Thus Spake Mathematica...

June 20, 2005 2:59 AM

This might be the only time in your life you get to hear this because the finance industry survives soley on large-scale ignorance, so listen very closely. There is NO housing bubble in the US. NEVER invest in actively managed funds. Financial lamers do better than financial jocks (and almost everyone else). .

Sadly however most of you won't have the mathematical knowledge to differentiate the advice backed by several Nobel laureates and world-renowned academics from the "advice" of any of the thousands of horny little evangelists spruking their financial "theories" for profit or fame.
posted by DirtyCreature (78 comments total)

So, okay. Shouldn't this be in a blog?
posted by blacklite at 3:15 AM on June 20, 2005

These articles seem more like advertisements. I hold little faith in them and call bullsh*t.
posted by lsd4all at 3:35 AM on June 20, 2005

Advice backed by several Nobel laureates, you say? Ever heard of Long-Term Capital Management, a hedge fund with a couple of Nobel laureates onboard who lost almost 2 billion dollars? It was also covered in the book, When Genius Failed.

And regarding the housing bubble, as this article in The Economist says, "The worldwide rise in house prices is the biggest bubble in history".

And yes, this should most definately be in a blog. Try The Housing Bubble blog for alot of lively discussion on this.
posted by Meridian at 3:40 AM on June 20, 2005

Umm. This thread takes a number of true points, like the fact that the financial industry is now more out to enrich itself than it's customers and that index funds are a good buy and that in many parts of the US housing is affordable and draws an incorrect conclusion, namely that there is not a bubble in the housing market right now.

See this thread for other comments on the topic.

But for what it's worth, a lot of the points made are valid. Housing is a surprisingly good investment (except now) that people can actually evaluate better than Enron/Adelphia/WorldCom/AOL balance sheets.

The Economist had a great article a few years back where they pointed out that housing came very close to matching stock market performance when other factors were taken into account.

Balance your portfolios and watch for bubbles folks. And remember - any person who is not paid by the hour for independent advice is a salesman - not an advisor.
posted by sien at 4:04 AM on June 20, 2005

And remember - any person who is not paid by the hour for independent advice is a salesman - not an advisor.

We are in complete agreement on this point and this is the main point of the post (and the fact that most people have no basis for assessing this information over opinion). Betting on every horse in the stock race is demonstrably consistently better on a probabilistic basis (or over the long term if you prefer that terminology) than paying fees to the "best" fund manager you can find. Who in the financial industry is ever going to tell you that?

However the fact you believe there is a housing bubble in the US is not supported by the evidence. Maybe there is a bubble in Australia (where you live) and in Britain and in some specific areas of the US, but I kind of doubt you read the article presented very closely. The analysis points out house prices in any given area are determined by the capacity of those living in that area to pay their mortgages. In a time of high wages and low interest rates, it is perfectly reasonable for house prices to be high. As demonstrated, this matches very well with 30 years of data. The frightening thing about a false self-fulfilling prophecy of belief in a bubble is that if there is enough press about a bubble and enough people believe there is a bubble, then there will be a (short-lived but significant) downturn.

Again, without cold hard mathematics to guide us, we are just aimless, confused and jaded and have no basis to differentiate opinion from fact.
posted by DirtyCreature at 4:45 AM on June 20, 2005

this matches very well with 30 years of data

What if you're in year 30 of a 30-year bubble?
posted by meehawl at 4:50 AM on June 20, 2005

without cold hard mathematics to guide us, we are just aimless

Oh, by the way, garbage in, garbage out.

From one of your links:
If the median family income in the U.S. is currently $60,000 per year and if lenders allow a mortgage/income ratio of 25%, then $1,250 per month is available for monthly payments.

From the US Census:
Real median household income remained unchanged between 2002 and 2003 at $43,318.
posted by meehawl at 4:55 AM on June 20, 2005

DirtyCreature,
You make valid points and then don't follow up. People are able to afford real estate in the bubble cities now only by buying interest-only mortgages and praying for a big capital gain. True, people buy a monthly payment, not a total price. So yeah, they can afford their interest-only loan in this unusual and super-low mortgage rate environment. But what happens the double whammy happens. Their loan after 3 or 5 years will start requiring principal payments and their floating rates will go back toward the usual 7-11% range. Aggregate wages are not rising and they can only afford the same payment - so what happens? Prices will fall. Prices have fallen in Japan for the last 9 years precisely after their own, very similar, bubble popped. Feel free to join the speculation frenzy. People like you believed in the "New Economy" in 2000. Just don't try to alleviate your doubt and go looking for social approval by trying to convince others that buying investment property now is anything other than speculation. For more good information see:
http://economist.com/finance/displayStory.cfm?story_id=4079027
posted by zwemer at 4:58 AM on June 20, 2005

For those who think there is no Bubble, all I can say is that those who forget history are bound to repeat it. Every bubble in history has people claiming this one is different, that its not a bubble, that the fundamentals have changed.

