USA Real Estate Bubble IF Any
Zeppelin Real Estate Analysis Limited
friend from the USA has emailed me an article which author-analyst
thinks there is now a real estate bubble in the USA. Apparently my
friend does not feel there is one judging from his tone but nonetheless
he asked for my views. The following is abstracted from the reply I gave
(i.e. your humble author) have been reading much about USA and even global
real estate bubbles in the local and foreign media. Judging whether there
are bubbles is always a difficult task and almost always involves a bit of
subjectivity which in turn relates to the analyst's past experience,
investment behavior, and / or even personal values.
Being thousands of miles away from the USA, I am handicapped in not
being able to really 'feel' the market sentiment e.g. whether people
talk about real estate in typical lunches, dinners, or family-friend
gatherings etc. Nonetheless, based on the information and data I have read
to date, I am inclined to think there is a bubble in some of the real estate
markets in the USA. But then again, having bubbles does not automatically
translate into immediate dooms (and bubbles can last quite a while), and
having NO bubbles does not automatically mean that prices will ONLY go up.
Yet I do think some form of crashes will happen assuming things
continue along the current path and that there are real estate bubbles. This
may include other markets such as those in Europe but I will guess the USA
ones will have more global impact. Apart from the usual rationale, some of
my reasons for expecting a crash are as follows:
a) Americans are new to variable rate mortgages and I doubt if those
using them really understand its nature = a double-edged sword unless
they instill-buy some form of cap on the interest rate in the mortgage
agreement. The panic (when and if a crash occurs) will be higher than IF
they had just used fixed rate ones. [Note: this is because fixed rate
mortgages offer some degree of financial payment certainty at least till the
expiry of the term, while variable rates may imply immediate significant
jumps in regular mortgage payments which could be more than what the
household budget has allowed for].
b) A crash does NOT have to have a 'banana republic-type economy' to
happen = e.g. the Hong Kong real estate bubble in the late 90s*. If you
look into the overall wealth of Hong Kong in the 7 years from 1997 to 2003,
you would notice that little had actually changed i.e. people were still
generally employed [it was the 'threat' of being laid off that counted] and
people still had some HK$3,000B placed with the banks [granted say 1/3 might
not be really Hong Kong's own money being an open economy but that still
left a big sum]. They were just not spending much, let alone buying real
estate. Hence, bubble nay-sayers citing how healthy the USA fundamentals
are, assuming if so, are misled.
c) A crash (at least in real estate) needs to involve only a small
portion of the overall real estate market stock to be 'traded' in
'desperate' pricing to set off the event = how deep and long-lasting the
impact depends on a variety of conditions including the 'sensitivity'
(degree of response, reaction and interaction etc) of market participants to
such market events i.e. how easily (or not) panicked or manipulated they
are. In short, the perils of so-called 'market price'. You may not agree to
it and you may decide not to sell your home at that particular 'market
price' at the time, but should you wish to refinance or upgrade or relocate
etc, you are bound by what the market is willing to offer at the time. Based
on the article emailed, it does NOT occur to me that spending 10-30% of your
disposable income on housing mortgages or having a mortgage to home value
ratio of 35% to 70% is overly worrying, BUT those families who leverage
themselves to the fullest (e.g. having 100%+ mortgages, owning 2+ homes etc)
are a catalyst to a crash, and it will be their desperate transactions, when
and if occurred, which will set the market price and the market tone.
d) Americans spending beyond their means and doing it with borrowed money
(e.g. from China) = despite all economic theories and financial wizard
strategies that have evolved since memory seeking to create new paradigms,
common sense tells me that such a condition cannot last forever. Something
has to give, be it via an economic crisis, a financial crash, or even some
form of war (if history is any guide).
would be of interest and use.
Note* = Hong Kong real estate
prices dropped BY (not to) almost 70% from the 1997 peak levels to the mid
2003 troughs. Prices have since recovered some 60% on average. This steep
drop was in part due to the HK$ to US$ peg (HK$7.78 = US$ 1.00) but that
alone could not have explained the whole story.
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