Bubble, Bubble, Toil and Trouble
I keep having the same conversation over and over again these days questioning the existence of a real estate bubble, and when -- and if -- it will burst. The short answer is, of course, that I have absolutely no idea. But periodically I read interesting things in the blog world on the subject, and the sage Barry Ritholtz at The Big Picture has several articles recently worth reading.
Barry notes that the most dangerous factor in all of this is not that interest rates will rise, so much as people will become unemployed and not be able to service their debt:
It's not the leverage, but the ability to service the debt that causes problems. A potentially negative scenario is the Fed tightens too far, inducing a recession. Something else goes wrong - theoretically, China stops buying our Treasuries, and that forces the Fed to become a buyer of last resort (think Bernanke's printing press). Next thing you know, we have hyperinflation, large-scale unemployment, and a housing market off 50%."He then goes on to cite statistics which demonstrate that from 2001 to April 2005, an astonishing 43% of all private sector jobs created have been housing related. But after the Fed started raising interest rates in June 2004, real estate-related job creation plummeted 68.2%. The implications are not good:
Barring a sudden rise in organic job creation over the next 6 to 9 months, this cycle will have run its course -- my guess is late 2005/early 2006.Elsewhere, he compares the present housing market to the dot.com stock speculation of the late 90s. He notes that the stock markets peaked when their valuation equaled 140% of GDP, which is right where the real estate market is now:
He then goes on to quote the work of Merrill Lynch economist David Rosenberg on the topic:
As David observes, a good rule-of-thumb is "to be wary when anything begins to approach or exceed 140% of GDP." (We assume that includes the New York Yankees' payroll.) He ticks off the various arguments bulls cite as explanation for the great surge in housing and house prices (the latter, incidentally, rose a tidy 11% last year), such as low interest rates, the availability of credit, demographic pressures, a rising tide of immigration -- but remains skeptical.One of the more interesting speculations I heard (and I don't remember where it came from) attributed Bush's big push to privatize Social Security to an attempt to infuse the stock markets with a lot of cash and thus create another bubble to take the place of the housing bubble (okay, Barry, "extended asset class") that will most certainly burst. It certainly makes sense, in a self-sabotaging Bushian economic sort of way.
He points out that "much of the move in real-estate valuation has not been due to income generation, per se, but rather due to loose financial-market conditions and an increasing level of exuberance."
He confesses that he gets "nervous when we see things move parabolically north because no asset class at any time ever failed to mean-revert after such an upside move." And, while acknowledging he has been bearish on housing for a spell now, points out that just because a bubble "hasn't burst doesn't mean it doesn't exist."
Warns David, "bubbles and baths usually go together." And so, we might add, do burst bubbles and tears.
I'm curious to know what everyone thinks. I realize it won't generate the heated debate that speculation about what's tattooed on Michael Jackson's gonads most certainly will, but since we're all going to be affected by it I'd like to know what plans, if any, you're making for whatever eventuality you foresee.
(photo courtesy stock.xchng)
posted by Jane Hamsher @ 5/30/2005 12:10:00 AM
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