As homes hit heights, a bubble?
Enviado: 22/1/2003 13:39One lousy word has everybody in the real estate business in a lather.
Bubble.
Home prices - both in Orange County and elsewhere across the land - have enjoyed a remarkable upswing in the face of tough conditions in the rest of the economy.
Over the past five years, national home values surged 40 percent. Locally, it's an 80 percent explosion. Yet the eerie shadow of the last major financial debacle - Wall Street, circa 2000 - puts a cloud over housing.
The hideous end to the stock market's bubble is so fresh in many psyches that debate about home prices becomes wrapped around a single esoteric economic descriptor. Is housing far too expensive, thus in a bubble? If so, will homebuyers eventually balk at such lofty prices, thus, popping the bubble? By the way, just what is a bubble?
• Industry's boom: two views It's no minor issue. Buyers across the land are betting their nest eggs against a bursting housing bubble. And lenders bet $2.4 trillion of the money lent last year based on home values set in this heated marketplace.
Folks are so antsy about this bubble thing that last week in Los Angeles, 300 or so real estate watchers and leaders gathered for a two-day workshop to debate the topic.
Veteran economist Jim Doti, president of Chapman U. in Orange, knows how touchy the b-word is. Before calling Orange County's home market a bubble last month in his annual outlook speech, Doti double-checked his bubble judgment call with his school's top economic professor and the advisory board of local business experts that oversees Chapman's economic forecasting.
"It's a very emotional issue," Doti noted. Doti's homework found local housing prices booming without the job growth that usually boosts property demand. To him, that was a bubble - not that bubble meant an oncoming downturn. Chapman sees county home prices rising a slender 2 percent in 2003. In the back of Doti's mind, though, were recollections of the early 1990s. Then the county's economy stood at a similar crossroads as he raised doubts about the viability of a run-up in commercial property values.
For years thereafter, he says, some industry leaders partially blamed him for the eventual collapse of that niche. "There is a bubble," Doti said of O.C. housing. "But I'm not suggesting that people sell their homes."
WHAT's IN A NAME?
You can't just pick up any business dictionary and look up "bubble" and see a precise definition. Nor can you find a statistical formula, apply the math and systematically say "yea" or "nay" for a bubble. Yale professor Robert Shiller was already well- known as a home-valuation expert before his book "Irrational Exuberance," on bubbles off all sorts, hit bookstands in 2000 as U.S. shares were peaking.
"Good timing," Shiller said.
Shiller explained to that Los Angeles bubble workshop that housing's current surge reasonably mirrors other bubbles, in which an asset gets caught in a price run-up lacking underlying financial facts.
He lectured the crowd on tulips, Holland's bubble of four centuries ago, the Ponzi scam of the early 20th century, and Japan in the late 1980s. He reminded the crowd of troubled U.S. home markets in the past two decades, including Southern California's 1990s debacle.
And, of course, Shiller explained how U.S. stocks tanked since 2000.
A true bubble, in Shiller's eyes, must have the asset in play powered upward in good part by emotion. News of profits made by others - and dreams of wealth that suck in even the skeptics - builds a "gambler's excitement," he said.
Overenthusiastic assumptions of future profits are another factor in creating a bubble climate, Shiller notes. Stock investors in the late 1990s - near the end of stock's bull market - were extremely guilty, telling pollsters that stocks could easily outperform historical norms practically forever.
Shiller and his research partner, Karl Case of Wellesley College near Boston, in 1988 found Orange County homebuyers almost equally buoyant.
As part of a study into buyer psychology, those Orange Countians surveyed by the duo expected annual profits on homes averaging 14 percent in the next 10 years. After the crash of Orange County's housing market in the early 1990s, actual 10-year average profit was virtually zero. As for housing in 2003, Shiller walked a tight line. He noted that his own forecasting models show no market at great risk. Still, he surmised, "there's concerns on both coasts."
ARE WE THERE YET?
A healthy housing market has job growth and consumer confidence as underpinnings. The current housing boom has little of each. Take the view from a seller's perspective in Orange County. Look at the spread between annualized appreciation - that is, median sales prices now vs. a year ago - then compare it with growth in new local jobs.
Today, local home prices are up nearly 20 percent in a year, while job growth is just slightly negative. That price-to-jobs gap is the widest since 1989. When that previous local housing euphoria ended, it was costly: By 1994, slightly more than half of all O.C. home sellers were losing money on the deal.
