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July 19, 2005
Homeowners Less Worried About a Bubble
A new study sponsored by ING Direct came to the surprising conclusion that homeowners are less concerned about a housing bubble this year than they were last year.
Of 1,000 people surveyed, all of whom had closed on a new mortgage or refinanced an existing mortgage in the prior six months, 73 percent said they were not concerned that a downturn in the housing market would lead to lower home values in the next year. In 2004, 67% said they were not concerned.
Jim Kelly, who heads customer service for the online bank (which offers adjustable rate mortgages), says the firm was happy to note that pessimism about the housing market had actually declined in the past year. "With all the talk about a housing bubble, it was a bit of a surprise for us -- a good one," he says.
Another surprising finding -- homeowners remain unconcerned about housing prices despite their expectation that rates will rise in the coming year. In fact, 42% think rates will rise a point and 40% said they expect rates to rise two or three points in the year ahead.
Kelly wouldn't speculate on why the survey shows so little pessimism among homeowners -- despite all the hand-wringing in the media (and on this blog) about a potential bubble. "People are probably more optimistic than we give them credit for when they look at their finances," says Kelly.
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There are two plausible scenarios for this. One, owners must think that since the bubble has not yet burst, it is not a bubble. Us naysayers have been talking housing bubble for three years. How foolish of us!! (Let's not forget the "irrational exuberance" in 12/96, almost a full 4 1/2 years before the collapse).
Two, do you think it's possible that people are in denial of their situation? They either are financially sound and able to weather any kind of weak market with minimal or no harm (excellent for them), or they are leveraged to the max and know that any kind of softness could push them over the edge, and don't want to consider that possibility.
Posted by: Wes at July 19, 2005 10:28 PM
Glad to see that the ING study you came across drew the same conclusion as my blog entry, "Housing Bubble? Most People Don't Think So"
Posted by: Peter Coy at July 20, 2005 04:42 PM
I meant to link to your previous item. The survey I quoted was most interesting in the context you described in your post.
Posted by: Amey at July 20, 2005 06:03 PM
Well, that's fine that homeowners don't think a bubble is iminent, but I also don't think people, in general, are always well informed. Furthermore, for those homeowners who are purchasing an owner-occupied property, then it really doesn't matter if a bubble occurs or not, as long as they stay put. Their only concern should be the interest rate hikes (and with the advent of interest only loans, 40 year mortgages, etc, maybe they 'should' be concerned). In any case, I think it would be more appropriate to ask real estate speculators...err...I mean investors whether or not they think a bubble is coming or not.
In my opinion, the housing market, in its current state, is unsustainable. Something is going to happen, it's just a matter of when.
Posted by: Chris at July 21, 2005 03:22 PM
Besides, a drop in skepticism about a market, or conversely a rise in skepticism that a bubble exists, is often a precursor for the bursting.
Posted by: Quartz at July 23, 2005 11:39 AM
Bubbles don't burst when the majority of the people, especially those investors in the mania, are of the opinon that a bubble exists. They burst when people are convinced that it will never burst, and prices have risen to a permanently high plateau and will only continue higher.
Human nature has two problems when dealing with a mania/asset bubble:
1. The masses remember only the most recent events. Bubbles of the past are ignored. Prices of the past are ignored. Median growth rates of the past are ignored.
2. We look to confirm what we would like to believe to be true. If someone recently purchased a house hoping that prices will continue to rise, they will look for all evidence to tell them that they are right. The same thing happened for stocks in the late 90s, and thier confirmation came in the form of higher prices until early 2000. So far, anyone who has bought a house in a hot market has received confirmation in the form of higher prices, for now.
Posted by: Eric at July 25, 2005 01:55 PM
If there is no Bubble or Correction, Decline or what ever you like to call it. Then why would the CAR have done this?
The striking comments goes like this: "Because the market is so frenzied..what it's worth today has no reflection on what it's worth tomorrow"
"While the debate continues over the existence of housing bubbles and potential fallout from a fizzle or pop, real estate agents in some sizzling markets are asking consumers to sign a disclosure form stating that home prices can – and do – go up and down."
"In October 2004, the California Association of Realtors announced the release of a new disclosure form, the 'Market Conditions Advisory.' Many real estate markets in California have not experienced a cooling trend in the past 10 years. 'In a less competitive or 'cool' market there are generally more sellers than buyers,' the form states, 'often causing real estate prices to level off or drop, sometimes precipitously.'"
"The disclosure form also advises buyers against making non-contingent offers on a home by waiving loan, appraisal and inspection contingencies. Even so, buyers in some competitive, super-heated markets have waived contingencies in an effort to elevate their offers."
"Barlow said..the form is intended as a preventative measure. 'Whenever you have a situation where a buyer is unhappy, then every minor problem with the house becomes major when the value has dropped.' It is always problematic, she added, when homeowners lose equity. 'They look for someone to blame. When the market has changed, there is no one to blame. We just want them to go in with their eyes wide open.'"
"Bill Jilbert, president of Coldwell Banker Success Realty, said his company adapted the form this year for its clients in the Phoenix metropolitan market. Jilbert said that the market in the Phoenix area was so over-heated that the company thought it would be a good idea to explain to clients about possible risks of price fluctuations. 'Our fear was that down the road, if and when the market does cool, they would forget..this was their independent decision. Because the market is so frenzied..what it's worth today has no reflection on what it's worth tomorrow,' he said."
"There has never been a need for a Market Conditions Advisory form in past real estate cycles in Arizona, Jilbert said, because the market conditions have never been so extreme. 'In Arizona this is the most over-heated real estate market we've ever had. In the past, we've had runs but nothing like this one. People haven't been doing the things they're doing (until now).'"
Posted by: Jack at August 8, 2005 01:47 AM