Actually, much of the problem is that there is actually a Credit Bubble. I really recommend you read the link to The Economist article that has been posted twice already above.

without cold hard mathematics to guide us, we are just aimless

Pure mathematical models don't help when much of the market is driven by sentiment.
posted by Meridian at 5:04 AM on June 20, 2005

What if you're in year 30 of a 30-year bubble?

The point is that if you plug in the average wage, the average lending rate and the average percentage of income spent on mortgages, you get a nice fit of the historical data.

Let's be clear though - according to the model if interest rates shoot up and wages remain stagnant there could be a sharp real downturn but that is not due to any bubble.

their floating rates will go back toward the usual 7-11% range. Aggregate wages are not rising and they can only afford the same payment - so what happens? Prices will fall

This is quite possible but not inevitable and not due to any mysterious bubble. Your argument also fits perfectly with the model. If you're going to be badly affected by such a circumstance, then by all means, get the hell out of property.

Just don't try to alleviate your doubt

For your information, I don't mess with investment property. Don't like being a landlord. So no, I have no agenda. Just argue the facts please. Just the facts.
posted by DirtyCreature at 5:05 AM on June 20, 2005

This has the makings of an excellent flame war. Lets see how long it takes for someone to mention Alan Greenspan, George Bush, and possibly Peak Oil for extra spice.
posted by Meridian at 5:07 AM on June 20, 2005

Pure mathematical models don't help when much of the market is driven by sentiment.

You seem to take it for granted that sentiment can not be modeled with mathematics?
posted by spazzm at 5:08 AM on June 20, 2005

who needs experts? i realized there was a bubble in the stockmarket when my buddy - who normally spends his time at the casino or at the track - started talking more about stock prices than the ponies.

now he's into real estate....
posted by three blind mice at 5:19 AM on June 20, 2005

You seem to take it for granted that sentiment can not be modeled with mathematics?

Economic models often leave it out, yes, since by their nature models are simplifications, or ideals, that the messy real world oftens fails to comply with. You can certainly model sentiment and even herding and flocking beahvior of large masses of people, but we are still a long way from Harry Seldon's psychohistory.

Financial organizations spend huge amounts of money and hire some of the smartest people available to try to model market movements and are not successful at it. Sometimes a company thinks they have hit upon the perfect mathematical model (see the links to LTCM above), which works for a while, but eventually ends up losing billions of dollars.
posted by Meridian at 5:23 AM on June 20, 2005

Just argue the facts please. Just the facts.

Okay. Please explain, then, why your source assumes a median US income almost 50% above the official census findings? That doesn't inspire confidence.
posted by meehawl at 5:23 AM on June 20, 2005

However the fact you believe there is a housing bubble in the US is not supported by the evidence.

This is a stupid FPP. Your first link tries to explain why the housing market should be seeing returns similar to the S&P 500 without using the either of the words 'risk' or 'relative' once. Get a clue.

All the cold, hard mathematics wrongly applied are still wrong.

Do you want to see the bubble collapse more quickly (for verification)? Have one or two more (S. Korea got this started a week or two ago) SE Asian governments stop trying to fix their exchange rate against the USD (hello, China!) by buying lots of US debt. Watch interest rates rise. Watch people suddenly notice their ARM rate adjust and that the equity value of their house become less than zero. Watch prices fall. Watch the cold, hard mathematics of it all render the truth.

On the anecdotal side, over the last month or two, I've noticed a sharp increase in the number of people selling their house and deciding to rent for a while.
posted by bafflegab at 5:27 AM on June 20, 2005

Real median household income remained unchanged between 2002 and 2003 at $43,318

Okay. Please explain, then, why your source assumes a median US income almost 50% above the official census findings? That doesn't inspire confidence.

Calm down. He said "family" not "household". They are substantially different. In fact he uses the BEA personal income per capita multiplied by two. Doesn't matter what he uses as long as it is consistent and the model fits.

All the cold, hard mathematics wrongly applied are still wrong

Heh. Lot of scared MeFi property investors out there I see.
posted by DirtyCreature at 5:30 AM on June 20, 2005

This is a stupid FPP

I fully agree. I'm having flashbacks to the internet bubble when every man and his dog was giving advice about getting into dot.com stocks. Now we have people saying much the same thing, "there is no bubble", "buy now before you will be priced out of the market", "there's easy money to be made, buy now, sell in year for 50% profit", etc.
posted by Meridian at 5:35 AM on June 20, 2005

As far as I can tell from that graph, if I wait a couple of years my house will be about as valuable as the yearly GNP of most West African nations.

