To all posters: please be nice to the newbies.

We are not a bubble blog. We are a blog about housing and real estate with a focus on residential housing in Irvine. We welcome all points of view to the discussion of that topic.

There is a general consensus among posters that we are entering a bear market in local real estate based on our analysis of current market conditions. However, these are just opinions, and they do not need to be shared by everyone who comes to this board. A board composed of people sharing the same opinions becomes an echo chamber where everything sounds the same. Preachers don’t win many converts when preaching to the choir. When people express opinions not shared by the consensus, we should listen and reply thoughtfully, not attack and condemn to drive away the heretics. If our consensus opinion is the correct one, the strength of our arguments will prevail.

Keep in mind that people have emotional needs concerning the value of their homes, and putting them on the defensive is a sure way to prevent them from listening to what you have to say.

To all new members:

1. If you have questions or wish to discuss a new topic, please use the search tab at the top of the page to see if the topic has been discussed in an existing thread before starting a new discussion.

2. If you want to understand why we are bearish, please read some of the posts linked to below.

Analysis Posts. Clicking the link will give you a distilled list of all analysis posts concerning our real estate market.

Below are some of the basics everyone considering buying a home should read and understand:

What is a Bubble?; The concepts and beliefs that when acted upon by the general public create an asset price bubble.

Rent Versus Own — A detailed look at the cost of ownership and the various reasons to rent or own a particular property.

Financially Conservative Home Financing. Discussion on the types of financing and the dangers of exotic loan products.

How Inflated are House Prices? Demonstration of simple valuation methods to evaluate the fundamental valuation of a residential house.

Predictions for the Irvine Housing Market. What could happen to house prices over the next several years.

Southern California’s Cultural Pathology. How the decisions and beliefs of individuals inflated the housing bubble.

Appreciation is Dead. Why you shouldn’t count on appreciation when making a home purchase.

The Anatomy of a Credit Bubble. A detailed analysis of exactly how prices got to where they are today, and why prices may crash very hard.

Many of the posts below contain links to various research documents from scholars in the field of finance, economics, psychology related to the housing market.

From Efficient Market Theory to Behavioral Finance

By

Robert J. Shiller

October 2002

Abstract. The efficient markets theory reached the height of its dominance in academic circles around the 1970s. Faith in this theory was eroded by a succession of discoveries of anomalies, many in the 1980s, and of evidence of excess volatility of returns. Finance literature in this decade and after suggests a more nuanced view of the value of the efficient markets theory, and, starting in the 1990s, a blossoming of research on behavioral finance. Some important developments in the 1990s and recently include feedback theories, models of the interaction of smart money with ordinary investors, and evidence on obstacles to smart money.

The PDF link above is 44 pages.

Bubbles, Human Judgment, and Expert Opinion

By

Robert J. Shiller

May 2001

Abstract: Research in psychology and behavioral finance is surveyed for evidence to what

extent experts such as professional investment managers or endowment trustees may behave in

such a way as to help perpetuate speculative bubbles in financial markets. This paper discusses

scholarly psychological literature on the representativeness heuristic, overconfidence, attentional

anomalies, self-esteem, conformity pressures, salience and justification for insights into

weaknesses in expert opinion. The role of the prudent person standard and the news media in

influencing experts is considered. The relevance of the literature on testing of the efficient

markets theory is discussed.

The PDF link above is 17 pages.

HISTORIC TURNING POINTS IN REAL ESTATE

By

Robert J. Shiller

June 2007

Abstract

This paper looks for markers of ends of real estate booms or busts. The changes in market

psychology and related indicators that occurred at real estate market turning points in the

United States since the 1980s are compared with changes at turning points in the more

distant past. In all these episodes changes in an atmosphere of optimism about the future

course of home prices, changes in public interpretation of the boom, as well as evidence

of supply response to the high prices of a boom, are noted.

The PDF link above is 29 pages.

HOUSEHOLD REACTION TO CHANGES IN HOUSING WEALTH

By

Robert J. Shiller

April 2004

It is widely claimed that home prices, as well as stock prices, have an impact on consumption

and hence on aggregate economic activity. Notably, the declining stock market since March

2000 is widely described as a contributing factor to the recession of 2001 and economic

weakness thereafter since it worked to weaken consumption growth, and the relative mildness of

the recession is often described as related to the rise of home prices, since the rise of real estate

prices since 2000 has been seen as having an effect on consumption that offsets that of declining

stock prices. But, it has been hard to quantify the separate effects of these different measures of

wealth and the impact of the wealth changes on consumption, and hence hard to quantify the

risks to the present economic expansion that might be created by falling housing prices.

The above PDF link is 17 pages.