Then take the buyer's view. Today's fat home appreciation isn't what most shoppers budget. Extremely cheap mortgages twist high price tags to seemingly affordable homes - on a monthly basis, at least. The Register's estimate of typical monthly payments for those buying O.C. homes shows that the size of the mortgage check regularly sent to the lender is basically unchanged in two years.
It's almost too good to be true. Sellers get a great deal - sales prices are up by a third since 2000 - while buyers don't shell out anything more to the bank each month. But what happens if mortgage rates spike? What if mortgages went up 1.5 percentage points - like they did in 1994? O.C. house prices would have to come down roughly 15 percent, or on average in the $50,000 ballpark, to keep a buyer's monthly payments at 2002's level.
John Burns, an O.C. real estate consultant, scrutinized the fundamentals of 44 major markets nationwide. He places Orange County homes in the second tier of potential problem spots after San Francisco, San Jose, Boston and New York. The risks of a downturn are real, Burns said, but talk of serious price drops "is way premature."
WHY EVEN DISCUSS IT?
If you have some contrarian blood in you, plus a solid memory of stock or technology conferences you attended around 1999, there's reason to be nervous about a housing bubble. Everybody - including supposedly knowledgeable big shots - gets blinded in a bubble. And some real estate types are starting to sound like those folks who foresaw no possible hiccups for stocks or the tech industry a few years back. These housing bulls are not just passionate about the lack of risk in the home market today - they're miffed with anybody who suggests such danger exists.
If you listen carefully to the logic supporting the argument for continued strength in housing, in its own way it parodies the now-refuted rationale that briefly backed overpriced stocks - that the world's changing and this is a special asset.
Enduring potency for housing, so the industry logic goes, can be tied to:
Demographics: More people are entering traditional homebuying age. But maybe the urge to own homes changes. Can job supply or salaries for the working stiffs support home purchases?
Immigration: New Americans have always been good homebuyers, and this wave of new residents is certainly keeping up the trend. But in a dangerous world, might immigration be curtailed? Smarter: Most builders are big national firms with shares on major stock exchanges, limiting the chance for huge supply errors - like previous cycles saw. But public ownership didn't stem all the recent corporate scandals - or record-high bankruptcy filings from public companies.
Better: Lenders are using modern technology to better assess loan risks. But creditworthy families turn into bad debts if breadwinners lose their jobs. Never before: Depending on whom you talk to and who's counting, home prices (1) have never fallen on a yearly basis nationwide, (2) have not collapsed since the Depression or (3) have only tanked on a regional basis - such as Texas in the 1970s or Boston in the 1980s or, lest you forgot, Orange County in the 1990s. But past performance is zero guarantee of future outcomes.
DOES IT HAVE TO BURST?
Let's assume we could statistically agree that housing is in a bubble.
Must the party end badly?
Paul McCulley, the chief economy watcher for Pimco in Newport Beach, agrees that housing is a different breed of financial asset. It does not trade as easily or frequently as stocks or bonds, thus making harsh price swings difficult.
Loans made to buy stocks and homes differ widely, too, McCulley notes. If stocks plummet, investors with margin loans on shares are often forced to sell - escalating a declining market. Mortgage lenders cannot call a home loan just because the equity has been diminished in a bad market. Homeowners tend to ride out housing storms.
And McCulley stated the obvious: "Everybody's born short a roof over their head."
You never have to own stocks. You can live productively without ever touching a bond. You need a place to live.
If you're nervous about home values and think it's time to cash out, it's likely that somebody in your household might ask where the furniture's going to go.
McCulley's a guy who had no problems questioning the sanity of a hot stock market at its 2000 zenith. Or even the bond market - Pimco's bread and butter - as it just finished its third superb year in a row. Yet, McCulley says of real estate, "from a macro dude like myself, it's hard to pound the table and say that it's way overvalued." A national housing bubble, if one even exists, "could go quietly into the night."
Still, that's no broad-based solace for housing.
Bubbles - or whatever you choose to call grotesquely high prices - can crop up in real estate in a neighborhood or even an extended region. Orange Countians with good memories know that. If you've bet with the bubble - paid too much for your home, or borrowed too much against it - just be prepared for the worst.
