By Martin Wolk FOR AT LEAST the past 40 years the national average price for both new and existing homes has risen every single year, usually beating the inflation rate. Bubbles have formed and collapsed, but they have been purely a local phenomenon, based on regional boom-and-bust economies. Housing prices in Texas and Louisiana plunged along with the oil industry in the 1980s, Southern California homeowners suffered mightily in the defense spending cutbacks of the 1990s and New York prices drifted closer to Earth in the financial industry downturn a decade ago. There is every reason to believe the dot-com collapse will lead to similar declines this time around in the hardest hit markets, and prices in Silicon Valley already are showing signs of cracking. Average prices fell 4 percent in the first half of this year in San Jose and were roughly flat in the San Francisco area, according to mortgage giant Freddie Mac. But in most of the nation, housing price gains are likely to slow over coming quarters rather than shift into reverse, economists say. It's difficult if not impossible to find prices looking out of alignment with underlying economic fundamentals, meaning I don't see any housing bubble in the national or regional markets, said Dave Seiders, chief economist for the National Association of Home Builders. The association, whose members are enjoying a record year for new-home sales, recently held a telephone news conference in an effort to dispel growing talk of a potential housing bubble. Because we had a bubble in the stock market, people are thinking about bubbles nowadays and wondering, where could we have another bubble, said Maury Harris, chief economist for UBS Warburg. Intellectually once people decide to be negative they start to look at things in the worst possible way. In addition to low mortgage rates, Harris said home prices are being supported by the slumping stock market, as investors increasingly look at housing as a safe and attractive investment option. A major 1997 change in U.S. tax laws, exempting from taxes most capital gains on residential real estate, helped foster the view that housing is a great place to park cash. At some point, yes, the stock market is going to come back and you're going to get a slower rate of increase on house prices, Harris said. But when that happens it likely will mean that the economy and job market is improving, which should put a floor under home prices. To be sure, there are some troubling signs, including a rise in personal bankruptcies, mortgage delinquencies and foreclosure activity. The unemployment rate, which has risen to 5.7 percent from 3.9 percent in late 2000, could rise further over the next year as companies remain cautious in a slow-growth economic environment. Initial claims for unemployment benefits have risen over the past month, and many analysts predict that monthly data due Friday will show the economy lost jobs in September for the first time in five months. Housing is still relatively affordable due to the low interest rates, but if income growth starts to slow, houses are not going to be as affordable, said Paul Kasriel, director of economic research at Northern Trust Co. in Chicago. If people are going to lose their jobs, even the most liberal underwriting standards won’t allow them to get a mortgage. Morgan Stanley chief economist Stephen Roach, well known for his bearish views, sketched a doomsday scenario in which consumer spending tanks and housing prices collapse, leading to a devastating deflationary price spiral. There is good reason to believe that both the property and consumer bubbles will burst in the not-so-distant future, Roach said, writing in The New York Times. If they do, there is a realistic possibility that the United States, like Japan in the 1990's, will suffer a series of recessionary relapses over the next several years. It is hard to find other economists who agree with this plot line. Stuart Gabriel, director of the USC Lusk Center for Real Estate, said a more realistic concern is that a weakening economy and new wave of layoffs will force highly indebted homeowners to put their property on the market. The surge in supply would cause prices to soften in many markets, especially at the high end, he said. This is not to say the bottom is going to fall out of the housing market, but it is to suggest the housing market is susceptible to economic fundamentals,he said. Gabriel suggested that New York, Boston, northern California and west Los Angeles are among the markets most at risk. All have experienced housing busts in the past. I prefer to call it a correction, rather than a bubble, said Rajeev Dhawan, director of the economic forecasting center at Georgia State University. Bubbles can start for any non-fundamental reason, and they can burst at any time, he said. They don't have to wait for the business cycle. That’s why they're called bubbles. Price corrections, on the other hand, are caused by fundamental economic reasons that may only affect a small geographic area. Unless job growth comes back miraculously over the next six months, price corrections are likely in many large urban markets, he said. Nationally there is no bubble, and in the vast majority of metropolitan areas there is no bubble, said David Berson, chief economist for Fannie Mae, which provides mortgage financing. “Home price gains are likely to slow. But are (prices) going to decline? Not in most places. If consumer demand weakens further and throws the economy into a double dip recession, mortgage rates could fall to 4 percent, and there still would be enough demand to support a decent real estate market, he argues. The only scenario he sees threatening the housing market is an inflationary price shock, such as an oil supply disruption. So far, veteran Southern California real estate agent Dick Gaylord sees no signs that the bubble is bursting. The market here is on fire, said Gaylord, an broker with RE/MAX Real Estate Specialists in Long Beach. If I had a complaint, the complaint would be that there is not enough inventory.
