Tuesday, August 15, 2006

Bursting the California Housing Bubble

SoCal home sales drop 22%, the biggest plunge on record. Prices down slightly.

Remember how the movie goes...first the prices and transaction volumes rise. Check.

Then people start saying the four words that Sir John Templeton said are the most expensive in the English language: "This time it's different." Check.

Then the prices and transaction volumes peak as people pile on, driven by the fear of missing out. Check.

Eventually, the market runs out of greater fools/new buyers. Check.

As the bubble deflates, asset holders try to sell without taking a loss. As a result, prices stabilize, but volume plunges. As today's story indicates, check.

How long until we enter the next phase, when overextended investors start selling at a loss, triggering a run for the exits and an asset price crash?

To paraphrase Bette Davis (and her eyes), fasten your seat belts, it's going to be a bumpy ride.


Eric Allam said...

I think you forgot one phase. After the prices tumble and investors sell at a loss, smart investors who were patient (also called vultures) by cheap properties and end up making tons of them in a couple of years.

Can't wait till that happens.

Chris said...

Very good point, Eric! I didn't mention it, but overcorrection is the next phase after the panic.

If "this time is different" are the most expensive words, "nobody will ever invest in X again" are the most profitable.

nate said...

I'll tell you, as an investor, that I've dropped my price twice since November and still can't get rid of a property. So, it's coming. You could even hold your breath if you want to because I don't think it'll be that long.

Chris said...


The parents of a friend of mine recently had their house burn down. Their options were to a) rebuild it, then sell, or b) sell the burned out lot.

They chose option B, and one of the main reasons is to get out while the getting is still good.

Foobarista said...

Having seen several booms and busts in SV real estate, my impression is that the bust will be hardest at the high end, where the market may simply disappear, while the low end will settle some, but not crash. Also, regions matter: I'd be far more worried about a house in Tracy or Gilroy than a non-high-end property in Palo Alto or Mtn View - the close-in areas historically hold their values better than outlying areas.

The danger in the above is that previous bubble-pops were driven by bigger economic issues more than by tons of people with garbage loans.

Another thing that is hitting hard is prices are high enough that even CA's relatively low property taxes are hurting: the taxes on a $700K house would be over $10K/year...

Zoli Erdos said...

Chris, can you pleeeeeze hold off bursting the bubble just yet, I need to save up a bit to buy back into the market at the bottom :-)