I can't wait. Maybe I should try to find some Chinese financiers to invest in an LLC that will buy up all the houses in my neighborhood. We'd all make a killing, and the profit they'd make would help to reduce the US balance of trade deficit. That - in turn - would help to keep interest rates low and enable my company to buy more and more houses. It's a win-win scenario, and it's amazing how really good, strong coffee cuts through all the financial murk to shed a light on the profits that are out there and ripe for the plucking.
posted by troutfishing at 5:51 AM on June 20, 2005

What I find most striking about the Economist's "housing bubble" article is that it claims that most of the growth in the US job market over the last three years comes from construction-related industries.
posted by Slothrup at 5:59 AM on June 20, 2005

I'm having flashbacks

I'm sure there's something you can take for that.

Ok let me be very clear for all the terrified highly geared non-mathematical property investors out there. If interest rates take a sudden hike, the model describes shows that you are even more vulnerable than you thought because not only will your mortgage payments be higher, but you will paying off a potentially less valuable property (especially if wages stay low). As a result, you're probably going to see a lot of panic and people selling which will make the whole situation worse (for a while).

But this is not what a bubble is. This was well known in advance and always going to be the case in those (by no means inevitable) circumstances. Then again interest rates might fall and property prices continue happily rising.....

That graph posted by troutfishing is a textbook example of why your average Joe should keep all his excess cash in 401ks.
posted by DirtyCreature at 6:04 AM on June 20, 2005

I believe it. All my financial schemes come to naught. Of course, this is probably because I have a complete blind spot when it comes to finance. We all have our mental lame areas and that, unfortunately is mine.

Honours degree in astrophysics? Check. IQ over 165? Check. Understand how my mortgage works after having had it explained for the umpteenth time? Oh dear...

I have about three investment schemes running. They've been running for almost twenty years in some cases. Every so often I receive statements - or something - from the companies involved. These statements contain lots of words and lots of numbers which mean absolutely nothing to me. It seems to me that the numbers are generally smaller than I might expect, but as I don't know what they mean I try not to let it worry me.

I like that graph which troutfishing posted. I like the pretty coloured lines. I like the way the blue one is nice and smooth while the others are really wiggly.

I am educated financial stupid.
posted by Decani at 6:07 AM on June 20, 2005

DirtyCreature

In economics, a bubble is a situation where speculation causes the price of goods to rise to unsustainable levels, usually followed by a crash.

So we have fast rising house prices, masses of speculators buying and flipping houses thanks to easy interest-only credit, and the high probability of a forthcoming crash. But, you say "its not a bubble".

You know, one of the significant aspects of a bubble is that so many people vehemently claim its not a bubble whilst in the midst of it.
posted by Meridian at 6:13 AM on June 20, 2005

the title bar of this thread confirms it as a shameless troll, right?
posted by mek at 6:25 AM on June 20, 2005

You know, one of the significant aspects of a bubble is that so many people vehemently claim its not a bubble whilst in the midst of it.

I'd bet hard money that those who most vehemently argue against the existance of the bubble are either: A. New home owners ("It's a good investment, dammit! I didn't get burned!"), or B. People who make their money off of real-estate (investors, realtors, etc.).
posted by Civil_Disobedient at 6:30 AM on June 20, 2005

So we have fast rising house prices, masses of speculators buying and flipping houses thanks to easy interest-only credit, and the high probability of a forthcoming crash. But, you say "its not a bubble".

Some scientists believe that the next time the volcano on the island of La Palma in the Canary Islands erupts, the western half of the island will slide into the ocean. Such a landslide would almost certainly result in a 90m wave hitting the eastern seaboard of the USA causing massive devastation. If this circumstance was inevitable, then there is a massive housing bubble on the east coast. The intrinsic value of the houses is a lot lower than what is being paid for them. But this situation is not inevitable and may never happen.

Likewise, interest rates may stay low or wages may rise smoothly in line with any future interest rate rise thereby averting any crash.

Sigh. This thread was not meant to make property owners any more comfortable. It's main purpose was to demonstrate the illegitimate foundations of a multi-trillion dollar industry that a mathematical analysis can clearly expose.

I'd bet hard money that those who most vehemently argue against the existance of the bubble

50 grand. On the table. NOW.
posted by DirtyCreature at 6:43 AM on June 20, 2005

That "NO housing bubble" page makes a nice case that the housing bubble is caused by low interest rates... which, uh, most of us could probably have guessed.

Note the various ways the first chart there is potentially misleading at first glance: It's a logarithmic scale in nominal dollars, which happens to start off with a decade-long period of high inflation and rising rates, during which the model doesn't match the observed prices at all. The current trend is made to look almost like a linear (on a logarithmic scale that is) continuation of the long-term trend only by that anomalous period up to 1982 (whenever interest rates peaked). Adjust it to show 1985-present for a nice "look, there's the bubble!" effect. I wonder what 1950-present would look like.
posted by sfenders at 7:02 AM on June 20, 2005

What I find most striking about the Economist's "housing bubble" article is that it claims that most of the growth in the US job market over the last three years comes from construction-related industries.

