"We don’t have a housing bubble here- the economy’s good, lots of people coming in, prices are going up like crazy.  We don’t have an overheated market like San Francisco or Phoenix."

You could be hearing that, you could be saying that- I was hearing that kind of talk in San Diego as recently as April.  But remember, bubbles can fly under the radar, undetected, if you don’t know what to look for.

So how do you detect a bubble?  The first thing to remember is that a bubble (and there are all kinds- stock market, housing- any market you can speculate in) isn’t just when a market comes down- a bubble has a front side to it as well.

Robert J. Shiller, the economist most noted for his studies of bubble behavior, defines a speculative bubble in his book, Irrational exuberance.  He states, I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of the investment,are drawn to it partly through envy of others’ successes and partler through a gambler’s excitement.  In other words, prices go up beyond expected levels, out of a pure speculative euphoria.

Note that Shiller’s definition really focuses more on what drives it up, than on what drives it down.  So because your market is currently going up, when the nation’s "hotter" markets are stagnating, doesn’t mean you don’t have a bubble- you could just be behind the curve.

Consider this example from Patrick.net-  Consider the turkey in the farmer’s barnyard. He thinks the farmer will always come feed him and not ask for anything. Then Thanksgiving comes. Whack. Past performance is no indication of future results.

What are some of the signs on the front side of a bubble?  One is looking at the areas fundamentals.  You don’t need to have a bad economy to have a problem.  My home town of Gilbert, AZ is one of the fastest growing cities in the nation.  However, building has far outstripped demand, creating a huge surplus.  One of our first clues then, was the large number of speculators, some say as high as 35%, buying into this market.  (Accurate statistics are hard to come by- not everyone is truthful on mortage applications.)

Remember, when "everyone is doing it," no one is going to make money.  The classic example was Joe Kennedy, President John F. Kennedy’s father, who jumped out of the stock market before it crashed.  According to Professor Piggington’s- -

One day, his local shoeshine boy gave him a tip on a stock to buy. Mr. Kennedy immediately cashed out his multi-million dollar gains and got out of the market. He realized that if the market were so oversaturated that even the shoeshine boys were giving out stock tips, it was time to get out. And that’s exactly what he did, just months before the stock market crash in 1929. Looking back, Mr. Kennedy based his investments on facts and statistics, not on fear and hype.

A bubble not only has a front, but a rounded top as well- remember, we are describing a "bubble" not a pyramid.  There is a temptation to declare a "soft landing" when the bubble loses steam and sales slow down.  But the "what goes up, must come down." axiom holds here.  Values aren’t going to stay above the market mean.  If speculation drove the bubble up, a lack of speculation will drive it down.

This "bubble top" can be the hardest part of the cycle to recognize.  There is a lot of money with a vested interest in hiding the top.  By hiding it, there is always the hope that investors and speculators can find one more sucker farther down the food chain.  But there are clues you can look for.

Let’s take for example Utah, particularly the Salt Lake City-Provo area along the Wasatch Front.  Utah has had a growing population and a strong economy, but recently home prices have been rising rapidly.  From the recent article in the Salt Lake Tribune, you would believe that there is no bubble.  The article starts, Anxious home buyers along the Wasatch Front are pushing the housing market to new heights, hoping to ink a deal before prices and interest rates rise even further.

In spite of the article’s upbeat tone, you can see your first clue- it is "anxiety" that is causing home buyers to buy- refer back to Shiller’s definition here.

There are other clues if you look closely. While builders such as MDC continue to report strong sales from Utah- there are starting to be hints of a slowdown.

The first is to drive around the area.  "For sale" signs are cropping up everywhere- billboards from SLC to Provo are dominated by builders and mortgage companies.  One of the best hints though, comes from the ads. In a "hot" market, sellers do not have to resort to creative financing, or appeal to subprime borrowers.  A recent issue of "The Real Estate Book"- a local real estate guide for Provo/Orem- had some of the following phrases in ads- Below Market Value!  Price Reduced!  Beat the bank! Hud acquired! Lease purchase!"  There aren’t a large percentage of these ads- not nearly as many as we see in the Phoenix, but they are indicative of a market that is starting to cool off.

There are hints from the Realtors as well. Here is a carefully worded quote from Carlene Sumner, a Realtor from Alpine.  Alpine values continue to appreciate but not quick enough to cause a panic. The average home sale has increased to $658,924 since May 1st with the average time on market also increasing to 92 days. Competition is growing, so buyer’s may benefit from the increased market time.

Translation, "Prices continue to rise at a somewhat worrisome rate. (not panic, just worrisome.)  Home sales are beginning to cool off."

The last hint is that Realtors do not give specifics when they mention the rate of home sales.  They only say, "Prices are going up!  Buy now!"

Here’s another clue from another Alpine Realtor, Kelly Goggia-Christiensen, The average number of new listings sold in Alpine has risen approx. 24% in the last year. The average days on the market for homes sold in July was 89 and the average asking price on a home in Alpine is $643,000, according to the Wasatch Front Regional MLS (7/18/06).

Translation- "Sales are insufficient to move inventory- homes are taking longer to sell."  Supply and demand says sales must come down.

Utah hasn’t experienced the level of "irrational exuberence" that other regions have, so it would be expected that they would not experience as severe a correction as other "frothier" markets.  It is apparent though, tha
t they are seeing an increase in inventory and slumping sales, in spite of the lack of "official" figures. Supply and demand again- prices will begin to feel a downward pressure.

It appears that "shoe shine boy" may be investing in Utah, and it’s time to consider the market may be on a downturn.

Utah is only one example.  Any number of housing markets across the country are showing similar symptoms.  Check your local housing ads, read what your Realtors are saying.  (A good source is Realtytimes.com.)

Check it out.  The "Housing Bubble" may be playing at a market near you.

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