The Economist on the Housing Bubble

Leave it to The Economist to pull no punches. They call the boom in housing prices "a bubble" with no apologies. Not just that, they point out that it's likely "the biggest bubble in history". Just to clarify what they're saying, that comparison includes the global stock market of the 90s, and the American stock market of the 20s.

This figure seems especially chilling:

"According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs."

100% of GDP, my homies. And that's just the increase.

The article also reveals that almost a quarter of all properties purchased in the US in 2004 were not primary residences, but rather investment properties. Additionally, a third of all home purchases this year were through adjustable rate mortgages. According to today's NY Times, we are alerted to the fact that in 2007, $1 Trillion (12% of the nation's mortgage debt) in ARM's will kick into adjustable rates. How many people are truly prepared for the upswing in their mortgage payments that will come due then? And the truly disturbing fact that 25% of all homebuyers in the US made no down payments - nada! zero! zilch! Seems to me that there was a time when, to purchase something, you at least had to come to the table with some percentage. If someone is unable to come up with ten or twenty percent of a purchase, what's the likelihood that when rates go up, they're not going to be able to pay?

Everything I'm reading here reminds me of the analyses of the 20's bull market. We've got easy money encouraging people to buy assets on margin for more than they could otherwise afford, all with the understanding that price appreciation will cover the shortfall. When the 90's stock market bubble popped, we had the housing market to prop things up, and keep things from getting too ugly. Let's hope that we don't emulate 1929 this time around.