It’s Not a Bubble Until It Bursts

Times Staff Writer

The chief economist for the Mortgage Bankers Assn. is worried enough about the torrid housing market to get out of it.

“I’m going to rent for a while,” said Douglas Duncan, who expects “significant reversals” in regions that have enjoyed strong home price appreciation, including Washington, D.C., Florida and California. He plans to sell his suburban Washington home, which has tripled in value since he bought it a dozen years ago, and move into an apartment.

Duncan is among a multitude of experts and consumers across the country debating the possibility of a housing bubble -- a condition where prices have risen so far out of hand that they eventually crash.


Prominent policymakers and academics, including Federal Reserve Chairman Alan Greenspan, have recently warned about bubbles in regional markets. A recent nationwide Gallup/Experian poll of consumers showed that nearly four in 10 said they expected a bubble to burst in their region in the next three years. Across America, water cooler or cocktail party conversations often include talk about those who have made a killing in real estate, and whether it’s now too late to get in on the action.

However, none of the experts or novices knows for sure when and how a bubble might burst. Bubbles throughout history, including tech stocks in the late 1990s, often go on for years, and crash when few expect it. Many experts and media pundits have been predicting a downturn for the last three years -- and home prices have continued to rise, up nearly 70% since 2001 in the hot Southern California market.

Consequently, though some homeowners like Duncan are pulling back, others are buying as if prices will continue to rise for quite some time. Still others regret that they didn’t buy in the last two or three years, now hoping to pounce when the bubble bursts and prices fall.

“If I had been reckless and disobeyed every single financial analyst’s advice, I would be one of those people with tons of equity,” said Susan Lindsey, a 42-year-old La Jolla renter who passed up buying a home in San Diego three years ago because she refused to take out a riskier type of mortgage that would have allowed her to qualify.

She estimates she would be up as much as $200,000 in home equity now if she had pulled the trigger then. “Yeah, I’m bitter. I want to own my own home. I want it badly.” When the crash comes, she said, “I will have no qualms about swooping in on someone’s foreclosure.”

To listen to many pundits and the media, housing was a sure bet to implode long ago.

In late summer 2001, Business Week magazine was cautioning that “a housing bubble may be developing.” In July 2002, a Wall Street Journal personal finance columnist warned, “Dumping Stocks for Land? That May Be a Big Mistake.”


The current issue of Fortune magazine has a cover story on real estate speculators getting rich buying and selling houses in rapid succession. None of them seems to have taken to heart the magazine’s 2002 cover story, which said: “U.S. housing prices are stretching the outer limits of what’s reasonable and sustainable.... In a year or two, prices will fall with a thud.”

When that didn’t happen, some people got tired of waiting. The website hasn’t been updated since mid-2003.

Others have accommodated themselves to the current reality.

A widely followed University of Michigan consumer survey, released Friday, showed that 24% of respondents nationwide said it was a good time to buy a home because prices would rise. That was the highest percentage since 1988 -- right before prices peaked in the previous real estate cycle.

“These are powerful engines creating a boom in home sales, and all booms end the same way,” Richard Curtin, director of the survey, said in a statement.

Three years ago, Phoenix Management Services, a turnaround firm based in Philadelphia, asked about 100 lenders in its regular quarterly survey if they thought there was a real estate bubble. Voting yes were 58%, and 29% said no.

A few months ago, Phoenix asked the question again. Despite the last three years of zooming prices, 46% of the lenders said it was a bubble, and 39% believed it wasn’t.


“They’re saying, ‘This isn’t a bubble -- this is here to stay,’ ” said Phoenix Managing Director Michael Jacoby. “That’s really scary.”

It’s possible that something fundamental in the nature of real estate has shifted over the last three years, powering the growth while tamping down the risks.

Irvine real estate consultant John Burns told the Los Angeles Times three years ago that “we’re in a mini-bubble.” He added that if the market continued to grow by double digits for more than a year, Orange County “will get to a point where home prices are no longer sustainable.”

The median price in the county then was $317,000. Last month, it hit $576,000. But Burns no longer thinks there’s much risk.

What’s changed, he argues, is the job picture. In 2002, the region had emerged from a recession the year before. People who lost their jobs had to sell their homes. That’s what dragged down housing in the early 1990s, and it easily could have done so again.

“It was a recipe for disaster,” Burns said. “We got through the job losses somehow, and now we’re generating more demand for houses than we’re building.”


In 2002, Dean Baker was a more emphatic housing bear than Burns. But he hasn’t changed his mind.

“We’re going to have a decline in house prices in six months,” said Baker, director of the Center for Economic and Policy Research, a Washington think tank. “I’ve been saying that for three years now.”

A year ago, Baker was so sure the collapse was at hand that he sold his Washington condo, which had tripled in value in the seven years he owned it. He moved two blocks away into a rental and wrote another article warning that “the crash of the housing market will not be pretty.”

He pointed out that housing prices traditionally didn’t rise faster than inflation, but that on the coasts the price jumps were exceeding that level by double digits. He dismissed the argument that prices were increasing because of immigration, or the scarcity of land or the demographics of the baby boomers.

Despite this excellent list of reasons, the crash stubbornly refused to happen.

“It’s kind of troubling, like you were a physicist studying the laws of motion and you see an object that ignores gravity,” Baker acknowledged.

Asked for his latest prediction of a bubble bursting, he said: “I’ll stick with six months.”


Some people, however, don’t think a crash will ever come. They include many California homeowners.

Yale University professor Robert J. Shiller, a housing bear who expects prices to fall so much he sees a risk of national or even world recession, has been surveying recent home buyers in the Southland.

In 2003, new owners surveyed said they thought the value of their homes would increase an average of 13% a year for a decade.

By last year, they expected 22.5%.

“They said their $650,000 home was going to be worth $1.7 million,” said Shiller. “About a third of the population has really high expectations. They see the price increases and extrapolate from them.”

Shiller’s unscientific survey -- he sent out 500 letters and followed up with a postcard if there was no reply -- was backed up by the recent Gallup/Experian poll, which surveyed the whole country.

A quarter of the respondents said they expected the value of their homes to increase by at least 10% a year, significantly above the historical average. However, that also was the survey in which about four in 10 said they expected a bubble to burst in the next three years.


Shiller, who earned a national reputation by calling the 2000 tech stock bubble shortly before it burst, is hedging his bets.

He bought a second house on Long Island a few years ago, despite his view that a psychological frenzy was gripping housing that matched the earlier mania for tech stocks. The house is worth a lot more now. He’s not selling but said, “I pulled back on my real estate portfolio a bit. I don’t see any sense of immediate urgency.”

Millions of people still have to change their thinking, Shiller said. “That’s a gradual thing.”

It’s a human temptation to stay in the game until the last moment. But Duncan, the economist for the mortgage bankers, doesn’t seem to feel it. Workmen are prepping his home now for a sale, he said.

Acting on his gut has served him well before. In 1988, as the economist was moving to Washington, he went to look at a house that was for sale. Three couples were already there. They started a bidding war in the living room.

“This is irrational behavior,” Duncan remembers thinking. He decided to rent. Shortly afterward, the market crashed.


In 1993, he decided it was a good time to own. The price he paid for his house was about a third less than the previous owner, who had lost it in a foreclosure sale.