7 ms·

The ten-year anniversary is a good moment to look at the Case-Schiller index today and compare it to the peak of the bubble in 2006. https://fred.stlouisfed.or

The ten-year anniversary is a good moment to look at the Case-Schiller index today and compare it to the peak of the bubble in 2006. https://fred.stlouisfed.org/series/CSUSHPINSA https://fred.stlouisfed.org/series/CSUSHPINSA I think there will be some great deals in real estate by 2021.

jeffreyrogers 8y ago
Maybe, but it's hard to predict. I don't think real estate prices are going to crash unless mortgage delinquency rates go up dramatically, which hasn't started yet: https://fred.stlouisfed.org/series/DRSFRMACBS https://fred.stlouisfed.org/series/DRSFRMACBS At least not nationally, maybe in some metro areas it has. Mortgage lending standards have started to loosen though, but I think it'd take a while for that to have a substantial effect. Housing prices tend to increase because good land is scarce in most places people want to live.
- ra1n85 8y ago
  >prices tend to increase because good land is scarce in most places people want to live. Prices are driven by demand. A crash will inevitably reduce demand. Just like equities, real estate involves speculation. It may not be as bad as 2008, but we will still see a significant drop in real estate prices.
  - jeffreyrogers 8y ago
    I don't think this analysis tells the whole story because it doesn't explain where the crash would come from. Demand is high (and likely to remain high) because good land is scarce. Developers can't create large amounts of new housing because of zoning and also because if they create too much they won't be able to make a profit (they take out loans to finance their projects too). So supply is likely to be less than demand for the foreseeable future in most locations. Supply could increase rapidly if the mortgage delinquency rate rises rapidly. There aren't signs of this happening soon that I'm aware of, although mortgage lending standards have lowered a bit. I don't see good evidence for an imminent crash, and saying prices will decline if a crash occurs is tautological.
    - ra1n85 8y ago
      House prices are the most expensive they have ever been relative to average income in 41% of markets [1]. Further, in 83% of markets the ratio of home price to income is growing. For the majority of US counties, we are seeing prices increase in both absolute and relative terms. At the same time, wage growth is nil and household debt has now exceeded 2008 levels [2]. We can argue about the implications of the trends, but the gist of my point is that an increasingly smaller pool of individuals is capable of affording houses in the majority of US markets. If the demand of that small pool of individuals, which is strongly tied to the health of the industry providing their wages, declines then we are in for a significant correction in home prices. [1] https://www.attomdata.com/news/market-trends/home-sales-prices/home-affordability-report-q1-2018/ https://www.attomdata.com/news/market-trends/home-sales-pric... [2] https://qz.com/1280927/us-household-debt-has-hit-an-all-time-high-of-13-2-trillion/ https://qz.com/1280927/us-household-debt-has-hit-an-all-time...
  - dragonwriter 8y ago
    > A crash will inevitably reduce demand. No, a crash will occur iff demand collapses. You've reversed cause and effect.
    - mcguire 8y ago
      I'm not sure about that. The direct cause of the 2008 crash was unavailability of loans once the risks of mortgage-backed securities became apparent, no?
      - dragonwriter 8y ago
        No, the direct cause was the drop in demand. Cutting off the spigot of loans was itself a direct cause of the decrease in demand: less financing means less quantity demanded at any given price. Demand, remember, is the function mapping price to quantity demanded.
        ra1n85 8y ago
        Credit was no longer available as a result of cascading failures triggered by defaults. The house of cards came tumbling down.
        dragonwriter 8y ago
        I don't disagree; the crash in the housing market was a direct result of a demand decrease which resultrd from credit tightening, which was itself a result of the wave of defaults which both revealed that current lending practices were unsustainable (which on its own would have led to tightening) and collapsed the huge market for mortgage-backed securities (which, itself, would have led to tightening). And so, as you say, the whole house of cards collapsed.
