Is recent housing bubble news cause for alarm

by Dan Krell
© 2013

real estate bubbleIf I said that we could experience another housing bubble, you might be concerned for my mental health.  But a couple of years ago I wrote about an impending housing shortage, which could spark another bubble similar to what occurred during 2004-2005.  The market-conditions similarities between 2004 and today are foreboding, if not intriguing. (Dan Krell © 2013)

There hasn’t been talk of a housing shortage since 2004; but looking at Montgomery County MD as an example, you might begin to see similarities between the housing bubble of 2005-2006 and today’s real estate market.

Monthly peek single family inventory in Montgomery County did not exceed 2,000 total active units in 2004; while the absorption rate was reported by the Greater Capital Area Association of Realtors® ( to be about 80% during the winter of 2004.  During the following year, the winter active inventory greatly increased and the absorption rates dropped to about 40%.  The result was a housing market that reached critical mass, and a one year appreciation rate of about 18% for Montgomery County single family homes; which played a key role in the rampant real estate speculation in 2005-2006.

Active housing inventory has been declining since 2010; the greatest decrease occurring during 2012.  According to the monthly home sale statistics posted on the GCAAR website (, there were 1813 active single family inventory units for sale in Montgomery County during January 2012.  And although active single family units peaked for the year during the spring of 2012, active inventory dwindled to a low of 1198 active units for sale during January 2013 – a year over year decrease of about 40%. Additionally, the absorption rate of listed homes for sale is rapidly approaching 60%

Add the home price facet – on March 5th, CoreLogic ( reported that national home prices increased 9.7% during January 2013, as compared to January 2012.  This was reported to be the greatest year of year home price increase since 2006.

An additional and telling similarity between the pre-bubble years and present is the number of real estate investors jumping in to cash in on distressed properties.  Of course at the height of the real estate bubble of 2004-2006, real estate investing was transformed from the traditional “rehab and flip” to no rehab and flipping properties as quickly as possible.   A great number of homes sold today are to investors, either to rehab or to rent.

In 2004, like today, we were about three years post recession; albeit the recession of 2001 was not as protracted as the “Great Recession.”  At that time, like today, the Federal Reserve funds rate was historically low.

Although an “easy money” monetary policy is another similarity between the periods, a major difference is the availability of mortgage money.  Getting a mortgage is much more difficult today than it was in 2004-2005.  Buying a home without a down payment as well as qualifying for a mortgage without documenting income could have been a factor of the wide spread real estate speculation of 2005-2006.  Today, as a result of the bursting of the 2005-2006 housing bubble, underwriting qualifications are more demanding as are down payment requirements.

The housing bubble phenomenon is not a new or a recent experience; housing bubbles have occurred in the past and most likely will occur in the future.  When they occur, housing bubbles seem to coincide with a recessionary cycle.  And just like recessions, housing bubbles vary in duration and severity.  Sure, another housing bubble may be looming; but the next bubble may be confined to specific regions of the country, and possibly some local neighborhoods.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of March 4, 2013. Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.

This is Chaos – anything can happen

by Dan Krell
© 2012

housing developmentThere has been a lot that has been written about chaos theory, and some have even tried to apply it to real estate. More specifically, many have discussed the application of chaos theory to real estate investing. And even more recently there have been attempts to applying chaos theory in figuring out where housing is headed; or to be succinct – when will housing once again begin to realize consistent appreciation?

I’m not one to disappoint, but I can’t predict the future. However, my attempt to explain chaos theory may reveal how its application to the housing market is difficult at best (at least in today’s environment), yet while simultaneously is an exceptional exercise in understanding the underlying dynamics.

Chaos theory is somewhat of a misnomer; a more apt name might have been “pattern to equilibrium theory” as it’s not so much about chaos as it is about predicting natural patterns that seek equilibrium; or put another way – predicting results by looking at dynamic patterns. Equilibrium could be what we typically think it is – a pattern of a self sustaining system; or it could also mean a pattern of inertia to the system’s inevitable demise.

Simplified, chaos theory investigates the relationships and patterns of a system’s trend toward stability. The theory delves into the natural patterns of subsystems so as to predict how patterns develop and unfold to manifest themselves.

housing developmentAlthough mathematicians have been investigating the precursors for chaos theory for many years, one of its first practical applications was in trying to predict the natural patterns of the weather. So it makes sense that you might want to apply the theory to the housing market so you could figure out the best time to buy and sell. The problem in the theory’s application to the housing market is that unlike the weather, housing is not an “organic” system; housing does not follow the natural unfettered patterns of market forces. Rather, decades of intervention and policy have influenced the expressed patterns of the housing market.

But don’t get discouraged, an aspect of chaos theory termed “the butterfly effect” explains that any action, no matter how small and insignificant, can influence a larger system. So, although the housing market is not an organic system, you could theoretically investigate its related influences to work out a market trajectory. So, rather than solely considering supply and demand, you might take into account more wide ranging and complex influences, such as Greek economic policies, German parliamentary elections, EU monetary policy, etc.

By looking at observable influences on the housing market, housing contrarians have been muttering their mantra of “the sky is falling” for years. And when the housing bubble burst, they of course claimed they had it right all along, and many are still waiting for the worst. Was it a coincidence? Of course, in the early 2000’s there were influences on housing and the economy that were inconceivable (such as mortgage CDO schemes).

