The ten-year anniversary is a good moment to look at the Case-Schiller index today and compare it to the peak of the bubble in 2006.
https://fred.stlouisfed.org/series/CSUSHPINSA
I think there will be some great deals in real estate by 2021.
https://fred.stlouisfed.org/series/CSUSHPINSA
I think there will be some great deals in real estate by 2021.
Downturns have reasons - Savings and Loans issuing long-term fixed rate loans at low interest rates, investors finally waking up to the shaky financials of dot-coms plus some accounting scandals, and mortgage defaults finally breaking through. If we want to predict the next recession we have to point at a reason not just high prices.
Are current valuations correct, though? That's not nearly as easy a question to answer. If in reality Snapchat is worth $8b, not $16b (current market value), then $8b of capital gets destroyed the moment everyone realizes the "true" value. Now, repeat that process over every highly valued and highly leveraged tech company that exists. Many billions of dollars could cease to exist in a short matter of time, which would impact bonds issued by, and loans taken out by, these companies, the bond market more generally, and the stock market.
There needs to be trillions of dollars of overvaluation and a huge amount of leverage to constitute a financial crisis. I'm open to being wrong, but I don't see that here. Valuations may cut back a bit, but as you say, it's not like these companies are worth nothing, like Bear Stearns and Lehman and most other investment banks in 2008.
If there's a market correction in startups, I don't see it necessarily leading to a systemic financial crisis. More like a mild recession.
It's much easier to see a pattern than to understand why it occurs.
At least not nationally, maybe in some metro areas it has. Mortgage lending standards have started to loosen though, but I think it'd take a while for that to have a substantial effect. Housing prices tend to increase because good land is scarce in most places people want to live.
Prices are driven by demand. A crash will inevitably reduce demand. Just like equities, real estate involves speculation. It may not be as bad as 2008, but we will still see a significant drop in real estate prices.
So supply is likely to be less than demand for the foreseeable future in most locations. Supply could increase rapidly if the mortgage delinquency rate rises rapidly. There aren't signs of this happening soon that I'm aware of, although mortgage lending standards have lowered a bit.
I don't see good evidence for an imminent crash, and saying prices will decline if a crash occurs is tautological.
At the same time, wage growth is nil and household debt has now exceeded 2008 levels [2].
We can argue about the implications of the trends, but the gist of my point is that an increasingly smaller pool of individuals is capable of affording houses in the majority of US markets. If the demand of that small pool of individuals, which is strongly tied to the health of the industry providing their wages, declines then we are in for a significant correction in home prices.
[1] https://www.attomdata.com/news/market-trends/home-sales-pric... [2] https://qz.com/1280927/us-household-debt-has-hit-an-all-time...
No, a crash will occur iff demand collapses. You've reversed cause and effect.
The direct cause of the 2008 crash was unavailability of loans once the risks of mortgage-backed securities became apparent, no?
Demand, remember, is the function mapping price to quantity demanded.
That’s fine advice, as far as it goes, but what would we be wait for - another crash? This chart does suggest that prices are inflated, but what do I do with that information? Wait for a downturn in two years? Ten?
One guy I worked with had an issue where his family outgrew the house he bought, but he couldn't get enough out of it for a down payment on a bigger place (even though the bigger house was cheaper than what he bought his small 2-bedroom for). So you don't want to get into this situation either.
Another situation that just happened to someone else I work with, she bought a house that she thought was reasonable. However her property taxes took a bit of a jump (the previous owner had lower taxes due to some senior discount). And it will be a few more years before she gets enough equity in it that can be used towards another house.
No one else can tell you that you shouldn't buy right now, if you can afford a house, need a house, and are willing to potentially be stuck under water for 5-10 years if prices go down, there are good reasons to purchase in this market. Just know going in that inventories are at historic lows, prices are very high, terms for purchasers are bad (in many markets), and many people are going to regret rushing in and purchasing homes in haste because they are worried about missing out, due to how quickly homes are selling.
That index is not adjusted for inflation.
"The indices kept by Standard and Poor are normalized to have a value of 100 in January 2000."
Source: https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index
This chart from the same wikipedia article seems to show that inflation adjusted (dotted line), the prices are less than 30% higher than in 2000: https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index#/me...
[0] https://en.wikipedia.org/wiki/Collateralized_debt_obligation [1] https://en.wikipedia.org/wiki/Bank_of_America_Home_Loans
People could get no down-payment mortgages, could get mortgages with bad credit, could get mortgages on houses they couldn't afford, because all the mortgage originators just fudged the paperwork. No one wanted to find a reason to not provide the mortgage.
Everyone being able to buy a house heated the market up, and as people got used to the market going up and up, it was seen as a good investment, and more people bought more expensive houses they couldn't afford, and mortgage originators did more shady things to make it happen.
A lot of these mortgages were adjustable rates that started at a really low rate, and in 3 years could shoot up to a much higher rate. An optimistic consumer wouldn't worry much about that. But when the time came, some people couldn't pay the crazy increase in their mortgage. The foreclosures coming onto the market depressed the market.
So the bubble finally popped, and someone owned a house that they bought for $750,000 with no money down, an adjustable mortgage for the whole $750,000 that started at 4% and in three years shot up to 8%, and when that happened the house could only be sold for $450,000. So they just stopped paying the mortgage and walked away. The foreclosures further depressed prices, created a very nasty cycle.
I worked in land records at the time, and the standards for the mortgage originators were just horrible. Not bothering to record mortgages in the correct town, not bothering to do a lot of things.
There are a few movies that are really interesting that described what happened, real life thrillers IMO. "Margin Call" is awesome, "The Big Short" explains what happened really well and is pretty funny at times, and "Too Big to Fail" is from the regulators point of view. It's kind of awkward but still really interesting.
It was insane how many new dimensions we'd have to create (on what seemed like a daily basis) for the variety of security and documentation types that the banks would generate.
More and more dual income housing, people can afford to spend more on a house so prices go up, then families have to have two incomes to have the same house that the previous generation had on one income
More households -- parents get divorce, now it's 2 houses needed for 2 parents and 2.4 kids