- gizmo385 8y ago
  As a side note, holy hell I didn't realize that the delinquency rate made it up to 11.5% after the financial crash... As someone in my early 20s, I remember that the crash was bad, but it's hard to appreciate the scope of it sometimes.
- germinalphrase 8y ago
  My wife and I have been looking to purchase a house, and it’s amazing how many people tell us “it’s a terrible time to buy. Don’t do it”. That’s fine advice, as far as it goes, but what would we be wait for - another crash? This chart does suggest that prices are inflated, but what do I do with that information? Wait for a downturn in two years? Ten?
  - derekp7 8y ago
    The best advice I can give you is to not buy more house than you need (too expensive will run the risk of negative equity). But also make sure what you get will meet your needs for at least a decade or so. And watch out for potentially high property taxes. One guy I worked with had an issue where his family outgrew the house he bought, but he couldn't get enough out of it for a down payment on a bigger place (even though the bigger house was cheaper than what he bought his small 2-bedroom for). So you don't want to get into this situation either. Another situation that just happened to someone else I work with, she bought a house that she thought was reasonable. However her property taxes took a bit of a jump (the previous owner had lower taxes due to some senior discount). And it will be a few more years before she gets enough equity in it that can be used towards another house.
  - lazerpants 8y ago
    This is a complicated question, depending on your cash position, where you want to buy, alternatives to buying, risk tolerance, future interest rates, and forward plans (5-10 years). No one else can tell you that you shouldn't buy right now, if you can afford a house, need a house, and are willing to potentially be stuck under water for 5-10 years if prices go down, there are good reasons to purchase in this market. Just know going in that inventories are at historic lows, prices are very high, terms for purchasers are bad (in many markets), and many people are going to regret rushing in and purchasing homes in haste because they are worried about missing out, due to how quickly homes are selling.
  - germinalphrase 8y ago
    Reasonable advice. Thank you both.
germinalphrase 8y ago
Can anyone tell me what happened/changed in 1990/2001 to influence the following acceleration of prices?
- appstateguy 8y ago
  It was probably the expansion of financial instruments like Collateralized Debt Obligations (CDOs) [0] along with shadow banking mortgage companies (like Country Wide [1]) that simply sell mortgages to banks that in turn securitize the mortgage into CDOs. [0] https://en.wikipedia.org/wiki/Collateralized_debt_obligation https://en.wikipedia.org/wiki/Collateralized_debt_obligation [1] https://en.wikipedia.org/wiki/Bank_of_America_Home_Loans https://en.wikipedia.org/wiki/Bank_of_America_Home_Loans
  - phyller 8y ago
    This is the correct answer, I think. The people who made the mortgages were no longer the people that owned the mortgages. The banks didn't even hold on to them, they sold them in tranches to investors. So no one in the actual industry had any incentive to do anything other than close mortgages. People could get no down-payment mortgages, could get mortgages with bad credit, could get mortgages on houses they couldn't afford, because all the mortgage originators just fudged the paperwork. No one wanted to find a reason to not provide the mortgage. Everyone being able to buy a house heated the market up, and as people got used to the market going up and up, it was seen as a good investment, and more people bought more expensive houses they couldn't afford, and mortgage originators did more shady things to make it happen. A lot of these mortgages were adjustable rates that started at a really low rate, and in 3 years could shoot up to a much higher rate. An optimistic consumer wouldn't worry much about that. But when the time came, some people couldn't pay the crazy increase in their mortgage. The foreclosures coming onto the market depressed the market. So the bubble finally popped, and someone owned a house that they