Chaos theory is as complex as the systems involved. We can also apply it to come up with alternate trajectories and think about what could have been. If for not some small event, someone’s seemingly insignificant decision in the past, there might not have been a housing bubble burst or great recession. But as they say hindsight is 20/20 – but that’s an entirely different theory.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of December 17, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Bubble market or solid economic fundamentals: Lessons we can learn from the Canadians

by Dan Krell © 2010

Bubble housing markets occur when real estate markets, either local or regional, are overvalued. The cause of bubble markets is often debated, as has been hotly argued in recent times, to be the cause of speculation and/or credit policies.

There are several real estate markets that have rebounded much faster than most such that they are in danger of becoming bubble markets. Some economists rank the real estate markets in China, Australia, and Canada as having the highest risk of becoming the next busted bubble market. Because of Canada’s close proximity and similar real estate market, we’re compelled to take a closer look.

Canada’s equivalent to the Federal Reserve Bank is called the Bank of Canada ( and much like the Fed, the Bank of Canada is a central bank that offers advice on monetary policy. The Deputy Director of the Bank of Canada, Timothy Lane, PhD, offered his analysis on the current situation that is occurring in Canada’s real estate market in a speech given on his behalf on January 11th, 2010.

Although Dr. Lane’s speech was delivered by an advisor, in what may seem like a déjà-vu to Americans, there was somewhat of a denial of a bubble market. The Deputy Director maintained that fundamentals of the Canadian market are intact, such that recent increases in home prices are not unusual for supply and demand economics. As Canadian housing starts are below the target to meet population growth requirements, the Deputy Director made clear that inventories were diminishing as well.

Although Dr. Lane’s opinion is that housing bubbles are fueled by credit expansion, and that recent growth in the Canadian housing market is due to low interest rates and pent up demand. Mr. Lane pointed out that the Canadian housing market was not as turbulent as the market in the United States because Canadian home price appreciation was not as steep. The resulting turbulence manifested in sharp declines in American housing, while Canadian housing fared much better.

Similarities between the current Canadian housing market and the U.S. market prior to the global recession includes: historically low mortgage interest rates, reduced inventory, and increased real estate speculation. The role of increased real estate speculation is of interest because it is not only the domestic investors fueling the Canadian market, but foreign investor looking for large gains.

However, fundamental differences also exist between the markets. Dr. Lane pointed out that the Canadian mortgage system is inherently different than its counterpart in the U.S. Canadian mortgage guidelines are written primarily by mortgage insurers because mortgage insurance is compulsory for mortgages with less than a 20% down payment. Additionally, about 70% of Canadian mortgages are held by the lending institution (rather than becoming securitized) forcing the lender to make more responsible lending decisions.

Deputy Director Lane’s summation was that the Canadian housing market requires “vigilance, but not alarm.” However, they may not have much choice but to ride out market disturbances because any intervention may stall the recovering Canadian economy in a global recessionary environment.

Time will tell whether the Canadian real estate market is a bubble waiting to burst, or just a manifestation of solid economic principles. Either way, we will learn whether prudent mortgage policies can play a part in mitigating future real estate bubbles here in the U.S.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of March 8, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell

Housing market 2006

In reading some of the real estate forecasts for 2006, I was reminded of H. G. Wells’ novel, “The Shape of Things to Come.” What does H. G. Wells have to do with Real Estate? Nothing. Well almost nothing. Any self respecting science fiction enthusiast knows that the 1933 novel about the future of mankind was eerily prophetic about the outbreak of the Second World War as well as some technological advances. However, the novel was pure science fiction. The housing market 2006 is another matter

So I had to ask myself, “what is it about economic forecasts, real estate market predictions specifically, that seem to be prophetic in one regard and erroneous in other details?” I believe that in order to get a balanced perspective you have to get information from various sources and pull the pertinent plausible statements to form the picture. The same holds true to the coming year in the local real estate market.

So what can we expect from the housing market 2006 ?

The National Association of Realtors predicts 2006 to be the second best year in history for sales activity ( David Lereah, chief economist for the NAR, stated in a NAR press release on December 12 that he feels that economic conditions will be positive for the housing market in the coming year. He states that general economic conditions will be good to help sustain a stable real estate market.

Conversely, the UCLA Anderson Forecast (, the folks who accurately predicted the recession in 2001, predicted in a recent press release that there will be a “weakness” in the national economy due to problems in the housing sector. Their vision is a weaker economy through 2007 because of a slower housing market and loss of construction and housing related jobs. The bottom line is that they believe that there is a rough road the next few years, but there will be no recession.

Interestingly enough you might think that Realtors who are active in the local market would have cohesive and consistent outlook on the future. That is not the case. Local Realtors who are quoted in Realty Times ( share differing opinions about the state of the present market and offer differing views about the near future.

So, what can we make of all this confusing information? Well, with regard to mortgage interest rates, the Fed is expected to have at least one more increase planed, so it will remain to be seen where mortgage interest rates level off. Currently, mortgage rates are higher than they have been in recent history, but still hover at a respectable 6.25%. Additionally, home sales have dropped off from last year’s pace but prices are still increasing. So economically, it seems as if there is a sense of return to equilibrium.

What people have described as a bubble bust, or a downturn in the real estate market, is actually a return to a more balanced market. The dysfunctional expectation that a home should sell for $25,000 (or more) than the last home sold, and have many home buyers place an offer on one home in a moments notice will change to the more reasonable expectation of selling at market value and having a buyer contract on a home in several (or more) weeks.