Tuesday, August 30, 2005
Housing Boom Simmering Down
Here's why the market goes down - these trends can't keep going forever:
- We've heard the National Association of Realtors reported that most homes sales of the past year or two have been 2nd homes and investments.
- 20-30% price appreciation cannot continue.
- People are using creative financing, 100% financing for example. As taxes and insurance go up each year, and if there is a real estate price decline, and/or rates tick up and people have adjustable rates-- people will owe more than the house is worth.
- People that are new to real estate are buying, the same way they bought Internet stocks in 1999-2000. There are more carrying costs to real estate, and prices DO NOT always go up in real estate. Contrary to popular belief, a balanced stock portfolio - held over the long term - have better returns than real estate.
ADVICE - buy a home because that's where you want to live for a long time! Rates are indeed good. Do not bet on price appreciation or a quick flip. You will loose!
NEW YORK TIMES ARTICLE:
August 28, 2005
Greenspan Says Housing Boom Is Nearly Over
JACKSON HOLE, Wyo., Aug. 27 - Looking forward to the time after he steps down as chairman of the Federal Reserve, Alan Greenspan predicted here on Saturday that the nation's frenzied housing boom - and the consumer spending that it has spurred - is near an end.
In a generally sanguine outlook at a Fed symposium here this weekend, Mr. Greenspan said both the excesses of the housing market and the nation's unprecedented dependence on foreign borrowing were likely to correct themselves through the normal function of market forces.
He also acknowledged more strongly than before that the housing boom, which has been fueled in large part by the Fed's own decision to prop up the economy with low interest rates, is closely tied to the nation's soaring trade deficit and its record level of foreign indebtedness.
But Mr. Greenspan also seemed intent on defending his legacy against critics who say his policies contributed to the United States' imbalances, which could lead to higher interest rates and potentially wrenching declines in housing prices and consumer spending.
"We have a problem. We have a policy that is adding to, adding to the systemic risk by subsidizing investors to take greater risks," said Michael Mussa, a senior fellow at the Institute for International Economics and a former director of research at the International Monetary Fund.
In Mr. Greenspan's view, the housing market will inevitably "simmer down," and sales and prices are all but certain to slow. "House turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease," he said.
Mr. Greenspan's prediction that prices could actually decline dovetailed with other recent warnings that people have become too confident that the market value of assets will remain high for the foreseeable future.
But he went further, saying that the end of the housing boom would also help correct other major imbalances. It would lead to weaker consumer spending, a recovery from today's nearly nonexistent rate of household savings and a reduction in the nation's huge trade deficit.
"An end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports and a corresponding improvement in the current account deficit," he said. Whether those changes are "wrenching," he said, will depend on whether the United States remains flexible and avoids over-regulation and barriers to trade.
Mr. Greenspan was gloomier about the nation's long-term budget deficits, which skyrocketed after President Bush took office. He said today's budget deficits were likely to get far worse as the nation's baby boomers begin to retire and drive up the costs of Medicare, Social Security and other entitlement programs.
Regardless of how the deficit is reined in, Mr. Greenspan said, rising federal deficits and overall government debt will, if not reduced, force the Federal Reserve to raise interest rates to prevent future inflation.
"We had too much experience with the dangers of inflation in the 1970's to tolerate going through another bout of dispiriting stagflation," he said. "The consequences for future workers and retirees could be daunting."
Wednesday, August 24, 2005
Is there a bubble in your house?
For our Florida readers....
Is There a Bubble in Your House?
Florida has a long and fascinating history of real estate cycles, dating at least as far back as the ′roaring ′ 20s′ boom in Coral Gables where residential real estate prices rose by an estimated 220 percent between 1924 and 1925 only to soften in 1926 and then collapse following the ″storm of 1926″ (hurricanes were not named at the time).
Today, many analysts are wondering if Florida is experiencing another cycle given the hefty escalation in residential real estate prices that began in about 2000. Not attached>>>the graphs and table to the left show the extent of the recent rapid rise in housing prices. They present information on the annual percentage change in the prices of single-family detached properties for Florida, the U.S., and selected states as well as the six largest Metropolitan Statistical Areas (MSAs) in Florida.
Several interesting points to note:
Nationally, housing prices are rising at double-digit rates for the second consecutive year, and have advanced by a cumulative 40 percent from 2000 - 2004 compared to a cumulative inflation rate of 10.85 percent.
The increases in housing prices in the four most populous states (California, Texas, New York, Florida) since 2000 have consistently and significantly outpaced the national average growth rate, with the exception of Texas.
Florida is the only state where the rate of increase has accelerated each and every year since 2000. All the other states and the nation exhibited slower growth in the 2002 - 2003 timeframe. Florida trails only California in terms of the cumulative ascent in housing prices among the four most populous states.
