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United States Housing Bubble

The United States housing bubble is the actual or hypothesized economic bubble in many parts of the U.S. housing market since 2001, especially in populous areas such as California, Florida, New York, the BosWash megalopolis, and the southwest markets. A real estate bubble is a type of economic bubble that occurs periodically in local or global real estate markets. Based upon the unprecedented rise in house prices since 2001, many economists believe that there is a housing bubble in these and other parts of the U.S. caused by historically low interest rates and a mania for purchasing houses; they argue that this bubble is related to the stock market or dot-com bubble of the 1990s. Other economists argue that recent price increases can be explained by limited supply and increased demand due to immigration and demographic forces.

A housing bubble is characterized by rapid increases in the valuations of real property such as housing until unsustainable levels are reached relative to incomes, price-to-rent ratios, and other economic indicators of affordability. This in turn is followed by decreases in home prices that can result in many owners holding negative equity, a mortgage debt higher than the value of the property. Bubbles may only be definitively identified in hindsight, after a market correction.[2] The impact of booming home valuations on the U.S. economy since the 2001–2002 recession is an important factor in the recovery because a large component of consumer spending came from the related refinancing boom, which simultaneously allowed people to reduce their monthly mortgage payments with lower interest rates and withdraw equity from their homes as values increased.[3] As the once-booming U.S. housing market softened in 2005–2006, economists debated whether this is a "soft" or "hard" landing and the impact this slowing will have on consumer confidence and on the overall economy.

Controversy over the existence of a housing bubble

Any type of economic bubble is difficult to identify except in hindsight, after the crash, although many economic and cultural factors have led several economists to argue that a housing bubble exists in the U.S.[2][4][5][6][7][8][9] The Economist magazine said that "the worldwide rise in house prices is the biggest bubble in history,"[10] so any explanation must consider global causes as well as those specific to the United States. Former Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' (in the U.S. housing market) … it's hard not to see that there are a lot of local bubbles." President Bush said of the U.S. housing boom in early 2006 "If houses get too expensive, people will stop buying them … Economies should cycle."[11]

Based on markedly declining 2006 market data, including lower sales, rising inventories, falling median prices, and increased foreclosure rates,[12] some economists have concluded that the correction in the U.S. housing market began in 2006.[13][14] A May 2006 Fortune magazine report on the US housing bubble states "The great housing bubble has finally started to deflate … In many once-sizzling markets around the country, accounts of dropping list prices have replaced tales of waiting lists for unbuilt condos and bidding wars over humdrum three-bedroom colonials."[15] The chief economist of Freddie Mac and the director of Harvard University's Joint Center for Housing Studies (JCHS) deny the existence of a national housing bubble and express doubt that any significant decline in home prices are ever possible, citing consistently rising prices since the Great Depression, expected increasing demand by the Baby Boom generation, and healthy employment.[16] [17] [18] others have questioned the funding that the JCHS receives from the real estate industry.[19] David Lereah, the chief economist of the National Association of Realtors, distributed "Anti-Bubble Reports" in August 2005 to "respond to the irresponsible bubble accusations made by your local media and local academics;"[20] among other statements, the reports say that people "should [not] be concerned that home prices are rising faster than family income," that "there is virtually no risk of a national housing price bubble based on the fundamental demand for housing and predictable economic factors," and that "a general slowing in the rate of price growth can be expected, but in many areas inventory shortages will persist and home prices are likely to continue to rise above historic norms."[21] Following reports of rapid sales declines and price depreciation in August 2006, [22] [23] Lereah admitted that "he expects home prices to come down 5% nationally, more in some markets, less in others. And a few cities in Florida and California, where home prices soared to nose-bleed heights, could have `hard landings'."[24]

The US Senate Banking Committee held hearings on the housing bubble and related loan practices in 2006, titled "The Housing Bubble and its Implications for the Economy" and "Calculated Risk: Assessing Non-Traditional Mortgage Products".[25]

Explanations for the existence of a U.S. housing bubble

Mania for home ownership

That Americans love their homes is widely known and acknowledged; [1] however, many believe that enthusiasm for home ownership is currently high even by American standards.[27][28] Many have commented anecdotally on this phenomenon,[29][30][31] as evidenced by the cover of the June 13, 2005 issue of Time Magazine[1] (seen above). The boom in housing has also created a boom in the real estate profession; for example, California has a record half-million real estate licensees—one for every 52 adults living in the state, up 57% in the last five years.[32]
During the 2004 Presidential election campaign, President George W. Bush boasted that "the overall U.S. homeownership rate in the second quarter of 2004 was at an all time high of 69.2 percent."[33] Bush's 2004 campaign slogan "the ownership society" indicates the strong preference and societal influence of Americans to own the homes they live in, as opposed to renting. However, in many parts of the United States, rent does not cover mortgage costs; the national median mortgage payment is $1,687 per month, nearly twice the median rent payment of $868 per month.[34]

