Bond Guru: Bubble Burst Not Inevitable

Agree with the others. That was indeed one of the best articulations of the 30-something housing squeeze I have read. If you are not a writer, you should be one.

Anyhow, I wasn’t trying to rub anybody’s nose in it. I forget that this board is not only brownstone owners, but folks who would like to become brownstone owners. And I can certainly sympathize. During the late 80’s, I felt the same way, that prices were racing out of control so fast, I would never be able to catch up. Of course, we know what happened after that.

Anyhow, I was only trying to illustrate that while 1st-timers stretching to buy are an important component of the market, cited by bubbleheads far and wide, actually there is a far greater population of stable home-owners with substantial equity cushion. Bubble or not, this population is not going to flood the market with houses, especially in established areas.

At any rate, I see your points and they are good ones. I don’t have all the answers. Like I said, even as a homeowner, I think a bit of rationalization of the market (hopefully a soft deflation) would not be a bad thing. I don’t want to see people like you finding it impossible to buy. Granted, owning brings with it a certain amount of lifestyle change, I would not want to feel it was impossible for 1st timers to even get in the door.

Agreed – unfortunately, there are a lot of fools in the world and you would be surprised at how many people in their early 30s are buying their first homes with adjustable mortgages and making huge stretches just to meet the current required monthly payment. There IS a generation who did not get into the market yet you know and this is the only way they are affording a family home due to the huge price increases.

I know some will say that daddy is giving these people the down payments, but I am in real estate finance and I am not seeing too much of this anymore. It was one thing when daddy was willing to shell out $40K for the down payment on a two bedroom – it happened a lot in the beginning of the upturn. But the daddys do not seem as interested in shelling out $150-$200K for the down payment on that same two bedroom now. Most daddy’s don’t come from NYC and are floored by the prices now and unwilling to part with that kind of money to buy what they consider a modest home for their darling 30 yr old children.

Even with a $150-$200K down payment from daddy, these young families still have a mortgage of over a million and the only way they are affording this is with creative, risky financing. I am a young professional and believe me, a majority of my contemporaries do not have more than 10-15% equity in their homes and have used creative financing because it was the only way for them to afford a family home and because everyone, everywhere was screaming from the roof that real estate is the best investment in the world and worth the risk. We all heard how much the generation above us made on real estate and wanted in.

Also – the theory posted on this board in the past that the Europeans and Japanese will swoop in to buy the fixer uppers in PPS at their outrageous asking prices because they will consider them a bargain seems a bit far fetched. It is true that we are seeing an increase in these buyers, but they are buying super-sexy midtown one bedrooms in full service buildings to use when they are in the city – not family homes and especially not family homes that need work in far from gentrified areas of outer bouroughs.

Real estate is stickier than most investments and I think that if you already bought, are in for the long haul and financed properly, you will do fine. Just my 2 cents, but with the interest rates rising and the new young families not necessarily having $150-$200K to put down on a home (because they were too young to buy when the market was rising and therefore have no RE profit to re-invest) and $7000 a month to pay the mortgage, there just aren’t going to be as many buyers out there able to or willing to pay way in excess of a million for a modest home in Brooklyn.

Although I did get in early, I for one would be happy if things slowed or went down a bit. I want normal, hard working, but not excessively wealthy families to be able to afford the house next to me – it is what makes a community and what attracted me to Brooklyn in the first place. If things kept going like this, only the very wealthy could afford to move in and buy the homes that are coming on the market as the middle class baby boomers downsize and move away. In that case, I might as well move back to the upper east side where there are more services and the commute is faster because Brooklyn will have lost that feeling of community that made me move here in the first place.

For clarification, I meant to say “I would STILL be damned happy” meaning, I would still be way ahead of the game.

I don’t think any advice was intended because everyone’s situation, plans for the future, etc… are different. People on this site tend to be brownstone owners and tend to get defensive at anything indicating prices won’t continue to rise. I think the post below was just responding to past posts where others seem to say a downturn or stabilization is very improbable. It is a possibility and, for those using real estate as an investment or buying way over their means with cheap short term adjustable financing (which has gone WAY up according to all reports in the tristate area over the last month even – I know, I work in real estate), they should think twice and consider that putting all of their savings into real estate on the hope it will continue rising at these rates is pretty risky. Having said that, everyone has to make their own decision based on their circumstances. If you own your home, can afford it (even if interest rates rise another point or two if you have an adjustable rate) and like it, there is no reason to sell. It is your home. It is just naive to think that an adjustment to the market is not possible given the unprecedented increases in prices over the last few years – far in excess of the increases we saw prior to the 1980s adjustment.

I respect all of your comments. However I think bubbles occur on more practical and emotional terms. I think a lot of people over the last four years have been buying just because of historic low interest rates coupled with cheap short term financing (i.e arms and interest only loans). The people who have done their homework and don’t have to move over the next 10-15 years are obviously ok. But, if we were all rational we would also lock in 30 year rates to take advantage of these long rates. That is not what has been happening (30% arms in the tri-state area) and therefore I think there are more people left open to the pain of rising interest rates. Easy financing coupled with 20-30% annual price increases (without corresponding increases income) is a recipe for disaster. Yes I am sure there are some of you well protected, but its not about you, but about the supply that comes onto the market in a downturn that affects everyone’s equity. Remember that even in the 80’s with 10-20% decreases they stayed that way for 10 years before recovering. If your home price falls 10-20% and stays that way for 10 years that is a much larger drop over the time period given inflation. Bubbles are rarely put off by monetary policy and are rarely forecasted by the majority and that’s why bubbles occur…people just think its normal for home prices to continue to soar (because they have as long as one can remember.) The correction is coming…real estate is cyclical…no one knows when…but when long term borrowing costs go up I think its a pretty good signal. Just my minority opinion…I don’t have an interest one way or another.