively brief pauses before prices started accelerating again.

But with mortgage rates now rising, the cost of gasoline hovering at or near $3 a gallon and house prices in some areas out of reach for many families, brokers and analysts said they thought that this slowdown could be the real thing.

Yesterday's blog post foretold one of the reasons for the slowdown:  "sellers still expect to reap double-digit price appreciation each year."  Leading listings agents quoted by the Times say overpricing is causing the market down to slow down, but that's not even on the short list of factors economists at the National Association of Realtors are watching to identify markets headed for a bust.  While we've been tracking expired listings as a leading indicator, and others in Massachusetts are watching record high inventory levels, one of the most comprehensive list of factors we've seen on why the housing market is headed for a correction or crash is coming out of San Francisco. 

What's your take?  If sellers adjust their price expectations, will the market take off again or more serious fundamentals leading to a housing recession?  Post your comments or call 617-876-2117 to record a 1 to 3 minute sound bite (which we may use in a future podcast).

Homebuying plans plunge, are housing prices next?

Stunning new finding today.  According to monthly University of Michigan Survey of Consumers, consumer confidence dropped to it's lowest point in 12 years, pulling homebuying plans to their lowest point in a decade.  According to Inman News, "The decline in home-buying plans was due to an increasingly negative reaction to high home prices, as consumers expressed in September the least favorable assessment in nearly a quarter century." 

How did the housing market go from record high real estate searches on Boston.com in March of 2005 -- seven million page views generated by one million homes for sale searches -- to no-shows at suburban open houses, and now this news? 

Have inflated housing prices reached a historic turning point that will see prices decline for years or is this just the annual October scare made worse by gas prices doubling in the aftershock of Katrina? Consumer confidence slipped to a nine year low on Halloween 2002 just before the housing market entered into the second wave of the current price surge.  So, no big surprise that the relentless press coverage of the real estate bubble has pushed homebuying plans down again this time of year, right?

If, on the other hand, you believe that prices in 2003 to 2005 were bloated by opportunistic buying driven by fears of rising interest rates, investors, and interest-only loans, you may be patting yourself on the back for not buying this Spring at the top of the market and wondering how far prices will fall as interest rates rise.

Should you sit out the Fall market, or take advantage of the "let's make a deal" price slashing that begins this time of year while interest rates are still near forty year lows?  We'd like to hear your opinion.  Click on "Comments" below or call 617-876-2117 to record a one to three minute sound bite that we may use in a future podcast.

Are lizard brains driving "irrational exuberance" in real estate?

The brain is hardwired to expect patterns to repeat themselves, says Harvard Business School professor Terry Burnham author of Mean Markets & Lizard Brains:  How to Profit from the New Science of Irrationality, which may explain why many smart people to want to buy homes at irrationally high prices.  Publisher John Wiley & Sons writes: 

"In contrast to old-school assumptions of cool-headed rationality, the new behavioral school embraces hot-blooded human irrationality as a core feature of both individuals and financial markets. The 2002 Nobel Prize in Economics was awarded to scholars of this new scientific approach to irrationality. ...The human brain contains ancient structures that exert powerful and often unconscious influences on behavior. This "lizard brain" may have helped our ancestors eat and reproduce, but it wreaks havoc with our finances. Going far beyond cataloguing our financial foibles, Dr. Burnham applies this novel approach to all of today's most important financial topics: the stock market, the economy, real estate, bonds, mortgages, inflation, and savings. This broad and scholarly investigation provides an in-depth look at why manias, panics, and crashes happen, and why people are built to want to buy at irrationally high prices..."

How should smart home buyers protect themselves?  Make every single financial decision rationally, not emotionally, says Burnham.  Analyze your own behavior, find out where your emotional weaknesses are, and act in rational ways to counteract them.  Most economists believe that people are rational but over the past 20 years they have found that is not the case.  People make all kinds of mistakes, driven by emotional non-rational factors whether they are evaluating stocks, bonds, or housing.

When asked by The Motley Fool if he would buy, sell or hold real estate right now, Burnham said, "Real estate is not a bubble, but it is overpriced.  ...the reason it has gotten there is that people have been fooled by low interest rates."  Burnham's bottom line advice in the radio interview today:  "Don't buy, I say "hold" as I do in the book."  Chapter Nine, entitled "Live in Your Home; Make Your Money at Work" includes a seven page subchapter on the housing bubble.  You can view the table of contents, index, and reader reviews on Amazon.com.  I haven't read the book or the section on the housing bubble yet but am eager to do so. 

What's your take -- is the irrational exuberance in the housing market being driven by our lizard brains or something else?