Comment of the Day: Bursting Your Housing Bubble Bubble

COMMENT OF THE DAY: BURSTING YOUR HOUSING BUBBLE BUBBLE “Your fears of a bubble being caused in this manner are unfounded. The sales of older homes (by Houston standards at least — still less than 10 years) have shot up in just the last 9 months. Sure, we always need to guard against bubbles, but I don’t think an EaDo-specific bubble is occurring, and certainly not because there aren’t existing single-family homes. Teardowns of existing, livable (leaving out the shotgun shacks) single-family homes have started (here, for instance). In the place of the teardowns are multiple townhomes. There are some examples of irrational exuberance on the part of the developers, like the $500,000 asking price for the townhomes bounded by Nagle/Capitol/Delano/Rusk, but the recent high appreciation occurring is not out of line and has only been occurring for a few years, whereas places like the Heights and Rice Military have seen prices increases for many years, all without any neighborhood-specific bubble. Midtown, too, has avoided a bubble-then-crash and they have an even smaller stock of single-family homes yards than EaDo.” [eiioi, commenting on Comment of the Day: East Downtown, Brought to You by Montrose] Illustration: Lulu

29 Comment

  • It’s not a bubble, if it doesn’t burst.

  • This is America real estate bubble 2.0 fueled by low interest rates and newly printed money. It will be interesting to see what props the fed tries next to reduce the pain of reality. IMO this is going to end badly, especially for new luxury apartments with no ground floor retail.

  • There is no bubble of nay sort, there may be some minor fluctuation due to interest rates, temporary supply constraints etc, but that’s business as normal in the real estate market.
    The ’08 bubble and crash was caused by way too many people who should not have owned homes in the first place, they lacked financial responsibility. Sure banks were stupid to give loans to those people, but they were heavily pressured by liberal policies of the democratically controlled congress.

  • there is no bubble here. it is a scientific truth that housing prices only go up. no need to worry.

  • And they blamed Bush with the help of the liberal media.

  • Politics….because having an original thought is so passe.

  • @commonnonsense – You may be entitled to your own opinions, but you don’t get to have your own facts.

    The bubble and crash was a direct result of deregulation of lending, the creation of securitized mortgages, and the dissolution of the walls between investment banking, commercial banking, and insurance.

    Rather than the traditional model of lenders doing their own servicing and evaluating their own portfolio of loans, mortgages would get bundled into packages (grossly simplified, a small company made up of the loans that were made during a given time period), the equivalent of shares of which were then sold to various investor entities. There was little or no due diligence about checking a borrower’s credit, and down payment requirements were continually reduced to keep the Ponzi scheme going. The mortgage broker and/or original “lender” generally had little to no responsibility if loans failed after an initial period, often as short as a few months to maybe a year – so their motivation was to make as many loans as possible and live off the origination fees, and let someone downstream worry about the risk of default. Evaluation of that risk was done in house or by related entities. Eventual ownership of a given loan ends up being a deep, dark secret – in part because nobody really can answer the question with any certainty (imagine the warehouse final scene in Raiders of the Lost Ark). Servicing (taking the payments and distributing them, making sure that there’s insurance and that the taxes are paid, and foreclosing or working out if need be) is farmed out to third parties who also have no skin in the game – again, they live off the fees they charge for doing that bookkeeping. Investment banking (which includes trading in these sorts of complicated vehicles, a higher risk/return activity) was merged with commercial banking (taking deposits and making loans from those proceeds – lower risk/return). Fannie and Freddie got pushed into it later rather than sooner because RIGHT WING members of Congress were all over the “look how much money Lehman is making off this” drool fest, rather than hanging in with being dull, boring, and low risk (I won’t say “conservative,” because that would imply being careful with one’s money).

    It could very well topple again, because the root problems weren’t really addressed as part of the bailouts. Nothing got unwound, just swept to the side, while the basic structure that blew this up is still in place. It’s Enron, Act II, and I hope to high Heaven it doesn’t end up in Enron, Act III.

  • I’m putting all my money into tulips!