You might be stuck living in that home for years to come.
Bubble.
Home prices - both in Orange County and elsewhere across the land - have enjoyed a remarkable upswing in the face of tough conditions in the rest of the economy.
Over the past five years, national home values surged 40 percent. Locally, it's an 80 percent explosion. Yet the eerie shadow of the last major financial debacle - Wall Street, circa 2000 - puts a cloud over housing.
The hideous end to the stock market's bubble is so fresh in many psyches that debate about home prices becomes wrapped around a single esoteric economic descriptor. Is housing far too expensive, thus in a bubble? If so, will homebuyers eventually balk at such lofty prices, thus, popping the bubble? By the way, just what is a bubble?
• Industry's boom: two views It's no minor issue. Buyers across the land are betting their nest eggs against a bursting housing bubble. And lenders bet $2.4 trillion of the money lent last year based on home values set in this heated marketplace.
Folks are so antsy about this bubble thing that last week in Los Angeles, 300 or so real estate watchers and leaders gathered for a two-day workshop to debate the topic.
Veteran economist Jim Doti, president of Chapman U. in Orange, knows how touchy the b-word is. Before calling Orange County's home market a bubble last month in his annual outlook speech, Doti double-checked his bubble judgment call with his school's top economic professor and the advisory board of local business experts that oversees Chapman's economic forecasting.
"It's a very emotional issue," Doti noted. Doti's homework found local housing prices booming without the job growth that usually boosts property demand. To him, that was a bubble - not that bubble meant an oncoming downturn. Chapman sees county home prices rising a slender 2 percent in 2003. In the back of Doti's mind, though, were recollections of the early 1990s. Then the county's economy stood at a similar crossroads as he raised doubts about the viability of a run-up in commercial property values.
For years thereafter, he says, some industry leaders partially blamed him for the eventual collapse of that niche. "There is a bubble," Doti said of O.C. housing. "But I'm not suggesting that people sell their homes."
WHAT's IN A NAME?
You can't just pick up any business dictionary and look up "bubble" and see a precise definition. Nor can you find a statistical formula, apply the math and systematically say "yea" or "nay" for a bubble. Yale professor Robert Shiller was already well- known as a home-valuation expert before his book "Irrational Exuberance," on bubbles off all sorts, hit bookstands in 2000 as U.S. shares were peaking.
"Good timing," Shiller said.
Shiller explained to that Los Angeles bubble workshop that housing's current surge reasonably mirrors other bubbles, in which an asset gets caught in a price run-up lacking underlying financial facts.
He lectured the crowd on tulips, Holland's bubble of four centuries ago, the Ponzi scam of the early 20th century, and Japan in the late 1980s. He reminded the crowd of troubled U.S. home markets in the past two decades, including Southern California's 1990s debacle.
And, of course, Shiller explained how U.S. stocks tanked since 2000.
A true bubble, in Shiller's eyes, must have the asset in play powered upward in good part by emotion. News of profits made by others - and dreams of wealth that suck in even the skeptics - builds a "gambler's excitement," he said.
Overenthusiastic assumptions of future profits are another factor in creating a bubble climate, Shiller notes. Stock investors in the late 1990s - near the end of stock's bull market - were extremely guilty, telling pollsters that stocks could easily outperform historical norms practically forever.
Shiller and his research partner, Karl Case of Wellesley College near Boston, in 1988 found Orange County homebuyers almost equally buoyant.
As part of a study into buyer psychology, those Orange Countians surveyed by the duo expected annual profits on homes averaging 14 percent in the next 10 years. After the crash of Orange County's housing market in the early 1990s, actual 10-year average profit was virtually zero. As for housing in 2003, Shiller walked a tight line. He noted that his own forecasting models show no market at great risk. Still, he surmised, "there's concerns on both coasts."
ARE WE THERE YET?
A healthy housing market has job growth and consumer confidence as underpinnings. The current housing boom has little of each. Take the view from a seller's perspective in Orange County. Look at the spread between annualized appreciation - that is, median sales prices now vs. a year ago - then compare it with growth in new local jobs.
Today, local home prices are up nearly 20 percent in a year, while job growth is just slightly negative. That price-to-jobs gap is the widest since 1989. When that previous local housing euphoria ended, it was costly: By 1994, slightly more than half of all O.C. home sellers were losing money on the deal.
