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Introduction
The real estate market, like other markets, is subject to the pressure of supply and demand. When speculation runs wild, prices can inflate rapidly. This is a "housing bubble." The danger in this situation is that the market will not be capable of sustaining the inflated prices, so the value of properties begins to come down, sometimes rapidly.

Definition of a Housing Bubble * A "housing bubble" is a cyclical economic event where high trade volumes inflate prices, which ultimately become unsustainable, causing a lowering, or "crash" in values. Economic bubbles may be called by a variety of terms, including a speculative bubble, a market bubble or a balloon. Economic cycles of this nature are not exclusive to real estate. They have occurred throughout history in a variety of markets, including stocks, tulips and pottery.
Contributing Factors to Unstable Housing Conditions * It could be argued that a housing bubble is really an example of a credit bubble. Although real estate is the underlying commodity, most house buyers use credit -- in the form of a mortgage -- to secure the property. Lax lending guidelines, rapidly inflating values, speculative buyers and the use of adjustable rate mortgages (ARMs), which can adjust to higher rates, are all factors in accelerating the likelihood of borrowers defaulting on their loans.
The Effect a Housing Bubble Has on Local Markets * Tighter credit is likely to result after a housing bubble bursts; and although the effects following the downturn may have a broad effect on consumer purchasing power, the depth and duration of the housing bubble effects will vary drastically in local real estate markets. Factors such as location, social trends, local economies and geographic amenities, such as beachfronts and mountains, can play a big role in a local market's resiliency.
The Broad Effects of a Housing Bubble * As home values increase and demand for property is high, building is in risk and construction employment is high. Speculators who enter the market early and sell before the market turns can earn good profits. Lenders and real estate brokers are busy, and buyers are motivated to buy. After the bubble bursts, lenders and brokers slow down, construction stops and workers are laid off. Homeowners either can't afford to sell or run the risk of foreclosure.

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Housing Bubble Globally Impact on Economy: There has been a great deal of argument in regards to what the full impact of the U.S. housing bubble will entail. Optimists keep insisting that we have hit bottom and can only go up from here. Of course nearly every bottom call that has been made thus far has been wrong. There is evidence and no reason to think anyone who sees a bottom now is correct.
The fact is that housing has helped to support our economy since the great depression and became even more of an investment vehicle after the fallout from the stock market bubble. Because housing is so huge, a decline in the housing market could have a serious effect on our economy.
How Bad Will It Get?
Losses in the housing market are expected to exceed any damage done by the savings and loan crisis, the tech bubble, and the stock bubble.'They're going to dwarf those losses because the losses could easily approach $1 trillion - that dwarfs anything that has ever happened,' said Kenneth Heebner, manager of CGM Realty Fund (Capital Growth Management) in a recent interview with Bloomberg. A $1 trillion loss in housing will certainly be difficult to make up elsewhere. And the U.S. isn't the only country that will suffer as a result. According to housing author Henry C K Liu, the effect will be global.
'Since the money financing this housing bubble is sourced globally, a bursting of the US housing bubble will have dire consequences globally,' said LiuLiu's comment is far from an exaggeration. It is estimated that 50 percent of the 'securitized' mortgage debt within the U.S.-the debt that helped to finance this housing bubble-is now owned by foreign investors.
A Coming Recession
The current housing bubble is not as unique as one might think. It happened nearly two decades ago in Japan. Just as they did in the U.S., home prices in Japan doubled nationally in ten years and tripled in large cities like Tokyo. And then they began to fall.When the bubble burst in Japan, it forced the country into a lengthy recession. The main reason Japan was not able to pull out quickly was because the Japanese government did not act quickly during the boom years, Japanese banks made money hand over fist. Unfortunately, most of the money they made was a direct result of bad loans. (Sound familiar?)The kicker is that the Japanese government knew what was going on, but rather than call the banks on their bad loan practices, they played a waiting game, hoping the banks would somehow be able to work things out and replace the losses caused by the bad loans.

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Of course, some people may argue that our government would never knowingly allow banks to fill their books with bad loans at the expense of the American people, but the fact is that is exactly what our government did.
It became obvious to everyone some time ago that the housing bubble had grown out of control due in part to a lending bubble . Rather than discourage the use of creative financing and predatory lending practices, the government actually encouraged it.In 2004 Federal Reserve Chairman Alan Greenspan stated that 'American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.'American lenders delivered, pushing interest only loans, no-documentation loans, tricky ARMs, and other imaginative loan products.In short, the government was the source of all of the lending troubles that haunt the market today. Just like the Japanese government, our government did not regulate these lenders and they did not protect the American people.These similarities suggest that it is not far fetched to imagine that we could end up in a recession very similar to the one that occurred in Japan. And that would be very bad indeed.
PROPERTY prices are rising throughout Asia and concerns are growing that a property bubble would have dire consequences on the banking sector and overall economies of countries in the region.From India to Shanghai, and from Hong Kong to Singapore, prices are red hot. While economic growth, modernisation and urban migration is creating huge demand for residential properties, much of that is also due to money seeking higher returns in a low interest rate environment.The leverage being taken on by households to purchase what many would say is the primal urge to own a home is growing in a number of countries but like all bubbles in history, there is a point to its elasticity.StarBizWeek take a brief look at how some of the asset bubbles have affected some countries in the past and what are the current problems in the property sector.

