Thursday, July 21, 2005

Forbes - The Housing Bubble is a Bubble

According to Forbes, the housing bubble is in fact a national bubble. Some choice quotes:
"The housing bubble is not local, but national—not surprising since it's driven by economy-wide forces: investor zeal for high returns but skepticism over stocks, ample cheap mortgage money and lax lending standards. Indeed, these forces and the housing boom are global."

"The most likely bubble-pricking pin is massive speculation itself, and as prospective buyers stand aside, mounting inventories will precipitate a downward price spiral."

"In any event, investors remain complacent, apparently convinced that there is no bubble or, if there is one, that it will continue to expand for some time—and even then not burst but rather slowly deflate. Witness the persistent upward trend in conventional home builder stocks (see chart below). Sure, these stocks sell at low price-to-earnings ratios and may appear cheap, but if home building slows substantially, their earnings will evaporate."

"The housing bubble could end if the low-end first-time home buyers who made down payments of 3% or less under government-sponsored programs engineered by Fannie Mae and Freddie Mac lost their jobs and consequently were frozen out of the market. Then their plight would ripple up the move-up market, as those planning to buy more expensive houses wouldn't be able to sell their existing abodes at their hoped-for prices. Already, the delinquency rates of these low-income, minority and young folks, most of whose mortgages are insured by the Federal Housing Authority, have jumped. It probably would take a recession, spawned elsewhere, however, to create the unemployment needed to activate this housing bubble pricking pin."

"Finally, extreme speculation and excessive investment may finally sink the housing ship. During speculations, the participants see nothing but shortages and insufficient inventories. Housing today is no exception. Publicly-owned home builders assure stockholders that they build only to firm orders, with virtually no inventories. Note, however, that home builder Toll Brothers’ CEO recently bragged about the firm’s high level of non-binding deposits — essentially reservations for new houses that prospective buyers can cancel and reclaim their money."

"Speculators assure themselves and all who will listen that they are long-term real estate investors, but many of those houses are rented at less than profitable returns, and only make economic sense if prices continue to rise rapidly. An National Association of Realtors economist said that “house price appreciation over the last three years has been nearly 20% nationwide in each of the years, and that implies there is a housing shortage.” Well, sure, a shortage relative to insatiable and self-feeding speculative demand."

"But in past bubbles, even the starry-eyed speculators finally realized that huge excesses had been built, and shortages became surpluses overnight as they dumped their holdings on the market, depressing prices in a self-feeding cycle. In addition, when buyers disappear, the supply chain can never be shut off fast enough to avoid huge inventories."

"And remember that inventory problems are never fully understood by buyers and sellers until they’re huge. What’s different about housing? And even if major builders have avoided excess inventories, how about all those small builders with their pickups who each build only a few houses a year but constitute the bulk of that fragmented industry? Has human nature so changed that they’re resisting the urge to build extra houses amidst the multiyear surge in prices?"

"Inventories of new homes for sale—or existing homes for sale, either—have yet to move up to alarming rates. But what will happen when housing buying dries up while supply increases continue to roll and inventories come out of the woodwork? Many of the houses bought in recent years as investments and now rented at unprofitable rates will be dumped on the market. Look for mounting inventories to precipitate a downward price spiral."

"
During a full-blown housing retreat, the bulls’ argument about strong demographic underpinnings will also be seen as hype, not reality. Indeed, demographics will be rough on housing in the years ahead, at least on primary residences. A large percentage of the population, the postwar babies, now in their 40s and 50s, are all housed. Meanwhile, people in their 20s and 30s, the prime first home buyers, are fewer in number."
E.g., Marin:
"Trying to predict the timing of any bubble’s end is normally a waste of time, but for the demise of housing mania there are some straws in the wind. In some of the nation’s more tony suburbs, high-priced houses aren’t moving. Also, house prices have gotten so high and rents are so cheap that a number of people are renting apartments."

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