How did you first learn of the National Housing Bubble?

[synthetik]

My story: It's just pure dumb luck that my wife and I didn't get involved in the housing bubble.

My wife and I had been married for 4 years and being from LA, she absolutely hated my hometown of Tampa, FL and couldn't wait to get the heck out of there. We decided that once she was finished at USF we'd move and although Seattle was our first choice, I ended up choosing a business opportunity in San Diego.

While I had a fair amount of equity built up, a similar home in San Diego would have cost about $1.2M or more. On top of that, we moved there with no jobs so the idea of buying a home was a little nutty.

My wife found work after about a month with a .com type company while I tried to make my new business and partnership work. I was the $ guy and bailed on the project after 4 months. I started another business in 2004 and by mid year things were getting to the point where we started to think about buying another house. After all, we didn't want to be PRICED OUT FOREVER.

We met with a realtor who hooked us up with a mortgage broker. Evidently we could swing a $650K home with no money down, etc. The other 4 homes I'd purchased during my life, all had at least 20% down and I put 70% down on my last home.

In the end, I just decided I'd have too much anxiety trying to make the payment so we didn't do it.

During 2003 and 2004 the most common conversation in San Diego was about real estate. No matter where you went, the constant chatter about equity gains in SD, Vegas, Arizona and even Colorado could be heard. I knew something strange was going on and I often talked to my wife about it.

Around Sept 04 my wife sent me a link to Rich Toscano's blog, , a San Diego based bubble blog. From there, I linked to and the rest is history.

Was I smart or lucky? I'd say I'm lucky I have a smart wife.

Would I have been able to recognize the bubble had I purchased a home? It's hard to say... I'm just as good at deluding myself as the next guy.

How about you? How and when did you hear about the bubble?

[biliruben]

I started shopping for a house in 2003. Prices seemed out-of-whack even back then, and I started to look for historical fundamentals to re-assure myself that I wasn't making too much of a mistake financially if I bought.

I wrote a long blog post detailing my research, which unfortunately appears to have been lost in the ether.

Data was scarce back then, but I have found a copy of the post with what data I had:


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In my quest to go into my first-time home buying adventure as well educated on the process as I can stand while still maintaining job and social life, I began to ponder the security of an investment in bricks and mortar (or wood and stucco, as my wife prefers). The reason for this is that I live in Seattle.

In Seattle, housing prices have been rising at an alarming clip for nearly 10 years now, accelerated more recently by extremely low interest rates. I began to ponder whether we were seeing a real estate bubble. When I began discussing this, most of my home-owning friends laughed it off, as they are currently enjoying the affects of stratospheric appreciation, and preferred to buy into the conventional wisdom of home-ownership as a safe investment. It's not like they are going to sell even if they are worried, because the transaction costs are too high. As far as expert advice goes, the wielders of the pertinent data, those in the real estate industry, are the very same people who have strong economic interest in perpetuating the rise in housing prices. To them, "bubble" is a dirty word.

I then talked to a friend who has been looking for a first home in this market for a couple of years now (I know, it's a tough market), and recently gave up completely. She pointed me to the May 31st issue of The Economist. What I read was a sobering perspective on world housing prices.

There are a number of reasons The Economist delineates for housing prices to potentially be in a bubble situation, or by definition the expectation of rising prices based on appreciation in the recent past:

- The absence of short-selling (Q: can you short REITs?)

- Construction lags. This is particularly alarming in Seattle, where I see a 57% increase in building permits from just a year ago in King County:
Washington Center for Real Estate Research

- The higher the housing prices go, instead of the lenders exercising restraint and being more conservative in lending, their perverse incentives combined with the rise in value of collateral on existing loans and bank owned properties, makes them willing to lend more and pull out all stops to qualify chumps like me. They are offering me something called a 80-15-5 30-year fixed, which is basically two loans, the second to help me gain the 20% I need to avoid mortgage insurance and keep my monthly payment down near something I can afford (sort of) with only 5% down.

This steep housing appreciation is not uniform throughout the United States. We mainly see it in particularly attractive cities. Seattle is one of the worst, with nearly a 30% chance of home price decline in the next 2 years. The only metropolitan areas that are worse are San Jose, Portland and Detroit of all places.
PMI Mortgage Insurance Co. (warning: 750K PDF - page 4)

I came away from my research feeling like a home purchase at the current time has the potential to be an investment disaster. I don't really look at a place to live as an investment, per se; I just don't want to lose every dime of my mortgage down payment and then some, if and when the potential bubble bursts and my mortgage is larger than the decreased value of my future home.

If you aren't particularly concerned about my future financial prospects, the broader concern is that, in staving off a much steeper economic bust after the stock-market decline by dropping interest rates, we merely delayed the inevitable by spurring a refinancing boom and extending individual debt, and when the real estate bubble bursts, given the current close proximity of base interest-rates to 0%, we could see our economy drop into a deflationary situation with no macro-economic recourse to pull us out of it.
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I did eventually scrape up enough for 20% down, and bought almost a year later, in May 2004. I bought much less house than I could have qualified for, and thought I over-paid by at least a 25% (paid 250K on a SF house I thought wasn't worth 200K).

