Housing Bubble......

I am totally against the thought of a housing bubble.

What you read in the paper or hear people say is that as rates go up house prices are going to go down because of a bubble. They never say why it should be that way though, so I will. Logically it makes sense.

The way bonds work is as interest rates go up, the price of the bond goes down...and vice versa. Houses are secured by bonds.

So you would expect that as interest rates go back up houses will go down in value. Right? Except the experts are missing the logic that bond prices go down when rates go up, because newly issued bonds have a more attractive rate to investors. This isn't the case for housing. When interest rates go down, people just continue to live in their house and pay their mortgage (easier than they would if they went and took out a new mortgage on a different house). The people that buy CMOs (bonds based on mortgages) expect rates to go up. They shan't mind, because it reduces the potential default risk of homeowners. You know this as foreclosure. Its the nature of the CMO product and thus the CMO investor. They are buying CMOs because of the strong liklihood of repayment, not to make money. If they wanted to make money in bonds they would get more risky corporate bonds.

Is there a bubble? Probably in a few parts of California where small houses with no basements cost half a million. But in places like the midwest, house prices will just appreciate a little slower than they have been the last few years. I would guess 3% over the next 3-5 years. This is lower than average apperciation is a result of supply and demand. There will be less houses on the market, because people will just stay put and stick to their lower rate. Houses will appreciate slower than normal, but I dont forsee them depreciatating.

Side note: there might be a bubble, I doubt it, but there might be. To hedge yourself against this, just buy houses undervalue. If you pay 90k for a 100k house, and it depreciates 5% you are still up $5k!

The wild card will be all of the foreclosures and bankruptcies. 1 in 4 mortgages taken out last year was an adjustable rate mortgage. Which correlates with my assertion that half the people in the U.S. is stupid. These mortgages are great for those people who will move out in 2 years. Adjustable mortages and interest only mortgages will foreclose or bankrupt a large percentage of people who got them to have lower payments. See mortgages are approved on what the payments will be today. But the rates are at all time lows "today" (aka the last few years). When the rates go up, people's salaries are not going to go up as fast, so they will lose their houses. Plus their rates on the credit card debt will go up as well.

amd hopefully I'll be buying their houses.