Housing price increases have been especially pronounced in the South Florida MSAs encompassing Broward, Palm Beach and Miami-Dade counties. Prices have soared by cumulative totals of 68, 67, and 66 percents, respectively, from 2000 - 2004 in these three counties and the data for early 2005 show no signs of abatement.
Since the inception of the price indexes there has been no comparable five-plus year period for the nation, Florida, and Florida′s six largest MSAs when prices have accelerated as rapidly as the 2000 - 2005 periods.
Do these data indicate a bubble in Florida real estate in general, and in South Florida in particular? Will we witness a collapse in housing prices such as occurred in1926; or something similar to the dot com crash; or along the lines of the plunge in property values in Tokyo? Or, will prices continue their strong ascent, or level off? Are we observing a one-time jump upward before a return to more normal price changes? What might happen to Florida′s robust economy if residential real estate prices contract?
The candid answer is I do not know with a high degree of certainty, but increasingly suspect that a bubble is present and is centered in South Florida. Bubbles are conventionally defined as periods when buyers continue to buy the asset in question (housing, stocks, commodities, etc.) even though they are aware that its price exceeds its fundamental economic value. Investors continue to buy based on the expectation that they will be able to sell at a sufficiently higher price so as to provide an acceptable risk-adjusted return.Although bubbles can be easily defined, statistically proving their existence before the fact is extremely difficult. A quote from a recent research paper entitled ″Econometric Tests of Asset Pricing Bubbles: Taking Stock″, by Federal Reserve Board economist R.S. Gurkaynak nicely summarizes the dilemma: ″Tests of bubbles are inconclusive. Statistical testing of asset price bubbles cannot be achieved with a satisfactory degree of certainty. We cannot (empirically) distinguish bubbles from structural changes in economic fundamentals.″If our empirical models are inconclusive, then we must rely on our best judgment of the facts to discern whether or not a residential real estate bubble is present. In this regard economic fundamentals must be carefully analyzed to determine if structural changes have occurred. Is it really ″different this time″ as many who do not see a bubble claim? Here is one economist′s assessment of the fundamentals:
Strong and Healthy Economic Growth: Spurred by a highly favorable economic environment, Florida′s economy has been one of - if not the strongest state economy in the nation over the last five years by any measure. Per capita income has increased a healthy 13.22 percent, sparking the demand for many goods and services including housing. Moreover, the outlook calls for continued growth. Florida′s economy is likely undergoing beneficial structural changes. However, even in an economy as vigorous as Florida′s it is difficult to see this translating into the torrid housing price increases we have observed unless some other thing or things have radically changed.
Population Growth and Demographics: Florida′s population has been growing recently at a rate of about 2.30 percent per year or in the 350,000 - 400,000 range. This is robust growth for an already large state and undoubtedly has contributed to the uptrend in housing prices. But, our population growth rate is not appreciably different from the 1980s and 1990s when housing prices were rising by an average of about 4.00 percent per year. Population growth alone cannot explain the rapid run-up in housing prices.
Non-Local Buyers: Whether from out-of-state, out-of-country, or out-of-hemisphere, for many years non-local buyers have been a part of the demand for Florida residential real estate. There is no evidence of a sustained boost in demand from non-local buyers over the last five years compared to the past. Non-local buyers alone cannot account for the escalation in housing prices.
Low Interest Rates: Especially when adjusted for inflation and taxes, the low interest rate environment beginning in 2002 has likely been a major force behind the rapid appreciation in residential real estate prices. However, it is hard to imagine that housing demand in Florida is so much more sensitive to low interest rates than in the rest of the nation to account for Florida′s soaring prices.
Supply Constraints: Homebuilders in Florida, as is the case in many states, face state and local laws and regulations that may act to constrain the supply of new housing units and raise their cost. However, Florida has been among the national leaders in the number of new housing units constructed since 2001. Limits on supply do not appear to be the primary force behind higher housing prices. The ascent in housing prices appears to be driven largely by growth in demand.
Florida Real Estate Is Relatively Inexpensive: The obvious question here is, ″in comparison to what?″ Florida real estate has been, arguably, undervalued compared to areas like Manhattan, Boston, San Diego, London, Paris, Hong Kong and Tokyo but not necessarily in comparison to areas such as Atlanta, Denver, Dallas, Baltimore, Frankfurt, Milan, and Sydney.
New Mortgage Products: Waves of new and innovative mortgage products have emerged in recent years, as part of the ongoing innovation in the financial sector. By and large these new products and innovations have created substantial value for consumers. Less conventional financing vehicles have surely enabled many buyers to purchase and invest in homes than otherwise would have been possible. At the same time not all consumers and providers of new mortgage products may yet fully understand their risks and other features. Federal Reserve Board Chair Alan Greenspan, in his semiannual Monetary Policy Report to Congress delivered on July 20, 2005 was moved to comment on the effects of new mortgage products when he said, ″ interest only loans and the introduction of more exotic forms of adjustable rate mortgages are developments of particular concern.″ (italics added)
Speculators and Investors: Low interest rates and new mortgage products, especially those allowing ′interest only′ type loans for the first few years, have been an elixir for those seeking to speculate and invest in real estate as they permit greater leverage and reduce the initial income and cash flow requirements. Additionally, the fact that the surge in real estate values has occurred at the same time as when segments of the stock market have been moribund does not appear to be a coincidence. Speculators and investors may have moved from dot coms to doorknobs. Behavioral finance theorists talk about ′overconfident′ investors who assign any gain to their talents and ascribe any loss to just bad luck, and their resultant penchant for concentrating their investments. This could be happening now.
