It's distressing to see two wise old hands who have built community respect through their experiences and their posts slip into a flame war.
In some important respects I think you are both right and both wrong. To say that real estate is on the verge of going to hell in a handbasket is overkill; on the other hand, to pretend that everything is hunky dory just because the charts look good is pollyanna also.
Charts have a lot to say, but they can't tell you about the underlying health of a market or the buildup of catastrophe risk. Think Victor Niederhoffer, LTCM, and countless other premium sellers who have smooth uptrends right until they blow up. The surface is only the surface.
Real Estate has major exposure in the form of interest rate risk, which in turn is driven by currency risk and political risk. I don't know of any real estate bull who can credibly deny this. In order to deny it, they would have to be solid in macroeconomics as well as RE. Decades of owning and refurbishing don't mean a thing here.
IF the dollar goes into a severe freefall, US rates will rise sharply and there won't be a damn thing we can do about it. Thus the problem in today's markets: massive exposure to interest rate risk via leverage, right down to the average joe. The maestro, Greenspan hiimself, has justified his no bubble view by saying valuations are reasonable vis a vis current rates. And that is precisely the problem. If today's interest rates go higher quickly and painfully, valuations go in the tank just as quickly via pocketbook damage - and it won't just be speculators leveraged up to the eyeballs who get killed. It will be many average homeowners as well, who "bought as much house as they could afford," just as the financial community told them to, and suddenly find their ARMS strangling them. And it will be banks of all sizes, from moms and pops to the big money centers, who are betting so heavy. Hell, even the Chinese have skin in the game via big purchases of CMOs.
And an interest rate shock via collapsing dollar would not just attack homeowners and speculators through ballooning mortgage payments. It would also slam the brakes on our economic expansion. Improving corporate circumstances would go from sunny to stormy in short order, corporate debt burdens would get much heavier, and we would be looking at new rounds of layoffs, which in turn would hammer consumer sentiment. This in turn would put more homeowners underwater, creating a vicious circle.
Leverage amplifies the circle. It makes good circles that much better and bad ones that much worse. We have RE leverage in spades right now.
Thus, to say that the real estate market is hunky dory only because the charts are still all pointing north is myopic imho. The problem is the shifting currents below the surface and the risks we are running. Fannie Mae pushing 40 year mortgages is irresponsible, plain and simple. Wells Fargo running radio commercials suggesting you treat your house like a credit card is irresponsible, plain and simple. The real estate market is facing the risk of a blowup through catastrophic circumstances, with the same profile as a premium seller: looking good on the surface level, serious issues beneath. The problem is not seasoned owners who know what they are doing. It is precisely with the people who have no idea what the hell they are doing: namely, overleveraged idiots (of which there are enough to be a true danger b/c of the size they are wielding) and naive homeowners who have made major bets on low rates and ongoing appreciation without even realizing it.
Now, with that said, is it inevitable that the dollar is going to collapse? No. Is an interest rate shock a foregone conclusion? No, it is not. It's still possible that the situation will work itself out without catastrophic consequences. The dollar could decline in herks and jerks without crashing, and even enjoy long periods of bullish countertrend on its way down. The political backroom deals btw Asia and USA could hold together. China could see a return on their depreciating investment through long run trade concessions. Asia may be feeling inflationary pressures as we speak, bringing the situation into longer term alignment. We just don't know.
We may even see a scenario where real estate doesn't decline much at all, because markets don't have to fall in order to go back to trend. They can simply flatline. It's possible that we hold it together and housing just gets dull as dishwater with no real upside or downside for the next decade.
So, this is why I suggest you are both right and both wrong.
I'm inclined to agree with Bill and OWP that the situation is genuinely dangerous. RE is about as stable as the guy working two full time jobs to maintain huge liabilities, keeping it all together but one paycheck away from insolvency. This guy could have perfect credit, but so what. Even if the number of high risk owners and speculators is proportionally small, the situation is still dangerous because of the potential for a chain reaction (think portfolio insurance in 87).
Not to mention that numbers suggest something is a little wacky. Look at real estate appreciation in plain old percentage terms. Not just in the US but around the world. We're talking numbers like 20, 50, 100, 150 percent appreciation over the past five years. Right? Now look at long term average appreciation, covering decades. It's single digits, not far ahead of inflation. Add in the fact that interest rates have been dramatically low, artificially low, for the past few years due to extraordinary circumstances, and extraordinary easy money by the fed. It doesn't take a rocket scientist to see that these are major factors -the big picture didn't change in 5 years, the money flow did- and thus trying to attribute the recent runup to internal RE factors only (supply / demand etc) is just plain silly.
On the other hand, I'm inclined to agree with Old Trader that you can't just throw up your hands and run for the hills, or expect everything to fall apart tomorrow. The situation may well resolve itself through nonviolent means. We could see a dip and then a modest but long decline, or a dip and then a long term flatline that brings real estate back to trend through an absence of appreciation even as inflation soldiers on. It doesn't have to all fall apart. We're talking russian roulette risk here, not "game over man we're screwed." Not to take away from the fact that Russian Roulette risk is serious.
The position to hold, imho, is the clear eyed recognition that things could go very, very wrong in short order but that a catastrophe is not guaranteed. A 10-20% probability for the oh shit scenario is definitely high enough to be concerned when you consider what's at stake. There is tremendous risk beneath the surface here. But on the other hand, that doesn't mean it's a foregone conclusion that we're going over the cliff. If you plan to own your property (or properties) for the next few decades and you know you are financially solid even if the shit hits the fan, fine. On the other hand, if you are thinking about moving or selling anyway and you have already enjoyed massive appreciation, remember that bulls make money but hogs get slaughtered.
