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Boom Bubble Bust

Live From Wyoming: Low, Risk Premiums

August 27, 2005 | 2:09 pm | |

hills

Greenspan spoke this week at symposium, held in Jackson Hole, Wyoming, sponsored by the Federal Reserve on the legacy of his 18 year era. He took the position that the housing market now suffers an imbalance.

The Federal Reserve is paying closer attention to the rising values of assets such as stocks, bonds and homes, as low interest rates encourage more risk-taking, Fed Chairman Alan Greenspan said.

Low “Risk Premiums” (A new mantra?) This trend reflects what Mr. Greenspan said was the increased willingness of investors to accept low “risk premiums, a willingness based on a complacent assumption that the low interest rates, low inflation and strong growth of recent years are likely to be permanent.”

tightrope

His concern is when (bond) investors become more cautious, yields will rise, lowering housing values and then selloff of bonds that caused rates to drop in the first place. “This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.”

Other notable Greenspan-speak, etched in the public conscience are:

A Conundrum – An inverted yield curve appears to loom on the horizon.

A Frothy Housing Market – “The Fed feels it needs to squeeze more air out of the market – the housing market in particular, although the Fed has stressed that it’s not targeting housing with interest-rate policy.”

Irrational Exuberance – Greenspan first used the phrase in 1996 several years before the stock market corrected in 2000 but it came to define the rapid run up in stocks in the 1990’s. The analysts that missed the dot com bubble now seem to be the ones warning us about the housing market boom’s eventual conversion to bust.


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Housing Stats Send No Clear Message, Well Sort Of

August 25, 2005 | 9:26 pm | |

rollercoaster

A slew of seemingly conflicting, or at a bare minimum, entangled housing related statistics have been released over the past few days. Each statistic is generally covered as the subject of a story rather than combined into one analysis, the results often contradict each other. Here are some headlines grouped by their indicated trends for the month:

Headline Summary – Improving Conditions (sort of):

Associated Press: Rates on 30 – Year Mortgages Decline
MarketWatch: New-home sales surge to record 1.41 mln [Note: Reg.]

Headline Summary – Weakening Conditions (sort of):

Wall Street Journal: Economic Data Send Mixed Signals [Note: Paid Sub.]
New York Times: The nation’s long housing boom appears to be losing steam.
New York Times: Rents Head Up as Home Prices Put Off Buyers
Wall Street Journal: Rise in Supply of Homes for Sale Suggests Market Could Be Cooling [Note: Paid Sub.]

signs

And The Trend (This Month) Is…

Existing home sales are far greater than new sales so their decline, coupled with rising rents and expanding inventory would appear to indicate a leveling off of the market. But then again, these are July stats, an historically slow period of the year for housing sales, and next month is expected to be more of the same.

What The Real Estate Economy Really Needs:

Washington Post: More Cowbell!

cowbell …sorry, it was late when this was posted.


Miami Vice

August 24, 2005 | 10:26 pm |

miamivice

In the Economist print edition: From Coke to Cubists [Note: Paid Subscription] the current surge in Miami condo development is characterized as leading its transformation from drug-dealers’ playground to mainstream metropolis.”

miamimap
Source: The Economist

Roughly 65,000 condos are under some stage of development.

According to a Merrill Lynch study on “Mega Metro Bubbles”, Miami was top on the list. The study analyzed income to price ratios to determine affordability. Miami housing had some of the highest appreciation rates found in the US since 2001.

With all this development, someone got the idea to start a franchise in Miami for flipping condos called, oddly enough, Condo Flipâ„¢ pat. pend. (Coming soon to an overheated market near you.)

Their slogan:
bathtub
Source: Condo Flip.

Seems a bit arrogant, doesn’t it?


Boom as in Baby

August 23, 2005 | 10:59 pm |

housejump

Scott Reeves contends, in an article posted on Forbes.com: Don’t Believe The Hype that the booming real estate market is driven by fundamentals including low mortgage rates, increased employment and demand (note: demographics). Its not driven by investors.