What, then, can be concluded? My assessment is that changing economic fundamentals such as Florida′s healthy and more diverse economy, strong population growth, non-local buyers, low interest rates, and relatively low prices have combined to produce a one-time increase in prices that has taken several years to play out and is probably not yet at an end. While these factors account for a reasonable portion they simply cannot account for all of the rapid run-up in Florida residential real estate prices, particularly those in South Florida. Since about 2004, prices have appeared to increasingly diverge from those driven by economic fundamentals alone, even accounting for structural changes. A highly credible empirical model developed by my former student Luis Guerra indicated that as of early 2004 prices in Miami-Dade County were about 15 percent overvalued. Prices have risen another 30 percent since then. The course of interest rates and the timing of re-financings of speculator/investor mortgages are, in my estimation, the two key elements to how long the rapid uptrend in the cycle can last. Bubbles burst when investors sell en masse to take advantage of the overvaluation. Real estate, however, is generally a less liquid asset than stocks and bonds and subject to higher transactions cost. Slow erosion, adjusted for inflation, in residential real estate values might be more likely than a sudden crash, but a lengthy, gradual falloff in prices could constrain the state′s economy for a longer time. Florida′s improved economic diversity should help to cushion any slackening in the residential real estate sector. Generations of economics professors have put generations of college students to sleep by droning on about the law of diminishing returns. In its simplest form the law just says that, with few exceptions, trees, stock prices, and housing prices don′t grow to the sky. Federal Reserve Chair Alan Greenspan also stated in his semiannual Monetary Policy Report to Congress ″ there do appear to be, at a minimum, signs of froth in some local housing markets where home prices seem to have risen to unsustainable levels. Among other indicators, the significant rise in purchases of homes for investment since 2001 seems to have charged some regional markets with speculative fervor.″ When the nation′s best-known economist says it, it might be time to wake up.By Stephen O. Morrell, Ph.D., Florida TaxWatch Senior Research Fellow and Professor of Economics and Finance, Andreas School of Business, Barry University, Miami Shores. The Florida TaxWatch Center for a Competitive Florida...Resolving issues vital to Florida's global economic competitiveness.
Is There a Bubble in Your House?
Florida has a long and fascinating history of real estate cycles, dating at least as far back as the ′roaring ′ 20s′ boom in Coral Gables where residential real estate prices rose by an estimated 220 percent between 1924 and 1925 only to soften in 1926 and then collapse following the ″storm of 1926″ (hurricanes were not named at the time).
Today, many analysts are wondering if Florida is experiencing another cycle given the hefty escalation in residential real estate prices that began in about 2000. Not attached>>>the graphs and table to the left show the extent of the recent rapid rise in housing prices. They present information on the annual percentage change in the prices of single-family detached properties for Florida, the U.S., and selected states as well as the six largest Metropolitan Statistical Areas (MSAs) in Florida.
Several interesting points to note:
Nationally, housing prices are rising at double-digit rates for the second consecutive year, and have advanced by a cumulative 40 percent from 2000 - 2004 compared to a cumulative inflation rate of 10.85 percent.
The increases in housing prices in the four most populous states (California, Texas, New York, Florida) since 2000 have consistently and significantly outpaced the national average growth rate, with the exception of Texas.
Florida is the only state where the rate of increase has accelerated each and every year since 2000. All the other states and the nation exhibited slower growth in the 2002 - 2003 timeframe. Florida trails only California in terms of the cumulative ascent in housing prices among the four most populous states.
Housing price increases have been especially pronounced in the South Florida MSAs encompassing Broward, Palm Beach and Miami-Dade counties. Prices have soared by cumulative totals of 68, 67, and 66 percents, respectively, from 2000 - 2004 in these three counties and the data for early 2005 show no signs of abatement.
Since the inception of the price indexes there has been no comparable five-plus year period for the nation, Florida, and Florida′s six largest MSAs when prices have accelerated as rapidly as the 2000 - 2005 periods.
Do these data indicate a bubble in Florida real estate in general, and in South Florida in particular? Will we witness a collapse in housing prices such as occurred in1926; or something similar to the dot com crash; or along the lines of the plunge in property values in Tokyo? Or, will prices continue their strong ascent, or level off? Are we observing a one-time jump upward before a return to more normal price changes? What might happen to Florida′s robust economy if residential real estate prices contract?
