Bursting any day now

The writing has been on the wall for ages but the real estate bubble’s getting really bad lately. Now I know my friends in SF have been hearing about it for a decade, but let me tell you: it exists and it’s real because it’s hit my out of the way corner of Oregon.

I remember before the internet bubble burst and friends in far off places like Austin, Texas were talking about all the new construction, the big salaries, and lack of employable talent. I remember thinking if the madness that happened South of Market could migrate halfway across the country to a place like Austin, it was bound to burst. NY and SF are where the internet hype started, and I’d call LA and Seattle 2nd wave cities. Austin I’d consider a third wave beneficiary of the bubble time and if it ever burst, those in the 2nd and 3rd wave would be hit hardest. Just a few months later everyone I knew in a Texas dotcom was out of work.

So we’ve owned our first home for about 18 months now and I watched real estate up here for a while before we moved, and prices barely budged. But in just the past six months, everything is skyrocketing. We are considering moving up to a house with an extra bedroom (having a baby that gobbles up your extra room tends to make you want to upgrade) and we found out our home has gained quite a bit in value in this short time. We were thinking a price that was about 10% over what we paid in late 2003 was pushing it. Turns out the local market is bearing a 30% gain on the house in this short amount of time.

Of course, any gains we make from the bubble will be gobbled up by a follow-up purchase. When we arrived in Oregon, I distinctly remember how refreshing it was to see affordable housing that was completely unlike the Bay Area’s ridiculous prices. What is shocking to me today is that this small out-of-the-way town in pretty much the middle of nowhere has a couple new neighborhoods with large custom homes pushing the half-million dollar mark. It’s like the Bay Area all over again, but worse since it feels like we’re sort of in one of those third wave kinds of places far from the source.

When things are getting bad this far off the beaten path, I have a strong feeling the end is near. The economy is doing better than it was, but it’s not great. The interest rates are really what is making this happen and they have nowhere to go but up, causing the entire house of cards to collapse. I’m counting the days until that happens and wondering if I should take the plunge in this market. We hope the next house will be something we can grow with and hold onto for a good 10-15 years, so maybe any temporary market correction is moot.

3 Comments

  • Matt,
    The bubble, I feel is quite real. And getting ready to pop. Doing lots of reading and such as I am in a similar need for housingupgrade/lateralmove/extraroomeforbaby situation. I have found that most indicators are -no lateral10-20% moves right ow. Wait for a bit, wait for pop then settle. That’s my observations in talking to experts.

  • Yeah. We’re living in San Francisco and bought around the same time as you—roughly 18 months. In that timeframe, we’ve seen a gain of about 33%. Just amazing. Our feeling is that if the bubble bursts, housing prices will just stabilize instead of seeing a sharp drop. Worst case is that people will just stay put, instead of trying to sell for less.
    Like you, we’ve thought about trading up for a place that we’d want to stay in for a good 10-15 years. Right now, we’re going to hold tight and see what happens. The plan was to stay in this place for a good five years.

  • I don’t think it will burst so much as fizzle. American home owners have already borrowed out all their equity and can’t afford to sell at a loss – so i think you’ll have some scare stories and then a flat market for a bit.
    I’m in the process of buying my first house right now – I live in St. Louis (which isn’t even a third wave city – I’d say we’re around the 19th or 20th wave) Prices here are under market value. I’m buying a 3 bedroom in a cool old neighborhood surrounded by the best italian restaurants in the midwest for 110k – with the seller paying my closing costs.
    I used to live in the bay area, left because of the cost of living… I think it worked – the income levels out here are not much lower, just the prices.

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