“Bubbles do burst”

Economist Robert Shiller, of Irrational Exhuberance fame, gave a rather important interview to ABC/Nightline news yesterday. I say important because it means the housing bubble is beginning to get significant exposure and coverage in the mainstream news.

Robert Shiller, the Prophet of House Prices
Economics Professor Predicted the Dot-Com Bust; Sees Another on the Horizon

If a prophet is only as good as his last prophecy, then you’d be wise to listen to Robert Shiller. On “Nightline,” Shiller offered his considerable analysis of the current real estate market … and he doesn’t bring good news.
It was back in the heady stock market days of 1996 that Shiller, an economics professor at Yale University, gave voice to his first prophecy. He warned that the stock market was overheating and that investment had risen to what he described as irrational levels. The stock market crash that followed was no surprise to Shiller and proved that he had called it right.

Now he’s warning that a similar collapse may soon apply to the real estate market. And there’s evidence that he may be right here, too.

Shiller argued that human emotion, not strategic economic factors, drives prices and property buying.

He argues that many first-time buyers pay inflated prices simply because they fear they’ll be left behind…

Shiller has traced the actual financial return that houses produce for their owners. He says that over the long term, house prices roughly match gains in people’s incomes and that booms are more often followed by busts, thereby dissipating any major increases in equity.

The Star Ledger ran an AP piece on the New Home Sales report today:

New home sales plunge 10.5 percent

New home sales fell the biggest amount in al most nine years in February while home prices declined for a fourth straight month, raising concerns the once high-flying housing market could be in for a rougher-than- expected landing.

Analysts, who had been forecasting a much more moderate drop of around 2 percent in February sales, said the big decline and downward revisions to sales activity in the previous three months could be signaling that housing will slow more this year than had been expected. “The new home market looks like it is starting to stagger,” said Joel Naroff, chief economist at Naroff Economic Advisers, a Pennsylvania forecasting firm. “Bubbles do burst.”

Caveat Emptor!

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11 Responses to “Bubbles do burst”

  1. Anonymous says:

    Mar 23, 2006

    Real estate


    After long, ‘hot’ run, market may be cooling

    As the “for sale” and “open house” signs sprout along area roadways, many Lewisboro residents are wondering if the much-discussed real estate “bubble” of the past several years has finally burst. National and regional statistics say the answer may be “yes,” with home sales and prices down and inventory up.

    But all real estate markets are strictly local, with their own distinctive pulses and patterns.

    In Lewisboro, the critical spring home marketing season is already underway. Sellers, buyers and residents planning to stay put all want to know what lies ahead. The Ledger sat down recently with four local real estate professionals to get some answers.

    Donna Ganung-Ornstein, a sales agent for Coldwell Banker Real Estate in Katonah; Mary Ellen Walsh, manager for Houlihan-Lawrence Real Estate in South Salem and Pound Ridge; and Ken Sobel, owner of Ken Sobel Real Estate in South Salem hamlet, all weighed in on prospects for the coming months.

    Ed Ferguson, vice president of branch operations for Houlihan-Lawrence in Westchester and Putnam counties, was also on hand to offer a broader perspective.

    The unanimous verdict? In Lewisboro, the vaunted bubble hasn’t exactly burst but is definitely leaking some hot air.

    Market snapshot

    “When you do a year-to-year comparison, the changes are obvious,” said Mr. Sobel. “For the first quarter of 2005, there were 69 houses listed and 20 sold, leaving 49 on the market at the end of March. This year there are 74 listed, 13 sold, and 61 remaining as of the middle of March.”

    Ms. Ganung-Ornstein agrees.

    “In short, there are simply more homes on the market, about 35% more,” she said. “It is no longer a pure seller’s market.”

    The rise in inventory has had its effect on the time homes remain on the market and their eventual sale price. According to Mr. Sobel, the average number of days on the market has increased year to year, going from 162 days in 2005 to 180 for 2006.

    Ms. Walsh provided some figures on prices.

    “According to data from the Multiple Listing Service, the median year to date sale price is $735,000, down from $750,000 for the same period last year,” she said. “The median list, or asking price, has actually gone up to $835,000 from $790,000 last year. This upward movement shows that homeowners still think they have a chance to sell for a high price, even though the 2006 reality is somewhat different.”

    Mr. Sobel added his opinion on the market.

