Editor’s note: The housing bubble debate has grown louder in recent weeks. Rather than add to the mix of confusing stories that attempt to decide who’s right and who’s wrong, this four-part series takes a closer at look at the numbers, what’s happening in specific markets and how the media is relaying the message. (See Part 1: Making sense of a changing housing market, Part 3: Some real estate markets are cooling and Part 4: Media caught in real estate bubble fray.)
Never has there been so much confusion about predicting the future of the housing market. For certain, the experts can’t even agree.
On the one hand, you have numbers from the real estate industry that show the market is as hot as ever. Housing sales continue to set records, mortgage delinquencies and foreclosure inventory have dropped and trade associations continue to forecast a banner year.
In the housing bubble camp are major media outlets, which have been running stories questioning how much longer the boom can last and a recent UCLA forecast that calls for a housing collapse along with a recession. Even Federal Reserve Chairman Alan Greenspan warned the housing boom has seen its last days.
Many of those in the non-bubble camp are from within the real estate industry, and obviously earn their living from forecasting good days ahead for the industry. That’s not to say their numbers are wrong, but their interpretations of what’s to come may skew toward the positive.
The National Association of Realtors’ figures last month showed single-family home sales rose in May to the highest monthly pace on record. Existing-home sales increased 2.6 percent to a seasonally adjusted annual rate of 6.8 million units in May, up from a level of 6.63 million units in April. May’s sales activity was 15.8 percent above the 5.87 million unit pace in May 2003. The previous record was 6.68 million in September 2003.
Source: National Association of Realtors
The spike could be partly attributed to buyers on the fence finally getting into the market after mortgage rates began to rise, NAR explained. Sales in the second half of this year are likely to slow, but NAR is still predicting a record year for real estate sales. Lawrence Yun, NAR’s senior economist, expects sales to slow only slightly in the second half of this year.
The drop, however, likely won’t be too significant, he said, especially given mitigating factors such as job creation. That could bring more potential home buyers into the market.
The National Association of Home Builders also predicts a record year for new-home sales. Sales of new single-family homes in May rose to a record-high seasonally adjusted rate of 1.4 million units, according to the Commerce Department. That was 14.8 percent ahead of April’s upwardly revised sales pace.
“The extraordinary sales pace for May probably involved some acceleration of transactions in anticipation of higher interest rates down the line,” NAHB chief economist David Seiders said in a statement. “But it’s clear that underlying housing demand is quite strong and the current supply-demand balance is excellent. We are now forecasting that new-home sales will hit another record in 2004.”
The California Association of Realtors also reported positive numbers, showing a 10.5 percent increase in sales in May compared with the same period a year ago. The recent uptick in mortgage rates only accelerated the demand for housing.
Numbers from DataQuick back up the trade groups’ information. The company has shown record sales in Southern California and the San Francisco Bay Area. DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.
Those in the real estate finance industry also are part of the debate. The Mortgage Bankers Association, for example, expects record new-home sales and only a slight decline in existing-home sales.
And MBA’s most recent delinquency survey shows that residential mortgage delinquency and foreclosure inventory fell in the first quarter from the previous quarter. The delinquency drop, from 4.49 in the fourth quarter of 2003 to 4.33 in the first quarter of 2004, bodes well for continued strength in the housing market, said MBA chief economist Doug Duncan.
But how many of those numbers merely reflect a previous strong housing market? Is there too much lag in them to use for forecasts of continued housing strength?
Some people apparently think so, including newspapers and other media across the country. They’ve been running stories for the past couple of weeks that question whether the housing boom is sustainable. A front-page article in this week’s San Francisco Chronicle, for example, booms, “Will housing bubble burst?” Even though the stories may not conclude a housing bubble is about to burst, the mere fact they are written lends credence to the belief that a bubble exists.
A recent forecast from the University of California, Los Angeles, went even further. Edward E. Leamer, director of the UCLA Anderson Forecast, said the bottom will drop out of the national housing boom, which will likely be accompanied by a recession, probably in late 2005 or 2006.
“We are building up the same kind of mountain of home spending that eventually crashed into the valleys of eight recessions,” Leamer said.
The forecast calls for a drop in housing starts from 1.87 million this year to 1.59 million in 2005, and then a slight increase to 1.64 million in 2006. The abnormally low interest rates of the past couple of years have been “stealing (home and car) sales from the future, and guaranteeing weakness in these critical marketplaces in the years ahead,” the report states.
Economist Dean Baker, co-director of the Center for Economic and Policy Research, has warned of a bubble for several months. He said the unprecedented run-up in the home prices over the last eight years creates the possibility for an unprecedented decline in the years ahead.
“The basic facts are striking,” Baker wrote. “According to the government’s House Price Index (HPI), the increase in the sale price of an average house has exceeded the overall rate of inflation by more than 40 percentage points over the last eight years. In the past, house prices had largely kept pace with the overall rate of inflation.”
After the Fed raised rates earlier this week, Baker said Greenspan has allowed, and even promoted, a housing bubble in recent years. The collapse of the bubble will almost certainly lead to a recession, Baker said.
Yet Greenspan told the Senate Banking Committee last month that the Fed perceives the strong expansion in new- and existing-home sales is now flattening. The unexpected boom in home sales in recent years is unlikely to continue, he said.
“Our forecast is generally flat, not in price, but in aggregate volumes,” Greenspan said, according to an AFP report. “Where prices go, I’m not sure, but I could be quite surprised if they showed continued acceleration on the up side.”
With all this conflicting information, how does anyone make sense of it?
The bottom line is it’s difficult. Everyone is likely to come to his or her own conclusion, and some doubt whether most people even worry about housing bubble talk.
It’s possible for the public to do all sorts of calculations, including income spreads compared with housing value increases, said Ken Goldstein, an economist with The Conference Board. In the end, however, it’s likely just a waste of time, he said, since houses are still selling for at least the asking price.
“I doubt if many of the folks who are actually in the market, buyers or sellers, are trying to calculate their position vis-à-vis the housing bubble and when it’s going to break,” Goldstein said.
Tomorrow: Find out what’s happening in local markets around the country.
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