I work in the industry and can confirm that we can't find people fast enough at the moment - for anything, general labour to preconstruction estimating to management.
posted by jamesonandwater at 7:16 AM on June 20, 2005

This is a stupid FPP.

WTF? "FPP I don't personally agree with" does not equal "stupid FPP." This is far more interesting than 90% of what's on the front page at any given time, and it's sparked off some interesting and educational discussion... which would be even better if people could, as DC suggests, debate the facts rather than calling the poster names.
posted by languagehat at 7:18 AM on June 20, 2005

Sadly however most of you won't have the mathematical knowledge to differentiate the advice backed by several Nobel laureates and world-renowned academics from the "advice" of any of the thousands of horny little evangelists spruking their financial "theories" for profit or fame.

Popular beliefs - especially those concerning economic trends - have a way of becoming self-fulfilling prophecy.
posted by Ryvar at 7:25 AM on June 20, 2005

That graph posted by troutfishing is a textbook example of why your average Joe should keep all his excess cash in 401ks.

You realize that a 401(k) is a registration, not a type of investment? You realize that you can't just put "excess cash" in a 401(k)? You realize that 401(k) withdrawals are taxed as ordinary income (and penalized for the under 59 1/2 crowd unless they meet very specific tests)? You realize that due to their tax-deferred nature, 401(k)s are one of the best places to put risky, tax-inefficient investments?

Bringing to light the rest of your idiocies and overstatements would take way, way too long. You are in way over your head, here. Crappy post, muddy thinking.
posted by trharlan at 7:28 AM on June 20, 2005

That's another issue I have with the current housing boom/bubble: The quality of the work.

The way I see it there are only a finite number of really skilled artisans out there and with all the development happening they are being spread rather thin. My girl's dad supervised the installation of windows at a new apartment development and he had complete horror stories about the construction. Skew walls, pipes from upstairs apartments running over prefab ceiling in the downstairs apartment (#{deity} help you if there's ever a burst), loose(!!!) walls that moved when you pushed, cracks opening before construction was finished the list went on and on. I have a feeling that people who bought the apartments off plan are going to have a tougher time than they expected trying to 'flip' them once they're built because a buyer is going to see all the flaws the seller couldn't predict looking at a blueprint and an architects sketch.

All of which made me resolve to never buy a house that is less that at least 5 years old.
posted by PenDevil at 7:29 AM on June 20, 2005

DirtyCreature: A little learning is a dangerous thing. You sound like someone who just got home from a "Financial Success!" weekend seminar.

Your enthusiasm is clouding your rational judgement. An interesting parallel to the rest of the market. In certain parts of the country people are more or less choosing to live in tulip bulbs.

The "it's a bubble!" and the "it's NOT a bubble!" people can rail at each other as much as they want. It is somewhat a semantic argument, as you never REALLY know one way or the other until you're past it.

However, growth in home prices is far outstripping growth in real wages. This is not sustainable, so regardless of if you call it a "bubble" or not, things will not be forever the same as they are now.

The housing market will retract, then expand again, then retract again. Same as it has ever been. When someone starts screaming at you that the market is no longer governed by well established and understood rules and trends, that's when you should run, not walk, the other direction.

Remember when Dr. Greenspan mentioned "irrational exuberance" back before the dot-com collapse? He was a few years early, but turns out he was dead on.

I think the best we can hope for is another Greenspan turn of phrase, the "soft landing".

What's funny is, I was working in finance back when Y2K was the alpha-numeric combination on everyone's lips.

The general sentiment was that if Y2K was a non-event, those investors who had been frightened away from the market and done stuff like buying land in Wyoming and converting all their cash to gold would come back with gusto, and the market would skyrocket. And the dot-coms would lead the way in this New Economy. Fundamentals don't matter anymore!

I think we all know how that turned out.
posted by Ynoxas at 7:38 AM on June 20, 2005

From the first link:

When will home prices fall in these modern high-rent districts? When at least one of two things happens: mortgage rates rise, or the average income in these locales falls.

Talk about a sure thing!
posted by mischief at 7:39 AM on June 20, 2005

I think this whole discussion should have stopped dead when DirtyCreature let slip this clause:

without cold hard mathematics to guide us

"cold hard mathematics" can't "guide" us -- it's a tool, and it can be employed any way you'd like. This is a typical fallacy of our time and place to believe that the hard sciences simply hand us answers. If more people were familiar with their practices they wouldn't make this mistake.
posted by argybarg at 7:41 AM on June 20, 2005

I think it's interesting and I welcome contrarian viewpoints, even if I don't entirely trust the source. It's true that when most people believe one thing about the economy, the opposite is often the case.

