Housing Bubble Evidence Abundant

On this blog I've often talked about how out of line the current real estate market. For example, this entry illustrates the out of whack ratio between mortgage and rental costs, while this entry examines the disparity between incomes and mortgage costs. Needless to say, we're in an economically untenable situation - something's gotta give.

This sentiment was echoed nicely in a recent Houston Chronicle article, Housing Bubble Evidence Abundant:

If the stories and magazine covers aren't enough, is there any broad statistical evidence of excess? Yes. One indicator, cited in a recent issue of Grant's Interest Rate Observer, is the dollar volume of home sales divided by gross domestic product. The figure for 2004 was a near record, nearly three standard deviations greater than the average of the last 35 years.

Examining the same data back to 1952, I found that:

• Residential homes are the highest percentage of our collective net worth they have ever been, 36.3 percent.
• We have been borrowing at a prodigious rate, with mortgages equal to 43.7 percent of home value. That's only a bit less than the record 44.2 percent set in 2004.
• We reached a record for the value of homes compared with the value of our financial assets, 48.5 percent.
• Compared with the median values of the last 50 years, these are big shifts. Viewed statistically, values are at extremes. The median value of houses as a percent of net worth was 26.8 percent. That's 2.6 standard deviations from the current 36.3 percent value.

What this boils down to is that home values are at insane, all-time highs... and folks, when you've reached a peak there's only one way left to go - down. I think most people who aren't speculators, mortgage brokers, realtors, or somehow financially vested in the results of the real estate boom know that we have hit the peak of this real estate roller coaster ride. The question on rational peoples' minds is whether or not there will be a 'soft landing' or if this bubble is going to burst.

You know from the title of my blog that I squarely believe we're going to see a bursting of this over-inflated bubble. While a soft landing would be ideal for our economy (and the global economy as a whole), I worry that it's not going to happen. I think a growing number of people and businesses have poured too much money and have leveraged themselves far much to have anything but a painful correction.

Since it's obvious that we've reached the peak, the prudent investor is now asking himself, "How do I profit from the deflating of this bubble?" There's an interesting discussion on this very topic going on over at The Housing Bubble Blog. I think the big gamble on this is matter is whether the bubble bursting is going to lead to inflation or deflation, and how long and strong will these economic swings be?