Widespread belief that housing is a risk-free, growth investment

Among Americans, home ownership is widely accepted as preferable to renting in many cases, especially when the ownership term is expected to be at least five years. This is partly due to the fact that the fraction of a fixed-rate mortgage used to pay down the principal builds equity for the homeowner over time, whereas money spent on either rent or mortgage interest do not. However, when considered as an investment, that is, an asset that is expected to grow in value over time, as opposed to the utility of shelter that home ownership provides, housing is not a risk-free investment. The popular notion that, unlike stocks, homes do not fall in value is believed to have contributed to the mania for purchasing homes. This assertion has been true for the United States as a whole since the Great Depression,[16] and appears to be encouraged by the real estate industry.[9][35] However, housing prices can move both up and down in local markets, as evidenced by the relatively recent price history in locations such as New York, Los Angeles, Boston, Japan, Vancouver, Sydney, and Hong Kong; large trends of up and down price fluctuations can be seen in many U.S. cities (see graph). Since 2005, the year-over-year median sale prices (inflation-adjusted) of single family homes in Massachusetts fell over 10% in 2006.[36] David Lereah of the NAR said in August 2006 that "he expects home prices to come down 5% nationally, more in some markets, less in others."[24] Commenting in August 2005 on the perceived low risk of housing as an investment vehicle, Alan Greenspan said, "History has not dealt kindly with the aftermath of protracted periods of low risk premiums."[37]

Compounding the popular expectation that home prices do not fall, it is also widely believed that home values will yield average or better-than-average returns as investments. The investment motive for purchasing homes should not be conflated with the necessity of shelter that housing provides; an economic comparison of the relative costs of owning versus renting the equivalent utility of shelter can be made separately (see boxed text). Over the holding periods of decades, inflation-adjusted house prices have increased less than 1% per year.[4][38] Robert Shiller shows[4] that over long periods, inflation adjusted U.S. home prices increased 0.4% per year from 1890–2004, and 0.7% per year from 1940–2004. Shiller also showed comparable results for housing prices on a single street in Amsterdam (the site of the fabled tulip mania, and where the housing supply is notably limited) over a 350 year period. Such meager returns are dwarfed by investments in the stock and bond markets. If historic trends hold, it is reasonable to expect home prices to only slightly beat inflation over the long term. Furthermore, one way to assess the quality of any investment is to compute its price-to-earnings (P/E) ratio, which for houses can be defined as the price of the house divided by the potential annual rental income, minus expenses including property taxes, maintenance, insurance, and condominium fees. For many locations, this computation yields a P/E ratio of about 30–40, which is considered by economists to be high for both the housing and the stock markets;[4] historical price-to-rent ratios are 11–12.[26] For comparison, just before the dot-com crash the P/E ratio of the S&P 500 was 45.

Popularity of home purchasing in the media

In late 2005 and into 2006, there are an abundance of television programs promoting real estate investment and flipping.[41][42] In addition to the numerous television shows, book stores in cities throughout the United States could be seen showing large displays of books touting real-estate investment, such as NAR chief economist David Lereah's book Are You Missing the Real Estate Boom?: Why Home Values and Other Real Estate Investments Will Climb Through The End of The Decade—And How to Profit From Them[39] published in February 2005. One year later in February 2006, Lereah retitled his book Why the Real Estate Boom Will Not Bust—And How You Can Profit from It.[40]

However, following Fed chairman Ben Bernanke's comments on the "downturn of the housing market" in August 2006,[43] Lereah said in an NBC interview that "we've had a boom marketplace: you've got to correct because booms cannot sustain itself forever [sic]."[44] Commenting on the phenomenon of shifting NAR accounts of the national housing market (see David Lereah's comments[44][45][46]), the Motley Fool reported, "There's nothing funnier or more satisfying … than watching the National Association of Realtors (NAR) change its tune these days. … the NAR is full of it and will spin the numbers any way it can to keep up the pleasant fiction that all is well."[35]

Speculative purchases of homes

As median home prices began to rise dramatically in 2000–2001 following the fall in interest rates, speculative purchases of homes also increased.[47] Fortune magazine's article on housing speculation in 2005 said, "America was awash in a stark, raving frenzy that looked every bit as crazy as dot-com stocks."[48] In a 2006 interview in BusinessWeek magazine, Yale economist Robert Shiller said of the impact of speculators on long term valuations, "I worry about a big fall because prices today are being supported by a speculative fever,"[49] and NAR chief economist David Lereah said in 2005 that "[t]here's a speculative element in home buying now."[45] Speculation in some local markets has been greater than others, and any correction in valuations is expected to be strongly related to the percentage amount of speculative purchases.[46][50][3] In the same BusinessWeek interview, Angelo Mozilo, CEO of mortgage lender Countrywide Financial, said in March 2006, "in areas where you have had heavy speculation, you could have 30% [home price declines]. … A year or a year and half from now, you will have seen a slow deterioration of home values and a substantial deterioration in those areas where there has been speculative excess.”[51] The chief economist for the National Association of Home Builders, David Seiders, said that California, Las Vegas, Florida and the Washington, D.C., area “have the largest potential for a price slowdown” because the rising prices in those markets were fed by speculators who bought homes intending to “flip” or sell them for a quick profit.[52]