The candid answer is I do not know with a high degree of certainty, but increasingly suspect that a bubble is present and is centered in South Florida. Bubbles are conventionally defined as periods when buyers continue to buy the asset in question (housing, stocks, commodities, etc.) even though they are aware that its price exceeds its fundamental economic value. Investors continue to buy based on the expectation that they will be able to sell at a sufficiently higher price so as to provide an acceptable risk-adjusted return.Although bubbles can be easily defined, statistically proving their existence before the fact is extremely difficult. A quote from a recent research paper entitled ″Econometric Tests of Asset Pricing Bubbles: Taking Stock″, by Federal Reserve Board economist R.S. Gurkaynak nicely summarizes the dilemma: ″Tests of bubbles are inconclusive. Statistical testing of asset price bubbles cannot be achieved with a satisfactory degree of certainty. We cannot (empirically) distinguish bubbles from structural changes in economic fundamentals.″If our empirical models are inconclusive, then we must rely on our best judgment of the facts to discern whether or not a residential real estate bubble is present. In this regard economic fundamentals must be carefully analyzed to determine if structural changes have occurred. Is it really ″different this time″ as many who do not see a bubble claim? Here is one economist′s assessment of the fundamentals:
Strong and Healthy Economic Growth: Spurred by a highly favorable economic environment, Florida′s economy has been one of - if not the strongest state economy in the nation over the last five years by any measure. Per capita income has increased a healthy 13.22 percent, sparking the demand for many goods and services including housing. Moreover, the outlook calls for continued growth. Florida′s economy is likely undergoing beneficial structural changes. However, even in an economy as vigorous as Florida′s it is difficult to see this translating into the torrid housing price increases we have observed unless some other thing or things have radically changed.
Population Growth and Demographics: Florida′s population has been growing recently at a rate of about 2.30 percent per year or in the 350,000 - 400,000 range. This is robust growth for an already large state and undoubtedly has contributed to the uptrend in housing prices. But, our population growth rate is not appreciably different from the 1980s and 1990s when housing prices were rising by an average of about 4.00 percent per year. Population growth alone cannot explain the rapid run-up in housing prices.
Non-Local Buyers: Whether from out-of-state, out-of-country, or out-of-hemisphere, for many years non-local buyers have been a part of the demand for Florida residential real estate. There is no evidence of a sustained boost in demand from non-local buyers over the last five years compared to the past. Non-local buyers alone cannot account for the escalation in housing prices.
Low Interest Rates: Especially when adjusted for inflation and taxes, the low interest rate environment beginning in 2002 has likely been a major force behind the rapid appreciation in residential real estate prices. However, it is hard to imagine that housing demand in Florida is so much more sensitive to low interest rates than in the rest of the nation to account for Florida′s soaring prices.
Supply Constraints: Homebuilders in Florida, as is the case in many states, face state and local laws and regulations that may act to constrain the supply of new housing units and raise their cost. However, Florida has been among the national leaders in the number of new housing units constructed since 2001. Limits on supply do not appear to be the primary force behind higher housing prices. The ascent in housing prices appears to be driven largely by growth in demand.
Florida Real Estate Is Relatively Inexpensive: The obvious question here is, ″in comparison to what?″ Florida real estate has been, arguably, undervalued compared to areas like Manhattan, Boston, San Diego, London, Paris, Hong Kong and Tokyo but not necessarily in comparison to areas such as Atlanta, Denver, Dallas, Baltimore, Frankfurt, Milan, and Sydney.
New Mortgage Products: Waves of new and innovative mortgage products have emerged in recent years, as part of the ongoing innovation in the financial sector. By and large these new products and innovations have created substantial value for consumers. Less conventional financing vehicles have surely enabled many buyers to purchase and invest in homes than otherwise would have been possible. At the same time not all consumers and providers of new mortgage products may yet fully understand their risks and other features. Federal Reserve Board Chair Alan Greenspan, in his semiannual Monetary Policy Report to Congress delivered on July 20, 2005 was moved to comment on the effects of new mortgage products when he said, ″ interest only loans and the introduction of more exotic forms of adjustable rate mortgages are developments of particular concern.″ (italics added)
Speculators and Investors: Low interest rates and new mortgage products, especially those allowing ′interest only′ type loans for the first few years, have been an elixir for those seeking to speculate and invest in real estate as they permit greater leverage and reduce the initial income and cash flow requirements. Additionally, the fact that the surge in real estate values has occurred at the same time as when segments of the stock market have been moribund does not appear to be a coincidence. Speculators and investors may have moved from dot coms to doorknobs. Behavioral finance theorists talk about ′overconfident′ investors who assign any gain to their talents and ascribe any loss to just bad luck, and their resultant penchant for concentrating their investments. This could be happening now.
