Let’s talk residential real estate bubble, shall we? There seems to be a huge real estate bubble that seems ready to pop any day. It is global, huge, and consequently highly dangerous. At least I think so… Fueling this bubble is a confluence of politically forces, cheap money provided by central banks to attempt to reduce the economic effects of the unraveling of historic levels of speculative excess in the stock markets, the vote buying process of subsidizing the financing of homes via the financial black holes referred to as Fannie Mae and Freddie Mac, buyer’s complacency in this environment where they believe they cannot go wrong, and the increasinly widespread use of non-traditional financial methods. First, let’s talk about the cheap money. If the bubble was in the stock market, everyone would be talking about it. Instead, because real estate is not a daily auction market, and is not quotes as an index, and even more notably is thought of by the masses as an asset that never declines in value, it is not a general point of discussion. In fact, those that believe strongly in the bubble, I have found, generally do not bring the subject up due to the social price they have to pay as the one that is attempting to rain on their parade.
“If something cannot go on forever, it will stop.” ~Herbert Stein
Politicians for years have been espousing the societal benefits of widespread home ownership. The points seem difficult to contest, although not impossible. Anyone who believes that less government is better should then believe that government subsidy of any part of the economy is not a good thing. Even for the likely majority that believes this particular subsidy is a good thing, any thinking person among the group should agree that there is a limit. I content that the limit was long ago reached. Buyer’s complacency in this market is widespread. Buyer’s may not draw a parabola of probabilities, but instinctively they think in these terms. The problem with individuals’ intuitive parabolas is that they tend to be much fatter in the direction of the trend. With real estate in particular, there is a now deeply embedded culture of non-risk, characterized by common sayings such as “real estate alway goes up”, “they can’t make any more land”, or “worst case, you own the real estate”. These statements MIGHT be OK if nobody borrowed money to purchase real estate, nobody ever sold or intended to sell, nobody died, and nobody cared if they lost money. Obviously, this is not how the world works.
“It’s only when the tide goes out that you can see who’s swimming naked.” ~Warren Buffet
Finally, no discussion of the residential real estate bubble is complete without discussing the enormous increase in non-traditional financial methods, specifically variable rate mortgages. Buyers are borrowing money with payments they can barely afford as is, in a relatively favorable employment environment, and taking significant risks that there mortage payments will increase VERY meaningfully. The risk of all this is GLOBAL DEPRESSION. It has almost become my expectation. This one is bigger than the stock market crash. I cannot see a clear way out of this mess. Likely the crash in residential real estate, which I now believe will exceed 20%, will initially be fueled by higher interest rates, only to be further fueled by panic selling. In the end 20% may turn out to be way to conservative. With all this being said, let me quickly throw in the caveat that I HAVE NO IDEA, of about anything, for that matter. These are only opinions, and concerns, I suppose. However, I would have expressed similar concerns, albeit less adamantly, about 30% ago. Time will tell…
“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails”. ~William Arthur Ward