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Wednesday, February 08, 2006

What Housing Bubble?

John Weicher, director of the Centre for Housing and Financial Markets at the Hudson Institute was assistant secretary for housing and federal housing commissioner at the US Department of Housing and Urban Development from 2001-05. He is not worried about the housing bubble bursting, in part because he doesn't' think a bubble ever existed. I'm not overly concernend, but I'm not this optimistic either:

Rumours of US housing bubble are hot air, by John Weicher, Financial Times: Some economists are watching ... with concern about the impending end of the housing bubble and its impact on the US economy. This is rather odd, because two months ago the consensus seemed to be that the housing bubble had already been pricked. ... The worriers should take heart: reports of the death of the housing bubble are premature. Indeed, reports that there was a bubble at all were premature.

Certainly there is evidence that the housing market is at a peak. ... Moreover, mortgage rates have been rising. ... new home construction dropped in December and housing starts were down about 8 per cent since June. ... If the market is peaking, there could be problems. The past few years have seen a proliferation of new mortgage instruments that shift risk to the homebuyer... In a declining market, many of those borrowers are likely to default on their mortgage and lose their homes.

Not all the evidence points to a peak, however. The OFHEO price index, which is based on mortgage originations, has shown much sharper price increases over the past year for homes that are being refinanced than for homes being bought and sold. The home purchase price index has been rising more slowly and much more smoothly, by 10.9 per cent over the past year, more than the 10.4 per cent rate increase for the year before. The steadier growth suggests that the prices people are actually paying, and receiving, have not peaked.

The current mortgage rate increase is the third time in three years that rates have started to rise, accompanied by consensus among analysts that the housing boom was over. Both times previously, rates rose for a while and then dropped to a new low, while the boom continued. That of course may not happen this time. Yet even if rates continue to rise, house prices may also climb. ...

A longer view suggests that the US is seeing a blip in a long-term bull housing market, not a bubble about to be pricked. ... What seems to be happening is that home sellers are overshooting the market, incorporating a further expected increase in their asking price. Buyers are a little more cautious, quite reasonably. At the current rate, typical American homeowners will see the value of their homes double in six years. That would be nice for them, but the US is not likely to see continuing double-digit house price increases while the inflation rate remains low. Nonetheless, home prices are likely to keep rising.

The current demand for homeownership in the US is very different from the housing boom of the 1970s, when erratically accelerating inflation depressed stock prices and drove everyone into tangible assets in self-protection. This time, it is real.

Update: Here's a more sober view from the WSJ:

Finding a House Gets Easier, WSJ: With the key spring selling season about to get under way, the inventory of homes on the market is climbing sharply in a number of major cities. It is the latest sign that the balance of power between buyers and sellers is shifting as the once red-hot housing market continues to cool. ... Yesterday, the nation's largest builder of luxury homes, Toll Brothers Inc., reported a 29% decline in new orders in its first quarter, which ended Jan. 31. That was below many analysts' expectations ...

The changing climate is particularly noticeable in once-hot markets such as Miami, Phoenix and Washington, D.C., and in areas such as Detroit, where price increases have been modest but the job market is weak. ... The sharp rise in inventories isn't universal. In Seattle, inventories have declined modestly over the past 12 months as a robust job market sustains demand. .... In Dallas, inventory has edged up slightly, but the pace of sales is up. ... Still, the pinch is being felt in many corners of the housing market. ...

    Posted by on Wednesday, February 8, 2006 at 12:03 AM in Economics, Housing | Permalink  TrackBack (0)  Comments (7)

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