What, then, can be concluded? My assessment is that changing economic fundamentals such as Florida′s healthy and more diverse economy, strong population growth, non-local buyers, low interest rates, and relatively low prices have combined to produce a one-time increase in prices that has taken several years to play out and is probably not yet at an end. While these factors account for a reasonable portion they simply cannot account for all of the rapid run-up in Florida residential real estate prices, particularly those in South Florida. Since about 2004, prices have appeared to increasingly diverge from those driven by economic fundamentals alone, even accounting for structural changes. A highly credible empirical model developed by my former student Luis Guerra indicated that as of early 2004 prices in Miami-Dade County were about 15 percent overvalued. Prices have risen another 30 percent since then. The course of interest rates and the timing of re-financings of speculator/investor mortgages are, in my estimation, the two key elements to how long the rapid uptrend in the cycle can last. Bubbles burst when investors sell en masse to take advantage of the overvaluation. Real estate, however, is generally a less liquid asset than stocks and bonds and subject to higher transactions cost. Slow erosion, adjusted for inflation, in residential real estate values might be more likely than a sudden crash, but a lengthy, gradual falloff in prices could constrain the state′s economy for a longer time. Florida′s improved economic diversity should help to cushion any slackening in the residential real estate sector. Generations of economics professors have put generations of college students to sleep by droning on about the law of diminishing returns. In its simplest form the law just says that, with few exceptions, trees, stock prices, and housing prices don′t grow to the sky. Federal Reserve Chair Alan Greenspan also stated in his semiannual Monetary Policy Report to Congress ″ there do appear to be, at a minimum, signs of froth in some local housing markets where home prices seem to have risen to unsustainable levels. Among other indicators, the significant rise in purchases of homes for investment since 2001 seems to have charged some regional markets with speculative fervor.″ When the nation′s best-known economist says it, it might be time to wake up.By Stephen O. Morrell, Ph.D., Florida TaxWatch Senior Research Fellow and Professor of Economics and Finance, Andreas School of Business, Barry University, Miami Shores. The Florida TaxWatch Center for a Competitive Florida...Resolving issues vital to Florida's global economic competitiveness.
Sunday, August 14, 2005
Assess Your Local Real Estate Picture
A great article in the NY TIMES:
Do Try This at Home: Assess Your Area's Real Estate Bubble
By DAMON DARLIN, Published: August 13, 2005
For the first time since the residential real estate marathon began 13 years ago, parts of the country are showing signs of exhaustion. But if you rely on the experts to declare that a particular area's bubble has popped, you may have waited too long.
In Park Place, a condominium tower in San Diego, the monthly rent on a one-bedroom unit is far cheaper than the typical mortgage payment.
REAL ESTATE RESOURCES • Dataquick - Home price trends, primarily for the West Coast. • National Association of Realtors - Home sale volume trends. • National Association of Realtors - Find contact information for your local real estate association for time-on-market statistics. • PMI Risk Index - Where are home prices most likely to fall? • SmithFinancialPlace - A downloadable program that lets you determine the intrinsic value of your home. • The Housing Bubble Fact Sheet - The Center for Economic and Policy Research • The Run-Up in Housing Prices: Is It Real or Is It Another Bubble? - The Center for Economic and Policy Research • The State of the Nation's Housing - Harvard University Joint Center for Housing Studies • Is There a Housing Bubble in Southern California? - Pomona College Department of Economics • Housing Supply and Affordability: Do Affordable Housing Mandates Work? - Reason Public Policy Institute
So how can a homeowner tell if a market is about to go bust? This may be one of those rare occasions when professionals parsing data are at a disadvantage to regular people watching the market. That's because the main driver of today's market is consumer psychology. Home prices go up as long as people expect them to go up.
When they stop believing, prices fall - and no economist in Washington can get wind of that faster than someone chatting over knockwurst at a neighborhood block party. "Economists looking at the macrodata will be the last to know," said Richard A. Brown, chief economist at the Federal Deposit Insurance Corporation.
What you will learn from the professionals who are dutifully crunching numbers is that prices are not falling significantly in any of the hot markets, but in a dozen or so cities in the Northeast and in California, they are near the peak. In Boston, for example, the time that homes are sitting on the market has stretched to 46 days from 39 days a year ago.
An analysis of price appreciation, done for The New York Times by the Joint Center for Housing Studies at Harvard, shows that the price appreciation in cities including New York City; Austin, Tex.; Philadelphia; and Providence, R.I., are decelerating. Appreciation in Detroit and Denver has already slowed to a crawl.
"It's taking a lot longer to sell a home," says Karl A. Martone, a Re/Max Properties agent in Providence, where homes now sit on the market an average of 65 days, up from 14 days a year ago. The region has almost six months of inventory, which is up 35 percent from a year ago.
Vicki Doran, a real estate agent with Coldwell Banker in Providence, says: "It's switching to a buyer's market. Last year buyers had to snap things up. Now they can shop around."
