Tags: Housing | Bubble | Starting | Leak

Housing Bubble Starting to Leak

Friday, 19 August 2005 12:00 AM

1. Housing Bubble More Apt to Leak – Not Burst

Economic soothsayers have long maintained that the roaring U.S. housing market will collapse and that it's a matter of "when" not "if."

Recent evidence suggests something is up in the real estate market – and it may not bode well for U.S. homeowners or the economy in general.

As The Wall Street Journal said recently, from Boston to San Diego to Washington, D.C., there are signs that the red-hot housing market may be cooling. The number of

Real-estate agents say it appears that prices have become so high that more potential buyers are being squeezed out of the market. Buy-and-flip investors – who often

Families who can still afford the high prices are postponing their purchase plans until they can determine whether the current lull merely reflects summer doldrums – a routine

But will it all end in a bang? Maybe not.

The Journal reports that a growing number of economic experts say that the market collapse won't be a collapse at all. Instead, it will be more like a gradual decline that could

"It's not going to be a big dramatic event," William Apgar, senior scholar at Harvard University's Joint Center for Housing Studies, tells The Journal.

The housing market has been unusually hot for the past five years largely because low interest rates have allowed Americans to borrow and spend more. The National

In the five years through June, the nation's median house price grew at an inflation-adjusted average annual rate of 4.9%, according to the NAR.

That's triple the annual average since the real-estate trade group began compiling the data in 1968. In some places, the rise has been far greater. The median price (not adjusted

That, the Journal says, fuels a longer-term leak in real estate prices that belies the "sudden impact" theory that has blanketed media coverage of the housing environment in

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Slide Into Recession?

One of the primary problems with the current U.S. economic environment owes a lot to the housing boom and would likely suffer its own collapse in the event that the housing

Mark Zandi, chief economist at Economy.com, a forecasting firm in West Chester, Pa., says the housing surge accounts for nearly 40% of the four million jobs created by the

The Journal also says that economists disagree about how much damage a housing downturn would inflict on the economy. Mr. Zandi hopes that strong job growth in other

But others take a dimmer view.

Edward Leamer, an economics professor at the University of California Los Angeles, thinks a housing downturn could "kick the economy into slow growth and possibly an

Longtime property owners should be accustomed to that. Richard J. DeKaser, chief economist at National City Corp., a Cleveland-based banking concern, recently studied

He found that 63 of them at some point suffered declines of 10% or more over periods of at least two years. The worst hit was Lafayette, La., where prices fell 39% in the late

Such data suggests that when the housing market does slide downward, it will be more of a region-by-region event – not a larger crisis that will blanket the entire nation.

DeKaser told the Journal that he expects prices to erode in some overheated markets. But because the housing market depends so much on local conditions, prices probably

There are some highly respected economists who say that a housing bust may not occur at all. Unless interest rates rise much more sharply than expected, there is no reason

"I don't think this is a situation of boom-bust," he says.

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Look to Japan – and Boston – for History

Economic historians who have studied past busts point to two primary drivers: a drying up of liquidity – often through tighter lending standards or higher interest rates – or a serious economic shock, like an oil or currency crisis.

That's exactly what happened to Japan during its real estate crunch in the 1980s and 1990s.

What experts found in dissecting the Japan crisis proved surprising – particularly the notion that property booms themselves don't guarantee a bust. In a study of housing booms in 14 advanced economies during the past 35 years, the International Monetary Fund found that at least a third didn't bust. But in countries experiencing a nationwide real-estate bust (like Japan), the consequences can be drawn out and severe. All but one have been associated with recessions, and many have been tied to banking crises as well.

"History can tell you how bad things can get and can give you some ideas about some of the causes of what happened," Michael Bordo, a professor of economic history at Rutgers University in New Brunswick, N.J., told the Journal.

Another housing bust – this one the Boston condo collapse of the late 1980s – shines more light on what really happens during housing collapses. In what the Journal tags a "refuse to lose" mentality, homeowners often act irrationally when housing markets go sour.

As the Journal notes, from 1982 to 1989, condo prices in Boston nearly tripled. Then demand dried up. But rather than cut asking prices, many owners decided to sit tight and hope. By 1992, fewer than 30% of Boston condos sold within six months, while hundreds languished at prices few buyers were willing to pay.

Christopher Mayer, a Columbia University economist who studied the Boston boom and bust, found that through the early stages of the downturn, people had a strong aversion to selling at a loss, even if such a sale would have freed them to buy another house in the same market on the cheap.

"Psychology is impairing their ability to make good economic decisions," says professor Mayer.

Economists call this "loss aversion" – people are much more unwilling to face reality and sell losers than they are to sell winners. He says it's the key factor that makes real-estate markets so slow to adjust in a downturn.

Another factor that can grease the skids for a housing slide is a tendency for banks to slack off on their due diligence during flush economic times. It's a condition that Susan Wachter and Richard Herring, economists at the University of Pennsylvania's Wharton School, call "disaster myopia," an inability to envision worst-case scenarios during long

stretches of good times. That encourages them to loosen lending standards.

They note that Japan's long economic boom provided fuel for wild lending stunts like Nippon Housing Loan Company's infamous 100-year mortgage, which was supposed to be paid off by the borrower's grandchildren.

"There needs to be fuel for a boom, and banks historically provided that fuel," says professor Wachter.

In the United States, lenders have taken note of the lessons learned from Japan. Today, banks are selling increasingly exotic mortgages, such as interest-only loans and loans that backload interest and principal payments. But the key difference is they don't hold the loans. Instead, many sell them off to investors as bonds. That does protect individual banks, but it could spread the risk throughout the financial system.

One last lesson – and it's one worth mulling over. Just because it looks like a bust, acts like a bust and barks like a bust doesn't mean it's a bust.

Take the San Francisco-San Jose real estate market of 2000.

Under the very same conditions that precipitated a housing market tsunami in Los Angeles and in Texas during the 1980s – soft economy, job losses and consumer anxiety – the Bay Area real estate market survived the local technology market bust. Market prices continued to rise and remain high, for what it's worth today.

In fact, five years after the bust, the median sale prices of existing San Francisco homes were 41% higher, at $641,700.

Consequently, U.S. homeowners may want to climb back in off the ledge and begin looking for economic indicators that suggest their local market may be particularly vulnerable to a housing slide.

They'd be wise to do so with a measured, panic-free mindset. As recent history suggests, the bubble may not burst at all.

Editors Note:

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2. U.S. Economic Picture Continues to Brighten

The Board said its index of leading indicators climbed to 138.3 last month after an upwardly revised rise of 1.2% in June. That's the highest level for the leading indicators index

He adds that the recent energy price spike was one factor to watch in the outlook, but he was more concerned about a dip in business and consumer confidence.

"Both investment and hiring intentions reflect a level of caution over both pricing and profit strategies," Goldstein said in a statement.

The Conference Board economist said oil was not at a level lofty enough to put a serious crimp in consumer spending. Goldstein told Reuters that he did not believe major

Oil prices came off record highs on Wednesday and were trading around $63 a barrel on Thursday.

"What we are going to get is people grumbling about it – maybe buying one less latte – but they're not going to forego buying that new TV," Goldstein said.

The Conference Board numbers are hardly alone in suggesting continued U.S. economic growth. The Philadelphia Federal Reserve reports today that its business activity index


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1. Housing Bubble More Apt to Leak - Not BurstEconomic soothsayers have long maintained that the roaring U.S. housing market will collapse and that it's a matter of "when" not "if."Recent evidence suggests something is up in the real estate market - and it may not bode well...
Friday, 19 August 2005 12:00 AM
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