Crash of the dot-com bubble

Several economists have argued that the stock market crash, especially in the dot-com and technology sectors, in 2000 and the subsequent 70% (or so) drop of the NASDAQ composite index resulted in many people taking their money out of the stock market and purchasing real estate, which many believed to be a more reliable investment.[38][53][54] Yale economist Robert Shiller argued further that "irrational exuberance" was displaced from the fallen stock market to housing: "Once stocks fell, real estate became the primary outlet for the speculative frenzy that the stock market had unleashed."[55]

Historically low interest rates

Another important consequence of the dot-com crash and the subsequent 2001–2002 recession was that the Federal Reserve cut short-term interest rates to historically low levels, from about 6.5% to just 1%. The Federal Reserve acknowledges the connection between lower interest rates, higher home values, and the increased liquidity the higher home values bring to the overall economy.[56] A Federal Reserve report reads,

"Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission."[57]

For this reason some have criticized then Fed Chairman Alan Greenspan for "engineering" the housing bubble,[58][59][60][61][62][63] saying, e.g., "It was the Federal Reserve-engineered decline in rates that inflated the housing bubble."[64] The interest rate on 30-year fixed-rate mortgages fell 2 percentage points (from about 7.5% to about 5.5%). The interest rate on one-year adjustable rate mortgages (1/1 ARMs) fell 3 percentage points (from about 7% to about 4%).
A drop in mortgage interest rates reduces the cost of borrowing and should logically result in an increase in prices in a market where most people borrow money to purchase a home (for instance, in the United States). If one assumes that the housing market is efficient, the expected change in housing prices (relative to interest rates) can be computed mathematically. The calculation in the side box shows that a 1 percentage point change in interest rates would theoretically affect home prices by about 10% (given 2005 rates on fixed-rate mortgages). This represents a 10-to-1 multiplier between percentage-point changes in interest rates and percentage change in home prices. For interest-only mortgages (at 2005 rates), this yields about a 16% change in principal for a 1% change in interest rates at current rates. Therefore, the 2% drop in long-term interest rates can account for about a 10 × 2% = 20% rise in home prices if every buyer is using a fixed-rate mortgage (FRM), or about 16 × 3% ≈ 50% if every buyer is using an adjustable rate mortgage (ARM) whose interest rates dropped 3%. Robert Shiller shows that the inflation adjusted U.S. home price increase has been about 45% during this period,[4] an increase in valuations that is approximately consistent with most buyers financing their purchases using ARMs. In areas of the United States believed to have a housing bubble, price increases have far exceeded the 50% that might be explained by the cost of borrowing using ARMs. When interest rates rise, a reasonable question is how much house prices will fall, and what effect this will have on those holding negative equity, as well as on the U.S. economy in general. The salient question is whether interest rates are a determining factor in specific markets where there is high sensitivity to housing affordability.

Between 2004 and 2006, the Fed raised interest rates 17 times, increasing them from 1% to 5.25%, before pausing.[65] The Fed paused raising interest rates because of the concern that an accelerating downturn in the housing market could undermine the overall economy, just as the crash of the dot-com bubble in 2000 contributed to the subsequent recession. However, New York University economist Nouriel Roubini asserted that "The Fed should have tightened earlier to avoid a festering of the housing bubble early on."[66]

Interest-only, adjustable rate, and stated income mortgages

The recent use of the adjustable-rate, interest-only mortgages, and "stated income" loans (also known as "liar loans") to finance home purchases described above have raised concerns about the quality of these loans should interest rates rise again or the borrower is unable to pay the mortgage.[4][67][68][69] Harper's Magazine warned of the danger of rising interest rates for recent homebuyers holding such mortgages, as well as the U.S. economy as a whole: "The problem [is] that prices are falling even as the buyers' total mortgage remains the same or even increases. … Rising debt-service payments will further divert income from new consumer spending. Taken together, these factors will further shrink the “real” economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagnation or worse."[5] Factors that could contribute to rising rates are the U.S. national debt, inflationary pressure caused by such factors as increased fuel and housing costs, and changes in foreign investments in the U.S. economy. The Fed raised rates 17 times, increasing them from 1% to 5.25%, between 2004 and 2006.[65] BusinessWeek magazine called the option ARM "the riskiest and most complicated home loan product ever created" and warned that over one million borrowers took out $466 billion in option ARMs in 2004 through the second quarter of 2006, citing concerns that these financial products could hurt individual borrowers the most and "worsen the [housing] bust."[70] To address the problems arising from "liar loans," the Internal Revenue Service updated an income verification tool used by lenders to make confirmation of borrower's claimed income to be faster and easier.[68]