Then take the buyer's view. Today's fat home appreciation isn't what most shoppers budget. Extremely cheap mortgages twist high price tags to seemingly affordable homes - on a monthly basis, at least. The Register's estimate of typical monthly payments for those buying O.C. homes shows that the size of the mortgage check regularly sent to the lender is basically unchanged in two years.
It's almost too good to be true. Sellers get a great deal - sales prices are up by a third since 2000 - while buyers don't shell out anything more to the bank each month. But what happens if mortgage rates spike? What if mortgages went up 1.5 percentage points - like they did in 1994? O.C. house prices would have to come down roughly 15 percent, or on average in the $50,000 ballpark, to keep a buyer's monthly payments at 2002's level.
John Burns, an O.C. real estate consultant, scrutinized the fundamentals of 44 major markets nationwide. He places Orange County homes in the second tier of potential problem spots after San Francisco, San Jose, Boston and New York. The risks of a downturn are real, Burns said, but talk of serious price drops "is way premature."
WHY EVEN DISCUSS IT?
If you have some contrarian blood in you, plus a solid memory of stock or technology conferences you attended around 1999, there's reason to be nervous about a housing bubble. Everybody - including supposedly knowledgeable big shots - gets blinded in a bubble. And some real estate types are starting to sound like those folks who foresaw no possible hiccups for stocks or the tech industry a few years back. These housing bulls are not just passionate about the lack of risk in the home market today - they're miffed with anybody who suggests such danger exists.
If you listen carefully to the logic supporting the argument for continued strength in housing, in its own way it parodies the now-refuted rationale that briefly backed overpriced stocks - that the world's changing and this is a special asset.
Enduring potency for housing, so the industry logic goes, can be tied to:
Demographics: More people are entering traditional homebuying age. But maybe the urge to own homes changes. Can job supply or salaries for the working stiffs support home purchases?
Immigration: New Americans have always been good homebuyers, and this wave of new residents is certainly keeping up the trend. But in a dangerous world, might immigration be curtailed? Smarter: Most builders are big national firms with shares on major stock exchanges, limiting the chance for huge supply errors - like previous cycles saw. But public ownership didn't stem all the recent corporate scandals - or record-high bankruptcy filings from public companies.
Better: Lenders are using modern technology to better assess loan risks. But creditworthy families turn into bad debts if breadwinners lose their jobs. Never before: Depending on whom you talk to and who's counting, home prices (1) have never fallen on a yearly basis nationwide, (2) have not collapsed since the Depression or (3) have only tanked on a regional basis - such as Texas in the 1970s or Boston in the 1980s or, lest you forgot, Orange County in the 1990s. But past performance is zero guarantee of future outcomes.
DOES IT HAVE TO BURST?
Let's assume we could statistically agree that housing is in a bubble.
Must the party end badly?
Paul McCulley, the chief economy watcher for Pimco in Newport Beach, agrees that housing is a different breed of financial asset. It does not trade as easily or frequently as stocks or bonds, thus making harsh price swings difficult.
Loans made to buy stocks and homes differ widely, too, McCulley notes. If stocks plummet, investors with margin loans on shares are often forced to sell - escalating a declining market. Mortgage lenders cannot call a home loan just because the equity has been diminished in a bad market. Homeowners tend to ride out housing storms.
And McCulley stated the obvious: "Everybody's born short a roof over their head."
You never have to own stocks. You can live productively without ever touching a bond. You need a place to live.
If you're nervous about home values and think it's time to cash out, it's likely that somebody in your household might ask where the furniture's going to go.
McCulley's a guy who had no problems questioning the sanity of a hot stock market at its 2000 zenith. Or even the bond market - Pimco's bread and butter - as it just finished its third superb year in a row. Yet, McCulley says of real estate, "from a macro dude like myself, it's hard to pound the table and say that it's way overvalued." A national housing bubble, if one even exists, "could go quietly into the night."
Still, that's no broad-based solace for housing.
Bubbles - or whatever you choose to call grotesquely high prices - can crop up in real estate in a neighborhood or even an extended region. Orange Countians with good memories know that. If you've bet with the bubble - paid too much for your home, or borrowed too much against it - just be prepared for the worst.
You might be stuck living in that home for years to come.