Since then, obviously things have gotten much crazier. I wouldn't be able to comfortably buy now, given the same situation I was in then, and I would likely choose to rent.

I have been contributing to a few bubble discussions since then, though this has been my main outlet since Tim set this sweet blog up.

[twistjusty]

[EconE]

[Alan]

[EconE]

What is your father going to do after he sells?

Rent.

How does the loss of cheap property tax compare to his equity gain? How far will prices need to drop to make buying back into the market worthwhile with the higher property tax?

I believe Prop 13 should be either eradicated or adjusted somehow as it has worked itself into a system that is way out of whack. My Father feels the same way also....that it should benefit people that actually need it...not retired corporate executives. I think that it's 3rd rail status will be revoked sooner or later...so...I wouldn't assume that all will be rosy for the people that are protected under prop 13.

[Alan]

I stated in another post that I think prop 13 might be one of the reasons property values have been sustained in CA for so long. If he thinks it is going to be repealed then sellings sounds like a very smart move.

[refractedthought]

All it took me to recognize the bubble was one face-to-face encounter with a permabull specuvestor. All that talk about risk-free easy money turned the alarm bells on in my head immediately. After that I did my own research and concluded that the whole country was f'ed.

[Catherine Darrow]

It was a long awakening, for me. I put "2004" in the poll, but depending on how you call it, it could've been a year earlier or later.

The first sign of trouble came when we'd been married a couple years, living as poor grad students in an apartment, and I started dreaming about getting a house. Nothing fancy, really - like maybe one of those cute little cottages with a tiny yard that Need Lots Of Love. Surely an itsy bitsy house couldn't be that much, right? Cue realtor.com telling me what a funny little girl I was. That sent my spidey sense tingling a bit - if tiny crappy houses are that much, who the heck can afford a house to raise a family in? Strike 1. That was 2003 or 2004 I think.

Strike 2 came when I first got a job as an engineer - and a good one - and my husband and I started making plans about where to live. My family had recently moved, and now both our families were in the midwest. We wanted to live close, so we eyeballed houses in Denver, just for planning purposes. And promptly realized that they were extremely affordable. That tiny crappy fix-er-up I'd wanted? Less than my annual salary. Big New House For Big Family? We could totally swing it. Heck, save aggressively for a couple years and we could almost buy it outright.

I quickly flipped the page back to Seattle to see if the same was true here, but no dice. Apparently a mansion in Denver is worth about the same as a mud hut in Seattle. We still couldn't afford *anything*. We promptly resolved to rent, save aggressively for a couple years, and then move to Denver, which is where we'd rather live anyway. This was 2005.

I'd heard that big cities were supposed to be expensive, but this was rediculous. I mean, it's not like Denver is that much different from Seattle in terms of size and opportunities. Saving and moving seemed obvious. In fact, why wasn't everyone doing that? I suspected again that something was wrong. Strike 2.

Throughout that year I began actually watching the housing market - planning to buy in the eventual future, I figured I should get a better feel for how it worked. And as I thought about things, I began to put a lot of stuff together very quickly. (1) We can afford a pretty nice apartment, with tons of money to spare. Seems like we ought to be able to afford a crappy house. But we can't. That seems . . . odd. There ought to be some sort of in between transitional product, right? They should be pretty comparable, right? (2) Actually, come to think of it, we're pretty well off - I make more than a lot of friends and neighbors and relatives all of whom are homeowners, and I can't afford a house. What gives? (2) And actually, come to think of it, who the heck is buying all of the houses? Where do all the normal people live???

More complaints confirm it isn't me. My brother in law has trouble with his house and then more trouble with his house and then a little more trouble. My co-worker is crying about how she can't afford the low-end condos. My *boss* is considering buying a townhome full of 70's shag. And she's not your run-of-the-mill manager, either--she's gotta make twice what I do.

As soon as I saw a suggestion somewhere that there was a housing bubble, it all clicked. The market that had smelled so funny for years now made sense. That was maybe a year ago. If not immediately convinced, I definitely acknowledged that it was a strong possibility. Any desire I had to buy a house evaporated overnight.

The final straw actually came recently when someone on that blog pointed out that rent prices were out of whack with housing prices. For some reason, I'd never thought to check that - I'd just always assumed those markets would pace each other. A quick run by Craigslist confirmed it.

That cute little crappy house I'd wanted? Rents for about the same as my apartment. Perhaps a bit more, $200 or $300 more. Psshaw. Shopping around a bit more, I saw nice houses go by at decent rents. And it suddenly dawned on me that if I wanted to, I could live anywhere in Seattle. Fancy condos downtown? Check. I could make rent. 5 bedroom houses? No sweat. Fancy Vacation Homes On The Water With Stunning Views? Ahhh... I might not want to pay for it, but the mechanics says I could afford to live there full time. (Not that I'm going to - still sticking to plan A, but still . . .)

Quick check on the real estate market and . . . yup, I still can't afford the mud huts.

That's it, I decided. That maket's hosed.

[Alan]

That has to be the most effective common sense post I have seen here in a long time.