Even a few markets in hard-charging California - San Diego, Orange County and Santa Cruz - are part of the trend, according to data from the first three months of the year. Data for the second quarter to be released by the government on Sept. 1 may confirm the trend. But already Christopher Thornberg, senior forecaster at UCLA Anderson Forecast, a service of the University of California, Los Angeles, says California has "peaked and is already coming down the back side."
On Tuesday, David A. Lereah, the chief economist at the National Association of Realtors, said that the housing market was "probably close to a peak right now."
Take a look at the hot San Diego condo market. In Park Place, one of the many sleek towers of condominiums recently slung up around Petco Park, a one-bedroom condo is offered for $719,000. Someone buying it would expect to make mortgage payments of about $3,775 a month, plus monthly maintenance fees.
But someone really wanting to live in the high-rise, with hardwood floors, granite countertops and city views for a lot less, could rent a nearly identical unit in the same building for $2,400 a month. That is clear evidence prices have to move down. You are more apt to see that the price of residential property no longer is connected to its underlying value than a person looking only at spreadsheets of sales data.
Prices in overheated markets must, by definition, come back down to the mean. Knowing which way the market is headed before buying or selling is extremely important to anyone who wants to protect the wealth tied up in a house. And it certainly matters to anyone who is thinking of buying because it never makes much sense to buy at the top of the market. "The turning point is pretty important," Mr. Brown said, "because the trend will play out for years."
The trouble is, economists have been wrong before when they try to call the market. Three years ago, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said that it would be only a matter of months before prices began to fall. Prognosticators at the research firm Economy.com declared that the peak was last summer. Celia Chen, the firm's director for housing economics, is now saying that it will come this year.
"The timing is always difficult with these things," admits Ian Morris, chief United States economist at HSBC Securities U.S.A., who made the same call, repeatedly.
John Karevoll, an analyst with DataQuick Information Systems, which provides real estate data to lenders, said: "We've been told for years that the peak is just around the corner. The economists have so much egg on their faces."
REAL ESTATE RESOURCES • Dataquick - Home price trends, primarily for the West Coast. • National Association of Realtors - Home sale volume trends. • National Association of Realtors - Find contact information for your local real estate association for time-on-market statistics. • PMI Risk Index - Where are home prices most likely to fall? • SmithFinancialPlace - A downloadable program that lets you determine the intrinsic value of your home. • The Housing Bubble Fact Sheet - The Center for Economic and Policy Research • The Run-Up in Housing Prices: Is It Real or Is It Another Bubble? - The Center for Economic and Policy Research • The State of the Nation's Housing - Harvard University Joint Center for Housing Studies • Is There a Housing Bubble in Southern California? - Pomona College Department of Economics • Housing Supply and Affordability: Do Affordable Housing Mandates Work? - Reason Public Policy Institute
Don't be too hard on them. It's the nature of their science. N. Gregory Mankiw, the Harvard University professor and former head of the White House Council of Economic Advisers, made one of the most famous miscalls. In 1989 he wrote a paper arguing that the aging of the baby boomers was going to undermine the housing market in the 1990's and 2000's. Whoops.
Though it appears the shift is now at hand, the end of the bubble will not look anything like the crash in the stock market after the technology bubble. The stock market turns frenetic when investors scramble to get out and prices fall sharply. In housing, however, a collapse is signaled by a sharp drop in activity as people hold off buying. Houses stay on the market longer. Inventories grow. Only then will prices fall, slowly. Economists say prices will lag a slowdown in the market by four to six months.
Some of the data on where a local market is headed is available on the Internet (links are at nytimes.com/business). In other cases, your real estate agent is your best friend. He or she has access to a storehouse of raw data from the local Multiple Listing Service. Here are some indicators to look at:
Market activity How many homes are sold compared with the month before is the earliest indicator, but it is notorious for false positives. But if the number of homes sold starts to drop, perk up. Every county tracks this and makes it available to the public.
Inventory Some of the most crucial pieces of information are held closely by real estate agents. The number of houses on the market is one of them. The national average is 4.3 months; 6 months is closer to normal, the National Association of Realtors says. When it grows, there is trouble coming. Time on the market Agents control access to this information, and be warned: they know how to manipulate it. A house that has been languishing can be taken off and put back to look like a fresh listing. But you'll still be able to see the average time stretching as a clear signal of cooling.
Prices It's what you care about most. But month-to-month comparisons are nearly useless as an indicator because sales of a few houses on either end of the market can skew the figures. DataQuick at www.dqnews.com has some data and the Office of Federal Housing Enterprise Oversight issues quarterly reports.
Failed to sell The super-secret indicator among agents is the number of houses that are quietly taken off the market - usually because they are priced too high. Wheedle the number out of them and you'll have a strong indicator of market health.
