"Now that people are talking about a bubble in housing, I suspect it will take a lot longer for the housing-market bubble to pop. People say they are conscious of it, which means that a good portion of the population isn't entering the market. When the last marginal buyers give up and rush to get in, that will be when it ends. In other words, maybe we have some years left in this, but it will end eventually" (Jesse Eisinger, "Option ARMs Are Fueling Bubble, Aug 1, 2005, Long & Short Mailbox).
As a non-economist, I found this argument counter-intuitive to say the least. I had assumed that an increasing volume of talk would, if anything, begin to raise doubts in the minds of complacent buyers about whether housing is such a sure-win investment after all, thus helping prick the bubble. But I did recently run across this peculiar thing called the VIX index, which apparently measures how much people are willing to pay to be cushioned (with puts and calls) from a volatile stock market. Apparently it is now at an all-time low, meaning no one is much worried about volatility. For contrarians this overconfidence of the masses signals that the last fools are now entering the market, that there will soon be no one left to sell to, and that the Ponzi scheme is near its end. Is Eisinger, as it were, giving us his reading on the housing VIX, saying it has not reached its lows yet, so there's still an upside? Does this argument have a name in investment theory and a school behind it?
Anyway, while it's an ingenious theory, it don't think it holds up to the facts. I found the following quotes in my folder on the housing bubble. From the Wall Street Journal: "7 in 10 consumers expect housing prices in their areas to increase over the next year. Significantly, one in three of those who expect rising prices think they will go up by 10% or more during the next 12 months. In fact, nearly 1 in 10 expect housing price increases in the 20%+ range in their areas." And from the LA Times earlier in the year: "A widely followed University of Michigan consumer survey, released Friday, showed that 24% of respondents nationwide said it was a good time to buy a home because prices would rise. That was the highest percentage since 1988 — right before prices peaked in the previous real estate cycle. ( "It's Not a Bubble Till It Bursts," May 29, 2005).
Judging by these surveys, I am afraid the housing VIX may well be at an all-time low as well, and that the Ponzi scheme IS about to unravel (if you believe this whole theory). Eisinger may be living in a bit of a bubble himself judging by how he is overgeneralizing from his WSJ readers. On a housing blog about Washington, DC, that I happened across the other day, an average Washingtonian came on and said: "I have been following this discussion with fascination. ...This discussion is the ONLY place I have heard ANYONE say they think there is in fact a bubble and it will burst." And the above WSJ article noted that "Only about one in three consumers recognize the term housing bubble."
Regards, John Dixon