Here are a few excerpts from his posts.
Looking at the factors discussed in the previous four chapters, we can see that not only was there a fundamental economic reason for money to start pouring into real estate (capital flight to safety), three additional factors have been sustaining and accelerating upward price movement. … In all four cases, fundamental economic value has underpinned large increases in prices.
So, even though prices have been increasing, sometimes at breathtaking rates, in Seattle there have been solid economic reasons for them to have done so. That doesn’t necessarily mean that prices will continue to rise at their recent rates (an issue I will address in the final chapter to come), but it also means that a bubble-deflating crash to fundamentals isn’t impending. For those who have been priced out of the market, now facing still-stagnant wages and rising interest rates, that will likely be unwelcome news.
…claims of a bubble are grossly exaggerated. … there is no bubble in Seattle real estate.
I briefly mentioned in an earlier chapter than when real estate markets soften, it is usually not prices that fall but liquidity. Unless forced to sell for some reason, homeowners can continue to live in their homes if they cannot find buyers at their offering price. This effect has been observed in many different housing markets all around the world, even in very depressed markets. In the U.S., where mortgage finance plays a large part in home purchase decisions, homeowners will typically only sell at reduced prices if they can afford the implied loss of equity (which most can’t). If a sale price would fall below the outstanding principal amount on their mortgage, homeowners will usually stay put and continue making the payments rather than take such a loss. They may not like it, but they do it anyway.
That’s why it’s important to remember that real estate is not like the stock market. Even in a full-scale bear market, prices in real estate typically do not “crash” for systemic reasons.
Seattle has experienced other periods of price appreciation similar to what we’ve seen in the last five years. They’ve all been followed by decade-long plateaus before the next cycle gets going.
Oops. Apparently there were a few faulty assumptions in Mr. Wharton’s thesis after all.
Did Seattle-area home prices skyrocket for “solid economic reasons”? Nope. Are homeowners choosing to just “stay put and continue making the payments” on underwater homes? Nope. Was this boom anything like the booms of the past that just resulted in “plateaus”? Nope.
Lesson: If you base a lengthy argument on a bunch of faulty assumptions all you will end up with in the end is thousands of words that lead to a grossly incorrect conclusion.