Past Housing Bubbles
It has been six weeks since I wrote a story that discussed the experience of homeowners who experienced a real estate meltdown in their local markets in the past (See, "Getting Crushed in a Housing Collapse," May 31, 2005.
It proved to be a very popular topic with readers and I'm still getting feedback.
Surprisingly, many of the emails have been challenging the same point in the story, which comes very near the end. I wrote, "Two things have to happen to pop a real estate bubble: Interest rates have to rise and jobs have to disappear."
The following email from Kent Beuchert, which I just received on Sunday, is the latest example. Below is his note, (posted here in its entirety with his permission):
I read your article, "Getting Crushed in a Housing Collapse," and agreed with most of your claims. However, when you state that only two things can cause the bubble to bust (recession or sharply higher mortgage rates), I have to respectfully disagree. While either of those two events may cause the fastest bursting of the bubble, there are plenty of others.
The bubble exists because of speculators. Pent up demand and lack of supply is not the cause, otherwise the rental market wouldn't be so depressed. Current supply is in fact outstripping population growth. The excessive demand is produced by speculators. Since this doesn't satisfy the demands of housing anyone, the demand is totally artificial, thus creating totally artificial prices.
Eventually, there will be a physical lack of "Greater fools." There is, after all, a limit to the number of new real buyers. At that point prices will stabilize or possibly drop a little. That in turn will spook investors, who will dump their properties because they can't carry them or rent them. This will cause downward spiraling prices, causing prospective buyers to hold off, waiting for prices to stop dropping, and away we may go into a collapse.
Interest only mortgages will be walked away from and the collapse may accelerate. It will be far worse than previous price drops because the run up has been so much greater, the stability of the owners so much less, and the degree of speculation so much greater. Looking at past bubble busts doesn't provide an analogous situation. We're in a different game this time.
It's a pessimistic case, but worth considering. Thanks for writing, Kent!