    “There are more houses in inventory, they are taking somewhat longer to sell, and they are selling for less than they did at the same time last year,” he said.

    Sellers’ attitudes are key

    All of the professionals agreed that some sellers were still “living in the past” when it comes to setting a price for their homes and needed to change their attitudes.

    “This clinging to outdated figures can cause problems, because the bottom line in a sale is always pricing,” said Ms. Ganung-Ornstein. “To sell a house in today’s more competitive market, you have to price it right. At present, there is something of a gulf of expectations between what sellers think they can get and what buyers want to spend. Buyers have a lot more options because of the increase in inventory and can pick and choose.
    Overpriced homes are simply not selling.”

    Ms. Walsh agreed.

    “Lewisboro is an area with many lovely homes, so there is plenty for buyers to choose from. If they think you are asking too much, they simply move on to the next house. And there are options at all price levels now,” she said.

    According to the Multiple Listing Service, the least expensive home listed in mid-March was $389,000 for a 1,000-square-foot ranch in Goldens Bridge. The most expensive was a $28-million Cross River manor house and horse farm on 60 acres.

    Mr. Sobel said that brokers spend a good deal of time educating their clients to the realities of today’s pricing.

    “We try to put things in proper perspective by providing accurate comparative market figures so they can see things in an analytical light, rather than going on emotion or anecdotal evidence,” she said. “I find that most people are willing to be educated and most sellers do realize that we are in a softening market.”

    Ms. Walsh agreed.

    “We show them the statistics and let them know that it’s not personal, it’s just the market. They can then draw their own conclusions based on past sales in their area,” Ms. Walsh said. “It’s very unusual for sellers to hang on to their desire to overprice once they are presented with accurate information.”

    Ms. Ganung-Ornstein said that she believes all of the media attention to real estate and that famous “bubble” have had a downside, but have also had an upside in educating clients.

    “Real estate prices have been so well publicized, with market changes analyzed almost daily, that we have a very savvy and well-educated group of sellers and buyers,” she said. “Very few people are totally unrealistic, and if they are, I tend not to take them on as clients because I know that the outcome will not be positive.”

    What lies ahead?

    All of the professionals agreed that the Lewisboro market was settling into a gentle pattern of price correction, rather than a doomsday scenario of crashing prices and values.

    “I simply do not see prices plummeting in Lewisboro,” Mr. Sobel said, “but the mindset that it could happen is one of the reasons for the increase in our inventory. People read about that infamous ‘bubble’ bursting and wait for prices to come down.”

    Ms. Walsh agreed. “We are just going back to a normal market and will probably remain there for several years to come. People now have the opportunity to find a house they really want, consider all issues, including affordability, and make an educated decision. The days of multiple offers and bidding wars have pretty much faded away, even though we do still see them on certain very desirable and well-priced homes.”

    Ms. Ganung-Ornstein returned to the important issues of pricing.

    “As asking prices start to fall in line with what people want to spend, I think we will see a break in the inventory logjam.” she said. “The bottom line is that homes have to be priced right, especially during periods where buyers have more choices. In the end, it’s all about the price people are willing to pay. That is what is driving this market correction.”
    Interest rate ‘joker’

    With interest rates now nudging 6.3% for a 30-year, fixed-rate loan, all of the professionals agreed that rates could be the “joker” in the real estate deck of cards if they top 7%.

    “Interest rates are holding pretty steady right now,” Mr. Ferguson said, “and they are still at historically low rates. My guess is that they will probably top out at about 6.7% by the end of 2006. Unless we see a softening in the overall economy and people begin to feel uneasy about their jobs, I don’t foresee that type of a modest increase having any major effect.”

    Mr. Sobel said that any significant increase in interest rates would inevitably lead to a further softening in the market and a decrease in selling prices.

    “It’s a simple equation,” he said. “When rates go up, affordability goes down, even with people who go for 100% financing and no money down mortgage loans. Higher interest rates result in a lowering of prices to compensate.”

    Ms. Ganung-Ornstein concurred with the assessments but said that she did not see a modest rise in rates doing any serious damage.