Japan
The most extreme example of a stock market and real estate bubble in recent times has to be Japan.During the 1980s, the Nikkei 225, which is the benchmark stock market indicator for the Japanese stock market, surged to a height of over 38,957 in December 1989. Its peak this century was 18,300 points and the index has been hovering around the 9,400-point level this week.The consequence of the collapse of the Japanese stock market then was also felt in the Japanese property market, as both ran-up hand in hand during a time when exuberance was fuelled by low domestic interest rates and expectations of a “can’t lose” economic environment.The bursting of the asset bubble in Japan led to what is now known as the lost decade. Banks, which were also flushed with cash because of the high savings rate of the Japanese, lent heavily for speculative purposes in the securities and properties industry and were bailed-out by the government when asset prices deflated.In fact, the price of properties in Japan on average has not recovered anywhere close to what those properties were priced when the market started to unravel in 1990. 4
United States
The United States is no stranger to real estate booms and busts. In fact, those cycles tend to happen from state to state during different periods of time.But the grand daddy of all boom and bust cycles took place between 2000 and 2005 when property prices surge beyond any fundamental justification.The rising prices of property meant that banks started to seek more and more marginal quality buyers, which we all know today as subprime borrowers.Those people with poorer credit history had financial deals that were above the odds compared with what the prime borrowers were dishing out for their real estate loans.The lucrative real estate loan segment also saw the entry of non-banks that started lending money and packaging those subprime debt into collateralised debt obligations.When property prices headed south, so did the repayment capability of those subprime homeowners. The collapse of the US housing market resulted in a global recession brought about by troubles banks that had to deal with a mountain of bad debt triggered by the housing market.
China
In the world’s second-largest economy and most populous country, a housing boom has truly been in the works for some time now. There have been intermittent corrections but the massive stimulus package by China’s government and the subsequent pick-up in economic and investment activity has resulted in skyrocketing prices once again.Earlier in the week, China watcher and economist Andy Xie said the property market in China has peaked and is set for a 5-year bear market. Those who disagree say Xie’s comment does not take into account the measures taken by the authorities to cool the market and the high downpayments that are needed for property investments.The general believe is that a boom in real estate in China has now morphed into a bubble. When the bubble ends, the scale in the number of properties being built and the build up in prices could not only have a serious impact on the country but for the rest of Asia and the world.
Hong Kong and Singapore
For city states like Hong Kong and Singapore, which are built on financial services, the marriage between money and property has been a symbiotic relationship that is uncommon in many other parts of Asia.In Hong Kong, the percentage of a person’s pay packet that is used to pay for their mortgages are larger than what Malaysians are used to. But a combination of next-to-nothing interest rates, a booming economy, purchasers from foreigners especially mainland Chinese in Hong Kong have seen property prices in Hong Kong and Singapore not only recover from the bottoms reached during the 2008 global financial crisis but surged to new record highs.The governments there are naturally worried. In fact, Hong Kong and Singapore have instituted curbs to cool down the deluge of money that is headed towards the property sector.Their hope is that it should put the brakes on the property train in those countries but with people quite used to peaks and troughs in the price of property, the hope is that this bubble would not have a devastating impact on the large banking sectors of those jurisdictions. 5
Have you ever seen a U.S. bubble that is comparable to this one?
There has never been a housing bubble in the US as big as this one, on a national scale. Perhaps some international bubbles have been as big. Vancouver Canada is going to implode like Florida did. Spain and the UK are huge problem areas right now. The bubble in Japan was arguably bigger and it took 18 years to unwind.
What are the three biggest reasons why we ended up in this mess, and is there anything we can do to reverse the damage that has been done?
We ended up in this mess because of bad policies from Congress, bad policies from this administration, and bad policies from the Fed, all compounded by consumer greed. That is a toxic mix. Starting with Congress we have had policies that encouraged housing via tax breaks. That is a violation of sound free market policies. We had the creation of Fannie Mae. There were 300 some odd programs to make housing affordable.Well, guess what happens when you go pushing houses on everyone and handing out tax breaks? Prices go up. The more programs that were created to make housing affordable the higher prices went. Illinois Governor Rod Blagojevich went off the deep end with a program guaranteeing mortgage loans for illegal aliens. The peak of insanity was when Alphonso Jackson, Housing and Urban Development Secretary actually went so far as to send this message to private sub-prime lenders: 'I am absolutely emphatic about winning back our share of the market that has slipped away to subprime lenders.' Look at the insanity. Government was talking about winning market share from the private sector on housing.Then of course we have Bush's Ownership Policy making renters feel like second class citizens. Government has no business promoting one form of housing over another. The Fed's role in this was slashing interest rates to 1 percent in an inane attempt to prevent deflation in the aftermath of the last recession. At the same time Greenspan openly endorsed ARMs right at the bottom of interest rate yields. Greenspan is a man who was wrong at every major turn. History will not treat him kindly. The role of consumer greed should be obvious.
How long will it be before housing finally hits bottom? And where will prices decline the most?
It took Japan 18 years to hit bottom. I suspect it will take at least 5 to 7 here and 5 is very optimistic. It could easily take 10 years or more. My best guess is 7 but it all depends on what the Fed does to fight it. Ironically enough, the more the Fed fights it the longer it will take. That is what happened in Japan and it will likely happen here. Prices will decline most in the bubble areas: California, Florida, Phoenix, Las Vegas, Boston. Some of the rust belt states where masses of jobs were lost will also get hit hard. The process has already started. Florida is a disaster already: ground zero of bubble busting. 6
Could states like California and Florida be pushed into a recession because of the price drops?
Of course. The entire country is headed into a recession. Here is a chart I put together on housing and recessions. |
The thing to keep in mind is that housing permits lead housing starts. Housing starts provide jobs. The rest of the economy is showing severe signs of stress already with the latest GDP at 0.6 percent. Look at all the jobs associated with housing: carpenters, brick layers, appliance manufacturing, shipping, lighting, grass seed, trucking of everything to the new house, furniture, etc. How can it not have an impact?
You mentioned in a recent interview that the peak for sub-prime ARMS re-setting is going to be in November of this year. How do you think that will affect foreclosure rates, and in turn, the housing market?
Yes. Treasury rates have barely budged. In fact they are inching up. It is already too late for 430,000 people. That is how many foreclosures we have had in the first quarter alone according to RealtyTrac. Also remember that credit standards are getting tighter on top of this all. And finally some will be unable to refinance because they are too far 7 underwater. When banks take bank property in foreclosures they will dump those houses on the market. That will further depress prices.
What do you think about the proposed sub-prime bailouts? Will they help or cost more money than they are worth?
Government intervention is one of the causes of the housing bubble. It is axiomatic that the problem cannot be the solution. Note that Congress acted too late anyway.
Government always does. The market already imposed its solution to runaway credit and ridiculous lending standards: the market's solution was a subprime lending blowup and forced tightening of lending standards. If the free market is given a chance to work it will. Bear in mind some will say the free market caused this reckless expansion of credit in the first place and government is needed to clean it up. That is ass backwards. Remember my answer to what caused the problem? It was government intervention compounded by the Fed that allowed subprime lenders to wreck havoc.
What else could the government do to ease the pain of the market correction?
The best thing for Congress to do at this point is nothing. They will only make the problem worse.
Do you have any advice for investors and would be buyers hoping to make a buck off the housing debacle?
Well it's obviously too late to short many of the subprime lenders that have now gone bankrupt. I think the best advice here is to not get too cute. We are still relatively early in the debacle. There are no tremendous bargains out there (especially for novices) to be thinking of snatching properties at foreclosure auctions. The people that buy now looking for bargains are simply too early. Inventory is still building, the economy is slowing, and we are headed into a recession. I would caution the real estate buyer to be patient. Better opportunities will come down the road.