Price-to-rent ratio This is a wonderful measure that gets at the intrinsic value of a property, but it's a tricky tool for the layman. Rent data include everything from studios to four-bedroom penthouses, making a comparison with single-family homes difficult. Some of the rent data can be found at www.realfacts. com.
Loan quality The popularity of interest-only mortgages could become one of the best indicators of a fragile market, several economists say. Mr. Thornberg of UCLA Anderson says it's a sign that lenders are scraping the bottom of the barrel. "We are close to running out of shills," he says.
Risk The PMI Group of Walnut Creek, Calif., a provider of data to the mortgage industry, estimates how much prices could drop using an econometric model. It publishes the list of at-risk cities at www.pmigroup.com.
Popular sentiment To judge from the media, the housing bubble may have peaked in June. According to a Nexis search of magazines and newspapers, that month was the peak, with 312 references to "housing bubble," almost six times that of a year earlier. It fell 24 percent in July.
Of course, there is one constant: real estate agent sentiment. Most of them will never tire of saying it's a great time to buy.
Despite the signs of a slowdown, Mr. Martone, the Providence real estate agent, says prices are holding and he still does not have enough properties to sell. He says, "I am the eternal optimist."
Do Try This at Home: Assess Your Area's Real Estate Bubble
By DAMON DARLIN, Published: August 13, 2005
For the first time since the residential real estate marathon began 13 years ago, parts of the country are showing signs of exhaustion. But if you rely on the experts to declare that a particular area's bubble has popped, you may have waited too long.
In Park Place, a condominium tower in San Diego, the monthly rent on a one-bedroom unit is far cheaper than the typical mortgage payment.
REAL ESTATE RESOURCES • Dataquick - Home price trends, primarily for the West Coast. • National Association of Realtors - Home sale volume trends. • National Association of Realtors - Find contact information for your local real estate association for time-on-market statistics. • PMI Risk Index - Where are home prices most likely to fall? • SmithFinancialPlace - A downloadable program that lets you determine the intrinsic value of your home. • The Housing Bubble Fact Sheet - The Center for Economic and Policy Research • The Run-Up in Housing Prices: Is It Real or Is It Another Bubble? - The Center for Economic and Policy Research • The State of the Nation's Housing - Harvard University Joint Center for Housing Studies • Is There a Housing Bubble in Southern California? - Pomona College Department of Economics • Housing Supply and Affordability: Do Affordable Housing Mandates Work? - Reason Public Policy Institute
So how can a homeowner tell if a market is about to go bust? This may be one of those rare occasions when professionals parsing data are at a disadvantage to regular people watching the market. That's because the main driver of today's market is consumer psychology. Home prices go up as long as people expect them to go up.
When they stop believing, prices fall - and no economist in Washington can get wind of that faster than someone chatting over knockwurst at a neighborhood block party. "Economists looking at the macrodata will be the last to know," said Richard A. Brown, chief economist at the Federal Deposit Insurance Corporation.
What you will learn from the professionals who are dutifully crunching numbers is that prices are not falling significantly in any of the hot markets, but in a dozen or so cities in the Northeast and in California, they are near the peak. In Boston, for example, the time that homes are sitting on the market has stretched to 46 days from 39 days a year ago.
An analysis of price appreciation, done for The New York Times by the Joint Center for Housing Studies at Harvard, shows that the price appreciation in cities including New York City; Austin, Tex.; Philadelphia; and Providence, R.I., are decelerating. Appreciation in Detroit and Denver has already slowed to a crawl.
"It's taking a lot longer to sell a home," says Karl A. Martone, a Re/Max Properties agent in Providence, where homes now sit on the market an average of 65 days, up from 14 days a year ago. The region has almost six months of inventory, which is up 35 percent from a year ago.
Vicki Doran, a real estate agent with Coldwell Banker in Providence, says: "It's switching to a buyer's market. Last year buyers had to snap things up. Now they can shop around."
Even a few markets in hard-charging California - San Diego, Orange County and Santa Cruz - are part of the trend, according to data from the first three months of the year. Data for the second quarter to be released by the government on Sept. 1 may confirm the trend. But already Christopher Thornberg, senior forecaster at UCLA Anderson Forecast, a service of the University of California, Los Angeles, says California has "peaked and is already coming down the back side."
On Tuesday, David A. Lereah, the chief economist at the National Association of Realtors, said that the housing market was "probably close to a peak right now."
Take a look at the hot San Diego condo market. In Park Place, one of the many sleek towers of condominiums recently slung up around Petco Park, a one-bedroom condo is offered for $719,000. Someone buying it would expect to make mortgage payments of about $3,775 a month, plus monthly maintenance fees.
But someone really wanting to live in the high-rise, with hardwood floors, granite countertops and city views for a lot less, could rent a nearly identical unit in the same building for $2,400 a month. That is clear evidence prices have to move down. You are more apt to see that the price of residential property no longer is connected to its underlying value than a person looking only at spreadsheets of sales data.
