[CPAhem]

Real estate bubbles rarely burst unless there is accompanying unemployment. The reason is psychological, people hate realizing a loss.

Another practical reason is that if borrow $1 million for a house, and it is now worth $800,000 you just keep paying off the mortgage and hope prices go up again. Selling it would require you pay in some cash to pay off the loan. All this is provided you keep you job and can afford the loan.

[david927]

The faster a bicycle goes, the more stable it is and therefore less likely to fall over. But also when it does fall over, the damage is much more devastating.

You're right that there's a keel keeping real estate from tipping. The reason isn't just psychological (although there is a strong sentimental sense of attachment you have to your house); real estate is also less liquid than almost everything else. Other factors, including proximity to work, children's schools, etc. make it a last resort in terms of liquidating. You're right -- as long as someone can keep up the mortgage payments, they'll do so.

The problem is that the bigger the bubble, the more unlikely someone can maintain those payments if suddenly unemployed or underemployed. The crash of 2008 wasn't so much averted as postponed. Subprime mortgages became 'nonprime mortgages'. The practices are still there. The artificially low interest rates are still there. The bicycle is going a thousand miles an hour and when it really crashes, look out.

[saint_abroad]

> The crash of 2008 wasn't so much averted as postponed.

This.

The US housing market correction from 2006 was 30%. In this time, the US Fed funds rate went from 5.25% to 0.15% cutting banks' monthly cost for a $250k loan from >$1k/m to <$50/m.

In the meanwhile, median LTV has gone from 80% in 2007 to 95% in 2017 [1] and median loan sizes have gone from $175k to $325k. What happens when interest rates normalise and mortgage interest doubles?

The banks have been propped up but the risks have not left the system.

[1] https://www.urban.org/research/publication/housing-finance-g...

[a008t]

Why would interest rates "normalize" though?

[sct202]

US Federal Reserve rates have been increasing so banks get loans at higher prices which means consumer interest rates will also increase.

[a008t]

But the Fed cannot just arbitrarily set rates, presumably? There is some "real" rate in the economy, which is determined by supply/demand of capital at different maturities. If the Fed goes significantly below or above that, you should get price inflation or deflation.

Some people argue that interest rates are objectively low because we are in secular stagnation - there are loads of savings, but real economy growth is sluggish which means there are few investment opportunities, leading to low interest rates (e.g. https://www.morganstanley.com/pub/content/dam/msdotcom/ideas... - may not be the best link, I have seen the ideas elsewhere).

[saint_abroad]

> But the Fed cannot just arbitrarily set rates, presumably?

They absolutely can, by quantitative easing (aka large-scale asset purchases) buying $4 trillion of bonds priced to keep yields in range. This market can remain irrational longer than anyone can remain solvent.

By price-fixing this market they stimulate liquidity. Institutions (such as pensions) that would normally buy safe bonds are forced to invest elsewhere at marginal yields (ie. corporate bonds and MBS). Other, more risky, investors chase growth stocks with marginal yields.

> you should get price inflation or deflation.

Indeed there has been, though currently visible only through asset prices such as bonds, stocks, securities and housing. Who can complain?

The danger comes when the tide goes out and yields go up [1]. All that extra liquidity washes from assets into yields, thereby driving inflation on produce.

[1] And up yields must, to determine how much have been swimming naked.

[qubax]

> Real estate bubbles rarely burst unless there is accompanying unemployment. The reason is psychological, people hate realizing a loss.

Real estate bubbles generally burst when buy side gets squeezed. It doesn't matter if people sell homes and realize losses. The bursting of bubbles isn't a supply or sell side issue. It's a demand or buy side issue.

But there are many ways the demand side can be squeezed. The most prominent is increasing interest rates. Then there is unemployment as you noted during economic downturns. There are also legal methods - draconian anti-buyer laws. Imagine if a law was passed that banned sale of homes to foreigners and even gave foreigners 3 months to divest all property in X market. Not only would that burst the bubble, it would crash the housing market.

Bubbles form when the demand side is artificially increased while limiting supply side. For example, if you granted citizenship to foreigners if they buy a house. That would spike the demand for homes but the supply of homes wouldn't increase as quickly.

There are a myriad of reasons why bubbles form and why bubbles burst. Ultimately it's the manipulation of supply and demand sides which causes one or the other.