Condition of Housing Bubble in Economy:
The timing of any downturn is not easy to predict. But a recession is likely, because of the enormity of the housing bubble and the impact of its collapse. Recall that our last recession in 2001 was caused by the bursting of a stock market bubble of about $7 trillion. The housing bubble is comparable in size -- about $5 trillion at peak. And the bubble wealth is much more widely distributed: Most Americans still have most of their assets in housing and little or nothing in stocks.As this housing wealth disappears, people cut spending. We already have seen an enormous drop in the amount that people borrow on their homes, from $600 billion in 2005 to about $350 billion for 2006. It 8 was this borrowing, enabled by soaring house prices that allowed people to borrow more against the value of their homes, that fueled the U.S. economic recovery since 2001.Housing construction and sales also are a big sector of the economy, currently about 6 percent of GDP. If that falls 30 percent to 40 percent, as it has in previous downturns, that's a drop of about 2 percent of GDP.The recession caused by the stock market bubble bursting, which lasted only from March to November 2001, would have been a lot worse if not for the enormous demand created by the housing bubble. So what will rescue the U.S. economy from the collapse of the housing bubble?It's not easy to imagine what that would be. Personal savings rates are already negative, a phenomenon not seen since the Great Depression. How much can consumers borrow on their credit cards? A sustained surge of business investment is unlikely in the face of an economy that is already slowing: GDP growth was just 2 percent in the third quarter, down from 2.6 percent and 5.6 percent in the previous two quarters.And there are downside risks from the global economy: Foreign central banks are keeping our long-term interest rates extremely low -- below short-term rates -- by accumulating 10-year U.S. treasury bonds. They could lose just some of their appetite for this debt at any time and send U.S. long-term rates upward. A decline in the dollar, which is inevitable given that we are borrowing more than 6 percent of GDP from other countries, poses similar risks -- although it will eventually help the U.S. economy by narrowing our trade deficit.

Conclusion:
We possibly could get through the international imbalances for another year but the housing bubble collapse is already upon us, with November's 2007 housing starts down 25 percent over the last year, home sales plummeting, and home prices falling. This is something that our political leaders and policymakers should have warned people about, rather than encouraging the same kind of speculative excess that dominated our economy during the late 1990s stock market bubble.