the housing bubble...

Comments: On real estate
Buffett: "A lot of the psychological well being of the American public comes from how well they've done with their house over the years. If indeed there's been a bubble, and it's pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices]....

"Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement.... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than the underlying costs, sometimes there can be pretty serious consequences."

Munger: "You have a real asset-price bubble in places like parts of California and the suburbs of Washington, D.C."

Buffett: "I recently sold a house in Laguna for $3.5 million. It was on about 2,000 square feet of land, maybe a twentieth of an acre, and the house might cost about $500,000 if you wanted to replace it. So the land sold for something like $60 million an acre."

Munger: "I know someone who lives next door to what you would actually call a fairly modest house that just sold for $17 million. There are some very extreme housing price bubbles going on."

I yesterday learned of a pharmacist who has just recently left pharmacy to speculate in the housing market. This pharmacist previously knew nothing about the US housing market and in fact didn't move to the US until just recently. His wife still works as a pharmacist while he buys and sells 1 house at a time and is making more money doing this than working as a pharmacist.

Now I believe that pharmacists earn in the top 5% of all professions in the US. According to salary.com "The median expected salary for a typical Pharmacist in the United States is $95,386." Now assuming that he was earning the median and he has been tempted out of this industry just think about all of those people who have been pulled into this booming house market from all other industries that earn way less than what a pharmacist earns.

In fact, a friend of mine is an intern pharmacist and he just has a few months to go to become a pharmacist and he is thinking about throwing it all in and not finishing his qualification and going into real estate speculation.

Surely this is the madness at the height of a boom that is completely out-of-control? These must be the signs that we are nearing the precipice. I can hear the roar of the water further down the river dropping thousands of feet over a massive waterfall and more and more people are entering the water just above this fall. The longer we hover up here and the more neophytes we draw out of their current professions and into the housing market the bigger this fall is going to be.

What do you think?

Perfect timing. Just got an email detailing the launch of a housing future by CME. This should accelerate the fall in the house market when everyone shorts the future to hedge their properties:

CME Housing futures & options are designed to provide a facile way for institutional and individual investors to gain exposure to real estate risk and effectively diversity their portfolios. Commercial and private asset holders are afforded an efficient hedging mechanism. In the process, this novel market may have the effect of reducing transaction costs for trading real estate. CME is currently planning for a launch in the 2nd quarter of 2006.

More details on the launch party here: CME Housing Futures Launch Party