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Housing-bubble theory full of hot air Ever since the NASDAQ meltdown some folks have been waiting for the next big bad equity story. Since most equity is found in peoples' homes, that's where pundits have been focusing. They face disappointment however as they watch and wait for the "house-price bubble" to burst. It's not going to happen -- there isn't one. There has not been a single year since World War II in which house prices across the United States have declined; local markets, yes, but the whole United States, no (see chart). Homeowners know this intuitively and view housing as a solid, if conservative, investment. After all, you get to live in your house, you can't live in your stock portfolio, and you do have to live somewhere. Since there are more and more of us living in the good old United States, we will need more and more places to live. And the number of us is growing faster than the number of houses. Ergo, no bubble! OK, let's look at the issue a bit more systematically to see why from the economist's point of view the issue is overblown. I work for the Mortgage Bankers Association whose members make about 70 percent of all the home loans in the country, so it is important that you see the logic in the argument against the "price bubble" to overcome any suspicions of an inherent bias based on who I work for. Trouble with
the bubble About the only way an economist can find agreement with that argument is by discussing the role of expectations in decision making by consumers and investors. That is to say, consumers and investors might engage in speculation that prices will continue to rise as they have been (50 percent over the past six years), thus bidding house prices above the level indicated by the current supply-and-demand fundamentals. This speculative bidding would be for the purpose of capturing gains unrelated to their need for housing. To confirm that this is happening, there would need to be evidence that there was a growth in the number or share of residential home sales that were sold to purchasers not intending to live in them. It is difficult to find any confirmation of such a trend in the current market. Another way an economist would accommodate your thought that home prices might unexpectedly fall is if you argue that interest rates will rise rapidly and far enough to make people stop buying houses. The economist would call this an affordability issue, not a price bubble. Roughly nine out of 10 people who buy a house do so by borrowing money. When interest rates rise, the monthly payment on a given amount of borrowed money rises also and can exceed the maximum size payment the family budget can support. This can change the balance between the cost to rent and the cost to buy. The attached chart shows the recent relationship between average monthly rent and average monthly after-tax mortgage payments and gives a good picture of why people are buying homes. Article continued at http://www.bankrate.com/brm/news/real-estate/20030918a1.asp
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