Housing Is Not a House of Cards
Don't tell Federal Reserve Chairman Alan Greenspan that the red-hot housing market is a bubble about to burst. He scoffs at the rising chorus of worrywart economists who fear that buyers will flee housing as prices continue to soar, knocking out the last prop holding up consumer spending. As Greenspan recently told a hearing on Capitol Hill, "We have looked at the bubble question, and we have concluded it is most unlikely."
How can he be so sure? For starters, Greenspan and many economists say housing differs from stocks and bonds, which can be sold in seconds with a few computer strokes. Stock ownership turns over more than 100% a year, they say. In contrast, buying and selling homes involves high transaction costs, preventing people from flipping them quickly. That makes housing inherently less speculative than stocks.
Escalating housing prices, moreover, make perfect sense to the Fed chairman, reflecting solid demand. A sharp drop in mortgage rates during the past several years has turned lower-income families into home buyers. That's especially true of immigrants, who have been surging into this country at record levels--some 9.3 million arriving during the 1990s. Increasingly, these immigrant families are financially secure enough to afford first homes, according to the U.S. Census, which calculates that 46% of immigrants who have lived here for more than a decade can now afford homes. Greenspan has told colleagues he believes a good third of the increase in U.S. household formation is a direct result of immigration.
A shortage of land around urban hubs is also helping to drive up prices. Anecdotal evidence bears that out: Homebuilders say that a lack of building sites was a major challenge in the first half of this year, according to a National Association of Home Builders survey that was released in mid-August. That means the price of land for suburban tract housing is heading ever upward.
Even if prices do crack in some markets, they won't pull down others, Greenspan argues. Regional diversity makes the housing market resilient: Although housing prices fell 7.9% in Topeka, Kan., during the second quarter, they rose by the same percentage in Phoenix, according to the National Association of Realtors. That's because every regional market is driven by its own supply-and-demand dynamics. "There's not a bubble nationwide," says Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis. When it comes to housing, Sohn says, "having a fever doesn't mean you're going to die."
Greenspan's arguments haven't quieted skeptics. Dean Baker, co-director of the Center for Economic & Policy Research, a Washington think tank, sees parallels between the U.S. now and Japan in the late 1980s. Back then, Japan suffered from a real estate and stock bubble at the same time. Once both popped, the economy stagnated for over a decade. Baker, who warned of a U.S. stock blowout in 1997, says similar risks now exist in housing: In the past seven years, prices have risen nearly 30% faster than inflation. Such a steep climb could trigger a collapse in demand, causing "serious financial disruptions," says Baker. For Baker and others, today's housing market feels a lot like the stock market's "irrational exuberance" that Greenspan so famously warned about in 1996.
Nonsense, say those in the Greenspan camp. During the late 1980s in Japan, it was the commercial real estate market that collapsed--not housing. What's more, unlike Japan, U.S. housing prices tend to historically rise faster than inflation, many economists agree.
So who's right, a Feelgood Fed or the housing Jeremiahs? Greenspan certainly isn't infallible. But with housing starts still strong and mortgage rates at 30-year lows and falling, he makes a compelling argument that the market isn't about to collapse anytime soon.
By Laura Cohn in Washington