is how I can know that the bubble has popped and take advantage of this eventual reality in order to buy a house. We're renting right now and slowly saving up. How can one tell when the bubble has burst and prices are at their lowest? About how much longer do you think the bubble will last?

The housing boom affects everyone. When people cash out their equity and spend it, it fiels economic growth. When housing prices go up and people start building new houses, it creates jobs. When all these things go into reverse, it hurts people across the board.
From the<span class="Apple-style-span"><A HREF="http://www.nytimes.com/2005/05/29/business/yourmoney/2
9view.html"><span class="Apple-style-span"> NYTimes </span&gt</A></span&gt:
"<span class="Apple-style-span">The housing sector has even broader effects on the economy, by some estimates accounting for 25 percent of all activity. A decline in property values would most likely lead to declines in other industries, like construction, brokerage, banking and insurance. And these are important for future growth. Construction, for example, amounts to 4 percent to 5 percent of the economy, according to the Bureau of Economic Analysis. (...)</span&gt<span class="Apple-style-span">
</span&gt

<span class="Apple-style-span">Adding it all up, it's easy to see how a drop in real estate prices would spell trouble for the economy. To put that in perspective, the International Monetary Fund conducted a detailed study in 2003 that assessed the potential economic impact of a property slump. Reviewing the experience in the United States and 13 other industrialized countries, the I.M.F. found that a real estate bust is far more dangerous to the economy than a stock market bust.</span&gt

<span class="Apple-style-span">The I.M.F. calculated that a housing-price decline less than half as large as a decline in stock prices typically causes twice as big a drag on the economy and that its effects last twice as long as those of a stock market crash."</span&gt

I think using a broad term such as "middle class" without relative definition is unhelpful.  My wife and I live in Manhattan.  Combined, we have a salary in the low six figures, which in any other part of the country (save LA or DC) would likely place us in the upper middle class.  But here, in "Master of the Universe" NY, we are solidly middle class.  Consequently, because of the skyrocketing price of real estate here, we cannot find decent, affordable housing in which to raise a family.  (Add in the fact they have been slammed by the AMT)  We have been priced out.  If two people like us, with decent salaries, committed to raising a family in Manhattan, cannot find housing, who is left?

When you owe the bank $100k and can't pay, you're in trouble.

When you owe the bank $100 mil and can't pay, the bank's in trouble.

Add a couple of zeros and the world is in trouble.  Even red states.

I'm looking forward to a good discussion of this subject and I hope thibaud will stick around.  No housing bubble in Phoenix???????  Because........this time is different? 

As events unfold, the complacent and the worried will discover who is the "smart money".  I find the mortgage finance data scarily persuasive for the worriers' case.  Total US Mortgage Debt has doubled in seven years to $10.5 Trillion. 

It's worth recalling that the biggest mistake the technology new paradigmers made was not appreciating the paramount role played by the late-‘90s Speculative Bubble in telecom/junk/leveraged lending for the financing of blow-off industry excesses.   So any discussion of a housing bubble has to include an examination of Asset Backed Securities, Mortgage Backed Securities and GSEs Fannie Mae and Freddie Mac. 

Alan Greenspan understands better than anyone that  there's a thin line between revered financial genius at the height of a Bubble and repudiated monetary quack soon afterwards.  My guess is he's not as compacent as the "What, me worry" crowd who express no puzzlement and see no "conundrums."   The Catch-22 he and the Fed have created for themselves is one we're all caught in whether we comprehend it or not because it's a systemic bind. 

I fear we'll all find ouselves without any shelter from the gathering storm.  But I look forward to pulling up a deck chair and hearing what my fellow American Dreamers have to say.

The housing bubble is very regional. Much of the country has no concern with this issue.

Let's hope the government can tell the difference between Los Angeles and Toledo. 

Wee need jobs before we could even hope for a housing bubble. 

Where do you live that you don't see real estate prices going up dramatically?

I lived in Minneapolis until recently, and now live in Orlando.  I do a fair amount of real estate investing and my wife has worked as an agent and a mortgage broker.  There is most definitely a housing bubble in these areas.  Granted, it's not as extreme as that of San Francisco or NYC ... the dollar figures are not as imposing ... but it's very pronounced and very real.

When the bubble pops it will have as profound an effect here as it will in more concentrated urban areas.

Prices may go down (they certainly have before) but that does not mean people are going to run out and list their homes for sale.

Many won't have a choice.  48% of home purchases in CA last year, for example, were interest-only loans (vs. less than 2% in 2001).  Many of these people can barely make the payments because of skyrocketing home prices.  So a family scrapes together and buys their $250,000 house on a three-year, interest-only loan, fully expecting that they can just refinance at the end of the term.  But the super-heated housing market slows down, there's a correction in over-inflated home prices, and three years from now their house is only worth $210,000.  Oops.  No refi for you.  And if you can sell your house before the bank forecloses, you still owe them an extra $40,000.

Nationally, 1/3 of mortgages in 2004 were interest-only.  That's not good. 

