Gary send in these very interesting comments:
Geez, just as the dot.com distorted the allocation of capital and resources (i.e., too much broadband, not enough energy infrastructure), so to is the housing bubble!
What is he referring to? He was pointing to this article in the Washington Post:
"It feels as if Playboy’s Playmate of the Month for May is speaking for the entire country.
Lauderdale native Jamie Westenhiser, 23, told the magazine recently
that she is ditching her modeling career to take up real estate
In the magazine’s May issue, Westenhiser poses in her
lacy lavender baby doll, wearing nothing else except furry boots,
leaning on a computer desk next to a stack of books with titles
including "All About Escrow" and "Real Estate Principles." In her
"playmate data sheet," she writes that her ambition in life is to have
a "successful career in real estate."
That’s correct, a potentially lucrative career as a model is being tossed aside for real estate investing. Gary calls that a "misallocation of resources."
And apparently, you don’t need to be a scantily clad purty young thing to do it:
"A recent study by the National Association of Realtors showed that almost 25 percent of homes bought in 2004 in the United States were bought as investments. That’s up a whopping 14.4 percent, compared with 2003. David Lereah, chief economist for the association, said the organization was surprised by how big the investors’ share of the market had become."
Those numbers initially sounded pretty high to me; I;ve been seeing more and more confirmation in other data that they might be accurate after all.
My position that this isn’t a bubble looks less tenable with each passing day . . .
Everybody’s an Investor Now
With Home Prices Rising, Investors Play a Risky Game of Anticipation
Washington Post Staff Writer
Saturday, May 21, 2005; F01
Are we spenders or savers?
Gross references Bear Stearns Economist David Malpass:
"Some say that a flaw may exist not in our national character but in the way the government calculates savings: because the bureau’s method of tallying income and consumption doesn’t take into account structural changes in the finances of Americans, it may systematically understate income and overstate consumption.
For example, income includes wages and salaries, interest on bonds, and stock dividends. But it doesn’t include capital gains on stocks, profits from selling a house, or withdrawals from 401(k) plans. Nearly 70 percent of families own homes, nearly half of all households own stocks and mutual funds, and an increasing number of baby boomers are turning to 401(k)’s for income. Those trends, some say, can make a big difference. "The structure of the household portfolio has changed over time," said David Malpass, chief economist at Bear Stearns.
Convinced that Americans aren’t frittering away all their income, Mr. Malpass plumbed the Federal Reserve’s Flow of Funds data, a trove of information on Americans’ spending and saving habits. In 2004, he found that the net worth of all households – their assets minus their liabilities – stood at $48.525 trillion, up 9.6 percent from 2003. Sure, rising home prices helped. "But even if you take out houses completely, it still shows huge savings," he said.
The problem with Malpass’ analysis is that he is taking a mathematical approach to what is essentially a behavioral issue. (Hey, it happens) Call it a rationalization. We tend to see those from both the Bullish and Bullish contingencies, as way to feel comfortable with those ideologies.
Let’s state this another way: As a nation, are we spenders or savers?
It raises a host of issues, some net positive, others more troubling. How does our behavior as consumer impact economic downturns? (It seems to smooth them out, at least recently). Why haven’t Businesses been as spendthrift as Consumers this recovery? (My theory is execs are afraid to see their options go underwater again). And the $64,000 question, how might this low savings rate impact retirees when the Baby Boom generation starts playing shuffleboard?
I believe we are not savers. The fact that so many pension plans, 401ks and IRAs go unfunded is a big clue as to that. (It also reveals how Tax ignorant all too many people are).
But stop for a moment to contemplate this: That people would rather spend their money consuming, rather than put it into a 401K where their employer does dollar-for-dollar matching is proof positive of our savings mindset.
That’s right, as opposed to GETTING FREE MONEY, many Americans still prefer to shop — rather than save.
I’m curious today iof Malpass is correct. So here’s a suggestion for what would be a signifcant and useful analysis: Use Malpass’ methodology for calculating the national savings rate — and then apply it to as many countries we can get data for. I’d like to see a list that includes at least: the U.S., Japan, Great Britain, Norway, Sweden, France, South Korea, Italy, Germany, Australia, Canada, Spain, Israel and South Africa. That’s a short list, but we want it as extensive and complete as possible.
The goal is to determine whether or not, as judged against a planet of our peers, we Americans are — relatively speaking — savers or spenders.
Should be a rather interesting discussion . . .
Is It a Savings Crisis or a Math Error?
By Daniel Gross
NYT, May 22, 2005
Tony Crescenzi had an interesting article on RealMoney this week. In it, he notes that as the housing market soars, it ends up knocking rents lower. After all, why rent if ultra low real interest rates allow you to buy for the same price, and with nearly no money down? So what’s the problem with…Read More
Anyone looking for some clarity from Federal Reserve Chair Alan Greenspan on whether the United States Real Estate market is in a speculative bubble is probably asking the person least likely to provide a clear and understandable answer.
Well, do we or don’t we?
Well, yes kinda, but not really, no.
That was Big Al’s answer to the question of whether we have a housing bubble in the U.S. or not.
"There are a few things that suggest, at a minimum, there’s a little froth in this market. We don’t perceive that there is a national bubble, but it’s hard not to see that there are a lot of local bubbles," Greenspan opined to the Economic Club of New York.
O.K., frothy, no national bubble; yet lots of smaller bubblettes. (Recall our prior bubblette discussion in February).
But don’t breathe to deeply just yet. Greenie noted that asset gains in Real Estate are unsustainable:
"Without calling the overall national issue a bubble, it’s pretty clear that it’s an unsustainable underlying pattern. What we see are a number of forces, which are, as far as I can judge, not infinitely projectable."
Got that? Let’s review: Not a bubble, but Unsustainable. Not a national bubble, but local bubblettes.
Thanks for clarifying that for us . . .
UPDATE MAY 22,2005 6:36am
Alan Abelson had a few choice words on the Fed Chief’s prognostications here. He equates Friday’s speechifying to the infamous 1996 "irrational exuberance" speech. (So we got that going for us, which is nice).
Greenspan Calls Home-Price Speculation Unsustainable
Craig Torres, Alison Fitzgerald
Bloomberg, May 20, 2005 18:04 EDT
Greenspan sees no housing bubble
Federal Reserve chairman says sector shows sign of
‘froth’ but doesn’t perceive a national bubble.
Reuters, May 20, 2005: 3:08 PM EDT
A Bubble in the Housing Market? Any Implosion Won’t Be Obvious
The Wall Street Journal, May 20, 2005
Greenspan Is Concerned About ‘Froth’ in Housing
EDMUND L. ANDREWS
NYTimes, May 21, 2005
Category: Real Estate
Fortune aks: Is it too late to get in? The answer to that question, when posed by a major magazine cover, tends to be an emphatic yes. > > The articles are actually more circumspect than the cover: Is the Housing Boom Over? How Real People Get Rich The New King of the Real Estate…Read More