All the same, I'm sticking to renting. Not like there's anything I can afford anyway (without a shaky interest-only loan), and I have full faith in our leadership to fuck things up royally.
posted by fungible at 7:44 AM on June 20, 2005

Take the analysis by Ynoxas and factor in the retiring and dying baby boomer generation not being replaced individual for individual and income dollar for income dollar and you are back to the fundamentals of supply outstripping demand.
posted by mischief at 7:45 AM on June 20, 2005

50 grand. On the table. NOW.

Chickenshit poltroon!!
posted by blacklite at 8:00 AM on June 20, 2005

I think the best we can hope for is another Greenspan turn of phrase, the "soft landing".

The Economist covered this one too. It turns out that, in Holland, the late 1990s, there was a similar boom in the value of house prices. By 2002, the change in house prices adjusted for inflation had dropped to exactly 0 -- the textbook definition of a soft landing.

However, because people were no longer refinancing their homes at the same rate as they had been, consumer spending dropped considerably and triggered a recession.
posted by Slothrup at 8:13 AM on June 20, 2005

What does this tell us about the state of the present housing market? First, with the actual median home price about 13% below that of the model prediction, there certainly is no bubble at the national level.

No, it tells you that either there is no housing bubble or your four 2 variable mathimatical model of a multimilion agent economic system is wrong. Or both.

Hm....
posted by delmoi at 8:33 AM on June 20, 2005

Bubble or no, the median household income in Los Angeles is $36,687 while the median price of a single-family house in Los Angeles is $499,000. Using the 25% of income-towards-your-mortgage calculus presented in the FPP it would take almost 55 years to pay off that debt -- and that's without factoring in interest. Seems fishy to me...
posted by herc at 8:58 AM on June 20, 2005

Again, without cold hard mathematics to guide us, we are just aimless, confused and jaded and have no basis to differentiate opinion from fact.

Ok let me be very clear for all the terrified highly geared non-mathematical property investors out there

DirtyCreature: I'm a recent computer science graduate, and I took lots of classes on machine learning and statistics, high-level calculus, diffrential equations, etc. And I just graduated, so I don't have much money to to invest.

The only one 'non-mathematical' here is you. There's a diffrence between "mathimatics" and "handwaving with numbers". This is the latter, four paragraphs of folksy speculation is not a mathimatical proof. Adding and subtracting numbers dosn't tell you anything unless you are certan those are the right formulas.

Let me be more spesific. This guy just took a bunch of data and said "look, a corrilation". And that might be true, but that dosn't mean the model has any predictive power to tell you what things are going to be like in the future. There were all kinds of "models" that said Kerry was going to win the election because a certan sports team won, and that had held true for over 100 years. It was wrong.

The reason people belive there is a housing bubble is that they know intrest rates are going to go up. That means that the numbers in his "spreadsheet" are going to change.

Begin by assuming that most people mortgage themselves to the hilt. If the median family income in the U.S. is currently $60,000 per year and if lenders allow a mortgage/income ratio of 25%, then $1,250 per month is available for monthly payments. If the current 30-year fixed-rate mortgage is at 5.7%, then a theoretical median U.S. house price of $215,000 pops out of the spreadsheet. The actual value? $187,000.

All of a sudden that $1,250 is a lot more, and that $215,000 is a lot less, less then $187,000 maybe. If the BEA per capita figure also goes down then everyone is super-fucked, and that's certanly possible if the intrest rate goes back up.

So please, stop telling everyone who dissagrees with you that they are innumerate.
posted by delmoi at 9:07 AM on June 20, 2005

I thought the links were interesting, and am kind of suprised at the heated response. I ain't no economist, but why does the debate have to be "100% there's a bubble" vs. "100% there's not a bubble"? It seems to me that there are many instances where people have bought more house than they can afford based on the 'magic' of interest-only loans. I view this as risky behavior that will end up burning a lot of people in the end. It seems more like gambling on real estate, rather than investing in real estate. Sure, it'll work out for some folks, but still, I believe it will eventually blow up in the faces of most people, if they don't refinance or find another way to get out before its too late. Of course, maybe I'm wrong. But I don't care, because I have no interest in purchasing property in that manner. But the fact that many people do -- does that automatically make the entire US real estate market a bubble? I just don't think so. No matter what sort of ponzi scheme some other dude uses to finance his McMansion, in the end, I don't think it will turn my traditional, plain vanilla housing investments into a pile of WebVan stock. Speculators can amplify the natural ebb and flow of home values, but from a long-term perspective, I don't think they really have much impact. A good investment is still a good investment. A gamble is still a gamble. The only difference now is that more people are gambling rather than investing. It is the people who don't know the difference, who take a bigger risk than they can really handle after being seduced by the sales pitch of a mortgage broker.... people who think they are investing in real estate when they are really gambling with real estate.... those are the people who I think are in for a world of hurt.
posted by spilon at 9:18 AM on June 20, 2005

50 grand. On the table. NOW.

