Saturday, August 20, 2005

Porous Baloon or Bubble?

Some folks liken the current housing situations on the coasts to a bubble, others to something akin to a "porous balloon". If you take into account the natural time-scale of the housing market then it could be considered a bubble. Bulls who argue against the bubble interpretation often fail to take that time-scale into account. What do you think and why?

Anyway, here is an article that briefly summarizes some reasons for a deflating housing bubble:
"The most important indicator is probably the growing length of time "For Sale" signs are sitting on lawns across the country. The Wall Street Journal and New York Times recently published big-picture reports on that, but smaller papers, from New Hampshire to South Carolina to Palm Springs, Calif., had already presented the tiles for that mosaic. "This happens in every cycle," says Wellesley College economics professor Karl Case, who has published several studies of the housing market with Yale economist Robert Shiller. "The first sign [of a slowdown] is always time on the market and inventory.""

"Yet there are other, even tinier bubbles rising to the surface. New-home construction has plateaued in the past year, though at a high level. Mortgage applications have fallen in four of the past six weeks. The inventory of foreclosure properties rose nearly 5% in July, according to, and is up 10% in the past year. Sales growth at home-and-garden centers and furniture stores has slowed sharply from a peak in early 2004, according to Commerce Department data. As of the second quarter, Home Depot and Lowe's were still making money hand-over-fist, but their share prices have flattened in the past month, with investors worried that higher interest rates will hurt business. Furniture sales have fallen in three of the past five months."

"Another leading indicator could be a slowdown in the pace of new-home sales, says Richard DeKaser, chief economist with National City in Cleveland. Unlike homeowners, who tend to resist cutting prices, homebuilders are more willing to slash prices on brand-new homes to get rid of them, if they have to. "If a price adjustment is required, we will see it there first," he says. "My read there is that we may be seeing price-softening already in the process of playing out." The National Association of Home Builders' index of new, single-family home sales fell for the second straight month in August, matching its lowest level of the past year."


Blogger marine_explorer said...

I definitely don't think the bubble will pop like the dot-bomb. But I do suspect that inventory will be quickly flooded by the first wave of fleeing investors, followed by a lag in sales due to cautionary buyers, then more inventory. Prices will flatten, with some really stupid investors seeing "it's hit bottom" and they'll start buying again. Then there will be more bad news about overvaluation, appraiser scandals, bad lending, and interest rates. The stupid and late crowd will get really burned, driving the other herd of investors far away to their next big thing. Eventually, there will be a huge rise in mortgage defaults, followed by foreclosures, and more inventory. All this excess inventory (and bad RE history) will certainly drive down prices--even in Marin.

Aug 21, 2005, 2:22:00 PM  

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