Posts filed under “Real Estate”

Shiller on the Housing Bubble

Before we can discuss Real Estate, I want to address the somewhat internally conflicted position I have staked out on the Housing Bubble: 

First, with full contrarian glee, I have been saying that it is an extended asset class, and not a full blown bubble — at least not yet. At the same time, I have made no bones about what I see as an increasing possibility that the market tops out towards the end of this year, and that 2006 is potentially no fun for the long only crowd.

Housing may play into this process, but in a way I have yet to fully determine. Will a big equity market drop chase people out of stocks and into realty, eventually superheating it? Will interest rates trip up Home prices, forcing the interest-only-idiots to liquidate other assets, and thereby spill into equities, causing a crash? 

I do not know, but I find imagining the various scenarios intriguing. Meanwhile, like any good strategist, I am warily reading perspectives from smart people, and watching the different datapoints which may ultimately lead to this sector’s denouement (which seems to have become my new favorite word).

Which leads us to a Barron’s interview with Yale Economist Robert Shiller. Note that his book, Irrational Exuberance was a perfectly timed discussion about the biggest bubble ever.   

Let’s start with this chart:
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The Key Trends Impacting Housing:
click for larger chart 
Barrons_shiller_206172005223742
chart courtesy of Barron’s

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A few thoughts about this chart: We know that the most important factor impacting R/E prices are interest rates — yet this 115 year chart hardly shows the significance of rates at half century lows. At what point does yield pass a tipping point that generates a significant cycle upwards in real estate prices?  Further, let me also remind you that home ownership did not become a middle class  "birthright" until after WWII. So the 3.42% yield of 10 year in 1890 is rather irrelevant to the present discussion. Indeed, the entire scale of the chart seems designed  to make the recent price spike even more frenzied.

Still, that chart looks ominous. If it were a stock, I would
suggest that the vertical red line (Home Price Index) looks like Iomega
or Qualcomm did as their huge run ups ended, and the stocks
peaked and tumbled. However, this is not a stock chart — its real estate. Perhaps they work the same, maybe they don’t. Quite frankly, I have no means to tell if the two asset classes exhibit the same visual technical warning signs.

Why? Over the years, I’ve reviewed 10s of 1,000 of stock charts. (I’m sure many of you have also). I have developed a good feel for when something has gone vertical, and is about to keel over. I assume many readers have similar experiences.

But you and I have no experience whatsoever reading Real Estate charts. The chart above could be enormously significant — or it could be a graphic depiction of assets with no predictive power whatsoever. I DO NOT KNOW. Do we know if technical charting works for R/E?  Because an R/E chart looks like a dangerous equity chart about to top out, can we assume that it is the identical situation? Again, I (and I asusme you also) simply do not have enough experience looking at Real Estate graphs to hazard a guess. 

All that said, Barron’s takeaway from the always interesting Robert Shiller is worth a read:

"The Yale economist has done much work over the years on the behavior and psychology of the residential real-estate market, including a number of annual surveys of current expectations of homeowners around the U.S.

In 1988, dissatisfied with the home-price data put out by both the National Association of Realtors and the federal government, he and Wellesley College economist Karl Case established a price index based on "repeat sales" (to filter out distortions from changing mixes of house sales or other problematic factors). The project led to the formation of a company called Case Shiller Weiss that later became part of Fiserv. The CSW survey captures reliable housing data from major markets throughout the U.S. that tends to closely track the best price data put out by the U.S. Office of Housing Enterprise Oversight.

Shiller’s data show a housing bubble of extraordinary dimension.

The rise in real prices since 1997 has already dwarfed the surge after World War II, when long-pent-up demand for homes overwhelmed supply for a time. And it only seems to be gathering velocity, with each year’s increase topping the previous one’s. Though in 1997 real U.S. home prices went up 2.1%, by 2000 the rate of increase had accelerated to 5.8%. Last year it hit a torrid 11.2%, and Shiller believes it exceeded 15% in this year’s first quarter. The housing-price chart has gone nearly vertical, in seeming defiance of the gravitational drag of inflation and more subdued growth in personal income and gross domestic product.

