Housing: Bubble Talk

The bubble discourse has reached record decibel levels this week as an unprecedented barrage of mainstream housing related articles hit the newsstands. Measured with internet searches for “real estate bubble” and “housing bubble”, bubble interest has soared:

The market share of these terms across all major search engines like Google, Yahoo! Search, MSN Search and others, skyrocketed 311 percent and 174 percent respectively versus the prior week.

And there is more to come: The usually very accurate Anderson Forecast will be released on Tuesday when Drs. Leamer and Thornberg present their views on the housing bubble. Watch for their comments.

UPDATE: The WSJ (Greg Ip) has a front page article this morning: Booming Local Housing Markets Weigh Heavily on Overall Sector (pay): A few quotes:

New federal housing data show that the nation’s most overheated local housing markets now make up such a large share of the total U.S. market that a sharp fall in their values could stall or slow national economic growth.

“It’s a widespread boom and has macro implications,” says Richard Brown, chief economist of the FDIC. “A slowdown would not only hurt these markets, but the U.S. as a whole.”

Unlike stocks, the housing market “would be more likely flat with 10% to 20% declines in some regions, or down slightly nationally with some regions looking ugly,” says Ethan Harris, chief U.S. economist at Lehman Brothers. Even local housing crashes take years to unfold, he says.

Also see WSJ: Fannie Sees Higher Odds of Regional Busts

ORIGINAL POST: Some of this week’s articles included: NY Times: The Trillion Dollar Bet. The Economist on the global nature of the housing boom: In Come the Waves and After the fall. From the Sunday London Times: Is the global housing bubble set to burst? And an article on rising foreclosures: The real estate boom’s flip side: foreclosures.

Barron’s: The Bubble’s New Home (pay) features an interview with Dr. Shiller (see Big Picture for excerpts and graph). It includes this interesting thought:

“Shiller theorizes that both U.S. bubbles were precipitated by such factors as increasing veneration of market capitalism, the growing respectability of speculation and conspicuous consumption, and the conviction that the Internet and other technologies augured a golden age of unparalleled prosperity. Notes Shiller dryly: “Once stocks fell, real estate became the primary outlet for the speculative frenzy that the stock market had unleashed. Where else could plungers apply their newly acquired trading talents? The materialistic display of the big house also has become a salve to bruised egos of disappointed stock investors.”

In Shiller’s view, economics is more than just numbers; it is also about emotion and psychology. Therefore, according to Shiller, the bubble will break when market psychology changes. Perhaps the greater awareness of the bubble is the start of a shift in psychology.

Of course, not to be outdone, the industry economists fired back. I reviewed their comments earlier this week in Housing: The Empire Strikes Back And finally, as an introduction, I was going to name this post “Bubble Babble?” but new blogger, Economics Professor James D. Hamilton beat me to it: Babble about a housing bubble.

So where does this leave us? Watching and waiting for the market psychology to turn. In an earlier post, I described a likely scenario for what will happen after the boom ends.

When? Watch the numbers and market psychology.

Best Regards, CR Calculated Risk