bought for $750,000 with no money down, an adjustable mortgage for the whole $750,000 that started at 4% and in three years shot up to 8%, and when that happened the house could only be sold for $450,000. So they just stopped paying the mortgage and walked away. The foreclosures further depressed prices, created a very nasty cycle. I worked in land records at the time, and the standards for the mortgage originators were just horrible. Not bothering to record mortgages in the correct town, not bothering to do a lot of things. There are a few movies that are really interesting that described what happened, real life thrillers IMO. "Margin Call" is awesome, "The Big Short" explains what happened really well and is pretty funny at times, and "Too Big to Fail" is from the regulators point of view. It's kind of awkward but still really interesting.
frgtpsswrdlame 8y ago
2008 didn't happen because house prices were high, it happened because bad mortgages were labeled as good and then financial institutions placed levered bets on them. Downturns have reasons - Savings and Loans issuing long-term fixed rate loans at low interest rates, investors finally waking up to the shaky financials of dot-coms plus some accounting scandals, and mortgage defaults finally breaking through. If we want to predict the next recession we have to point at a reason not just high prices.
- padobson 8y ago
  Love this. I can't see a specific bubble yet. As someone in the tech industry, I'm tempted to say startups, but while the latest batch of IPOs seem underwhelming, none of them seem like out-and-out dotcom-style failures. SnapChat, Dropbox, Airbnb and their ilk seem like viable businesses to me.
  - lazerpants 8y ago
    Viable, absolutely. Are current valuations correct, though? That's not nearly as easy a question to answer. If in reality Snapchat is worth $8b, not $16b (current market value), then $8b of capital gets destroyed the moment everyone realizes the "true" value. Now, repeat that process over every highly valued and highly leveraged tech company that exists. Many billions of dollars could cease to exist in a short matter of time, which would impact bonds issued by, and loans taken out by, these companies, the bond market more generally, and the stock market.
    - padobson 8y ago
      Maybe, but how much overvaluation is there? $100 billion? $500 billion? There needs to be trillions of dollars of overvaluation and a huge amount of leverage to constitute a financial crisis. I'm open to being wrong, but I don't see that here. Valuations may cut back a bit, but as you say, it's not like these companies are worth nothing, like Bear Stearns and Lehman and most other investment banks in 2008. If there's a market correction in startups, I don't see it necessarily leading to a systemic financial crisis. More like a mild recession.
deleted 8y ago
[deleted]
phyller 8y ago
The average home price going up more than 80% from 2000 to 2006 is extreme. The average home price going up 100% from 2000 to 2018 isn't that crazy. Maybe prices will go down, maybe not, I wouldn't call it a bubble yet. There are also a higher percentage of people living in cities, and I would suspect more people renting, which can drive purchase prices up for legitimate reasons. That index is not adjusted for inflation.
- lazerpants 8y ago
  The Case-Shiller Index IS normalized for inflation. "The indices kept by Standard and Poor are normalized to have a value of 100 in January 2000." Source: https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index
  - phyller 8y ago
    I wouldn't be surprised if I misunderstood, but how is that normalized for inflation? Is the currency in January 2000 going to change in value? This chart from the same wikipedia article seems to show that inflation adjusted (dotted line), the prices are less than 30% higher than in 2000: https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index#/media/File:Case_shiller_janv09.jpg https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index#/me...
    - lazerpants 8y ago
      Hmm... After reading the index methodology, I think you're right. I had thought their indexing accounted for inflation, but it doesn't seem to based on the PDFs I skimmed.
- snarfybarfy 8y ago
  You call 100% in 18 years normal? I sure do hope that your salary also doubled in those two decades.
  - phyller 8y ago