As a market behavioralist, Shiller takes a dim view of what he calls the glib fundamental explanations offered by the housing bulls to justify home prices’ moonshot."

What I admire about Shiller is the way he theorizes explanations for various phenomena:

To Shiller, the housing bubble grew out of the same irrational exuberance that gave rise to the 1995-2000 stock mania. That would perhaps explain why most of the housing bubbles around the globe occurred in countries that also had stock bubbles. A recent study by the Bank of International Settlements of home prices in 13 industrialized countries indicated that peaks in home prices tend to trail stock-market peaks by two years or so.

I have discussed the 2 year delay following a market top off line — the 1987 crash saw NY Real Estate peaking by 1990 — but the reason is obvious: After the end of a business cycle and/or market crash, Central Banks (here as well as elsewhere) start cutting interest rates. That leads to home price appreciation.

Here’s another interesting thought:

"Shiller theorizes that both U.S. bubbles were precipitated by such factors as increasing veneration of market capitalism, the growing respectability of speculation and conspicuous consumption, and the conviction that the Internet and other technologies augured a golden age of unparalleled prosperity. Notes Shiller dryly: "Once stocks fell, real estate became the primary outlet for the speculative frenzy that the stock market had unleashed. Where else could plungers apply their newly acquired trading talents? The materialistic display of the big house also has become a salve to bruised egos of disappointed stock investors."

Quite fascinating stuff . . .

Source:
The Bubble’s New Home
JONATHAN R. LAING
Barron’s June 20, 2005      
http://online.barrons.com/article/SB111905372884363176.html

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uh-oh: Time Magazine on Housing

Is this the Magazine Indicator at work? First Fortune, now Time Magazine: We’ve seen some terrific Contrary market calls from magazine covers:  Time magazine naming Jeff Bezos man of the year in December 1999 marked the top of the internet bubble; The March 21st  2005 Newsweek cover story, “The Incredible  Shrinking Dollar,” marked a key…Read More

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Don’t Buy Housing Bubble Propaganda

UPDATE: The original version of this is still available on Real Money (subscription only). The 2005 article details was a pushback against the gloomers predicting a Nasdaq like collapse in RE prices. Instead, we detailed why this was a CREDIT (not a HOUSING) Bubble, and that while we should expect a 25-35% peak to trough drop in prices, it would not be a Nasdaq like 80% debacle. (35% was bad enough). We also noted that an extended period of high unemployment might make those numbers even worse.

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The latest subscription only Real Money column, Don’t Buy Housing Bubble Propaganda, is now available on Yahoo (no subscription required).

In writing it, I decided to forget everything I thought I knew, and look at housing from scratch.  Consider the factors that make Real Estate very different than stocks. Lose the assumptions, check out the numbers driving Real Estate, and see if Housing is truly the bubble everyone claims it to be.

Turns out there’s much less of a bubble than commonly believed by many people believe. While anecdotal evidence of regional excesses are interesting,
they doesn’t mean we are about to see home prices get cut in half (or worse) over the next few years.

There are three key drivers hardly discussed by pundits opining on the U.S. housing market “bubble”:

1)  Purchase prices don’t matter to buyers — monthly payments do;
2)  US has the fastest growing population of industrialized nations;
3)  “Only 3% of all buyers sell their home in a year or less,” a survey found.

These issues, taken together, suggest that while Real Estate may be an extended asset class (i.e., two  standard price deviations above historical trend) that doesn’t maeke it a bubble.

Of course, its interesting to note that a Playboy bunny gave up her modeling career to go into real estate speculation (mentioned previously here), it doesn’t mean the end is nigh.

Now if I can only figure out how these columns end up at Yahoo . . .

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Source:
Don’t Buy Housing Bubble Propaganda
Barry Ritholtz
RealMoney by TheStreet.com, Thursday May 26, 2:04 pm ET

http://biz.yahoo.com/ts/050526/10225437.html?.v=3

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UPDATE June 12, 2006 9:39am

I just noticed that the Yahoo page expired; The full RM article is after the jump . . .

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Category: Real Estate