Predictions and status of a market correction

Based on the historic trends in valuations of U.S. housing,[4][74] many economists and business writers have predicted a market correction, ranging from a few percentage points, to 50% or more from peak values in some markets,[75][76][77][78][79] and, in spite of the fact that this cooling has not affected all areas of the U.S., some have warned that it could and that the correction would be "nasty" and "severe".[80][81] Chief economist Mark Zandi of the investor service Moody's predicted a "crash" of double-digit depreciation in some U.S. cities by 2007–2009.[82][83] However, NAR chief economist David Lereah warned, "I don't think I would use the word `crash.' When you use a word like that, it's almost a self-fulfilling prophecy in the housing market. These are people's homes. Their retirement is depending on it."[82]

The booming housing market appears to have halted abruptly for many parts of the U.S. in late summer of 2005, and as of summer 2006, several markets are facing the issues of ballooning inventories, falling prices, and sharply reduced sales volumes. In August 2006, Barron's magazine warned, "a housing crisis approaches", and noted that the median price of new homes has dropped almost 3% since January 2006, that new-home inventories hit a record in April and remain near all-time highs, that existing-home inventories are 39% higher than they were just one year ago, and that sales are down more than 10%, and predicts that "the national median price of housing will probably fall by close to 30% in the next three years … simple reversion to the mean."[78] Fortune magazine labeled many previously strong housing markets as "Dead Zones;"[15] other areas are classified as "Danger Zones" and "Safe Havens." 'Fortune also dispelled "four myths about the future of home prices."[22] In Boston, year-over-year prices are dropping,[84] sales are falling, inventory is increasing, foreclosures are up,[67][12] and the correction in Massachusetts has been called a "hard landing".[85] The previously booming housing markets in Washington DC, San Diego CA, Phoenix AZ, and other cities have stalled as well.[86][87] Searching the Arizona Regional Multiple Listing Service (ARMLS) shows that in summer 2006, the for-sale housing inventory in Phoenix has grown to over 50,000 homes, of which nearly half are vacant (see graphic).[72] Several home builders have revised their forecasts sharply downward during summer 2006, e.g., D.R. Horton cut its yearly earnings forecast by one-third in July 2006,[88] the value of luxury home builder Toll Brothers' stock fell 50% between August 2005 and August 2006,[89] and the the Dow Jones U.S. Home Construction Index was down over 40% as of mid-August 2006.[90] CEO Robert Toll of Toll Brothers explained, "builders that built speculative homes are trying to move them by offering large incentives and discounts; and some anxious buyers are canceling contracts for homes already being built."[91] David Lereah, NAR’s chief economist, said higher interest rates dampened sales but that price softening is good news for the housing market because it is drawing buyers.[92]

As the housing market began to soften in winter 2005 through summer 2006,[93][94] NAR chief economist David Lereah predicted a "soft landing" for the market.[95] However, based on unprecedented rises in inventory and a sharply slowing market throughout 2006, Leslie Appleton-Young, the chief economist of the California Association of Realtors, said that she is not comfortable with the mild term "soft landing" to describe what is actually happening in California's real estate market.[96] The Financial Times warned of the impact on the U.S. economy of the "hard edge" in the "soft landing" scenario, saying "A slowdown in these red-hot markets is inevitable. It may be gentle, but it is impossible to rule out a collapse of sentiment and of prices. … If housing wealth stops rising … the effect on the world's economy could be depressing indeed."[97] "It would be difficult to characterize the position of home builders as other than in a hard landing," said Robert Toll, CEO of Toll Brothers.[98] Angelo Mozilo, CEO of Countrywide Financial, said "I've never seen a soft-landing in 53 years, so we have a ways to go before this levels out. I have to prepare the company for the worst that can happen."[99] Following these reports, Lereah admitted that "he expects home prices to come down 5% nationally," and said that some cities in Florida and California could have "hard landings."[24]

Others speculate on the negative impact of the retirement of the Baby Boom generation and the relative cost to rent on the declining housing market.[100][101] In many parts of the United States, it is significantly cheaper to rent the same property than to purchase it; the national median mortgage payment is $1,687 per month, nearly twice the median rent payment of $868 per month.[34]

Based on slumping sales and prices in August 2006, economist Nouriel Roubini warned that the housing sector is in "free fall" and will derail the rest of the economy, causing a recession in 2007.[13] Joseph Stiglitz, winner of the Nobel Prize in economics in 2001, agreed, saying that the U.S. may enter a recession as house prices decline.[102] The extent to which the economic slowdown, or possible recession, will last depends in large part on the resiliency of the U.S. consumer spending, which now makes up approximately 70% of the US$12.4 trillion economy. Fed chairman Benjamin Bernanke said in October 2006 that there is currently a "substantial correction" going on in the housing market and that the decline of residential housing construction is one of the "major drags that is causing the economy to slow"; he predicted that the correcting market will decrease U.S. economic growth by about one percent in the second half of 2006 and remain a drag on expansion into 2007.[103]