  • @mollusk, you are not incorrect on some of the facts, however, I think you have the cause and effect backwards…. The congress encouraged banks through a bunch of feel good legislations to lend to anyone and everyone. Through their regulatory agencies banks were bullied to lend to unbankable people, minorities with bad credit, low income customers, etc. It was an era of “You lend or we will audit you or won’t give you access to the Fed lines of credit”. Banks early on figured out that it’s a bad long term deal and is way too dangerous so they found a very elaborate scheme to pass the risk on as quickly as possible onto someone else (and make a buck in the process). Then the situation got a life of it’s own and grew into a monster which it eventually became.

  • Mollusk,

    You typed for a long time… too bad you missed the target. It was absolutley liberal (everyone is entitled to their own home) policies which created pressure to loan to anyone who wanted the American dream of home ownership…. The subsequent buying frenzy and housing shortage created the price “bubble”… The predatory and unscrupulous lending practices made many people rich and the packaging of mortgages as securities was a major part of the recession once the price bubble burst…. we arent seeing any of that now … except a bit of a housing shortage…. which is created by thousands of people moving to Houston every day in search of jobs…. the only near threat to our housing market is a wrecked job market …. or a massive increase in mortgage interest rates.

  • commonsense hit the nail on the head.

  • I think talking politics here misses the point a little bit. The current Houston economic boom isn’t connected to nation-wide anything. It’s connected to energy-sector activity. If, how and when energy activity slows will determine if the Houston economy, and the Houston real estate market by extension, also slows or busts. If all drilling were to stop tomorrow, our boom would be a bubble that that popped. If energy activity continues at this pace for 100 years, they won’t be able to call it a bubble. They’ll just call it growth.

  • The important point is that the regulatory mechanisms that prevented swiftly shoving risk and responsibility downhill were systematically disassembled by things like the repeal of Glass-Stegall (the brainchild of Phil Gramm, an R as I recall, who went on to a nice career at UBS, and whose wife sat on Enron’s board) and the Commodity Futures Modernization Act (another gift from Gramm). Once the brakes were released and the risks tossed to wherever they could land, of course the people who are in the business of making money did what they could to make more money. That’s why they’ve been promoted.

    Talking points from agenda driven media notwithstanding, practically every analysis I’ve read (much of it from within the financial industry) points to that deregulation as driving the eventual bubble and meltdown. Until something comes around to replace it, we are very much at risk of a return to the wide boom and bust swings that were a characteristic of the economy before those regulations were put in place during the Depression.

    I will not discuss arguments springing from stereotypes. Good credit is good credit, bad credit is bad credit, and neither relies much upon handy external markers.

  • anon #1 and Densify #12,


  • Mollusk with the easy win.

  • I was indirectly involved in the mortgage broker business and their short term lenders in the lead up to the bust. The idea that anyone felt pressure from the government to lend to high risk borrowers is hilarious. Mortgage brokers loved high risk borrowers because they were suckers for time bomb variable interest rate deals. Once the rates reset and the payments skyrocketed, these folks came running back to the mortgage broker for a refi to get their payments back down. The mortgage brokers made fees on top of fees. The short term lenders just bundled up the junk and securitized it for investors who relied on the fraudulent bond ratings. No one cared about getting audited by the fed for discriminatory lending practices because they were making money hand over fist on high risk lending. To the contrary, the industry couldn’t get enough of the subprime market during the bubble.
    The big irony of the 2008 housing bubble is that Texas avoided the worst of it because Texas sets a maximum of 80% on home equity loans. When the market crashed, people in Texas did not go underwater to the extent people did in markets where there were no limits on home equity borrowing.

  • The thing that I don’t understand about the whole idea that CRA oversight pushed the mortgage industry into crisis is that we saw the crisis in some states, like Nevada and Florida, but not so much here. We have just as many banks in Texas that fall under CRA regulation as those states do–but we didn’t see the same housing bubble here. In fact, I think you could say we were impacted, but we never had a “bubble” in any true sense. And the reason for that is not because Texas banks are super-tough righteous patriotic Americans who stand up to liberals in Washington–it’s because in Texas, we don’t allow debt on a home to exceed 80% of its appraised value, and the debt cannot be used to pay off other debts. It’s simply not as easy to be a middle-class house speculator in Texas as it is in those other states. So the answer, at least for Texas, is that we stayed strong because of government regulation.

    And I took all of that off the internet. You can go back to blaming poor people now.

