Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Real Estate Bubble on the Coasts

News stories indicate that real estate prices in the San Francisco Bay Area and New York have risen to astronomical highs. The prices have triggered an orgy of selling that is fueling a potentially dangerous bubble that could destroy property values nationwide when it bursts.

Some highlights on the front lines of the new real estate bubble on the Coasts include:


  • Prices are now so high in Brooklyn that some New Yorkers are actually moving to—gasp—Manhattan because it is cheaper, The New York Times reported.


  • The average home price in Brooklyn is now $610,894 for a basic apartment.


  • The average home price in some Brooklyn neighborhoods is now $1.275 million.


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  • Three bedroom apartments are now going for $2.5 to $4 million in some parts of Brooklyn, The Times


  • A house in Oakland’s Croker Heights neighborhood sold for $2.2 million in an all cash transaction, The San Jose Mercury News reported. The price was 32% over the list price, Real Estate agent Davey Cetina told the newspaper.


  • Homes in the Bay Area are selling after spending less than 10 days on the market, a Mercury News survey found. In March 2014 the average home was listed for 23 days before selling.


  • Many properties in the Bay Area are under contract within two or three days after they are listed.


  • A large percentage of the home purchases in the Bay Area, including 26.6% of those in Santa Clara County, are being made with cash. That indicates that a large number of investors, speculators and flippers are in the market. It could also be an indication of a lot of foreign buyers—possibly Chinese in the market. That could expose the market to collapse if the Chinese economy melts down.


This looks like a classic real estate bubble and a very dangerous one at that. The frenzy of buying going on is making the market inherently unstable. What’s worse is that it is pricing housing out of the reach of the working and middle classes.

It also looks like we are close to the peak of the bubble, which indicates that a burst and a crash could be imminent. One has to wonder what would happen if buying in such a market suddenly ground to a halt.

Zombie Assets

The situation is especially dangerous because many of the properties involved are now priced so high they could become zombie assets. A zombie asset is a property that is priced so high the owner cannot afford to sell it. To make matters worse, many zombie assets end up underwater, which means the amount of the mortgage exceeds the value of the real estate.

Zombie assets, primarily high property values, were responsible for the major economic stagnation that plagued Japan in the 1990s. One reason why such assets are so dangerous is that they can effectively freeze the real estate market. Nobody is buying and selling, which can bring the market to a sudden and dangerous halt.

Such a crash could effectively devastate the real estate market and drag banks and other financial institutions down with it as happened back in 2007 and 2008. The situation is volatile, but it is not as bad as it was back then.

Real Estate Will Come Crashing Down

The difference is that this real estate boom is confined to specific parts of the country; it is not happening on Main Street, and the middle class is not participating. The situation is similar to the Florida Land Boom of the 1920s; some people believe the bust of that boom in 1928 helped trigger the Great Depression.

This house in Flatbush Brooklyn is probably selling for a half million dollars.
This house in Flatbush Brooklyn is probably selling for a half million dollars.

The good news is that the collapse of the latest real estate bubble may not affect many areas of the country. The bad news is that it hurts the country because large amounts of capital flows into one segment and one area. There is less money to invest in truly productive endeavors and less money for areas outside New York or the Bay area.

A fringe benefit of that situation will be lower property values in other less “hot areas” of the country. Property values could effectively collapse in some older industrial cities such as Pittsburgh. Naturally, they could fall to incredibly low levels when the New York and Bay Area bubbles burst.

One result of this will be to make income inequality a geographic phenomenon as the working and middle classes flee the high property value (and high property tax) areas in search of affordable housing. There is already some evidence that is occurring in California, where the middle class is migrating to Texas. If this continues, the United States could become more like Great Britain with a few very prosperous urban areas surrounded by a sea of poverty and postindustrial blight.

My prediction is that a real estate crash in areas like New York, the Bay Area, Chicago and Denver is imminent. When that occurs, a lot of people are going to be hurt. Such a crash will occur because the real estate prices in those cities are unrealistic and simply cannot be sustained.