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Bulls on the housing market like to say there can’t possibly be a bubble because almost everyone thinks there’s a bubble.
According to this contrarian logic, if everyone thinks there’s a bubble, they’ll be cautious about overspending. So prices will remain reasonable. In computer code, that would be:
IF [Belief in bubble]
THEN [No bubble]
I hate to burst the bulls' bubble, but the IF statement was falsified in a report today by David Rosenberg, the North American economist for Merrill Lynch & Co.
To put it differently, most people DON'T think there's a bubble. They still think housing is a great investment, and they're betting on it bigtime. Evidence from Rosenberg's report:
--Nearly one in four Americans polled in a University of Michigan survey believe that now is a good time to buy a home since it is a good investment and/or prices will continue to inflate. This share is at a 25-year high.
--According to National Association of Realtors data, 23% of home purchases in the last year were bought as investments and another 13% were bought as second homes.
--Units sold even before construction began are up 47% from a year ago to a record high.
--Housing affordability is at a 13-year low and the total household debt service ratio is at a record high.
--Over one-third of homeowners are devoting over one-third of their incomes to monthly mortgage payments. Twelve percent are devoting over half their incomes.
--Seventeen percent of homeowners have a loan-to-value ratio of 95% or more. (A decade ago only 3% did.)
--The subprime market has accounted for 28% of new mortgage lending in the past six months, vs. 5% five years ago.
--In the hottest markets, adjustable-rate mortgages account for over half of new loans.
This is not the behavior of people who have turned hypercautious because they think a housing bubble is about to burst. This is the behavior of people who want to catch a wave and ride it as far as it'll carry them.
Any bulls out there have an answer to Mr. Rosenberg?
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.