Although NAR indicates that 23% of home purchases in 2004 were made by investors, Freddie Mac statistics indicate that the length of homeownership has increased from 6.5 years in the first half of 1999 to 7 years in the first half of 2004. Although this argument doesn’t reflect the recent uptick in housing prices in 2005, it could infer that the market is not being determined by runaway investors aka speculators aka flippers.

babyboom

In fact, NAR says that no more than 3% of all purchasers sell their homes in less than a year.

This is consistent with…

the cascade of baby boomers in their prime earning years who are beginning to think about retirement. Many boomers, real estate agents say, buy a second home with the intention of retiring there–but most are more than happy to sell it in a few years if plans change or if the price is right.

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Bubblicious? OMG, Give It A Rest!

August 23, 2005 | 10:00 pm | |

A humorous article was contributed for today’s NYT Op-ed Section on what else?: Bubble? What Bubble? The piece made me chuckle and stirred a lot of discussion. But now Bubble-speak has really gotten out of hand.

opedchart Source: [NYT]

The usually staid and conservative Wall Street Journal used “Bubblicious” [Warning: Paid Subscription] in an article today.

Economists believe that such bubblicious markets could see home prices fall.

And this quote linked to an another well-written article using the jargon Bubble-Metrics: Economists Handicap Housing Markets [Warning: Paid Subscription]

bubblelevel
Bubblicious? Bubble-metrics? I think we have gone from simple concern to plain giddiness.

Here are some rational thoughts of bubbleosity:
The Bubble in Bubbles


The Gamblers Say No Bubble, But Can’t Pick Superbowl Anymore

August 22, 2005 | 11:03 pm |

David Leonhardt’s article today about Online Betters was quite good. Using the odds fleshed out by online traders, you could have:

  • Predicted the winner presidential election for all 50 states in 2004
  • 85% of recent Emmy winners
  • The current American Idol winner

The NYT article says that online gamblers see no sign of a housing bubble anytime soon…

poker

Not sure I want to rely on this as a way to get comfortable with the real estate economy but it is tempting. One could argue that the recent poker craze, is a sign of speculative environment.

Then we get into predicting presidential elections..
2004 Predicting a Bush Victory [The Formula]

Using the Superbowl…

footballillustrated This brings to mind Superbowl predictors of presidential elections called The Superbowl Effect:

2000 It’s Redskins vs. the markets in the presidential race
1996 NFL Index Predicts Super Year For Stocks


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Investors As Wild Card

August 22, 2005 | 7:54 am |

cardhouse

Investors are the wild card of the current housing boom [Note: Subscription]. The NAR released a report last spring that said 23% of all homes purchased in 2004 were for investment and an additional 13% were vacation homes. Presumably, ratio of investors to owner occupancy will be even greater in 2005.

Here lies the problem for investors…

The rental market has taken a large hit over the past 4 years as lower mortgage rates have converted would-be renters into buyers. The free flow of capital stimulated rental development up until the past year, when it switched to condo development as prices rose rapidly. Now the increase in investor activity may drive down rents [Note: Subscription], placing more pressure for investors to sell quickly and not hold out for a higher price.

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Going Dutch

August 21, 2005 | 11:21 am | |

bubble

In today’s New York Times article, Professor Robert Shiller “>voices his concern about a real estate bubble. Professor Schiller is well-known for predicting the last stock market correction and possibly influencing Fed Chairman Greenspan’s use of the phrase irrational exuberance, the name of Professor Shiller’s subsequent book.

According to the article, origins of a housing bubble began with the Dutch about 400 years ago. Recently, a Dutch economist, Piet M. A. Eichholtz, a professor of Maastricht University, used Mr. Schiller’s method for converting actual sales into an index and found that the housing market saw a series of booms and busts. They found that in the long run, there was no long term trend and that prices match gains in personal income.

