Once More Into the Breach, Dear Friends

There's going to be another real estate bubble, and it's going to burst. (And no, I'm not talking about commercial real estate; that market's already collapsing.) When it does, housing prices are going to fall again. And it's going to happen just after the market begins recovering from the current real estate downturn, probably in the first half of 2010.

Why am I spreading this sunshine? Is it just another curmudgeonly conspiracy theory?

Nope. It's just the way things are shaking out in the real estate market.

I've reported in the past that by the end of 2008 it had been projected that banks would own a third of all real estate on the market. And it looks like that was indeed the case. As a result, foreclosure sales have come to dominate all real estate sales, accounting for nearly half of all homes purchased in the US in November. Sales in hard-hit California alone rose 83% in November, with the bulk of the activity in foreclosure sales, as banks are desperate to get out of the property management business that they were forced into involuntarily.

But wait - that's good news, right? Homes are selling! Homeownership is expanding! We're on the road to recovery! Barney Frank is happy!

Not quite so fast. The problem lies in just whom is buying these foreclosed properties.

Many of them are in disrepair - neglected since the foreclosed homeowner was forced out; or vandalized, either by the bitter homeowner on his way out or since the house stood vacant. So who's buying these fixer-uppers?

The same speculators that contributed mightily to the original bubble.

That's right, the majority of these sales are to the "Flip This House" crowd, hoping once more to make a quick buck turning these properties around when the time comes. That's simply going to lead to more speculation, which will artificially inflate prices again, which will require another correction.

Which will be painful.

We might at least hope that this time, the frenzy won't be fueled by the mindless relaxation of credit that we saw with the subprime mess. But there's the Barney Frank factor: this crazed desire to expand homeownership beyond the economically sustainable rate through lax credit. As long as Barney and his ilk are around, the risk remains that credit standards will be driven down again. Then there's Helicopter Ben, and his foray back into the rates-too-low-for-too-long jungle.

The risk is also exacerbated by the lack of skin in the game these speculators have. Once again, they'll have no compunctions about walking away from the home if the price doesn't rise fast enough to suit them, or if they face a reset on an ARM.

Lest you think I'm just being my usual curmudgeonly self, here's a comment from another guy who watches this stuff:

"We're creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve. We could see a double-dip in the housing market if that happens."

So who's this doom-and-gloomer? Dr. Joseph Stiglitz of Columbia University, who won a Nobel Prize in economics for seeing the first housing collapse coming.