Is the bubble a contrarian position?

who astutely describe the forces that have driven the markets into these conditions have sold some of their own property.

So what about Schilling's analysis? It's a thorough collection of the usual arguments:

• Home Equity loans are a growing percentage of loan amounts (the home-piggy bank argument)
• second home purchases have grown (the they'll-run-for-the-hills argument)
• Home prices have run away from rent prices.
• Rates are going up
• Delinquencies at the low end are going up and affordability is down (the those-people-are-hurtin' argument)
• They argue that the bubble this time is worse, because it is national rather than local
• Inventories are up (though his charts don't seem to support the argument, see below)
• High end buyers are sitting out, and the prices will flatten first because people don't have real time data. (Ahem, that's where Altos Research comes in.)
• Speculators are rampant, home builders will overshoot, etc.etc.etc.

Interestingly, the analysis points out how the markets have already factored in a bubble burst in 2006.

Investors are not amused. Credit default swaps on
subprime ARM pools, in effect insurance policies against defaults, have
almost doubled in price from mid-September to December of 2005. Buyers
of these derivatives obviously anticipate more trouble.

Here's the inventory chart for existing homes. He points to inventory growth of the last few months of 2005. The black line, number of sales, has been high. OK. But the red line is the important one. That's the one that measures available supply for current demand levels. That, while upticking, is still historically low. And since supply is to some degree a function of demand (a lot of people want to buy my home, it's a good time to sell) the red line has a long way to go before bubbles burst. Lots of people have to want to sell, that can't. That's the essence of the bubble. Schilling doesn't present any analysis on why we'll see broad recession and unemployment that would open the floodgates of these folks. (BTW - We observe similar relative-demand conditions with our Market Action Index for the Bay Area.)

The trouble with analyses like this is that the argument often strays between the "it's just gotta pop" and the "it's going to be bad when it does." The article is at its best with comments economic impacts and the investment opportunities that arise with the foregone conclusion.

... research shows that a 10% rise in
house prices leads to a 0.62% increase in consumer spending, about
twice the rise from a 10% jump in stock prices. So, the $2 trillion
rise in house values in the last several years just about offset, in
terms of consumer spending effects, the earlier $4 trillion drop in
equities. Obviously, this effect will work in reverse as house prices
fall.

Beyond the depressing effects of lower house prices on
consumer sentiment and spending, the related drying up of housing
activity will cause sizable layoffs and income loss. Moody's estimates
that 1.1 million of the 2 million net jobs created in the five years
ending last October were real estate-sired, including real estate
brokers, mortgage bankers and lenders, builders and building material
producers. UCLA's Anderson Forecast sees most of those gains
disappearing over the next several years with a housing bust--500,000
jobs lost in construction and 300,000 in financial services.

...

Rental apartments are an interesting example of this
as younger families no longer see any advantage in jumping into
single-family homeownership early on, and instead stay in rentals until
their kids are big enough to necessitate separate houses. At a later
stage, empty-nesters who hate home maintenance may sell their houses a
few years earlier than now and move into rental apartments, not condos.
Rental apartments, many owned by REITs, have been recovering in the
last 18 months as vacancies have fallen and rents have started to rise,
in part due to conversions to condos that reduce supply.

Unfortunately these are saved for the last few paragraphs and only lightly touched on. All in all, Schilling presents a complete summary of the usual arguments. Well done and recommended reading. But nothing really new. A thorough analysis and model of what happens when the bubble bursts, now that would be outside the box.