jeffreyrogers 8y ago

Maybe, but it's hard to predict. I don't think real estate prices are going to crash unless mortgage delinquency rates go up dramatically, which hasn't started yet: https://fred.stlouisfed.org/series/DRSFRMACBS https://fred.stlouisfed.org/series/DRSFRMACBS At least not nationally, maybe in some metro areas it has. Mortgage lending standards have started to loosen though, but I think it'd take a while for that to have a substantial effect. Housing prices tend to increase because good land is scarce in most places people want to live.

ra1n85 8y ago
>prices tend to increase because good land is scarce in most places people want to live. Prices are driven by demand. A crash will inevitably reduce demand. Just like equities, real estate involves speculation. It may not be as bad as 2008, but we will still see a significant drop in real estate prices.
- jeffreyrogers 8y ago
  I don't think this analysis tells the whole story because it doesn't explain where the crash would come from. Demand is high (and likely to remain high) because good land is scarce. Developers can't create large amounts of new housing because of zoning and also because if they create too much they won't be able to make a profit (they take out loans to finance their projects too). So supply is likely to be less than demand for the foreseeable future in most locations. Supply could increase rapidly if the mortgage delinquency rate rises rapidly. There aren't signs of this happening soon that I'm aware of, although mortgage lending standards have lowered a bit. I don't see good evidence for an imminent crash, and saying prices will decline if a crash occurs is tautological.
  - ra1n85 8y ago
    House prices are the most expensive they have ever been relative to average income in 41% of markets [1]. Further, in 83% of markets the ratio of home price to income is growing. For the majority of US counties, we are seeing prices increase in both absolute and relative terms. At the same time, wage growth is nil and household debt has now exceeded 2008 levels [2]. We can argue about the implications of the trends, but the gist of my point is that an increasingly smaller pool of individuals is capable of affording houses in the majority of US markets. If the demand of that small pool of individuals, which is strongly tied to the health of the industry providing their wages, declines then we are in for a significant correction in home prices. [1] https://www.attomdata.com/news/market-trends/home-sales-prices/home-affordability-report-q1-2018/ https://www.attomdata.com/news/market-trends/home-sales-pric... [2] https://qz.com/1280927/us-household-debt-has-hit-an-all-time-high-of-13-2-trillion/ https://qz.com/1280927/us-household-debt-has-hit-an-all-time...
- dragonwriter 8y ago
  > A crash will inevitably reduce demand. No, a crash will occur iff demand collapses. You've reversed cause and effect.
  - mcguire 8y ago
    I'm not sure about that. The direct cause of the 2008 crash was unavailability of loans once the risks of mortgage-backed securities became apparent, no?
    - dragonwriter 8y ago
      No, the direct cause was the drop in demand. Cutting off the spigot of loans was itself a direct cause of the decrease in demand: less financing means less quantity demanded at any given price. Demand, remember, is the function mapping price to quantity demanded.
      - ra1n85 8y ago
        Credit was no longer available as a result of cascading failures triggered by defaults. The house of cards came tumbling down.
        dragonwriter 8y ago
        I don't disagree; the crash in the housing market was a direct result of a demand decrease which resultrd from credit tightening, which was itself a result of the wave of defaults which both revealed that current lending practices were unsustainable (which on its own would have led to tightening) and collapsed the huge market for mortgage-backed securities (which, itself, would have led to tightening). And so, as you say, the whole house of cards collapsed.
gizmo385 8y ago
As a side note, holy hell I didn't realize that the delinquency rate made it up to 11.5% after the financial crash... As someone in my early 20s, I remember that the crash was bad, but it's hard to appreciate the scope of it sometimes.
germinalphrase 8y ago
My wife and I have been looking to purchase a house, and it’s amazing how many people tell us “it’s a terrible time to buy. Don’t do it”. That’s fine advice, as far as it goes, but what would we be wait for - another crash? This chart does suggest that prices are inflated, but what do I do with that information? Wait for a downturn in two years? Ten?
- derekp7 8y ago
  The best advice I can give you is to not buy more house than you need (too expensive will run the risk of negative equity). But also make sure what you get will meet your needs for at least a decade or so. And watch out for potentially high property taxes. One guy I worked with had an issue where his family outgrew the house he bought, but he couldn't get enough out of it for a down payment on a bigger place (even though the bigger house was cheaper than what he bought his small 2-bedroom for). So you don't want to get into this situation either. Another situation that just happened to someone else I work with, she bought a house that she thought was reasonable. However her property taxes took a bit of a jump (the previous owner had lower taxes due to some senior discount). And it will be a few more years before she gets enough equity in it that can be used towards another house.
- lazerpants 8y ago
  This is a complicated question, depending on your cash position, where you want to buy, alternatives to buying, risk tolerance, future interest rates, and forward plans (5-10 years). No one else can tell you that you shouldn't buy right now, if you can afford a house, need a house, and are willing to potentially be stuck under water for 5-10 years if prices go down, there are good reasons to purchase in this market. Just know going in that inventories are at historic lows, prices are very high, terms for purchasers are bad (in many markets), and many people are going to regret rushing in and purchasing homes in haste because they are worried about missing out, due to how quickly homes are selling.
- germinalphrase 8y ago
  Reasonable advice. Thank you both.

germinalphrase 8y ago

Can anyone tell me what happened/changed in 1990/2001 to influence the following acceleration of prices?