Prices in overheated markets must, by definition, come back down to the mean. Knowing which way the market is headed before buying or selling is extremely important to anyone who wants to protect the wealth tied up in a house. And it certainly matters to anyone who is thinking of buying because it never makes much sense to buy at the top of the market. "The turning point is pretty important," Mr. Brown said, "because the trend will play out for years."
The trouble is, economists have been wrong before when they try to call the market. Three years ago, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said that it would be only a matter of months before prices began to fall. Prognosticators at the research firm Economy.com declared that the peak was last summer. Celia Chen, the firm's director for housing economics, is now saying that it will come this year.
"The timing is always difficult with these things," admits Ian Morris, chief United States economist at HSBC Securities U.S.A., who made the same call, repeatedly.
John Karevoll, an analyst with DataQuick Information Systems, which provides real estate data to lenders, said: "We've been told for years that the peak is just around the corner. The economists have so much egg on their faces."
REAL ESTATE RESOURCES • Dataquick - Home price trends, primarily for the West Coast. • National Association of Realtors - Home sale volume trends. • National Association of Realtors - Find contact information for your local real estate association for time-on-market statistics. • PMI Risk Index - Where are home prices most likely to fall? • SmithFinancialPlace - A downloadable program that lets you determine the intrinsic value of your home. • The Housing Bubble Fact Sheet - The Center for Economic and Policy Research • The Run-Up in Housing Prices: Is It Real or Is It Another Bubble? - The Center for Economic and Policy Research • The State of the Nation's Housing - Harvard University Joint Center for Housing Studies • Is There a Housing Bubble in Southern California? - Pomona College Department of Economics • Housing Supply and Affordability: Do Affordable Housing Mandates Work? - Reason Public Policy Institute
Don't be too hard on them. It's the nature of their science. N. Gregory Mankiw, the Harvard University professor and former head of the White House Council of Economic Advisers, made one of the most famous miscalls. In 1989 he wrote a paper arguing that the aging of the baby boomers was going to undermine the housing market in the 1990's and 2000's. Whoops.
Though it appears the shift is now at hand, the end of the bubble will not look anything like the crash in the stock market after the technology bubble. The stock market turns frenetic when investors scramble to get out and prices fall sharply. In housing, however, a collapse is signaled by a sharp drop in activity as people hold off buying. Houses stay on the market longer. Inventories grow. Only then will prices fall, slowly. Economists say prices will lag a slowdown in the market by four to six months.
Some of the data on where a local market is headed is available on the Internet (links are at nytimes.com/business). In other cases, your real estate agent is your best friend. He or she has access to a storehouse of raw data from the local Multiple Listing Service. Here are some indicators to look at:
Market activity How many homes are sold compared with the month before is the earliest indicator, but it is notorious for false positives. But if the number of homes sold starts to drop, perk up. Every county tracks this and makes it available to the public.
Inventory Some of the most crucial pieces of information are held closely by real estate agents. The number of houses on the market is one of them. The national average is 4.3 months; 6 months is closer to normal, the National Association of Realtors says. When it grows, there is trouble coming. Time on the market Agents control access to this information, and be warned: they know how to manipulate it. A house that has been languishing can be taken off and put back to look like a fresh listing. But you'll still be able to see the average time stretching as a clear signal of cooling.
Prices It's what you care about most. But month-to-month comparisons are nearly useless as an indicator because sales of a few houses on either end of the market can skew the figures. DataQuick at www.dqnews.com has some data and the Office of Federal Housing Enterprise Oversight issues quarterly reports.
Failed to sell The super-secret indicator among agents is the number of houses that are quietly taken off the market - usually because they are priced too high. Wheedle the number out of them and you'll have a strong indicator of market health.
Price-to-rent ratio This is a wonderful measure that gets at the intrinsic value of a property, but it's a tricky tool for the layman. Rent data include everything from studios to four-bedroom penthouses, making a comparison with single-family homes difficult. Some of the rent data can be found at www.realfacts. com.
Loan quality The popularity of interest-only mortgages could become one of the best indicators of a fragile market, several economists say. Mr. Thornberg of UCLA Anderson says it's a sign that lenders are scraping the bottom of the barrel. "We are close to running out of shills," he says.
Risk The PMI Group of Walnut Creek, Calif., a provider of data to the mortgage industry, estimates how much prices could drop using an econometric model. It publishes the list of at-risk cities at www.pmigroup.com.
Popular sentiment To judge from the media, the housing bubble may have peaked in June. According to a Nexis search of magazines and newspapers, that month was the peak, with 312 references to "housing bubble," almost six times that of a year earlier. It fell 24 percent in July.
Of course, there is one constant: real estate agent sentiment. Most of them will never tire of saying it's a great time to buy.
Despite the signs of a slowdown, Mr. Martone, the Providence real estate agent, says prices are holding and he still does not have enough properties to sell. He says, "I am the eternal optimist."
