It's finally happening. Some of
us, who have been writing about the US housing bubble for several years now,
underestimated how long it would last. But as Ben Jones has exhaustively documented
at his excellent Housing
Bubble 2 Blog, bubble cities around the country are all starting to see the
following trends:
1.
Rising
inventories since January 1, 2006 (e.g., up over 8% for San Diego)
2.
Order
cancellations for new homes
3.
Local
evidence mass new home overbuilding relative to fundamental demand
4.
Huge
share of demand (over 25%) accounted for by speculators
Jones has carried several stories about real estate
economists, who for years have denied that there was a bubble, now say that
the housing "boom" may be "levelling off" as we go into a
"soft landing", meaning that prices might go sideways but could
never fall. These "housing bubble debunking" economists have cited
population growth generally and in particular, a large demographic segment
entering prime home-buying years, as fundamental factors driving the run-up
in US home prices. Some brokers and economists, according to Jones, are
blaming the media for the real estate slow down on the grounds that too many
articles about a non-existent "housing bubble" are making buyers
pause to question whether they should drop $800,000+ on a home.
Jones provides
this choice quote from a "housing bubble denial" economist:
'There is a bubble a bubble in the number of articles
about the housing bubble,' Leslie Appleton-Young said of the 'hype.' She
added, 'The median price of a U.S. home has never declined.'"
For some stunning statiscal evidence and charts showing
how extreme US housing prices are compared to historical norms, in terms of
income, debt leverage, home price to rent ratios, and the CPI, see Gary
Schilling's excellent article, The Housing Bubble Will
Probably Burst.
It has also frequently been
argued that housing is not over-priced "given low interest rates",
which is sort of true, although it would have to be acknowledged by anyone
making htis argument that higher interest rates would lower housing bubbles,
which has been denied by some of these same economists. But in a nation that
has a central bank, interest rates cannot be considered a
"fundamental" factor in the formation of prices because interest
rates are not entirely set by borrowers and savers, they are set by the
central bank. The interest rate argument ignores the role that interest rate
price fixing, the the resulting credit expansion plays in generating
unsustainable run-ups in credit-sensitive assets.
In fact, most Americans believe
that there is a constitutional right to have ever-rising property
appreciation. A new Federal
Reserve study of housing bubbles disputes this:We turn to Steve
Sjuggerud for a summary:
a new 71-page study by the Federal Reserve. The Fed
looked at real estate markets in 18 major countries over the last 35 years.
The results were amazing...Most people believe that "you can't go wrong
in real estate." And that "real estate doesn't go down over long
periods." But based on the findings in this important study, that's
simply not true...
While real estate rises
over the long run, there are distinct periods where it falls. In short, based
on the Fed study, right now we are right at the point where home prices
should turn over and head downward again.
The Fed found that
housing booms peak, on average, four-to-six quarters after that country's
Federal Reserve first starts to raise interest rates. Here in the States, the
Fed has raised rates for five quarters now. Based on history, we should be
extremely close to the top.
What happens after the
peak in real estate prices? The Fed then hits us with a whopper:
"Subsequently [after the peak], real house prices fall for about five
years, on average, and their previous run-up is largely reversed." Wow.
Want another 'wow?' Across the 18 major countries... and across the 35 years
of the study... the median real price fell over the five-year period after
the peak was about 15%.
Now that's nationwide...
of course, some areas will fall much more than others. Again, keep in mind
that, on average, the "previous run-up is largely reversed." Ouch!
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
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