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May 24, 2005

"Bubble Schmubble"

Karyn McCormack

I consider myself a housing "bull." When I went to Boston this weekend for my friend's graduation, one young business man boasted about how he landed a cool $1.2 million for his home after wisely renovating and converting it into three condos. And where I live in New Jersey, new developments are still cropping up all over the place.

That's why today's existing home sales report did not surprise me. Economists expected a slight decline to a 6.85 million annualized rate for April from 6.89 million in March. Instead, existing home sales jumped 4.5% last month to a record 7.18 million units. "The data further confirm that a boom is underway in the U.S. real estate market during this seasonally important Spring season," wrote the economists at Action Economics, which just released a note entitled "Bubble Schmubble -- The Housing Market is Soaring."

I believe housing will stay strong as long as mortgage rates remain low. The average rate for a 30-year fixed mortgage was 5.86% in April, down from 5.93% in March, according to Freddie Mac.

Action Economics notes that mortgage rates are only about 50 basis points above the all-time lows set in mid-2003 during the deflation scare. "Unless rates move significantly higher from here, the housing market should continue to get support from such low interest rates," says Action. "Moreover, any further increase in interest rates will likely be accompanied by stronger job growth, which may diminish much of the effect of rising rates on activity."

Plus, home prices are still rising -- a sure sign that demand is outstripping supply. In today's report, the median price of a home was a record $206,000, while the average price was a record $255,000. This left the median rising a whopping 15.1% year-over-year and the average price rising 10.9% year-over-year, says Action Economics.

Sure, even Fed chief Alan Greenspan acknowledged there may be a "bubble" in some local areas. However, Action says it's worth noting that the weakest existing home sales data by region were in the West, where talk of a "real estate bubble" is the most prevalent. "The strongest data for all the housing reports are emerging from the South, where prices appear to remain consistent with asset valuation models, hence providing little support for the "bubble" theory," says Action. "It appears that broad strength in the housing sector can be seen as a separate phenomenon from the "bubble" in prices that may be emerging in urban markets in the West and Northeast," Action explains.

I agree with Action Economics' take that housing will stay strong for the time being. They conclude:

"In total, the existing home sales data add to widespread evidence that the housing sector remains strong, with little sign of near-term cooling ... It is unlikely that this boom in the housing sector will reverse itself before the Spring and Summer construction seasons are behind us."

02:22 PM

Real Estate

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Thank goodness for the bond market.

Recent bond activity, definately indicates people are hedging against a bubble in the housing market, and shifting assets into the treasury.

If it works out right, these low long-term rates may actually, ease us into whatever we are going into.

The modern economy is quite remarkable.

Posted by: daniel oliver at May 24, 2005 07:51 PM

Yes of course these prices are realistic, it should cost 850 grand for what used to cost 375 grand 3 years ago, whats wrong with that, its completly normal that 37 percent of home purchasers are not planning to live under the roof, even though historicaly its been around 4 percent.
After all, people need more than one house these days, its the new economy, and theres a shortage
,its better to own too many homes than not enough.
I see the sky as the limit, this will never correct itself as there is nothing to correct.
Now if I can just convert my pets.com stock into a
condo or two....

Posted by: jon at May 24, 2005 11:13 PM

I have to disagree with Karen. There is a bubble. But not with Single family detached homes. Right now there are an over abundance of Lofts, Condos and Townhomes flooding into every market from Minneapolis to Houston and from L.A. to N.Y. There are litterally too many to find people in the area to occupy them. They are built because the cost on return for the developer is GREAT! They are loaded with lots of gizmos and gadgets, Most of them cost an arm and a leg in association fees. WHich people do not realize that they could be putting towards a home. AND MOST OF ALL, they arent appreciating as quickly as a single family home because there are so many. If we pulled the latest statistics and removed Lofts, Townhomes, condos and single family homes individually, what do you think it would tell us?

Posted by: Taziesmer at May 25, 2005 10:13 AM

I don't think I can see Karen's statements as realistic. Why hasn't anyone asked why the 10 year note keeps droping and inflation is yet all around us? Yes, I said "inflation" i.e; gas, food, paper, etc. Has anyone looked at the lates prices on raw materials for building? Has anyone asked why the Chinese continue to purchase our bonds at an alarming rate when other foreign contries offer a better return? The answer may frighten some people. Simply put-- it is to miniuplate our economy and keep the housing market booming so that we can continue to fuel the Chinese busines by keeping Americans confidence up so that the importing of cheep (chinese labor) goods to AMERICA continues. Meanwhile, Alan Greenspan and his cronies contine to "soften the blow" by slowly raising intrest rates. Sooner or later people will see that there is a buble and boy will it BURST!

