Don’t strain your ears listening for a “pop” of a price bubble in the real-estate market. A cross-section of experts tell us there is no housing price bubble, although that doesn’t mean the market is going to be in for an easy ride during recovery. Why? "A classic real-estate bubble is created by speculators hoping to make fast returns by buying homes and selling them quickly at higher prices," says Raphael Bostic, director of the U. of Southern California’s Real Estate Economic Forecast. Frank Nothaft of the Federal Home Loan Mortgage Corporation agrees. "Unlike the stock market, single-family housing lacks the attributes conducive to bubbles," says Nothaft. How? Three reasons: 1) Housing has a large consumption component, as 90% of homes are owner-occupied; 2)There are high transaction costs in selling a home; 3)Housing traditionally has a long-term holding period with an average occupancy of eight years. "While there is a speculative element in housing, it’s had very little effect on the market," Wellesley College economist and housing bubble-authority Karl Case tells us. "Many speculators got burned during the last recession and they haven’t forgotten that," says Case. Economists we’ve talked to are unanimous in saying there are no signs of a house-price bubble on the horizon,although they acknowledge emerging local bubbles in some areas of the country. “The simple answer to the question, ‘is there a housing bubble?’ is no,” says David Berson, of the Federal Nat’l Mortgage Assn. “In fact, price gains could go higher if constraints on new construction continue to intensify over the next decade.” Got land? Land availability will be a factor of growing importance in determining housing prices, experts tells us. Why? "Population growth, immigration and the strong economy of the last decade, as well as record-low mortgage rates, helped increase the nationwide demand for housing," says Bostic. But supply hasn’t kept pace with demand in many regions because of high land costs, Not-In-My-Back-Yard opposition to development, builders’ liability concerns and an elongated local permitting process. Look for affordability conditions to worsen steadily, says Bostic, until the supply-demand imbalance is addressed. Don’t hold your breath. "Given the low inventory levels,house-price gains could be as high as 6% if constraints to new construction intensify," says Berson. “Politically, we see every sign they will intensify,” he says. "But, no price bubble doesn’t mean that housing isn’t vulnerable," warns Stephen Percoco, of the Rahway, NJ based Lark Research Inc. "One of the primary threats to the housing market is the decline in employment," he says in his publication Net Realizable Value. Without job growth, there will eventually be little or no demand for new housing. “A housing market built upon a foundation of declining employment is vulnerable to a sharp slowdown,” says Percoco. “If job growth does not resume soon, there is no way that the record housing production pace can be sustained.” __________
November 5, 2002