Monday, May 30, 2005

How to tell the United States is in a real estate bubble

How do you know? Because of sentences in articles like this one:

"It's possible that something fundamental in the nature of real estate has shifted over the last three years, powering the growth while tamping down the risks."

Sweet. **Maybe** **something** has changed! Ergo, nothing has changed, ergo, we're in a bubble.

I have mixed feelings about this:

1. People are going to get hurt.
2. I hope my house doesn't drop in value.
3. Will the entire economy tank?

It's the first one that is the most complicated. When I say, "people are going to get hurt," mostly I mean "people who were foolhardy/brave/stupid enough to get adjustable-rate mortgages." Anybody who got a giant home-equity line of credit, yeah, they're hosed. Anyone who bought on a gimmick loan like 102% LTV, or no-money down loans, or interest-only loans, yeah, they're hosed. On one hand, they're real people, and they're going to experience real pain. On the other hand... where did they think the economy was going to go?

Even people who put 20% down on a house might be hosed, if values fall far enough and fast enough.

I don't think we could ever have our own house's value drop to the point where we'd be upside-down. Even if we did, the night would be peppered with noise as hundreds of unwise neighbors decided to have a delicious last meal of double-barreled shotgun, regretting their own foolishness with adjustable-rate mortgages.

The last REAL bust I experienced was the farm crisis of the early 1980's. If I remember correctly, 20% of everything got foreclosed. The domestic abuse and suicide rates shot up, naturally. Not all costs are economic costs.


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