by Calculated Risk on 6/30/2005 11:37:00 PM

On Tuesday night, CNN's Newsnight with Aaron Brown had a segment on the housing bubble. Here are excerpts from the transcript:

BROWN: Back in the mid '90s, when we were all thinking of early retirement after our Internet stocks tacked on another 10 or 15 points, there were naysayers who said it wouldn't last, who said rationality always returns eventually, who said it was a bubble and a dangerous one at that. Oh, those naysayers.

By the way, are you counting on home equity to fund your retirement? Like the fact that your home doubled in the last decade or so? Feeling rich again? So is this deja vu with a mortgage? Here's CNN's Andy Serwer.

(BEGIN VIDEOTAPE)

ANDY SERWER, CNN CORRESPONDENT (voice-over): Is there a housing bubble? It depends who you ask and where you ask.

DEAN BAKER, CTR FOR ECONOMIC POLICY RESEARCH: Well, there's absolutely a housing bubble. In the last seven or eight years, we've seen an unprecedented run-up in home prices nationwide.

SERWER: No question, certain markets are red hot. Since 2000, the price of a single family home has jumped 77 percent in New York City, 92 percent in Miami, and 105 percent in San Diego. And there are other signs besides just home prices, 86 books on real estate investing were published last year, nearly three times as many as 1998.

Speculators have added fuel to overheated markets. In Los Angeles, for example, the number of homes sold that have been owned for less than six months jumped 47 percent in a year.

Prices are so high in some areas that renting a home has become dirt cheap by comparison. In San Francisco, for example, rent on a median price house runs $1,532 a month. Owning the same house with a typical mortgage would cost $3,424 a month.

But not every market is on fire. Some experts say that bubbles are mostly in cities on the east and west coasts. If those bubbles were to burst, it would shock the entire economy. But some say prices won't collapse, they'll just ease up.

FRANK NOTHAFT, CHIEF ECONOMIST, FREDDIE MAC: As long as the local economy remains strong and there is good job creation, then we're not going to see a drop in home values.

SERWER: In cities such as Dallas or Salt Lake or Pittsburgh, prices haven't risen nearly so much. Radical differences in prices can make moving from a hot zone like LA to a colder one like Syracuse either a windfall or a slap in the face, depending on which way you're going.

So what does all this mean for the prospective buyer?

FRANK NOTHAFT: It's a very personal decision whether or not they should sell now and choose to rent. If you're happy with your home and you enjoy the home that you're in and the neighborhood you're in, there's no point to sell it right now and switch to renting.

SERWER: In other words, don't just buy a home because you think you'll make a ton of money on it in two years. And don't sell your home just because it's appreciated wildly either. Because in real estate, as in everything else in life, you can't count on getting a better deal down the road.

Andy Serwer, CNN, New York.

(END VIDEOTAPE)

BROWN: Taking the global view for a moment, globalization being the rage these days, in 2004, housing prices in Spain and France went up even faster than they did here in the United States, 15 percent up for the year. Compared to 9 percent nationwide in the U.S.

But before you bet the farm, or the house, consider this. In Japan, house prices have dropped for the last 14 years. And they are now down 40 percent from their peak back in 1991. Here at home again, the median price of a house is $207,000. That means half the houses cost more, half the houses cost less.

There is more, but that was the most in-depth part of the discussion. Dean Baker didn't get much face time!

Any economic topic is difficult for TV News. No pictures. I can imagine the viewers reaching for the remote ... hmmm, any shark attacks today?

by Calculated Risk on 6/30/2005 09:21:00 PM

Following are some comments and stories from the Reuters Real Estate Summit in New York.

Property guru says U.S. market nearing peak Peter Korpacz, the head of real estate business advisory services for PriceWaterhouseCoopers told reporters:

"The thing the industry is focusing on now is jobs growth. For the most part its running at about 175,000 a month. It's a healthy economy, but it's not robust. During this point in the last recovery (in the early 1990s) jobs were growing at about 217,000 a month."

Korpacz said real estate lenders and developers are far more disciplined now than in the past and so there was little threat to the market from speculative development, although the red-hot residential sector was giving rise to concerns among investors.

He added that if there is a major drop in prices for condos or single-family housing, it could hurt "real estate as a whole and just wash (away) the whole industry."

Toll Bros sees possible correction in hot markets

"In the hot markets, I wouldn't be surprised to see a 20 percent decline," [Robert Toll Brothers Inc.'s chief executive] said at the Reuters Real Estate Summit in New York. "You've got a price going from $1 million to $800,000, I don't have a problem with that.

