There are starting to be some clear indicators that the U.S. housing market bubble has reached its apex, though there are some that disagree. The signs of irrational exuberance are all to apparent. Witness, for example, the mad bidding wars for Miami condominiums that are being pre-sold, long before the ground has been broken at the construction sites.
The housing markets have already headed south in much of the rest of the English speaking world.(Prices are already dropping in Australia and England.) But not yet in the United States. Today’s housing market is the embodiment of “The Greater Fool Theory“, on steroids. One of my compadres said this is like watching the equivalent of the Dutch Tulip Mania, in modern times.
Will the bubble gradually and gently deflate, or will pop with a resounding bang? I’m not certain, but I’m betting on the latter. This will most likely happen in the Spring of Aught Six, when the expected annual home buying season fails to materialize. There will be a collective “Ah-hah”, as some home sellers begin to drop their prices. Buyers will sense a soft market, so they start putting in “low ball” bids. The sellers will then get panicky and drop their prices even more, to “be certain of a quick sale.” This downward ratcheting may very well turn into a outright snowballing effect as everyone with a spec house realizes that the music has stopped and their are precious few chairs in the room. Economist Dr. Gary North sagely opines that it is currently a good time to be a renter. If you have a vacation home, a house that you rent out, or any houses that you’ve bought on speculation, I then I strongly recommend that you sell them, ASAP! If the decline is as great as I anticipate–perhaps as much as 70% in the most overpriced regions–then it may take ten years for house prices to return to their 2005 levels. If you are planning to move within the next four or five years, then you might consider selling your house to a property management and renting it back. This may sound crazy, but as early as next June you may be congratulating yourself for your foresight.
As I mentioned back in a post on August 20, 2005, the popular “Mr. Housing Bubble” T-shirt sums up the current situation nicely.