Searching for the next bubble burst


It looks like the new burst is set to happen in the real-estate market. Or, at least, this is the conclusion of two physicists at UCLA in their article.



We analyze the quarterly average sale prices of new houses sold in the USA as a whole, in the northeast, midwest, south, and west of the USA, in each of the 50 states and the District of Columbia of the USA, to determine whether they have grown faster-than-exponential which we take as the diagnostic of a bubble. We find that 22 states (mostly Northeast and West) exhibit clear-cut signatures of a fast growing bubble. From the analysis of the S&P 500 Home Index, we conclude that the turning point of the bubble will probably occur around mid-2006.


PhysicsWeb has a short summary here:



House prices are rising so fast in 22 US states that they have created a “bubble” that could burst in the middle of next year according to two physicists (physics/0506027). The same team previously predicted that the UK housing market would crash in mid-2004.


Bubbles are formed in markets when large numbers of investors – often taking their lead from traders – start to buy more and more stocks and shares, forcing prices to artificially high levels. Such bubbles can also form in the housing market. And like real bubbles, these financial bubbles often burst.


Interesting theory. Good thing that I’ve bought my house two years ago 🙂


 

Comments (6)

  1. Travis Owens says:

    Aren’t you reading this data backwards? I mean wouldn’t you want to buy at the lowest point of the crash because that’s when houses will be at their cheapest?

    Maybe I read this wrong as I thought house buying was at a low which would explain why interest rates have been so low lately.

  2. Shaun says:

    Of course, it could be that the reason why demand is low at the moment is because the houses are over-priced!

    Here in the UK (or at least central UK) house prices are way over inflated. As an example, my wife and I bought a very modest terraced house 5 years ago for 27,500. The current value is a little over 80,000. There’s no way these kind of prices can last much longer! We want to move but the cost of anything remotely decent is way beyond our means atm.

  3. Sun/Volt says:

    Here in the NE USA, prices are unbelievable – where I live the median home sale (not mean, which is typically skewed to the upside) is ~$450,000 …(!)

    Another thing to note is that home price / rent differentials are incredibly high; in financial theory, this difference should be arbitraged out (i.e. ~0, post-tax) .. Should there be an interest rate shock, the bottom is going to fall out, and speculators and I/O mortgage holders are going to take a bath. Also, many more people have bought homes with less money down and are dramatically levered.

  4. Sun/Volt says:

    Here in the NE USA, prices are unbelievable – where I live the median home sale (not mean, which is typically skewed to the upside) is ~$450,000 …(!)

    Another thing to note is that home price / rent differentials are incredibly high; in financial theory, this difference should be arbitraged out (i.e. ~0, post-tax) .. Should there be an interest rate shock, the bottom is going to fall out, and speculators and I/O mortgage holders are going to take a bath. Also, many more people have bought homes with less money down and are dramatically levered.

  5. decheung says:

    You might be interested in this page, it has stats on how much prices went up in different zip codes:

    http://www.dqnews.com/ZIPWA.shtm

    See how you’re doing compared to the median!

    As a Silicon Valley colleague, I’m not sure where you live – but I’m really curious as to where "BLACK DIAMOND 98010" is. They had 107.1% growth in the median price!

    What’s up with the HQ’s zip code?

    BELLEVUE 98005 $300,000

    The zip code for the Silicon Valley Campus is:

    Mountain View 94043 $550,000

    But that price is far below the county median because it includes a SuperFund site, a toxic plume in the ground water, and gang related stabbings.

  6. Ian says:

    Black diamond is near maple valley, wa

    its in king county about 30 minutes east of seattle, 30 minutes nw of tacoma. Its a growing place. I Live next town over in Maple valley.