"I don't think you're going to have a pop, which means I don't think you've got a bubble," added the head of the luxury home builder at the summit held at Reuters U.S. headquarters in New York. "But I do think you're going to have a correction as the markets unnaturally overheat because of speculation."

For more stories see the Reuters Summit site.

by Calculated Risk on 6/30/2005 01:31:00 PM

An an undergrad, I was incredibly fortunate to take Chemistry from Drs.Sherwood Rowland and Mario Molina. At that time, the future Nobel Laureates (1995 Nobel Prize in Chemistry) Rowland and Molina were working on their ground breaking discoveries into how chlorofluorocarbons (CFCs) were impacting the ozone.

But Rowland and Molina's work was just the start. To correct the CFC caused ozone depletion problem it took a combination of great science, an open discussion of the environmental impact of various policy options, government action and international cooperation. Not only was the chemistry fascinating, but that was my introduction into market failures and externalities. When I spoke with Dr. Rowland a few months ago, he modestly told me the science might have been the easy part!

With that prelude, here is a new Environmental Economics blog with 17 contributing economists addressing many of the economic and political issues that are required to transform good science into good policy. Enjoy!

by Calculated Risk on 6/30/2005 11:16:00 AM

According to MSNBC:

The Bank of England's attempt to bring Britain's highflying economy in for a soft landing is starting to reach the nail-biting stage.

Fears are growing, even within the BOE, that consumer spending is faltering in response to past hikes in interest rates and soaring energy bills.

Of course less consumer spending is also related to the deflating housing bubble:

At the center of the drama is Britain's housing bubble, which began to lose air in the second half of last year. Although the growth rate of house prices has slowed sharply, a generally healthy economy has helped to allay worries over a collapse. Now the economic outlook is dimming.

In particular, consumers are pulling back more than anticipated.

Housing slows, consumers retrench, and then the job market starts to soften:

The newest concern is the labor markets. In May the number of workers claiming jobless benefits rose for the fourth month in a row. That hasn't happened since 1993, and it could be a harbinger of softer job markets. Wage growth, excluding bonuses, is already slowing.

And the next step in the downward vicious cycle? Falling housing prices, followed by even less consumer spending and more job losses and then a further reduction in house prices ...

Bloomberg columnist Matthew Lynn offers a similar view: U.K. Consumers Risk Recession With New Restraint.

The U.K. consumer shows every sign of having run out of steam and the economy is teetering as a result.

British shoppers have become hypersensitive since the Bank of England increased interest rates five times from November 2003 through August 2004, and since their household debt skyrocketed to more than 1 trillion pounds ($1.82 trillion).

There may well be a lesson in that for policy makers in many other countries. Consumers who have piled up debt are far more responsive to rate changes than previously.

What used to be just a nudge on the interest-rate rudder is now sending the economy downhill. The U.K.'s growth rate has fallen in each of the past four quarters.

``The main factor has been the huge increase in household debt,'' said Stuart Thomson, a fixed-income strategist at Charles Stanley Sutherlands in Edinburgh, in a telephone interview. ``It is the highest in the developed world. So people are really getting squeezed as rates rise.''

The US has also had a "huge increase in household debt". Perhaps Britain's problems offer a glimpse of the future for the US housing market and economy.

UPDATE: Another take on UK: Economic growth weakest in 2 years

And the GDP data suggest an even greater link between the housing market and consumer spending than the BoE at first assumed, suggesting worse could be yet to come.

The saving ratio in 2004 fell to its lowest since 1963 as household spending was credited with making an even greater contribution to the economy over the last few years, before slowing in line with the housing market.

The Nationwide building society said house prices fell 0.2 percent in June, bringing the annual rate of increase to a nine-year low of 4.1 percent, compared with nearly 20 percent a year earlier.

"This obviously increases the danger that the saving ratio will rise over the coming quarters as the housing market weakens, slowing the growth of household spending even further," said Jonathan Loynes, chief economist at Capital Economics.

by Calculated Risk on 6/28/2005 07:57:00 PM

According to the article in the previous post:

Today, the agency will release new state-by-state economic profiles. Taken together, the profiles conclude that most booming U.S. housing markets are sustained by strong growth in new jobs.

"In general, that is where home prices are rising most rapidly," said Barbara Ryan, associate director of the FDIC's research division.

Here is the California profile and two graphs.


Click on graph for larger image.

Job growth in the bay area and southern California trailed the rest of the Nation.


Price appreciation outpaced income growth.

The data for California does not seem to support the FDIC's conclusion.