Fine, I'm wrong about Minneapolis for certain, perhaps to a lesser extent about Phoenix and Orlando, but not about Dallas or San Antonio. Re Dallas, 23% growth is eminently reasonable, given that the economy has strengthened here considerably in the last several years.

As to Phoenix and Orlando, I would expect that employment and population and perhaps also income growth in those areas has been very strong - perhaps not strong enough to warrant the growth rate you mention, but close. Phoenix is set to surpass Philadelphia in population soon (if it hsn't already); it stands to reason that real estate there would be booming. As to Minneapolis, I can't fathom why it's booming. Perhaps Norwegian capital flight?

Seriously, my essential point is more likely validated than invalidated by your examples, the point being that the dynamics and characteristics of growth in places like Phoenix and Orlando are entirely different from the asset bubble in SF or Manhattan.

SF and Manhattan are not growing. There is next to no construction in SF, or throughout the South Bay, and real estate price rises there have always been driven largely by artificial suppression of supply due to density and environmental restrictions. Other weird aspects of these corners of the US are the impact of windfall stock market gains for a few (several hundred new Google millionaires just pushed Palo Alto prices up another 10%+) and an understudied phenomenon, the prevalence of speculative offshore Asian capital that prefers to store its wealth in the US rather than in Shanghai or Mumbai. I don't have hard data but I would expect that all of the above factors - extreme supply restrictions, a large number of gazillionaires, and Asian speculators - have next to no impact upon the markets in which 90% or more Americans live.

Phoenix and Orlando's increase of course has some speculative aspect to it but is much more closely correlated with real economic growth. I would submit that the Democratic Party is better off trying to understand the drivers of this growth, and the problems related to it, than to focus on the bicoastal bubble. Perhaps some help for Minnesotans might be warranted, though.

It's ridiculous to compare the US today to the Asian real estate bubble of the late 1990s, which was an order of magnitude greater than today's most overheated US market.

As other posters have noted, we had a bubble that burst in the early 1990s, and we survived that well enough. The crucial thing is the underlying drivers of economic strength: job growth, income growth. Focus on that, not on the waxing and waning of a few property markets. There will be some pain in SF and LA and South Florida and DC and Boston and Manhattan when the bubble bursts there - and maybe some pain in Minneapolis and even Phoenix as well - but no major dislocation for 90% of the country.

This is not something that the Democratic Party should be wasting its time on. Far bigger problems to solve, ones where our political leaders can and should have a much greater impact. Remember health insurance?

<i>If it wasn't a "crushing debt burden" before, what makes it a "crushing debt burden," then?</i>

The fact that before the housing bubble bursts, they have 20% equity, while after it bursts, they have -20% equity.

Also, as another commenter pointed out, 1/3 of mortgages recently are interest-only. Just like balloon-mortgages, interest-only mortgages are for people who expect to either refinance or hit the lottery (literally or figuratively) before the payment comes due. If the housing market crashes, they have no equity and can't refinance. If the economy isn't booming, most of them won't hit the lottery, either. So they're screwed.

A realtors' organization recently stated that 23% of home sales are to people primarily buying for investment - and second homes, in another catogory with about half-again that much, are also often bought with investment in mind. So a third of the home market - nationwide average - is being driven by investors now, not people buying for their own shelter. This is way up from just a couple of years ago. It's where people are putting money that used to go into the stock market. And they can pull it out pretty fast, too - at least at the beginning of a market decline, popping it almost as fast as a stock bubble.

There are parts of Northern New England now, still primarily working towns, where realtors sell houses and land as soon as they get them, in large part to outside investors buying sight-unseen. Same thing in the Mountain West. CBS News a couple weeks ago featured a Californian buying up houses in Atlanta over the Internet. You can almost day-trade in the stuff. This isn't dangerous??

Ellen - Doug Noland at PrudentBear.com writes regularly and extensively about debt markets in his Credit Bubble Bulletin.  That sentence was lifted from the January 3rd, 2005 bulletin here, This Time is Different.   Skip down to the so entitled section for the full argument.  He discusses Total Mortgage Debt in paragraph 9 (of that section).

Although he doesn't cite a primary source, I assume it's the Federal Reserve's Flow of Funds Report because in his December 4th, 2004 Credit+Bubble+Bulletin he has several charts that show the growth in mortgage debt and they're sourced to the Federal Reserve Z.1.  The analysis is entitled Q3 2004 Z.1  "Flow of Funds".

My eyes glaze over a bit, but when I look at the most recent, March 10, 2005 Flow of Funds Accounts of the United States I think the relevant table is F.217 on page 40.  But I get that far and decide "close enough".  Someone who knows their way around that report might enlighten me further but I think Doug Noland's numbers are probably credible. 

The Mortgage Bankers Association also has historical data on Mortgage Loans Outstanding.  Bill Gross at PIMCO addresses the mechanics and risks of mortgage backed securities in his February 2004 Market Outlook, The Last Vigilante.

