"Bubble Schmubble"

I consider myself a housing

I consider myself a housing "bull." When I went to Boston this weekend for my friend's graduation, one young business man boasted about how he landed a cool $1.2 million for his home after wisely renovating and converting it into three condos. And where I live in New Jersey, new developments are still cropping up all over the place.

That's why today's existing home sales report did not surprise me. Economists expected a slight decline to a 6.85 million annualized rate for April from 6.89 million in March. Instead, existing home sales jumped 4.5% last month to a record 7.18 million units. "The data further confirm that a boom is underway in the U.S. real estate market during this seasonally important Spring season," wrote the economists at Action Economics, which just released a note entitled "Bubble Schmubble -- The Housing Market is Soaring."

I believe housing will stay strong as long as mortgage rates remain low. The average rate for a 30-year fixed mortgage was 5.86% in April, down from 5.93% in March, according to Freddie Mac.

Action Economics notes that mortgage rates are only about 50 basis points above the all-time lows set in mid-2003 during the deflation scare. "Unless rates move significantly higher from here, the housing market should continue to get support from such low interest rates," says Action. "Moreover, any further increase in interest rates will likely be accompanied by stronger job growth, which may diminish much of the effect of rising rates on activity."

Plus, home prices are still rising -- a sure sign that demand is outstripping supply. In today's report, the median price of a home was a record $206,000, while the average price was a record $255,000. This left the median rising a whopping 15.1% year-over-year and the average price rising 10.9% year-over-year, says Action Economics.

Sure, even Fed chief Alan Greenspan acknowledged there may be a "bubble" in some local areas. However, Action says it's worth noting that the weakest existing home sales data by region were in the West, where talk of a "real estate bubble" is the most prevalent. "The strongest data for all the housing reports are emerging from the South, where prices appear to remain consistent with asset valuation models, hence providing little support for the "bubble" theory," says Action. "It appears that broad strength in the housing sector can be seen as a separate phenomenon from the "bubble" in prices that may be emerging in urban markets in the West and Northeast," Action explains.

I agree with Action Economics' take that housing will stay strong for the time being. They conclude:

"In total, the existing home sales data add to widespread evidence that the housing sector remains strong, with little sign of near-term cooling ... It is unlikely that this boom in the housing sector will reverse itself before the Spring and Summer construction seasons are behind us."

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