Bubble? Better find a hefty needle
Tim Ellis, who seems like a stand-up fella, has started a blog devoted to the idea that there’s a housing bubble here in Seattle. Well, he claims it’s dedicated to exploring the question of whether or not there is a bubble, but the title of the blog–”Seattle Bubble”–pretty much gives the game away.
Speaking as someone who just bought a towhouse, I don’t like the idea that there’s a housing bubble similar to the Internet bubble of a few years ago. But then again, I don’t worry about it much either. People who owned Pets.com stock owned a piece of paper. I own a home–there’s a fairly significant difference. Beyond that, I don’t see where the downturn in demand for housing is going to come from. Are we planning on closing our borders? Is the Seattle area going to stop growing in population? Are we going to fill in Puget Sound to make more room? Is the state suddenly going to up and loosen its restrictions on development? The answers are “no,” “no,” “no” and “hopefully, but doubtful–and even that will simply encourage more growth, bringing us right back to where we started.”
Housing bubbles (as opposed to real estate bubbles) don’t really happen–everyone wants to own a home, so demand never goes down. The people who are convinced there is a housing bubble tend to be people who totally misunderstand basic human impulses, like Paul Krugman. Orrin Judd, who generally understands human impulses much better, has been watching the “bubble” idea closely, and points out that even even a “popped” housing bubble still looks an awful lot like a very good investment.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. To comment, please register. No profanity, please. Non-family-friendly words will be changed to amusing euphemisms as suits the author.
August 10th, 2005 at 6:48 am
The fear of a housing bubble “popping” usually is based on the amount of speculative purchases of property in a given market. In most markets, this is not an issue, but if you get a critical mass of property trading which is speculative in nature, (i.e. people buy a house specifically because it is an investment, not because they want to live there) then there is the real possibility of decreased demand for housing/property if people lose confidence in houses as an investment and shift to other assets/investments. Combine this phenomenon with steady increases in interest rates, and the idea is worth considering.
That said, it depends a lot on what market you are in. I have no idea what the housing market is like in seattle, so my argument must remain hypothetical. You are right though, that a housing bubble “pop” is not quite as scary as a stock market bubble “pop,” for the very reason that your house has value which derives from something other than another person’s willingness to pay, that is its usefullness to you as shelter. Thus if you are willing to wait out a few years of stagnant houseing prices, a bubble is not really all that scary.
August 10th, 2005 at 8:36 am
That’s where I drew the distinction between a “real estate bubble” and a “housing bubble.” I’ve seen no one claim–even the Seattle Bubble guy– that speculators are driving the price increases here, so I’m really not concerned.
August 15th, 2005 at 11:57 am
With housing the concern is not, I think, a change in demand, but rather the prices of houses far outstripping what people are able to pay. If you reach a point where there is demand, but no one is able to pay the asking prices, the bubble will “pop.” As you point out, Tim, you still own a valuable asset, but the market value may decrease significantly leaving a number of people in the position of owing more than a house is worth. I think such a “pop” would cool the housing market a great deal as people would be more inclined to wait for prices to creep back up before selling. Having recently bought a house as well, I hope not to see such a pop (although Minneapolis/St. Paul is another area described as having a housing bubble).
August 15th, 2005 at 6:50 pm
Jim, if prices “far outstrip what people are able to pay,” then, as you point out, people will “wait for prices to creep back up before selling.” It’s a self-correcting mechanism. If people stop selling their houses, supply drops to meet demand, and the price goes back to what it was. That’s the thing about housing–you can pretty much always wait to sell until it has made you some money. Even if the “bubble” “pops” next week, you and I can wait four years for prices to increase again–just like they always do.
August 16th, 2005 at 11:15 am
Hey, thanks for the mention, fellow Timothy. I appreciate discussion on this subject. I think you have a good point: People who owned Pets.com stock owned a piece of paper. I own a home–there’s a fairly significant difference. There is a distinct difference. Housing can’t possibly fall through the floor, taking as big of a tumble as stocks did. But that doesn’t mean it can’t fall in value. I completely disagree with you when you said: Housing bubbles (as opposed to real estate bubbles) don’t really happen–everyone wants to own a home, so demand never goes down. That is demonstrably false. They do happen. Japan in the late 80’s, Boston in the late 80’s, LA in the early 90’s, etc. When owning a home gets too expensive for people, they rent instead.Anyway, yeah I do think there’s a bubble right now in many parts of the country, Seattle included, but I’m totally open to discussion and I’m not some kind of blind faith believer in it or something. I actually just posted a lengthy post to give everyone an idea of where I’m coming from.
August 16th, 2005 at 11:28 am
But, Tim, if house prices decrease too much, people who want or need to move may be unable too because the amount they owe is now greater than the worth of their house. Yes, after several years it may again reach the original value, but it the meantime it could pose problems for people who need to sell for whatever reason. It is for me a slight concern, as there is a good chance that Kelly and I will move in the next 3-5 years and depending on when and if a bubble pops it could be, at the very least, frustrating. If someone, for example, find they can no longer afford their house after a bubble pops, there are few options. To sell means being stuck with debt and no longer having the asset of your house, and to not sell may ultimately mean forclosure. Granted this is a worst-case scenario. At the same time, one great thing about a house is that you can put your own work into it and ultimately turn your hard work into more equity. That’s our hope, anyway.
September 4th, 2005 at 11:32 pm
[…]
1951 vs. 2005
Timothy Ellis of the well-intentioned but misguided blog Seattle Bubble has posted a great find over at his other site: a Seattle civil defense m […]
May 26th, 2006 at 11:24 pm
seattlebubble now has a competitor with a different tone: SeattleBubble?
It is at seattlemetrorealestate.blogspot.com/ SeattleBubble? is dedicated to exploring the same question with a calm, civil, and factual approach. Allegations made without citation of factual sources are challenged, and uncivility will be chastised. I am its moderator. I share the views of Mr. Goddard and Mr. McMullen above.