I'd love to, unfortunately all my money is currently tied up in the enormous interest payments on my new home, my gigantic student loan repayments, my monthly raping known as "car insurance", my bloated COBRA payments...

Yeah, this country's doing just fine.
posted by Civil_Disobedient at 9:30 AM on June 20, 2005

uh.. so.. you bought a house that you probably couldn't afford, took out too much money in student loans, and own a car.

Yeah, it's the country's fault your paying so much money each month... I forgot we were living in the age of entitlement.

Count your blessings instead of bitching about your horrible finances, please.
posted by rulethirty at 10:06 AM on June 20, 2005

I'm putting my money into goats. Their milk can be turned into delicious cheese, they don't speculate about economic trends, and I hear they'll eat anything - even shoddy bubble-era housing.
posted by troutfishing at 10:18 AM on June 20, 2005

Balance your portfolios and watch for bubbles folks. And remember - any person who is not paid by the hour for independent advice is a salesman - not an advisor.

Well said, and let's add that those who sell their advice in the form of seminars, books etc are also simply salesmen of their own seminars, books, etc.

people who think they are investing in real estate when they are really gambling with real estate.... those are the people who I think are in for a world of hurt.

Gamblers hurt everyone in a downturn and there's a maximal number of them in the market right now because interest rates are at historical lows. Gamblers always amplify prices changes first up by increasing demand, then down when they have to bail fast.

The point about baby boomers trading down has been made. Don't underestimate this factor, a lot of these folks will be looking to both simplify their lives and cash in by moving into smaller cheaper accomodations. This trend has the potential to form part of a perfect storm scenario at some point.
posted by scheptech at 10:29 AM on June 20, 2005

uh.. so.. you bought a house that you probably couldn't afford, took out too much money in student loans, and own a car.

No, numbnuts, I was generalizing for the average American worker.
posted by Civil_Disobedient at 10:33 AM on June 20, 2005

I work for the investment banking division of a company that also includes a large retail bank. I was recently at a local branch having my car title notarized in order to sell it. The blue-collar guy that was buying my car asked me as we waited, "who do you think I should use for a stock-broker?" My reply was that he should probably just invest in some passively managed funds from a low-cost provider like Vanguard. The bank guy who was sitting in front of us rolled his eyes and said sarcastically, "Yeah, that's good advice." Then he tried to get the car-buyer to talk to him about an investment account as we finished - the car-buyer ignored him.

That's the type of advice offered to the average investor in my experience. Awesome.
posted by mullacc at 10:56 AM on June 20, 2005

We're not in a housing bubble, this is just a transformation to an ownership society. You know, where a small part of the population owns everything and the rest of us rent/lease/etc from them?

OK enough snark for now. I dont think we're in a housing bubble (from a nationwide perspective) but I do believe that we wont see much appreciation for the next 5 years or so while wages catch up (maybe). I figure that I am in a bubble in my town. Between July 2003 and June 2004, new home prices doubled (this is no exaggeration, homes that were 2000 sq ft were selling for $200,000, now sell for anywhere from $390,000 to $450,000). And unless you were a real estate sales agent, your salary didnt double. I figure we'll see a price decline once everyone decides to stop moving here (currently we have 7 people moving to the city every hour - 24/7/365.24). Until then, the city will continue to grow and prices will stay artifically high, or go even higher as land becomes more expensive - since the city is surrounded by mountains.
posted by SirOmega at 10:56 AM on June 20, 2005

Civil_Disobedient: You bought a bloated snake ?!?
posted by daveg at 11:18 AM on June 20, 2005

The only thing I bought was a pack of ramen. Rumors to the contrary notwithstanding.
posted by Civil_Disobedient at 12:00 PM on June 20, 2005

he uses the BEA personal income per capita multiplied by two

Oh, I see. So where your precious analyst says "median family income", what he really means to say is "fictional, artificially inflated income with no relation to median US family size, created by taking the income of two working adults and doubling it".

That makes all the difference. As long as you are willing to assume that all US households consist of two full-time working adults, with no gender pay disparity between them, and no kids.

In final analysis: garbage in, garbage out.
posted by meehawl at 12:16 PM on June 20, 2005

there won't be a bubble the same as the internet stock bubble because I can't live in 1,000 shares of WebMD.com
posted by brucec at 12:44 PM on June 20, 2005

there won't be a bubble the same as the internet stock bubble because I can't live in 1,000 shares of WebMD.com
posted by brucec at 2:44 PM CST on June 20 [!]