Posted by: C.B at May 25, 2005 01:28 PM

I don't know what the deal is with economists but they never get real estate right. Look at the California RE crash. All the economists in California were mad at some developer for saying they were in a bubble. The economists said historcally it couldn't happen. The crash happened just one month later. Look at the stock market crash. Those economists said it couldn't happen too. Then crash! I think economist is code for industry sales person. A non truth teller.

Posted by: Dave at May 25, 2005 01:48 PM

Im sorry Karen, but if you cant see this bubble, which is much larger than any bubble in US history,even bigger than the dotcom bubble, than you would not recognize a bubble if it bit you on the nose.
I live in Orange County CA. and I'm a mechanic making 45k a year but I'm a millionair on paper, unfortunatly I cant stand snow, and the Arizona desert doesnt appeal to me either, otherwise I would have cashed out already.
The only way for me to benefit from this, is to do what my neighbors are doing, tap into my equity using a dangerous veriable rate loan, then I could feel that euphoria thats been going around lately.
I'd look good in a new hummer, maybe with a boat in tow...hey how about a new harley, before I get old.
One day we will look back at these days and see how utterly ridiculous this all was.
Did you sell your dotcom stock prior to 10 march 2000?
Or did you buy into the "new economy" thinking, all that nonsense about theres only a limited amount of company stock available, and these mutual funds with their billions of dollars had to park their investments somewhere, therefore stocks had to go up due to a "shortage".
I'm sure you didnt see that one comming.

Posted by: s.parker at May 26, 2005 04:03 AM

Predicting economic bubbles - housing or otherwise - is futile. Only after a collapse in prices can one say there was a bubble and to what extent. The exact same arguments were made prior to the stock market implosion a few years ago and we now know the result. Demand caused by higher prices begetting higher prices is not sustainable as we shall see. When? Who knows. One prediction though: It'll be ugly when it happens. Circular causation will negatively affect many areas of the economy including many bank failures.

Posted by: David at May 27, 2005 09:09 AM

Please don't confuse yourself by making "housing bubble" a "healthy housing market" mutually exclusive events. There were many (so it seemed) very healthy technology companies before the Internet bubble burst. And there were many tech companies that didn't make it past hose bubble days.

The crux of the matter is what is driving interest rates-- and specifically the 10-year Treasury, lower, while the short end of the curve goes higher. It has little to do with housing activity. It has much to do with foreign buyers willing to suck up supply at cheap rates. How much longer can that last?

The result is a perverse cycle of credit creation-- and a lot of it is centered on housing in the U.S. The longer the cycle continues, the greater it will need to unwind.

So, I can see the housing market remaining strong in the near term, just like Karyn. But I think it's more due to a debt-driven bubble that just keeps on building. But hey, let's enjoy this very strong housing market while it's still going gangbusters!

All I know is that there is a LOT of housing related debt out there, and there is some very concerning things going on in some regional real estate markets. And how do you feel about the underlying credits that is supporting this debt? I feel incredibly lucky that Fannie Mae and Freddie Mac are guranteeing those mortgage notes in the secondary markets (he said, with a drip of sarcasm).

The one thing I WOULD NOT do is participate in a market that looks strong, but is only supported by underlying influences that cannot last forever. In other words, if you believe there's a real estate bubble-- don't time it and try to get out on top. If you don't believe there's a housing bubble, well-- I really can't help you...

Posted by: Assetman at May 30, 2005 01:42 AM

I live in a bubble! Thankfully I have a multi-family home that pays the mortgage in good and bad times. But in my nearby town of Edgewater NJ i have seen 700 sq ft condos, with no closet space and overcrowding, go for $475,000. then tack on the 500/month maintenance and tax. You are paying over $3000 for a 1 bedroom. then add your commute fees into manhattan. Look for some 2-3 bedroom condos you are looking at 600-950k! people are stretching their buying power with fancy mortgage products and can barely sustain to pay off debt in tri-state ny. If you look at Atlas Van lines migration report, all signs point to where there are bubbles in America; give or take some large states where the numbers areskewed by overall population. However there are still great opportunities as well. People are just reluctant to move to those places. After all Moving is the most stressful life experience next to death and divorce. http://www.atlasworldgroup.com/migration/

Posted by: Bubble boy at June 3, 2005 12:06 AM

Probably you are right

Posted by: Edgewater real estate at August 25, 2005 12:20 AM

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