appstateguy 8y ago
It was probably the expansion of financial instruments like Collateralized Debt Obligations (CDOs) [0] along with shadow banking mortgage companies (like Country Wide [1]) that simply sell mortgages to banks that in turn securitize the mortgage into CDOs. [0] https://en.wikipedia.org/wiki/Collateralized_debt_obligation https://en.wikipedia.org/wiki/Collateralized_debt_obligation [1] https://en.wikipedia.org/wiki/Bank_of_America_Home_Loans https://en.wikipedia.org/wiki/Bank_of_America_Home_Loans
- phyller 8y ago
  This is the correct answer, I think. The people who made the mortgages were no longer the people that owned the mortgages. The banks didn't even hold on to them, they sold them in tranches to investors. So no one in the actual industry had any incentive to do anything other than close mortgages. People could get no down-payment mortgages, could get mortgages with bad credit, could get mortgages on houses they couldn't afford, because all the mortgage originators just fudged the paperwork. No one wanted to find a reason to not provide the mortgage. Everyone being able to buy a house heated the market up, and as people got used to the market going up and up, it was seen as a good investment, and more people bought more expensive houses they couldn't afford, and mortgage originators did more shady things to make it happen. A lot of these mortgages were adjustable rates that started at a really low rate, and in 3 years could shoot up to a much higher rate. An optimistic consumer wouldn't worry much about that. But when the time came, some people couldn't pay the crazy increase in their mortgage. The foreclosures coming onto the market depressed the market. So the bubble finally popped, and someone owned a house that they bought for $750,000 with no money down, an adjustable mortgage for the whole $750,000 that started at 4% and in three years shot up to 8%, and when that happened the house could only be sold for $450,000. So they just stopped paying the mortgage and walked away. The foreclosures further depressed prices, created a very nasty cycle. I worked in land records at the time, and the standards for the mortgage originators were just horrible. Not bothering to record mortgages in the correct town, not bothering to do a lot of things. There are a few movies that are really interesting that described what happened, real life thrillers IMO. "Margin Call" is awesome, "The Big Short" explains what happened really well and is pretty funny at times, and "Too Big to Fail" is from the regulators point of view. It's kind of awkward but still really interesting.

frgtpsswrdlame 8y ago

2008 didn't happen because house prices were high, it happened because bad mortgages were labeled as good and then financial institutions placed levered bets on them. Downturns have reasons - Savings and Loans issuing long-term fixed rate loans at low interest rates, investors finally waking up to the shaky financials of dot-coms plus some accounting scandals, and mortgage defaults finally breaking through. If we want to predict the next recession we have to point at a reason not just high prices.

padobson 8y ago
Love this. I can't see a specific bubble yet. As someone in the tech industry, I'm tempted to say startups, but while the latest batch of IPOs seem underwhelming, none of them seem like out-and-out dotcom-style failures. SnapChat, Dropbox, Airbnb and their ilk seem like viable businesses to me.
- lazerpants 8y ago
  Viable, absolutely. Are current valuations correct, though? That's not nearly as easy a question to answer. If in reality Snapchat is worth $8b, not $16b (current market value), then $8b of capital gets destroyed the moment everyone realizes the "true" value. Now, repeat that process over every highly valued and highly leveraged tech company that exists. Many billions of dollars could cease to exist in a short matter of time, which would impact bonds issued by, and loans taken out by, these companies, the bond market more generally, and the stock market.
  - padobson 8y ago
    Maybe, but how much overvaluation is there? $100 billion? $500 billion? There needs to be trillions of dollars of overvaluation and a huge amount of leverage to constitute a financial crisis. I'm open to being wrong, but I don't see that here. Valuations may cut back a bit, but as you say, it's not like these companies are worth nothing, like Bear Stearns and Lehman and most other investment banks in 2008. If there's a market correction in startups, I don't see it necessarily leading to a systemic financial crisis. More like a mild recession.

deleted 8y ago

[deleted]

phyller 8y ago

The average home price going up more than 80% from 2000 to 2006 is extreme. The average home price going up 100% from 2000 to 2018 isn't that crazy. Maybe prices will go down, maybe not, I wouldn't call it a bubble yet. There are also a higher percentage of people living in cities, and I would suspect more people renting, which can drive purchase prices up for legitimate reasons. That index is not adjusted for inflation.

lazerpants 8y ago
The Case-Shiller Index IS normalized for inflation. "The indices kept by Standard and Poor are normalized to have a value of 100 in January 2000." Source: https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index
- phyller 8y ago
  I wouldn't be surprised if I misunderstood, but how is that normalized for inflation? Is the currency in January 2000 going to change in value? This chart from the same wikipedia article seems to show that inflation adjusted (dotted line), the prices are less than 30% higher than in 2000: https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index#/media/File:Case_shiller_janv09.jpg https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index#/me...
  - lazerpants 8y ago
    Hmm... After reading the index methodology, I think you're right. I had thought their indexing accounted for inflation, but it doesn't seem to based on the PDFs I skimmed.
snarfybarfy 8y ago
You call 100% in 18 years normal? I sure do hope that your salary also doubled in those two decades.
- phyller 8y ago