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:
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.
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.