| | Housing boom brings `bubble' trouble - Will sudden surge in house prices puncture ove
This story was the first of a five-part News series about the housing "bubble" debate.
Part one provides an overview of the no-there-isn't-a-housing-bubble arguments presented by housing market bulls and the yes-there
is-a-housing-bubble views stated by housing market bears.
Martino Magin, clad in black and wearing a cowboy hat, his dark hair pulled back into a neat ponytail, his neck adorned with a bone-and-leather choker, is out shopping for a house. He seems to match the eclectic, 752-square-foot, remodel-in-progress single-family home he's eyeballing. The home is tucked so deeply into the El Sobrante, Calif., foothills that at 2:30 p.m., hardly any sunlight filters through the trees.
The home's unfinished kitchen includes a small stove and a refrigerator. The price tag on this miniature fixer-upper situated on a 9,000-square-foot hillside lot is $298,000.
The motorcycle-riding third-grade teacher is looking for home that will ease his commute in the expensive San Francisco Bay Area housing market.
Magin isn't worried about a housing "bubble," the controversial notion that the U.S. residential real estate market is on the verge of crashing and burning. But others are worried about exactly that scenario.
A. Gary Shilling, president of a same-named economic consulting firm, is predicting a housing market collapse, and he said it's going to happen within the next few months.
"Consumers are starting a retraction, and we're going to have a renewed recession and that's going to trigger the unwinding of the housing boom," he said.
Researchers at the Center for Economic and Policy Research agree.
"In the last seven years, home sales prices have increased nearly 30 percent more than the overall rate of inflation," wrote CEPR researcher Dean Baker in a recent report on the subject. "The only plausible
explanation for the sudden surge in homes prices is the existence of a housing bubble."
Housing market bulls dismiss the "bubble" theory as nonsense.
"There is no housing bubble, period," declared Fannie Mae Chief Economist David Berson.
"To find culprits for a housing bubble is essentially to look for shadows around corners," said Ken Goldstein, an economist with the Conference Board. "To look for an end for the housing characteristics that we have been looking at, even into the first half of 2003, is going to be a very disappointing exercise."
Is the greatest real estate market boom in history headed for a correction?
Housing economists affiliated with industry groups that have built-in biases point to a pile of research to show why the market isn't a bubble on the point of bursting. They cite rising demand for housing fueled by
Baby Boomers in their peak earning years, an ever-increasing population of new immigrants, a recovering national economy, continued low interest rates and an abundance of cheap and easy-to-obtain mortgage
money as factors that will continue to sustain a strong housing market.
It may indeed be difficult to see an end to the prosperity the housing industry has experienced, given that sales of existing homes remain hot, prices are still posting double-digit gains, mortgage interest rates are
expected to remain low into next year and 11 million immigrants arrived in the U.S. in the last decade.
Weakened faith in the stock market has added to the demand for housing. Americans now consider real estate to be the psychological equivalent of gold; a recent Milken Institute study found investors are seeking tangible assets to supplement plummeting stock portfolios.
Residential real estate today is a main asset category and nationwide is valued at more than $23 trillion, of which the household sector amounts to $11 trillion, according to the Milken Institute report, "A New Kind of Gold." That $11 trillion figure is equal to the combined market value of all the stocks traded on the New York Stock Exchange.
But the cynics contend the sector simply is drunk on its own momentum, and they refute the industry's arguments point by point.
Experts like Shilling and Baker say the Baby Boomers already have housing, immigrants are priced out of the market, a double-dip recession is on the way, interest rates surely will rise, and cheap and easy mortgage money is risky and leads to more delinquencies and foreclosures. For good measure, the bears throw in the horrors of rapidly rising home values that outrun household earnings, strip would-be homeowners of the ability to buy a home and ultimately result in depreciating home values that rob tens
of millions of homeowners of their precious equity.
One realty is undeniable: The housing market over the past few years has broken every record, beginning with the sale of 5.3 million existing homes last year, according to the National Association of Realtors. And this year's forecast is for a new record of 5.44 million existing home sales. Then there is the national median home price, which reached $157,700 in August and was significantly higher than that in areas where the demand for housing is especially strong and the supply is particularly tight. One instance is
Nassau-Suffolk, N.Y., where the median home price reached $307,200.
The argument may all boil down to the basic economic principles of supply and demand. As long as people continue to buy homes and land suitable for new home construction remains in short supply in many major metropolitan markets, it seems likely the housing market will stay buoyant. Low interest rates and easy-qualify mortgages will continue to open the door for many first-time home buyers, who eventually will become the housing market's trade-up buyers.
Whether home buyers care about--or are even aware of--the housing "bubble" may not matter. Most buyers don't act on the advice of experts. Rather, their decisions are rooted in the realities of their everyday lives and their desire to own a home.
"Prices could go down, but it only matters if you're selling," said Magin, the cowboy-hatted Bay Area home-shopper. He's optimistic about the housing market in part because immigrants are "inundating" the area and are expected to sustain the strong demand for housing. He's not alone in his thinking.