It's finally happening. Some of us, who have been writing about the US housing bubble for several years now, underestimated how long it would last. But as Ben Jones has exhaustively documented at his excellent Housing Bubble 2 Blog, bubble cities around the country are all starting to see the following trends:
- Rising inventories since January 1, 2006 (e.g., up over 8% for San Diego)
- Order cancellations for new homes
- Local evidence mass new home overbuilding relative to fundamental demand
- Huge share of demand (over 25%) accounted for by speculators
Jones has carried several stories about real estate economists, who for years have denied that there was a bubble, now say that the housing "boom" may be "levelling off" as we go into a "soft landing", meaning that prices might go sideways but could never fall. These "housing bubble debunking" economists have cited population growth generally and in particular, a large demographic segment entering prime home-buying years, as fundamental factors driving the run-up in US home prices. Some brokers and economists, according to Jones, are blaming the media for the real estate slow down on the grounds that too many articles about a non-existent "housing bubble" are making buyers pause to question whether they should drop $800,000+ on a home. Jones provides this choice quote from a "housing bubble denial" economist:
'There is a bubble a bubble in the number of articles about the housing bubble,' Leslie Appleton-Young said of the 'hype.' She added, 'The median price of a U.S. home has never declined.'"
For some stunning statiscal evidence and charts showing how extreme US housing prices are compared to historical norms, in terms of income, debt leverage, home price to rent ratios, and the CPI, see Gary Schilling's excellent article, The Housing Bubble Will Probably Burst.
It has also frequently been argued that housing is not over-priced "given low interest rates", which is sort of true, although it would have to be acknowledged by anyone making this argument that higher interest rates would lower housing bubbles, which has been denied by some of these same economists. But in a nation that has a central bank, interest rates cannot be considered a "fundamental" factor in the formation of prices because interest rates are not entirely set by borrowers and savers, they are set by the central bank. The interest rate argument ignores the role that interest rate price fixing, the the resulting credit expansion plays in generating unsustainable run-ups in credit-sensitive assets.
In fact, most Americans believe that there is a constitutional right to have ever-rising property appreciation. A new Federal Reserve study of housing bubbles disputes this: We turn to Steve Sjuggerud for a summary:
a new 71-page study by the Federal Reserve. The Fed looked at real estate markets in 18 major countries over the last 35 years. The results were amazing...Most people believe that "you can't go wrong in real estate." And that "real estate doesn't go down over long periods." But based on the findings in this important study, that's simply not true...
While real estate rises over the long run, there are distinct periods where it falls. In short, based on the Fed study, right now we are right at the point where home prices should turn over and head downward again.
The Fed found that housing booms peak, on average, four-to-six quarters after that country's Federal Reserve first starts to raise interest rates. Here in the States, the Fed has raised rates for five quarters now. Based on history, we should be extremely close to the top.
What happens after the peak in real estate prices? The Fed then hits us with a whopper: "Subsequently [after the peak], real house prices fall for about five years, on average, and their previous run-up is largely reversed." Wow. Want another 'wow?' Across the 18 major countries... and across the 35 years of the study... the median real price fell over the five-year period after the peak was about 15%.
Now that's nationwide... of course, some areas will fall much more than others. Again, keep in mind that, on average, the "previous run-up is largely reversed." Ouch!