Notes

  1. ^ a b c "Home $weet Home", Time, 13 June 2005.
  2. ^ a b c A prediction of a correction in the housing market, possibly after the "fall" of 2005, is implied by the Economist magazine's cover story for the article "After the fall," which illustrates a brick falling, with the label "House Prices": Image:Economist-06-15-2005.jpg. "After the fall: Soaring house prices have given a huge boost to the world economy. What happens when they drop?", The Economist, 16 June 2005.
  3. ^ a b "The crux of the debate is house prices. If the inflated prices are justified by economic fundamentals and sustainable, then the 82 percent increase in mortgage debt since 2000 will probably turn out to be innocuous and the risks to the economy minimal. If, on the other hand, prices are out of whack, painful adjustments lie ahead. Unfortunately, the weight of the evidence strongly suggests a bubble. The price of the median home is up an inflation-adjusted 50 percent during the last five years, an unprecedented national increase. … Just as cheerleaders of the high-tech bubble of the late 1990s developed ever more creative explanations for why traditional metrics of valuing stocks no longer applied, the same has been true during the housing bubble. Housing bulls point to immigration, building restrictions, Baby Boomer demand for second homes, and other seemingly plausible justifications for skyrocketing home prices. But examining the value of housing using time-tested and common-sense metrics such as price-to-income and price-to-rent ratios suggest the gains in the bubble areas can't be explained by economic fundamentals. … People are buying in the face of sky-high prices because they've seen so many of their friends or relatives make a fortune in real estate; besides (they tell themselves), everyone knows real estate prices never fall. As with the stock market during the tech bubble, many are basing purchasing decisions not on underlying economic value, but on what they think they can sell a property for in the future—the very definition of a speculative bubble. … Even flat home prices would therefore slow economic growth unless other parts of the economy rapidly accelerate. But a hard landing—meaning a recession—is a real risk. If home prices fall modestly, millions of homeowners will see their equity wiped out. Many of those with the least amount of equity, as we've already shown, are going to face significant increases in their monthly payments. So what has been a virtuous but unsustainable cycle for the economy—higher home prices, more borrowing against home equity, higher spending, increased job creation, even higher home prices—could easily reverse and become a vicious cycle—higher monthly payments, declining home prices, less spending, job losses, foreclosures, even lower home prices." "Housing Bubble Trouble: Have we been living beyond our means?", The Weekly Standard, 10 April 2006.
  4. ^ a b c d e f g h i "People in much of the world are still overconfident that the stock market, and in many places the housing market, will do extremely well, and this overconfidence can lead to instability. Significant further rises in these markets could lead, eventually, to even more significant declines. The bad outcome could be that eventual declines would result in a substantial increase in the rate of personal bankruptcies, which could lead to a secondary string of bankruptcies of financial institutions as well. Another long-run consequence could be a decline in consumer and business confidence, and another, possibly worldwide, recession. This extreme outcome—like the situation in Japan since 1990 writ large—is not inevitable, but it is a much more serious risk than is widely acknowledged." Shiller, Robert (2005). Irrational Exuberance (2d ed.). Princeton University Press. ISBN 0691123357.
  5. ^ a b "[A]lthough home ownership may be a wise choice for many people, this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage, a lifetime spent working to pay off debt on an asset of rapidly dwindling value. Most everyone involved in the real estate bubble thus far has made at least a few dollars. But that is about to change. The bubble will burst, and when it does, the people who thought they would be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom. … America holds record mortgage debt in a declining housing market. Even that at first might seem okay—we can just weather the storm in our nice new houses. And in fact things will be okay for homeowners who bought long ago and have seen the price of their homes double and then double again. But for more recent homebuyers, who bought at the top and who now face decades of payments on houses that soon will be worth less than they paid for them, serious trouble is brewing. And they are not an insignificant bunch. The problem for recent homebuyers is not just that prices are falling; it's that prices are falling even as the buyers' total mortgage remains the same or even increases. Eventually the price of the house will fall below what homeowners owe, a state that economists call negative equity. They can't sell—the declining market price won't cover what they owe the bank—but they still have to make those (often growing) monthly payments. Their only “choice” is to cut back spending in other areas or lose the house—and everything they paid for it—in foreclosure. Free markets are based on choice. But more and more homeowners are discovering that what they got for their money is fewer and fewer choices. A real estate boom that began with the promise of “economic freedom” will almost certainly end with a growing number of workers locked into a lifetime of debt servitude that absorbs every spare penny. … Rising debt-service payments will further divert income from new consumer spending. Taken together, these factors will further shrink the “real” economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagnation or worse. Then only the debt itself will remain a bitter monument to our love of easy freedom." Hudson, Michael. "The New Road to Serfdom: An Illustrated Guide to the Coming Real Estate Collapse", Harpers, May 2006, pp. 39–46.
