I’m wondering about a possible correlation between the internet bubble and the housing bubble.

Internet bubble started in 1995, burst in 2001:
http://en.wikipedia.org/wiki/Dot-com_bubble

A graph from the New York Times that shows the housing bubble, with prices adjusted for inflation, over the last 110 years. The darker graph is the Nasdaq prices from Wikipedia superimposed on the image.

There’s some lag – the housing bubble started 2 years after the internet bubble. Although not reflected in the graph, the downturn started first quarter 2007.

I was living in San Jose when the internet boom and the housing bubble started. From my perspective and location, internet companies were starting up constantly, and people were snapping up houses as soon as they went on the market. I was listening to a realtor talk about how it wasn’t enough to be pre-approved. You had to have the money in-hand to buy a house, and if you didn’t the house would have been sold to someone else the following week.

My grandmother’s house jumped from the 300K range to 700K plus. My dad lives about 30 miles away in what used to be farmland, and was at the time pretty shabby houses each with an acre or so. As the prices started to become unreasonable, it was now worthwhile for people to commute an hour plus to work. So instead of spending a million dollars for a 2000 square foot house, people would buy these old shabby houses for 350K, tear them down, and rebuild mansions. Even now about 30% of the houses in that area are mansions with an acre of land, with the other houses basically shabby farmhouses.

Prices actually become unsustainable in 2000. My theory is that the internet boom kept the prices going until 2001. Over the next 5 years prices continued to rise due to speculation, temporary fixed-rate ARMs, and towards the end, dishonesty, shortsightedness, and greed on the part of lenders and buyers. Now the ARMs are coming due, people are losing their houses, and prices have dropped 10-20% depending on the house you are looking at.

Right now as I go house hunting I am looking at houses between 550K and 600K, 2000-2500 square feet. It’s very hard to find houses at that prices level that are not damaged or undesirable in some way. Last week my Realtor took me to a house with 6 families of illegal aliens in it in the process of a short sale. They had even converted the garage into another room. You can imagine the condition of the house. Another house had been abandoned in a damaged state by the prior owners, with big telephone transformer poles in the backyard. We did see one nice house for sale by owner for $850K, but he was asking that while his neighbors were asking $700K.

I don’t know of any fundamental reason why prices should be where they are right now. I think the only reason it’s taking as long as it is for prices to drop is reluctance on the part of sellers to accept 6 figure losses in home value. If the downturn takes as long as the upswing, prices should drop for the next 10 years to about half of what they are now.

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