Editor’s note: Talk of a real estate bubble, brewing for many years, has spawned an assortment of real estate blogs devoted to bubble talk and statistical analyses. These bubble sites offer a counterpoint to industry data and mainstream media coverage, and have gained a following among consumers and industry analysts alike. Several “bubble bloggers” — some named and some choosing to remain anonymous — have shared their views with Inman News. (Read the intro to this series, “The rise of real estate bubble blogs.”)

Name: John McLeod

Work experience: Information technology

Blog site: Co-blogger at HousingDoom.com, “Housing Doom Housing Bubble Blog: The housing bubble has burst — what happens next?”

Audience: About 2,000 visitors per day.

Q: What makes you a real estate bubble believer, a bubble debunker, or bubble neutral?

A: Bubble believers are heavily weighted to short-sellers, renters, etc., while bubble denial is common in Realtors, builders and research institutes studying the market and being paid by these.

The spectacular profitability of many financial institutions in the period 2001-05 is what makes me a bubble believer.

Q: How do you define a housing bubble?

A: A housing bubble is a situation where inflation-adjusted, year-over-year house-price increases have covered a significant proportion of the previous year’s typical mortgage payments, and there is the expectation this situation will be maintained for at least another year. (In this situation a hairdresser can occupy a house indefinitely by simply lying.)

Q: How does this definition fit (or not fit) the national housing market? Which regional or local housing markets have exhibited the most bubble characteristics?

A: I’d say it seems to have fit the national market pretty well in the years 2001-05 when there was talk of a “(refinancing) boom” powering the whole economy.

As far as regions, the economic fundamentals of perceived baby-boom retirement migration to the warm regions — Florida, Arizona, California and Nevada — seems to have touched off the bubble-process there, with “equity-locust” episodes of early winners doubling-down in, say, Utah, spreading the contagion. There seem to be bubbles in the Washington, D.C., area, Washington and New York City, where the dynamics may be different.

Q: Which bubbles burst? Which ones have deflated? Which ones are inflating? Which are about to pop?

A: Reversion to the mean is inevitable, but the burst of a bubble would result from a sudden change of psychology and recognition by the authorities that fraud has produced vast numbers of mortgage holders who never could realistically expect to pay off their debts. This can’t happen until prices stall or drop, and that usually happens after affordability disappears.

Q: Are there any common traits among the bubble markets?

A: Good enough fundamentals to get the refi ramjet started, or an infestation of equity locusts.

Q: What is your best evidence for or against a housing bubble?

A: Best evidence: the whole food chain of MBS (mortgage-backed security) finance was returning legendary returns over the last few years, and when you think about it, they don’t really add any value to the transaction. Next-best? Pure anecdote: a Florida reporter repeated the story of three waiters in a modest restaurant comparing their Treasure Coast investment properties and then her doorman asked for advice on whether he should sell his condo investment yet. It was clearly “game over” at that point, at least for Florida.

Third-best: U-Hauls are cheaper heading into Florida than back out.

Q: Is it possible to accurately identify the existence of a bubble before it is gone? Explain.

A: Sure, if it’s possible to pay your mortgage out your own house’s increase in value, you’re elected.

Q: How are bubbles born and how do they die?

A: They’re born when speculation is profitable and die by exhaustion when lack of affordability makes buying impossible for the next group of potential buyers.

Q: Why do people get so fired up about the concept of a housing bubble?

A: People have a lot invested in where they live, and are judged to a great extent by their address, both in financial and in psychological terms.

So justifying their housing choice is a big deal. Additionally, those speculating on the market (say people shorting “Real Estate Industrial Complex” stocks) take their results (that change with the housing market’s movements) as part of their own worth. Of course this goes all the more for actual REIC types.

Q: Will there ever be an explanation for bubbles that we can all agree upon?

A: No. For one thing, bubbles wouldn’t work were most people able to perceive the risk bearing down on them.

Q: Will there ever be a time when the discussion about bubbles goes away? Is this just a passing fancy?

A: For the next five or seven years home buyers will be repeatedly convinced by the “Real Estate Industrial Complex” that the bottom has been reached, and their down payments will be vaporized time and time again as the mean reversion process continues. The actual bottom will be reached in total silence once the repeated disappointments destroy all confidence in the housing market.


What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

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