  6. ^ "This soft-landing scenario is a fantasy. … Anything housing-related is going to feel like a recession, almost like a depression." Leamer, Ed. "Is economy headed to a soft landing?", USA Today, 23 August 2006.
  7. ^ "No question about it, the housing downturn is here now, and it's big." Hamilton, Jim. "New home sales continue to fall", Econbrowser, 25 August 2006.
  8. ^ Shiller, Robert. "Bloomberg Interview of Robert Shiller", Bloomberg, 20 August 2006.
  9. ^ a b "A lot of spin is being furiously spinned around–often from folks close to real estate interests–to minimize the importance of this housing bust, it is worth to point out a number of flawed arguments and misperception that are being peddled around. You will hear many of these arguments over and over again in the financial pages of the media, in sell-side research reports and in innumerous TV programs. So, be prepared to understand this misinformation, myths and spins." Roubini, Nouriel. "Eight Market Spins About Housing by Perma-Bull Spin-Doctors … And the Reality of the Coming Ugliest Housing Bust Ever …", RGE Monitor, 26 August 2006.
  10. ^ "The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops." "In come the waves: The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops.", The Economist, 16 June 2005.
  11. ^ President George W. Bush was asked about the housing boom's impact on the ability of the questioner's children to purchase a home. The President answered "… If houses get too expensive, people will stop buying them, which will cause people to adjust their spending habits. … Let the market function properly. I guarantee that your kind of question has been asked throughout the history of homebuilding—you know, prices for my homes are getting bid up so high that I'm afraid I'm not going to have any consumers—or my kid—and yet, things cycle. That's just the way it works. Economies should cycle." Bush, George W... "President Highlights Importance of Small Business in Economic Growth", The White House, 19 January 2006.
  12. ^ a b "The number of Bay State homeowners falling into foreclosure has shot up 56 percent—and more than doubled in parts of Eastern Massachusetts. … Things are even worse in much of Greater Boston. Foreclosure.com said filings rose 102.4 percent in Plymouth County, 72 percent in Bristol County, 65.2 percent in Worcester County and 63.1 percent in Suffolk County. Statewide, foreclosures have risen more than 50 percent from year-earlier levels for three straight months. ForeclosuresMass.com President Jeremy Shapiro attributed the increases to a combination of “soaring energy costs … our slumping housing market and tightening economy—with no end in sight.” He particularly noted that Massachusetts home sales have cooled at a time when mortgage rates have risen. That means homeowners in jams—say, someone whose adjustable—rate mortgage’s interest rate has shot up—are often unable to either refinance or sell." "Mass. home foreclosures rise quickly", Boston Herald, 29 August 2006.
  13. ^ a b "This is the biggest housing slump in the last four or five decades: every housing indicator is in free fall, including now housing prices." Roubini, Nouriel. "Recession will be nasty and deep, economist says: Housing is in a free fall and is pulling the economy down with it, Roubini says", Dow Jones, 23 August 2006.
  14. ^ "We have enough data at this point (lower sales, rising inventories, falling median prices) that I feel confident in saying that the crash has begun. We don't yet know the speed of the decline or the full repercussions in terms of the financial havoc or the extent of the economic downturn. Of course, the housing crash, like the stock crash, was entirely predictable. Housing prices had never risen like this in the past and NO ONE has identified anything that made the period after 1996 different from the period prior to 1996. The press can be given a bit of a pass on this one—as with the stock bubble, most of the blame lies with my profession. In both cases, economists were more worried about the possibility that we might have to raise Social Security taxes in 50 years or tariffs on imported shirts, than trillions of dollars of paper wealth disappearing with the collapse of a financial bubble. … [F]inancial bubbles can have an enormous impact on the economy, as Japan has demonstrated over the last 15 years. Most economists like to pretend bubbles don't exist. The fact is that they do exist, and any economist who can't recognize a multi-trillion dollar bubble staring them in the face does not deserve to be taken seriously. One final point: the crash of the housing bubble will not be pretty. Millions of people stand to lose their home and/or their life savings. However, it was inevitable. The bubble created a fantasy world that could not continue. At the peak of the bubble, 160,000 people a week were buying a home, most at bubble inflated prices. The longer the bubble persists, the larger the group of people who paid way too much for their home. While it is not good that so many dreams had to be ruined, the number will be even larger if the bubble deflates slowly. So I make no apologies about hoping for the hasty demise of the housing bubble." Baker, Dean. "The Slow Motion Train Wreck", The American Prospect, 2 August 2006.