    “Unless interest rates climb to very high levels, there are always people that want to get into the market and are going to take a mortgage,” she said. “We are coming off a period of very low rates over recent years and today’s figures are still very reasonable.”
    Summing things up

    “Normalization” was the word most often used when the four professionals were asked to define this spring’s real estate market.
    “The public has been told that there was a bubble and that the bubble is now bursting,” said Mr. Ferguson. “But all that has really happened in Lewisboro and the rest of Westchester and Putnam is normalization. In my opinion, it is still something of a seller’s market. Real estate has become the investment of choice for many people and will continue to be so.”

    The three local agents were in basic agreement with Mr. Ferguson.
    “The spring and summer should be a good market,” said Ms. Ganung-Ornstein. “Everything has to be put into perspective. Over the long term you come out a winner if you buy a home in Lewisboro.”

    “The reality is that everyone wants to own a home,” Mr. Sobel said. “Home ownership is very compelling and very satisfying. Historically, real estate is the best investment for the average person and brings the greatest rewards over time. Once we get through this period of consolidation, things will smooth out. Lewisboro offers a unique life style and wonderful properties, from antiques, to lakefront homes, to beautiful new construction. The market is like water, it will find its own level.”

    Ms. Walsh put it succinctly.

    “The real estate market in Lewisboro is alive and well and getting back to normal. Our calls are picking up and we see good things ahead for both sellers and buyers,” she said.


  2. grim says:

    To the anonymous poster that commented on the U.S. Radium Corp in Orange, thanks for the tip.

    What an interesting story.. I spent the past hour researching the story from the beginnings in Orange to the Superfund Radium sites in Montclair, West Orange, and Glen Ridge.

    Quite a story, Wikipedia has a good summary.



  3. Hey Grim,
    I have a question for you – I have been watching the house in Montclair. On the corner of midland and walnut. It was an old green house that they redid with a massive addition, and planted another house in the yard. Anyhow, they were asking something like 1,495,000 for it, and it just dropped to 995,000. Can you check on this:



  4. Anonymous says:

    “I have a question for you – I have been watching the house in Montclair. On the corner of midland and walnut.”

    Well, unless you’re a multi-millionaire, you’ll want to stay away from that house.

    Even if it sells for $995K, when the taxes are reassesed, they’ll likely be well over $20,000.

  5. Anonymous says:

    so last time this guy was 5 years early in his prediction of the stock market fall? i don’t consider that being correct. how does he get credit for being right when he was predicting a crash even before most of the boom happened?

  6. grim says:

    His book, Irrational Exuberance was published in 2000.

    He began warning of irrational behavior in the mid/late 90’s. Use whatever tool you’d like to plot the Dow, by late 1996 it was obvious something other than fundamentals were driving stock prices.



    Despite (or perhaps because of) the 4000 Dow points the market has added since the Shiller-Greenspan team first pronounced it overvalued, Shiller is not backing down. He tells us, “The high recent valuations in the U.S. stock market come about for no good reasons . . . . The market is high because of the combined effect of indifferent thinking by millions of people, very few of whom feel the need to perform careful research on the long-term investment value of the aggregate stock market, and who are motivated substantially by their own emotions, random attentions, and perceptions of conventional wisdom.” Put simply: If you haven’t gotten out already, do it now.

    Are you kidding? Do you know who Shiller is?


  7. Anonymous says:

    I’m the anonymous poster that commented on the U.S. Radium Corp.

    Individual workers can now sue for damages from corporations due to labor abuse as a result of the Radium Girls case. Industrial safety standards improved. The congressional bill passed made all occupational diseases compensable, and extended the time during which workers could discover illnesses and make a claim. Say “ASBESTOS”


  8. Anonymous says:


    Even when the market crashed the Dow did not return to anywhere near the 1996 levels. If you had, in fact, bought a diversified set of stocks late 1996 and held on, you’d be reasonably well off today, almost 10 years later.
    Most stocks at the time were, in fact, appropriately valued. It was just tech stocks that were out of whack, hence the term dot com bubble.

  9. trroll says:


    You are only partially right when referring to the dot com bubble in a term of tech stocks. The dot com comes from “.com” companies, hence the term “dot com”, that were spreading like mushrooms after the rain. There were thousands of those companies in NYC alone. They had not assets (but people they were employing) and they had no business plans but yet, banks and investors were flooding them with the money hoping they will next Yahoo. The “real” tech companies have suffered the downfall of the .com’s as their stock prices plummeted. But at the end they eminently survived the market correction unlike thousands of .com’s.

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