True, but you might build a big new house banking on earning 50% profit on your current house.

Then, the market contracts/shrinks/bursts and suddenly you have 2 mortgages, just one of which is already too much without those profits.

Really, there's not much difference at that point.

So right, you can't live in 1000 shares of WebMD (currently worth $10 per), but you also can't live in a house you can't afford the mortgage on.

Note you could have traded those 1000 shares of WebMD for a small house in a small town in mid 1999. Now 1000 shares of WebMD will get you a used Honda Civic.
posted by Ynoxas at 1:32 PM on June 20, 2005

> I'd love to, unfortunately all my money is currently tied up in the
> enormous interest payments on my new home, my gigantic student
> loan repayments, my monthly raping known as "car insurance", my
> bloated COBRA payments...

Charge it! (the payements or the 50K, or both!)
posted by NewBornHippy at 1:45 PM on June 20, 2005

Bringing to light the rest of your idiocies and overstatements would take way, way too long

I got all week pal. Enlighten us .....

Too many fires in this thread set by confused, scared people who resort to amateur psycho-analysis instead of trying to wrestle with the facts.

Still waiting on a post that directly addresses the issues raised in the post. Very eager to see a convincing counterargument............ ....... ..... ..

[psychoanalysis rant filter ON]
posted by DirtyCreature at 1:55 PM on June 20, 2005

Shoddy 'bubble-era housing' seems to be all over, it's noticable here in the UK and this from the New Zealand parliament:
homeowners have suffered significant problems caused by leaky buildings... Weathertightness problems appear to be mainly associated with multi-unit speculative housing and complex high cost single family homes... It is a concern that there is currently a widespread perception that standards have fallen right across the building industry...The main findings of the research were that:
- Seventy-five percent of the sample dwellings constructed about or after the introduction of the building code had one form of defect or another.

- Fifty percent of the sample dwellings (post building code) let moisture in to one degree or another.
[Full PDF] - but still the prices go up
posted by Lanark at 2:01 PM on June 20, 2005

Languagehat writes : "FPP I don't personally agree with" does not equal "stupid FPP."

Thank you, Languagehat. I couldn't possibly agree more. To me, the anger that is being expressed at DirtyCreature is the same sort of anger that is always directed at someone who calls into question the "conventional wisdom" among a given group.

Whoever wrote the housing bubble article may actually be wrong. So what? Is it such a bad thing to posit an alternate theory? I know next to nothing about the housing market, and am interested to see these topics discussed.

The ad hominem attacks, however, I can do without.
posted by afroblanca at 2:25 PM on June 20, 2005

"Shoddy 'bubble-era housing' "

During high school in the 70s, I worked for my father framing and doing finish-work in suburban sprawl projects, and I doubt more than 10% of those houses would survive 50 years. The siding and roofing contractors cut every possible corner.

From what I have seen of projects since then, things did not improve until the mid-90s, however that was when the trend for all those complicated rooflines began, so I doubt water-tightness is any better.
posted by mischief at 2:26 PM on June 20, 2005

my bloated COBRA payments

Yeah, and if you miss another one, you lose a kneecap, pal.
posted by COBRA! at 2:30 PM on June 20, 2005

Are these Nobel Laureates willing to put their money where their mouths are and underwrite the $100,000 in home value that may be lost when the imaginary bubble bursts? If they're right, they'll never have to make a payment.
posted by VulcanMike at 2:51 PM on June 20, 2005

This baby boomer lives in a nice compact brick house built in 1940, and he ain't selling. Low purchase price + 5 1/4% mortgage = happy camper. Let the bubble burst!
posted by languagehat at 2:56 PM on June 20, 2005

For a thought-out, detailed analysis with true "mathematica", go here for a view on the San Diego housing market.
posted by thekorruptor at 5:28 PM on June 20, 2005

Hey, it's not like we're seeing crazy behavior on the part of buyers, sellers, and lenders or anything. This time it's different! Prices will plateau at a permanently high level! After all, there's only so much real estate to go around...
posted by snarkout at 5:52 PM on June 20, 2005

Languagehat, the reason it's a bad post isn't the point of view expressed; it's the shameless (and, hey, insulting, unless DirtyCreature wants to explain how he knows about the mathematical acumen of MetaFilter's readership, which I know for a fact includes several CPAs and at least two professional mathematicians) editorializing, as well as the fact that, well, it's not a very good post. What does an ef.com post on people's tendencies to overvalue traits they're good at (yoked to a concise -- to the point of inaccuracy -- history of the the downfall of Long Term Capital Management) have to do with real estate? Eugene Fama is a hellaciously smart person and the advice for average investors to stick to index funds is probably good (Warren Buffet's objections aside), but shouldn't the financial advisories -- and advertisements for the Dimensional Funds -- stay on the Motley Fool where they belong?
posted by snarkout at 6:12 PM on June 20, 2005

it's the shameless editorializing, as well as the fact that, well, it's not a very good post

If some of you people on here spent just a fraction of the time you spend criticizing other people's posts and making personal judgements, on trying to gain knowledge in areas where you are clearly lacking, you might find people actually start to listen to you.