Mr. Shiller has a Norwegian housing index and a US Index that shows a similar pattern and is concerned that the recent run-up shows we are in a bubble.

shillerindex
Source: New York Times


To his critics, he says that housing charts generally go back to the 1970’s and stock market charts go back almost a century.


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What If?

August 21, 2005 | 12:21 am | |

You know what I am referring to…

Businessweek Online did a series of interviews with economists to see if a housing bubble exists.

While housing experts have described the current situation as either a bubble or at worst case, a boom,when a bubble bursts, the price drop tends to be gradual.

Reportedly more than 50% of the employment gains over the past five years have been related to the housing industry. So it appears to be clear, that a market correction in housing would do a lot of harm to the economy.

A study by National City Bank saw that in 1 in 5 metropolitan areas, housing outpaced income, making them more vulnerable. Fannie Mae is also concerned but says that the middle of the country is less of a concern than the coasts. Location seems to matter.

Americans are more vested in real estate than the stock market. According to the Federal Reserve, the appraised value of housing accounted for 145% of GDP while stocks and mutual funds accounted for 82%.

The Economist Magazine charted housing prices for Britain, UK and Australia. Both Australia and the UK saw far more appreciation than the US, more than double. Now price changes there have fallen below the US pace. The chart makes appreciation in the US look relatively tame.



The Wealth Effect: Stocks vs. Housing

August 19, 2005 | 8:12 am | |

With the discussion today comparing stocks versus real estate, its worth taking another look at a research paper from a few years ago: Comparing wealth effects: the stock market versus the housing market [Note: PDF] written by professors Case, Quigley & Shiller. In their abstract they state:

We find a statistically significant and rather large effect of housing wealth upon household consumption.

The wealth effect is defined as:

The premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more.

The impact on consumer spending is more than double when tied to the value of their home rather than their stock portfolio. This has broad implications for the economy and is likely of significant concern to the Federal Reserve in their recent policy of reigning in the threat of inflation.

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For Keeping the Rain Out, Housing Beats Stocks

August 19, 2005 | 7:36 am |

The article in the NY Times today “In the Long Run, Sleep at Home and Invest in the Stock Market” compared the stock market and real estate as an investment vehicle. The volatility of stocks over the past decade has faciliated a change in the perception of housing as an investment. With significant price appreciation over the past several years, that argument has been made even stronger.

As a pure investment, housing lags behind stocks in a long term window. However, homeowners generally calculate their return on investment off of the change in sales price or from their leveraged initial investment.

But when calculating the returns of both, which is tricky to compare, this quantification of the “use and enjoyment” of the asset makes real estate in this context, a better overall investment.

The use of the asset as a home, is where the return in housing exceeds the stock market. One way to figure the value for the use and enjoyment of the house is to estimate its rent. This quantifies the actual occupancy but falls short since it doesn’t quantify intangibles of pride of ownership, the flexibility to customize the home to your personal needs or style, etc. Therefore, the rental factor likely understates the value of using the home, suggesting that the returns on housing would be even higher.


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Home, Sweet, Condo?

August 18, 2005 | 10:20 pm | |

According to this article from the Real Estate Journal [Note: Subscription], condo prices exceeded single family home prices for the first time ever in early 2005.

Condo Facts
* Condos leapt to prominence after the 1961 Housing Act enabled the FHA to insure mortgages on the units.
* 970,000 condos were sold nationwide in 2004
* 1 out of 7 existing home sales are condos
* national median condo sales price is $223,500
* national median home sales price is $218,600

Why are the overall condo prices higher than houses?

With the resurgence of urban areas and a decline in “nuclear” families (40% in 1970 to 24% in 2000), condos have increased in demand.



Areas of Concern
Now there is concern that the change is more than demographics, that condo prices are rising too fast [Note: WSJ Subscription] as a result of speculators and investors favoring them over housing.

With great investor concentration in condos, could infer that the single family housing market has the potential to be less volatile in a market down turn.

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