  • I hope that my comment wasn’t misconstrued as any of the following:
    -there is no real estate bubble anywhere in the U.S.
    -a real estate bubble isn’t possible because we already went through all that in 2008
    -a real estate bubble can’t happen again
    -people in EaDo can only gain money by buying a house and need not fear ever losing money on real estate in EaDo.

    Bubbles happen. A real estate bubble will happen again both on a semi-global scale (e.g., western nations) and at a state/local level (e.g., price of oil plummets). My comment was addressing the notion of an EaDo-specific bubble, which I think does not exist.

    All investors in real estate or any other investment should be cognizant of the potential for a bubble. Insert standard investment disclaimer here.

  • If energy starts to sputter, possibly because other sectors of the economy begin to make themselves viable contenders for money storage, then Houston’s bubble may slow down a bit and housing may begin to slow as well. Instead of 2,000 people moving here per day maybe it’ll be only 1,000.

    I think the way to contend with this is to strategically deploy QOL initiatives that could boost housing prices via policy (but without resorting to zoning, of course).

  • Looking at the original comment and ignoring most of the stuff typed above this, the Houston housing market today is not truly in a bubble. There is just more demand than supply, mostly due to a freeze on builder’s loans that came along with the crash of 2008. Nothing much got built here from 2008 until late 2010. The market is still playing catch up. That said, I think as more neighborhoods like EaDo, 3rd Ward, Oak Forest, Westbury(?) are redeveloped, we will see an evening out of prices in some hot neighborhoods like Montrose and the Heights.
    As to “liberal-induced” easy lending policies, I’m pretty sure I remember George W. Bush pushing the “Ownership Society” in his 2004 or 5 State of The Union address. I don’t remember there being a “D” after his name. And the House at the time was under control of Republicans for those of you who forget.

  • That’s not to say it’s impossible to create a genuine frothy bubbly bubble here in Houston. Momentum is undoubtedly in speculators’ favor, so the step one seems like it’s in place.

    Now the key is to convince the Chinese that this is where they want to park their money.

  • I was also indirectly involved in the lending industry right before the crash, and yes individual brokers were going nuts, but they did not have any say in how the greater system works, that was all established way above their heads. And yes, there most certainly was pressure for the banks to approve what the crazy brokers were doing.

    @Anse, right before the crash you could get a mortgage 104% to 107% of the appraised value. You could also get interest only and even defferred payment loan where you don’t have to make any payments at all for over a year. Even now you can easily get a loan of 95% to 97% of appraised value.

  • Yes, please let’s get off the political angle, it just leads to an civil discussion that vears off course like a Caddyshack drop shot. I agree the ongoing condition of the energy sector will decide in time whether this this current housing price rise is sustainable over time. It can certainly be argued that real estate in Houston has been undervalued for some time, maybe the prices are just catching up. I think the Eado is a good investment simply because prices are so cheap that an uptick will net a profit. Houston has become a hot market for investors, let’s hope the energy market stays hot and the investment continues at the current torrid pace.

  • Is the uptick in avg. price also possibly attributable to an increase in quality? The houses they are building now seem so much better than the one I grew up in.

  • The tragedy of the housing bubble is that there were so few consequences for the irresponsible lending that Old School and mollusk point out. I’m not talking about jail, I just wish that more banks had gone under – Goldman, BoA, etc. Would have made 2009 far more unpleasant, but much better for everyone in the long run.

  • Most of you people just don’t get it… in this town it’s all about the oil.

  • Commonsense, yes, of course. We bought a house that was priced considerably above the county’s appraised value. We had to borrow more money than the county said it was worth. Happens all the time. But you can’t get a home equity loan on those terms. That’s what I and Old School are referring to, which I’m sure you understand but being trollish in your ways, will not acknowledge…and it’s one–just one–of the regulations Texas enacted to control real estate markets from going bananas.

  • Too complicated a line of thought for some of these guys, Mollusk! For a lot of people, it is much easier to understand the world and the financial markets by simplifying things for themselves into terms they can understand, such as “LIBERALZZZ!!!!”

  • Those are house rates and they are bound to rise no matter what you do. Increasing rates of interest are forcing first time buyers to wait for this housing bubble to burst.