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July 18, 2005
Housing Bubble? Most People Don't Think So
Bulls on the housing market like to say there can't possibly be a bubble because almost everyone thinks there's a bubble.
According to this contrarian logic, if everyone thinks there's a bubble, they'll be cautious about overspending. So prices will remain reasonable. In computer code, that would be:
IF [Belief in bubble]
THEN [No bubble]
I hate to burst the bulls' bubble, but the IF statement was falsified in a report today by David Rosenberg, the North American economist for Merrill Lynch & Co.
To put it differently, most people DON'T think there's a bubble. They still think housing is a great investment, and they're betting on it bigtime. Evidence from Rosenberg's report:
--Nearly one in four Americans polled in a University of Michigan survey believe that now is a good time to buy a home since it is a good investment and/or prices will continue to inflate. This share is at a 25-year high.
--According to National Association of Realtors data, 23% of home purchases in the last year were bought as investments and another 13% were bought as second homes.
--Units sold even before construction began are up 47% from a year ago to a record high.
--Housing affordability is at a 13-year low and the total household debt service ratio is at a record high.
--Over one-third of homeowners are devoting over one-third of their incomes to monthly mortgage payments. Twelve percent are devoting over half their incomes.
--Seventeen percent of homeowners have a loan-to-value ratio of 95% or more. (A decade ago only 3% did.)
--The subprime market has accounted for 28% of new mortgage lending in the past six months, vs. 5% five years ago.
--In the hottest markets, adjustable-rate mortgages account for over half of new loans.
This is not the behavior of people who have turned hypercautious because they think a housing bubble is about to burst. This is the behavior of people who want to catch a wave and ride it as far as it'll carry them.
Any bulls out there have an answer to Mr. Rosenberg?
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Tracked on August 18, 2005 05:31 PM
Oh Yeah, I agree. People that I ask think it won't go down here in Southern California.
I'm seeing dumps for 400K here in Orange County that no one in their right mind should buy.
When will all these factors implode the market is what I wonder?
Posted by: Eric at August 18, 2005 11:51 PM
Most people don't think there's a bubble because they don't know what a Bubble is! They are riding the wave created by real estate agents and lenders. They believe what they are told by the real estate community... Buy now! The market is hot!
Do your homework, people! Use common sense. This will not last.
Posted by: georgie at August 29, 2005 06:07 PM
Finally, a major publication wrote about Harvard's housing study which puts all this bubble talk in it's proper perspective. In a Wall Street Journal article entitled, " What's Eating Home-Builder Stocks" by Scott Patterson he states:
In its recent report, "The State of the Nation's Housing: 2005," researchers at Harvard University's Joint Center for Housing Studies said new-home construction shows no sign of declining in the near future. Harvard's economists found that the inventory of new homes for sale today, measured against the pace of home sales, is near its lowest level ever.
"Given this small backlog, new-home sales would have to retreat by more than a third -- and stay there for a year or more -- to create anywhere near a buyer's market," the study said."
If you want to read the entire Harvard study or the Executive Summary, click:
Posted by: Frank Pecarich at August 31, 2005 06:32 PM