  15. ^ a b "Welcome to the dead zone: The great housing bubble has finally started to deflate, and the fall will be harder in some markets than others." This article classified several U.S. real-estate regions as "Dead Zones," "Danger Zones," and "Safe Havens."
  16. "Welcome to the Dead Zone", Fortune, 4 May 2006.
  17. ^ a b "Housing Bubble—or Bunk? Are home prices soaring unsustainably and due for plunge? A group of experts takes a look—and come to very different conclusions", Business Week, 22 June 2005.
  18. ^ "By 2005, nominal house prices were rising at their fastest pace since 1978. Inflation-adjusted prices were up 9.4 percent, the largest increase in more than 40 years of recordkeeping. It is no surprise, then, that media reports of a housing bubble reached a fever pitch last year. … [W]hen and if house prices do fall, the so-called bubble is more likely to deflate slowly rather than burst suddenly. History suggests that appreciation eases for a year or two before prices come down in nominal terms. While dips of a few percentage points are common, nominal house prices rarely drop by 10 percent or more. Still, over the past 30 years, nominal house prices have in fact fallen by five percent or more at least once in about half of the nation’s 75 largest metros. In most cases, it takes significant job losses—or a combination of overbuilding, modest job losses and population outflows—to drive house prices down substantially. In terms of magnitude, price declines associated with episodes of major job losses alone average 4.5 percent, while those occurring in and around periods of overbuilding alone average 8.3 percent (Figure 11). While low interest rates certainly helped, house prices probably continued to appreciate throughout the last recession simply because these two conditions were absent." "The State of the Nation's Housing 2006", Harvard University, Joint Center for Housing Studies, 2006.
  19. ^ "The headline hints of catastrophe: a dot-com repeat, a bubble bursting, an economic apocalypse. Cassandra, though, can stop wailing: the expected price corrections mark a slowing in the rate of increase - not a precipitous decline. This will not spark a chain reaction that will devastate homeowners, builders and communities. Contradicting another gloomy seer, Chicken Little, the sky is not falling." Retsinas, Nicolas. "The housing wail", Scripps Howard News Service, 26 September 2006.
  20. ^ "Why would [Retsinas and the Harvard JCHS] pump out to the press a defense of the bubble without a single, salient data point to back it up? What's the motive? I think the answer might be found in the cozy relationship between Harvard's JCHS and the home-building, -selling, and -supply industry. Take a look at the "policy advisory board" at the JCHS. It just happens to be made up of a few dozen companies with an enormous financial stake in the continuation of the housing bubble, like Centex (NYSE: CTX), scandal-plagued Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM), and UBS (NYSE: UBS). Oh please. Don't be shocked. You knew something like this was coming, didn't you? Well, it gets even better: These companies are also cutting checks to the JCHS. … I've got a message into Harvard to find out just how much dough is changing hands here. If it's much more than a pittance, I consider that an interesting—and by interesting, I mean scandalous—conflict of interest." "Harvard Hypes Housing, but Why?", Motley Fool, 29 September 2006.
  21. ^ Lereah, David. "Anti-Bubble Reports", National Association of Realtors, August 2005.
  22. ^ "Housing Bubble Prospects Q&A", National Association of Realtors, 2005.
  23. ^ a b Tully, Shawn. "Getting real about the real estate bubble: Fortune's Shawn Tully dispels four myths about the future of home prices", Fortune, 25 August 2005.
  24. ^ "Housing market may be on ice, but the blame market is red hot", Chicago Tribune, 10 September 2006.
  25. ^ a b c Lereah, David. "Existing home sales drop 4.1% in July, median prices drop in most regions", USA Today, 24 August 2005.
  26. ^ "Lawmakers to probe housing "bubble," mortgages", Reuters, 12 September 2006. Streaming video is available at the "Paper-Money" blog for both the hearings of "The Housing Bubble and its Implications for the Economy" and "Calculated Risk: Assessing Non-Traditional Mortgage Products."
  27. ^ a b "Economists reckon that the rental value of a house closely follows the trends for apartment rents in the same area. Both are tied to the underlying economics. If a region creates a slew of jobs and companies boost wages, rents climb. Ditto house prices. One way to look at the economics of your home is to use what we'll call a price-to-annual-rent ratio (or P/R), the rough equivalent of a price/earnings ratio for a stock. Like stock P/Es, they hew toward long-term averages. But also like P/Es, P/Rs can defy gravity and reason. Prices sometimes jump far faster than underlying rents, driving P/R multiples to extremely high levels. Danger looms when future rents look as if they can't grow fast enough to satisfy the market's Brobdingnagian expectations. That's precisely what has happened. The P/R multiple is extremely high both by historical standards and compared with ratios for apartment buildings. Over the years P/Rs for both single-family dwellings and larger rental structures have averaged between 11 and 12. Since the beginning of the boom in '98, however, when both stood near 11, P/Rs for houses have blown ahead of those for apartment buildings. Rental P/Rs rose sharply with the strong economy, then fell with the recession. As rents dropped or leveled off, apartment prices cooled but kept the gains they'd registered from 1998 to 2001. Their multiples rose from 11 to around 13 in most markets. By contrast, houses totally broke loose from the pull of falling rents. Prices just kept skyrocketing. Since 1998, P/Rs in the 20 hottest markets, including San Diego, Los Angeles, Denver, Boston, and New York City, have jumped, on average, from 11 to 20—an incredible 82%." Tully, Shawn. "The New Home Economics: With heavier mortgage and tax rates looming, your one can't-miss investment—your house—may soon be worth less than you're counting on", Fortune, 22 December 2003.