Throwing up a few random links you scraped up in an engine trawl to make up for your lack of knowledge really just doesn't cut it.

Still waiting for the counterargument ......
posted by DirtyCreature at 6:56 PM on June 20, 2005

DirtyCreature:

Your beligerence and (it seems) unwarranted arrogance are unwelcome here.

You are addressing an intelligent and potentially receptive audience. Sticking your chest out and copping an attitude are liable to ruin some very reasonable odds of a good conversation.
posted by argybarg at 6:57 PM on June 20, 2005

............
posted by DirtyCreature at 7:05 PM on June 20, 2005

And, incidentally, the burden of proof is on what you post. Your job, not ours. If you have a claim to make, back it up with multiple sources and a coherent argument of your own. Showing up on MeFi with one guy's analysis, a lot of beligerent spew and a demand that people prove you/him wrong is going to get you ignored -- and, I would wish, banned.

And, while we're at it -- what are your credentials, mathematically?
posted by argybarg at 7:13 PM on June 20, 2005

You know, a troll is a dirty creature...

Performance Art?
posted by Ynoxas at 8:45 PM on June 20, 2005

meh.
posted by troutfishing at 8:55 PM on June 20, 2005

Still waiting for the counterargument ......

I don't think anyone has yet quite described the precise magnitude of the suckage of that housing bubble article. He's got a predicted house price that maybe sort of seems to be somewhere near reality, perhaps half the time since 1970.

The most fundamental mistake seems to be confusing mean with median. He uses per capita income, and median house price. He also notes that income inequality has increased, supposedly by so large a degree as to account for the change in the house price to rent ratio (which seems dubious). To the extent that inequality has increased, it means his main theory is broken, since it's going to change the average income per capita relative to the median, presumably also changing the relationship of median house price to per-capita income.

Another possible source of error is inflation. The chart suggests that maybe people are more willing to borrow large amounts of money when inflation is high (and thus it'll be worth less when they have to pay it back). Inflation being relatively low over the past few years would thus also tend to push the model-predicted house price above the reality.

Never mind the more obvious fact that the housing market has in fact been through a few significant ups and downs since 1970 and the model correctly predicts, as far as I can tell, excatly none of them.

No data or argument is given to support the bold assertion that the model works just as well in the cities where housing markets are really hot. The market in San Diego at least does not seem to fit at all (according to some link I followed from here).

So, it's a steaming pile of data gleefully misinterpreted by someone who is clearly not an economist. Presumably done for the profit and fame (and sublime mathematickal truth) that can only be achieved by writing books about how to pick mutual funds for people who know even less than the author.

That enough counter-argument for ya?
posted by sfenders at 9:20 PM on June 20, 2005

and, I would wish, banned

You want him banned for this post?
*boggles*
posted by languagehat at 5:19 AM on June 21, 2005

Well, no, not banned for the post. The recurrent beligerence in the post and the comments ... well, probably still not banned. But warned. Or chastized. Or I'd have #1 shave his head or something.
posted by argybarg at 11:26 AM on June 21, 2005

Showing up on MeFi with one guy's analysis, a lot of beligerent spew and a demand that people prove you/him wrong is going to get you ignored

Perfect. The sort of people who would ignore me as a result of this thread are exactly the sort of people who I don't want posting comments on my threads.

Mission accomplished.

That enough counter-argument for ya?

No but there seems to be far too many editors and not enough intelligence on this thread to warrant explaining how your counter-argument sounded like a sophomoric attempt at trying to challenge the basis of a mathematical model by inconsequential editorializing of defintions so I will save you the embarassment.

To those who want to confuse the issue for the benefit of their less-educated friends, you're only fooling those who don't have the knowledge to understand - the exposition of which was the point of this whole thread anyway.

Case closed.
------------------
posted by DirtyCreature at 6:39 PM on June 22, 2005

Lame.
------------------
posted by VulcanMike at 9:23 PM on June 23, 2005

Calculated Risk responds in a much more reasonable way than I could, to a much more reasonable form of the argument that house prices are justified by income and interest rates (from the Chicago Fed.) He points out what should probably have been obvious: house prices historically correlate a lot more closely with household income than with income divided by mortage interest rate (at least from 1976 to 2000.) Morgage rates have been falling since 1982. I guess it's only in the past few years that "assuming that most people mortgage themselves to the hilt" has been close to the truth.
posted by sfenders at 7:42 AM on June 27, 2005