Housing bubble just local swelling?

BY ROBERT P. MADER Of CONTRACTORs staff THE ALLEGED housing bubble story is, to mix metaphors, rearing its ugly head again, even after Federal Reserve Board Chairman Alan Greenspan testified before Congress during the summer that no housing bubble exists. On Aug. 28, the Financial Times newspaper ran a story that said executives and directors of home builders were dumping their stock at a record pace.

BY ROBERT P. MADER

Of CONTRACTOR’s staff

THE ALLEGED housing bubble story is, to mix metaphors, rearing its ugly head again, even after Federal Reserve Board Chairman Alan Greenspan testified before Congress during the summer that no housing bubble exists.

On Aug. 28, the Financial Times newspaper ran a story that said executives and directors of home builders were dumping their stock at a record pace. Perhaps they know something we don’t know, the paper mused.

On Sept. 13, a California-based Internet information service issued a press release stating, “Despite a spate of recent news stories denying the existence of a bubble in the U.S. residential housing market, Foreclosures.com, a Sacramento, Calif.-based publisher of pre-foreclosure data, reports that leading housing economists see severe bubbles in three major housing markets: Boston, Mass.; San Diego, Calif.; and Fort Lauderdale, Fla.”

The Financial Times story reported that Thomson Financial and consulting firm The Washington Service had compiled figures that show that home-building executives and directors had sold $258 million more in stock than they had bought in the second quarter of this year. It was the largest quarterly sale of stock in records going back to 1996, the newspaper reported. The implication was that housing executives were bailing out before a crash.

The weakness of the story, however, was that it didn’t report who was doing the selling or why, said Joe Sroka, a vice president and analyst at Merrill Lynch in New York. Of the eight home builders that Sroka covers, the chief executive officers of seven of them have not sold any stock in 2002, he noted.

The housing industry saw a rash of mergers and acquisitions, Sroka said, the biggest of which was Pulte Homes’ purchase of Del Webb Corp. Many of the executives at the acquired companies were given stock.

“Obviously stocks are up, so you may have a finance [vice president] or a regional director of operations who took some money off the table,” Sroka told CONTRACTOR.

Perhaps the biggest argument against the existence of a housing bubble is that housing is unlike any other investment that may depreciate.

“Bubble is the wrong word because the inference is that it can be burst,” said Nicholas Retsinas, director of the Harvard Joint Center for Housing Studies. “The reason I say that bubble is the wrong word is that the underlying fundamentals of demand and supply are such that it’s hard to imagine circumstances with a widespread price correction.

So over an extended period of five to 10 years, the fundamentals augur well for a relatively muscular housing market.”

Housing prices could be “punctured,” Retsinas noted, but they won’t burst as a bubble would. A couple events might lead to price corrections.

One factor would be higher mortgage rates of 8.5% to 9%. That would eliminate affordability that has brought many entry-level buyers into the market.

The second factor would be unemployment, although Retsinas said he doesn’t know what level would cool demand for housing. A few years ago, before the raging economy of 2000 had unemployment down to 3.9%, most economists thought the floor for unemployment was 6%; anything below that would trigger inflation. Double-digit job losses would probably kill housing demand.

Retsinas said he believes the housing market will cool rather than burst. Price appreciation may be more in the range of 3% to 5%, rather than the 20% increases seen in some markets.

The reason why home prices have risen so dramatically in some markets, besides low mortgage rates, is that there aren’t enough houses.

“We forecast the sales pace of existing homes to hover in the range of 5.1 million to 5.3 million through the end of next year,” said David Lereah, chief economist for the National Association of Realtors.

Overall sales in 2002 are forecast to rise 2.7% to a total of 5.44 million units, a new record, NAR said, with about 5.22 million expected in 2003, which would be one of the top three years on record.

New-home sales should rise 1.9% to a total of 926,000 units this year, also a record, then ease to 898,000 in 2003, which would be the third highest year on record. Housing starts are seen to rise 3.5% to a total of 1.66 million units in 2002, then ease slightly to 1.63 million next year.

“Tight housing inventories have placed a lot of pressure on home prices this year,” Lereah said. “With a more even pace of home sales, we should see a better balance between buyers and sellers in 2003. As a result, the rate of price increases should slow to historic norms next year.”

Foreclosures.com may be closer to being correct by pointing out overheated housing markets in specific cities. Other overpriced markets with lesser bubbles include San Francisco; Orange County, Calif.; San Jose, Calif.; and Phoenix, according to the company. Few people would probably be surprised if home prices fell in Silicon Valley as the high-tech market continues to fall.

Alexis McGee, president of Foreclosures.com, said she based her belief in a housing bubble on findings by economists Edward Leamer of UCLA, Dean Baker of the Center for Economic and Policy Research and John Burns, head of a private real estate consulting firm based in Irvine, Calif.

Consumers may be taking their money out of the stock market and putting it in housing, hoping for a better return, McGee said.

Baker and Leamer agree that the increasing divergence of price and annualized rents is evidence both of the investment emphasis being placed on home buying and of bubble formation.

That, however, doesn’t address the fact that people buy houses because they’re looking for a decent place to live and raise their children.

Retsinas discounts the spread between rents and housing prices.

“There was a study by UCLA that looked at the question of housing prices vs. apartment rentals so that in some markets it appears that homes are overpriced,” Retsinas said. “But they tend to forget that other factors influence a home-buying decision, like the use value of a bundle of services.

For example, you’re not just buying a particular piece of property, you’re buying a school district and that is capitalized in the value of the property where the stock is located. There are often better schools in areas with for-sale housing as opposed to areas with rental housing.”