  28. ^ "At a minimum, there's a little froth [in the U.S. housing market] … It's hard not to see that there are a lot of local bubbles." Greenspan, Alan. "Greenspan Calls Home-Price Speculation Unsustainable", Bloomberg, 20 May 2005.
  29. ^ "[T]he American housing boom is now the mother of all bubbles—in sheer volume, if not in degrees of speculative madness." "No mercy now, no bail-out later", The Telegraph (UK), 23 March 2006.
  30. ^ "Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement. … People go crazy in economics periodically, in all kinds of ways … when you get prices increasing faster than the underlying costs, sometimes there can be pretty serious consequences." Buffett, Warren. "The oracle speaks: Warren Buffett and Charles Munger warn of real estate 'bubble,' the risk of terrorist nukes.", CNN, 2 May 2005.
  31. ^ "Soros said he believed the U.S. housing bubble, a major factor behind strong U.S. consumption, had reached its peak and was in the process of being deflated." Soros, George. "The oracle speaks: Warren Buffett and Charles Munger warn of real estate 'bubble,' the risk of terrorist nukes.", Reuters, 9 January 2006.
  32. ^ "Lately, I have been asked if we are in a real estate bubble. My answer is, ‘Duh!’ In my opinion, this is the biggest real estate bubble I have ever lived through. Next, I am asked, ‘Will the bubble burst?’ Again, my answer is, ‘Duh!’" Kiosaki, Robert. "All Booms Bust", Robert Kiyosaki, 2005.
  33. ^ "To accommodate the demand for real estate licenses, the DRE conducted numerous "mega-exams" in which thousands of applicants took the real estate license examination. … “The level of interest in real estate licensure is unprecedented”" "New record: Nearly a half-million real estate licenses", Sacramento Business Journal, 23 May 2006.
  34. ^ "Fact Sheet: America's Ownership Society: Expanding Opportunities", The White House, August 2004.
  35. ^ a b "The financial reasons for renting instead of buying are the strongest they've been in 25 years. … What's alarming this time is that interest rates are still historically low. That means rents need to go up, and home prices to come down in some areas, for the balance to be regained. And that may be a painful process that takes between a year to 18 months. The market was thrown out of kilter during the five-year real estate boom. Renters stampeded at the sight of an "open house" sign, trying to buy anything they could afford. Prices soared by 40%, and by even more along the coasts and in such places as Las Vegas and Phoenix. Landlords couldn't raise rents as fast, so many apartment owners simply gave up and converted their buildings into condos for sale. … The national median mortgage payment is $1,687 a month, nearly twice the median rent payment of $868 a month. The financial gap is even larger in cities where home prices recently rose to sky-scraping heights, such as New York, San Francisco, Los Angeles and Washington. … Add rising interest rates, and it's easy to see why many would-be home buyers are sitting on the sidelines and why even some homeowners are cashing out. By renting, they gain the flexibility of a lease and freedom from home repairs. They can also invest more money in stocks, bonds and other assets that could appreciate faster than real estate over the next couple of years. “For someone debating whether to rent or buy in a market that's experienced recent and substantial house-price run-up, it may be better to delay the home purchase and see what the market looks like a year or two down the road.”" "For some, renting makes more sense", USA Today, 10 August 2006.
  36. ^ a b "There's nothing funnier or more satisfying (for me, at least) than watching the National Association of Realtors (NAR) change its tune these days. The latest news release from this sunny-Jim industry group finally fesses up to its past fiction, but even when it admits the bubble's going to pop, it can't muster the courage to just come out and say it. … the NAR is full of it and will spin the numbers any way it can to keep up the pleasant fiction that all is well. … [T]he cracks began to show in subsequent remarks from NAR 'Chief Economist' David Lereah. The head outfit that ridiculed the idea of a housing bubble for years is now crying for Ben Bernanke to bring it back. … The real problem here isn’t the NAR, of course. You have to expect these people to spin the facts for their industry. No, the real problem here is the uncritical press out there, which is all too happy to pepper every contrary indicator or bearish remark with an NAR official’s informed-sounding bubble denial. Never mind if what the NAR folks are saying doesn't seem to make sense (or contradicts what they said just a few months back). … It should have been completely obvious to anyone with a loan calculator and a glance at wage increases that those months of industry bubble denials were just wishful thinking." "I want my bubble back", Motley Fool, 9 June 2006.
  37. ^ Image:Ma sfh compare years.20060925.png, plot of Massachusetts Single Family Home Infl