Affordable Housing Institute : US

Does this graph scare you?

 

 

More to the point, should it?

 

Has the US home real estate market peaked, as so many have speculated it must?  Using the time-honored technique of Single-Point Analogy, the New York Times (subscription probably required) says it is precisely because people think it has not:

 

Real estate-crazed Americans have started behaving in ways that eerily recall the stock market obsession of the late 1990’s.

 

Then we quote the offstage experts:

 

Nobody can know whether the housing boom of the last decade will end as the dot-com frenzy did.  But the parallels are raising alarms among many economists, even those who acknowledge that there are important differences between homes and stocks that significantly reduce the chances of another meltdown.  [Out of idle curiosity, what economists don’t acknowledge these differences? — Ed.]

 

For one thing, houses are not just paper wealth: you can live in them.

 

Further down, the Times offers many more differences as well:

 

There are certainly serious reasons to believe that house prices will not suffer the fate of technology stocks.  Not only are houses more tangible, but people do not sell their homes as quickly as stocks, making a panic much less likely.  Because of tax advantages, few owners are likely to sell and rent something else simply because local house prices start to decline.

 

Lest you stop worrying, the Times then presents scintillating bigger-fool logic like this:

 

“It really is a very hot real estate market, and I don’t know how long it’s going to continue,” said Douglas Paul, a 46-year-old former analyst who owns two condominium units around Fort Lauderdale and one in Miami Beach, all bought during the last year, in addition to the one where he lives.  “But in the short term, why not profit from it?”

 

Mr. Paul’s path is an increasingly common one. The National Association of Realtors estimates that nearly one-quarter of home purchases last year were made by people who thought of the house as an investment rather than a place to live. Seminars promising to teach amateurs the tricks of real estate speculation have proliferated.

 

I have a great and good friend on whom I rely for market timing.  He’s careful, well-informed, and deliberate.  The minute he buys something, I figure it’s time to sell.

 

Meanwhile, the Times offers us a superficial-equivalence of house prices and stock P/E ratios:

 

The average house in San Jose, Calif., costs 35 times what it would cost to rent for a year, according to Economy.com, a research company. In New York and West Palm Beach, this ratio - a rough equivalent of the price-earnings ratio for stocks - is almost 25.

 

In March 2000, the price-earnings ratio of the Standard & Poor’s 500 - the combined price of the stocks, divided by their profits per share - peaked around 32, and it was briefly even higher for telecommunications stocks.  The S.& P.’s P.E. ratio has since fallen to around 20.

 

What’s relevant here, of course, is not whether price-rent P/E’s compare to stock — the flows are vastly different — but three questions:

 

1. Are they much higher than historical norms?  Yes, the Times graph is dispositive.
2. Can we trace that to a logical reason?  Yep, very low interest rates.
3. Will the aberrant stimulus (low interest rates) continue? 

Here’s where it gets murkier.  In the very long run —

 

 

“In the long run, we are all dead.” — John Maynard Keynes

 

– in the very long run, interest rates trace inflation (if they don’t a currency implodes), and both relate to currency strength and deficits (budgetary and trade).  With the US running up very large deficits (always measure as percentage of Gross Domestic Product, to avoid spurious ‘biggest deficit ever’ inflated claims),

 

 

it’s very hard to avoid the conclusion that rates are going to spike up big-time.

 

But if they do, and the currency inflates suddenly, what assets win?  Tangible ones like property.  So the same force that makes housing more expensive in dollar terms also makes those dollars cheaper in real terms.  The interdependencies and feedback loops swiftly get very complicated.

 

Meanwhile, in the competing paper of record (Washington Post), old friend and long-time housing pundit Ken Harney offers, in addition to those invisible ’some’ economists, a different is-it-meaningful stat:

 

Although some economists are concerned about homeowners’ rising debt burden especially in high-cost, high-inflation markets, a new study suggests that those worries may be misplaced.  Homeowners in “bubble markets” such as metropolitan Washington, California, Nevada, New England and the mid-Atlantic region are more likely to pay their mortgages on time than homeowners in parts of the country with lower housing inflation rates.

 

In California, for example, where house prices have risen at double-digit rates each year for five years, just 2.04 percent of borrowers were behind on their payments in the final quarter of 2004, according to the latest loan delinquency data compiled by the Mortgage Bankers Association.  The national average during the same period was 4.6 percent.

 

Gee, wouldn’t it be the case that if you thought your home price was rising rapidly, you’d keep paying the debt?  Conversely, if the appreciation stalled, mightn’t your mortgage payments likely stall too?

 

Harney’s conclusion too assumes away the question:

 

As long as interest rates remain low and employment growth continues, that could be an indicator that bursting bubbles are nowhere in sight.

 

Yes, as long as it doesn’t rain, we’ll all stay dry. 

 

Will markets peak?  When?

 

Once, looking up at a gray sky pelting rain, a bystander asked Mark Twain, “Will it stop?”

 

Said the sage, “it always has.”

 

“Don’t ask me, I lost all my money in linotype.”

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