Telltale signs of housing bubble and other speculative frenzies
So, is there a housing bubble? Better to ask: Are there housing bubbles? There really is no national housing market. There are markets, plural, so there could be bubbles, plural.
Talk of a housing bubble, an unsustainable surge in home values followed by a crash, has emerged in the news again, mostly in the form of questions.
Fox Business: “Is the US already in a housing bubble?”
Realtor.com: “Are We Approaching Bubble Territory in the U.S. Real Estate Market?”
Fortune implies the question: “A bit of 2008 déjà vu: The housing market hits a level not seen since the last bubble.”
But then there’s this from the Federal Reserve Bank of Dallas: “Real-Time Market Monitoring Finds Signs of Brewing U.S. Housing Bubble.” Gulp.
Before anybody panics, let’s review some components of a financial bubble, as outlined by the late experteconomist-historian John Kenneth
Galbraith, who literally wrote the book (s) on bubbles.
“The Great Crash, 1929,” in print since first published in 1955, is a detailed, but lively account of the stock market crash that launched the Great Depression.
Nearly 40 years later, in 1994, he wrote another bubble book, a little read-it-in-one-sitting thing that has stood the test of time: “A Short History of Financial Euphoria.”
Housing bubble? John Kenneth Galbraith said to look for this:
• Speculation is necessary for a bubble, but a bubble also requires a financial mechanism that creates leverage, lending false support, not fundamental demand, to rising prices.
Is iBuying such a financial mechanism? Companies use technology to make instant offers to buy people’s homes. It’s financial, and it’s a mechanism.
Zillow saw the handwriting on its own self-induced bubble and got out of it last year because it was losing money when it sold, which sure sounds like it paid bubbly prices to buy. Zillow dodged its own bubble.
• People jump into a leveraging-buying frenzy because they believe there is something “new under the sun.” iBuying is still pretty new.
Plus, in case you missed it, some investors are bulk buying new houses directly from homebuilders. That’s new, isn’t it? The bulk part? They’re buying them to rent out, for income, although just about any property has a price, so some get flipped.
Top builders in Oklahoma City say they’re not interested in selling new houses to investors a whole street or neighborhood at time. That’s mainly because they are also developers who see themselves as community builders.
Fostering a sense of community is harder with renters because they’re more transient than homeowners. (Don’t @ me. It’s true. I’ve been a renter, seven apartments and a house, and it is harder to feel connected to neighbors.)
• A bubble has to include a “new financial instrument,” such as the margin buying that led to the 1929 stock market crash.
Other examples are the leveraged buy-outs and corporate merger mania that led to the stock crash of October 1987, the internet itself, dot- coms and reckless financing of high-tech startups that filled the 1990s tech bubble that burst in 2000, and the “liar’s loans,” NINJA loans — for “no income, no job, no assets” — and other subprime lending shenanigans that helped fuel the 2006-2007 housing bubble.
Maybe mortgage rates being so low for so long (RIP) was the “new financial instrument.” It certainly handed unprecedented buying power to homebuyers, and sellers are certainly taking advantage of it.
Rates are rising now. Unless they really spike, and there is a housing bubble, maybe it’ll wheeze as it lets the air out rather than popping.
• People who get in on the action, and others thinking about it, trust in what seems like the genius of those who got in first. If they weren’t geniuses, they wouldn’t be getting rich, the reasoning goes.
More people invest and make money, which attracts more investors who are making money, which fuels speculation even further. If we count rising home prices and values as “making money,” that seems to be happening.
So, is there a housing bubble? Better to ask: Are there housing bubbles? There really is no national housing market. There are markets, plural, so there could be bubbles, plural.
If there are bubbles, then crashes are inevitable. Galbraith says doubt will surge, then anger, directed at the supposed former geniuses. Those who got sucked in by the frenzy will search their souls. The government will step in and scrutinize the new financial instruments and practices.
It happened after 1929. It happened after 1987. It’s happened after 2000. It happened after 2008. It will happen again if, or when, housing bubbles burst.
Galbraith’s ‘A Short History of Financial Euphoria’ applies to a housing bubble
Galbraith ends “A Short History of Financial Euphoria” with a tidy summation of what he had come to know about speculation, and admits what no one can know about financial bubbles. It seems to fit these times.
“When a mood of excitement pervades a market or surrounds an investment prospect,” he wrote, “when there is a claim of unique opportunity based on special foresight, all sensible people should circle the wagons; it is the time for caution.
“Perhaps, indeed, there is opportunity. ... A rich history provides proof, however, that, as often or more often, there is only delusion and self- delusion.
“When will come the next great speculative episode, and in what venue will it recur — real estate, securities markets, art, antique automobiles? To these there are no answers; no one knows, and anyone who presumes to answer does not know he doesn’t know.
“But one thing is certain: there will be another of these episodes and yet more beyond. Fools, as it has long been said, are indeed separated, soon or eventually, from their money. So, alas, are those who, responding to a general mood of optimism, are captured by a sense of their own financial acumen. Thus it has been for centuries; thus in the long future it will also be.”
Senior business writer Richard Mize has covered housing, construction, commercial real estate, and related topics for the newspaper and Oklahoman.com since 1999. Contact him at rmize@oklahoman.com.