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June 22, 2005

More Bubble Schmubble....

Karyn McCormack

Here's some more fodder for those of us chasing the "housing bubble." Mike Englund, chief economist at Action Economics, continues to debunk the bubble theory.

Englund dissected price trends of new and existing U.S. homes. He also looked at the total value of household holdings of real estate since 1968, both overall and as a ratio to GDP.

"The data show that large price gains are regional, within the range of prior boom periods, and fairly proportional to the decade-long global boom in net worth driven by strong GDP growth and low interest rates," Englund wrote today.

In particular, he found that the average growth rates of existing home prices over the last 37 years for the four regions are not that different, "despite what appears to be a considerable over-performance for the West and Northeast when we first looked at [the level of] prices." Average price appreciation for the West was 7.3% over the 37-year period, vs. 6.9% in the Northeast, 6.3% in the South, and 6.1% in the Midwest, he says.

Englund also compared prices of new homes to existing homes. He found that prices for new homes appear to be moderating. "New home sales soared ahead during 2004, but are actually taking a "breather" in 2005 just as existing home prices catch up," he says.

These are just a few of Englund's thoughts, illustrated in economist fashion with graphs and charts.

He surmises that "the data clearly document that home prices are high, and are rising at a solid rate in both the West and Northeast in recent years that is unlikely to be sustained." He also points out that household real estate holdings are only now returning to the high levels held consistently through the 1980s.

He concludes:

"There does appear to be a bubble in prices for various "hot" urban markets, leaving noteworthy price strength on the two coasts and risks that a drop in prices in these markets could have ripple-through effects for the economy. But there is little evidence in historic data by region that large price gains can't extend for long periods of time, making forecasts of the timing of a "pop" troublesome. The jury is still out on whether there exists a "bubble" for regions as a whole that will "pop," with price declines that actually reverse a sizable portion of recent gains, and not just a lull in price gains that are the usual housing market response to the business and interest rate cycle."

For more views from other economists, click here.

03:52 PM

Real Estate

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