Tayefeth makes the salient point here.  If mortgages evaporated along with the inflated equity, there'd be no cause for worry.  But, of course, what happens with adjustable rate mortgages is that the debt will increase as the equity decreases.  And for most of us, income supports the whole debt structure.  Household income can also decline, or disappear altogether, while consumer and household debt have a nasty way of increasing.  It all just looks pretty shaky and out of control.  How wise do we think the Maestro and his fellow central bankers are?  Wise enough to navigate these tricky shores?  They lowered rates and kept them there, hoping the underlying economy would recover more robustly and sustainably than it seems to have done - especially in light of Friday's dismal jobs report - 78,000 instead of the expected 185,000.  They welcomed inflation because the dreaded "D word" (DEFLATION) was the scarrier threat - which it is.  It was a gamble that hasn't quite worked out the way they'd hoped and now they have to decide whether to keep raising the Fed Funds rate or declare victory and hope the inevitable happens on someone else's watch. 

So.......the bond market had an interesting week and everyone waits with bated breath for Bubbles Greenspan to speak Monday night - 9PM Eastern.  He announced he'll take questions.  Oooooh.  Is the "What Bubble" contingent going to be listening?

Stay tuned......

are fueled in part by emigrants from SoCal, who are cashing out of even higher prices in the LA basin.  I'm one of them, but I fled north of the border, to Oregon, where prices aren't quite so bubbly.  The same situation has applied in CA for many years.  No one can afford housing.  And if you have a home you can't afford to move to a more expensive neighborhood if you change jobs.  So the commutes just get hairier.

I watched the Southern California housing bubble of the late '80s collapse.  Here's what happens:  Lots of regular working and middle class people find themselves in a tough spot when an unexpected event occurs -- divorce, a job loss, a major medical crisis.  In short, anything that substantially reduces income poses a huge problem because the homeowner is effectively unable to sell his/her house...because the price the owner could get is far less than the owner's mortgage balance.  Thus, foreclosure or bankruptcy become the only real alternatives.

Those whose incomes remain stable, and who have a "locked in" mortage payment, can ride out the storm.  Everyone else (including those unfortunate enough to end up in a divorce, laid off, or afflicted with cancer or another major medical crisis) are in real trouble.

The frightening thing about the current situation, IMO, is the number of people who apparently don't have a "locked in" mortage payment.

I think if we're going to accuse others of gilding lilies and reading reports carelessly, we might want to be a little more cautious ourselves.  The Flow of Funds report isn't an easy read and it would be presumptious of me to pretend I understand it.  But Doug Noland says "Total US Mortgage Debt" and I'm going to take that to mean "Total US Mortgage Debt".  Digging deeper I found what are called "Level Tables" and table L. 217 Total Mortgages: Z.1 Release, Level Tables.  Scroll down to Table L. 217 and look at Line 1 "Total Mortgages" and scan over to Q3 2004.  $10,507.5 billion.

What about his assertion that the number had doubled since 1997?  The December 9, 2002 Z.1 Level Tables includes 1997.  Again, scroll down to the L.217 table.  Total Mortgages:  $5,201.1 billion.

So, while Stephen Roach will certainly stay on my list of trusted analysts, if it's OK with you, I'll keep Doug Noland there as well; his "thing" against derivatives, nothwithstanding.  He might argue he actually has a well-reasoned case against derivatives backed up by actual numbers and exhaustive analysis.  Dismissing it as a "thing" without putting forward at least a mild effort at articulating and refuting even his main arguments strikes me as flippant. 

I may regret asking this, but was there a larger point to your taking issue with Doug Noland's numbers? 

Let's stay ladies and gentlemen.

The title of this thread is "Home Economics" and its principal concern is the "housing bubble."   I do apologize for jumping, incorrectly as it turns out, to the conclusion that you had the same concern.  

The figure you and Noland are citing includes "multi-family residential, commercial, and farm" mortgages. Are you claiming that there's some sort of bubble in Arizona cotton farms and Cleveland walk-ups?

And never regret a question asked in good faith -- as I'm certain yours is.

When I asked the question, I was concerned with changes in net equity since changes in mortgage debt cannot be understood without knowing the total value of the underlying security. At the time I did not realize that the figure you cited was irrelevant to an analysis of the "housing bubble."

Anyone foolish enough to be "day-trading in real estate" is not my concern, and should not be a major concern of our party's leaders. On a 1-10 scale of importance to the nation, this rates maybe a 1.5. I hear what others have said about the dangers of bringing into overheated markets a large number of gullible first-time homebuyers who lack the reserves to weather a downturn. Fine, more education, more disclosure, and by all means rein in deceptive lending practices.

But the most important thing by far we can do to help this people is to keep interest rates from spiking. Which is to say, address your comments to Mr. Greenspan, not to Congress. My own guess is that Mr G is unlikely to let rates spike, because we'd have far bigger problems on our hands in that case than merely the easing of air out of the bicoastal property markets.

In the meantime, Democrats need to focus like the proverbial laser beam on the issues that rate a 9 or a 10: healthcare, healthcare, healthcare. Affordable access to college. National security.