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Saturday, December 24, 2005

Fundamental Strength in Housing?

Here's a perspective on housing markets from an industry representative who sees the potential for some slowing from abnormally high growth, but presents a picture of a strong and robust market. Prices can be explained, for the most part, by fundamentals and the fundamentals remain strong:

House Prices: The State of the Bubble,  by Vikas Bajaj, NY Times: Richard A. Smith ..., chairman and chief executive of the ... real estate services division of the Cendant Corporation... discussed recently why he thinks - like most other real estate industry executives - that there is no national housing bubble.

Q. The question on everyone's mind is whether the housing market is slowing. What do you think?
A. Every year for the past five years we have forecasts about this time that there will be a slowing next year. Everyone from Fannie Mae to us has forecast that. There are very early indications that there is a slowing of a very, very strong market.

Q. What do you say to people who contend home prices in many markets are unjustified and will fall drastically?
A. It's an interesting topic for people that like to think that there is a new lion coming over the hill - that there is a new thing to be worried about. ... but it's not supported by fact. There have always been year-over-year increases in prices. There have been unit declines in recessions, but not year-over-year price depreciation. ... The facts don't support a national bubble. Are there local bubbles? Absolutely, there have always been. ...

Q. What is the primary driver of the soaring home prices in the last few years?
A. It's driven by population growth, per capita income growth, the supply-and-demand issues and job growth. If ... those numbers are moving in the right direction it's very, very unlikely that you have a property value issue. Where you don't have those favorable trends, you are susceptible to a decline in property values.

Q. Can you describe some of the trends that support your views on the long-term growth prospects of the housing market?
A. In the old days, the typical 50-year-old homeowner would downsize, sell the family home and buy something smaller. What is occurring now is that they are keeping the family home and buying the second and third home. The typical immigrant buys a home much faster than his or her historical counterpart. Thirty-five percent of the household formations forecasted for the next 10 years will be driven by Hispanics.

Q. The Justice Department's antitrust division has been looking into the practices of the real estate industry, specifically whether the industry is stifling competition. What do you think will come of the inquiry?
A. The barrier to entry in this industry is, in my view, virtually nonexistent. We think competition is incredibly robust ...

Pretty much what you would expect to hear from an industry representative. Recent data on housing hint at a slowdown and many papers highlighted Friday's report of an 11.3% decline in new home sales and an increase in the inventory of unsold homes as a sign of the much anticipated slowdown in housing. However, Calculated Risk views the report as "still reasonably strong."

    Posted by on Saturday, December 24, 2005 at 01:03 AM in Economics, Housing | Permalink  TrackBack (0)  Comments (11)

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