Moral Hazard in Home Equity Conversion*

by

Robert J. Shiller and Allan N.Weiss

Home equity conversion as presently constituted or proposed usually does not deal well

with the potential problem of moral hazard. Once homeowners know that the risk of poor

market performance of their homes is borne by investors, they have an incentive to neglect

to take steps to maintain the homes’ values. They may thus create serious future losses for

the investors. A calibrated model for assessing this moral hazard risk is presented that is

suitable for a number of home equity conversion forms: 1) reverse mortgages, 2) home

equity insurance, 3) shared appreciation mortgages, 4) housing partnerships, 5) shared

equity mortgages and 6) sale of remainder interest. Modifications of these forms involving

real estate price indices are proposed that might deal better with the problem of moral

hazard.

The PDF link above is 29 pages.

Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?

W. Scott Frame and Lawrence J. White

Journal ofEconomic Perspectives-Volume 19, Number 2-Spnng 2005-Pages 159-184

The Federal National Mortgage Association and the Federal Home Loan

Mortgage Corporation-commonly known as Fannie Mae and Freddie

Mac, respectivelyi-e—havc led the way in dramatic changes that have taken

place in the structure of the U.S. residential mortgage markets since the 1970s.

Fannie Mae and Freddie Mac are quasi-private/quasi-public: for example, they have

federal charters that confer unique regulatory provisions; but their shares are

publicly traded on the New York Stock Exchange. The biggest advantage of Fannie

Mae’s and Freddie Mac’s anomalous legal status arises because financial markets

treat their obligations as if those obligations are backed by the federal

government-even though the federal government explicitly does not do so. With

the benefit of this special status, Fannie Mae and Freddie Mac have grown into

enormous financial institutions, with combined total assets of over $1.8 trillion in

2003. One critic, Richard Carnell (2004), a former Assistant Secretary of the

Treasury, has suggested that the two companies’ growth is at least partially a

consequence of a "double game" that they play: "[They] tell Congress and the news

media, ‘Don’t worry, the government is not on the hook’-and then turn around

and tell Wall Street, ‘Don’t worry, the government really is on the hook.‘"

The PDF link above is 28 pages

The Fed will print trillions before this is over.

A theory of fads, fashion, custom, and cultural changes as informational cascades.

An informational cascade occurs when it is optimal for an individual, having observed the actions ahead of him, to follow the behavior of the preceding individual without regard to his own information. We argue that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades.

[url=“http://economistsview.typepad.com/economistsview/2008/03/rational-herdin.html”]

And, to add what Dr. Thoma thinks[/url]...

Here’s another example of how this mechanism can work: Suppose you are in a long line of cars that are all headed to the same place. You have a vague, but not perfect idea of how to get to your destination. At one intersection, by chance, the first three cars get it wrong and turn left instead of right. The fourth car, though somewhat certain the correct way to go is to turn right, is not certain enough to go in a different direction and chooses to follow the first three cars. The driver assumes that since all three cars turned left, that must be the right way to go. As everyone begins to turn left, the signal strengthens and only those who are very certain of the true direction (which is a difficult condition to meet in asset markets) will choose to deviate from the group and go in the direction they know is correct. [For this to work, it is important that decisions be sequential, and that people can observe and learn from the decisions of others.]
We don’t know for sure how or why bubbles occur, so this may or may not be the correct explanation. In general, it’s hard for economists to admit they can occur at all since they do not appear to be rational responses to economic fundamentals and we do not have very good models of them, so this may explain some of the resistance to admitting a bubble is occurring at the time it is inflating. We prefer to explain market outcomes with economic models that we understand instead of with bubbles that occur for mysterious reasons. It is only after the fact, when it becomes clear that no fundamentals based interpretation seems possible, that we admit a bubble could be the correct explanation.  But maybe recent experience will change that and we won’t be so quick to deny it when the next bubble begins to inflate, though I can’t say I’m very confident in that prediction.

"Suppose you are in a long line of cars that are all headed to the same place. You have a vague, but not perfect idea of how to get to your destination. At one intersection, by chance, the first three cars get it wrong and turn left instead of right."
That is PRECISELY what happened to a bunch of us gringoes trying to get back from Tijuana on a Sunday morning last summer.  The San Ysidro (I5) traffic backed up enough that they wouldn’t let people enter the queue and sent dozens of cars in the direction of the Otay Mesa crossing a few miles to the east.  But the route is not marked, so it was a classic case of the blind leading the blind.  Any car with a California plate would follow another car with a California plate until they got seperated or realized they were heading south.  Our reward for eventually finding it was a 3 hour, 2.3 mile crawl in that line.
Lesson:  Fly to and from Mexico!
 

Land Value 101 has come up recently, and it needs a permanent home in the forums.