|
Clear Thoughts
Which Housing Market is a Bubble?
Originally Published Thursday, June 2, 2005
| There are many sectors and sub-sectors that make up the housing market. As the price of homes continues to increase, many Wall Street analysts speculate about the housing market bubble or bubbles and when and if it (they) will finally burst. |
Where is the real bubble? Is it just in home prices, and where they are going? Or is it more granular; involving realtors, REITs, mortgage and financing companies, title insurers, building material providers, property management companies, moving companies, construction firms, their subcontractors and workers? The list goes on and on.
There are sectors, sub-sectors and sectors within sub-sectors, many of which do not have public company components, driven by the quest for new home ownership, trading up of existing homes, additions to homes and most recently, speculative home buying and flipping. Each of their success, growth or contraction touches many other parts of our economy. If the housing market is at risk, as many headlines suggest, how will the bubble bursting effect the country and the stocks we invest in?
We love to watch Wall Street analysts speculate on where it is all going; nationally and region by region. They Monday morning quarterback long and short term interest rate movements, consumer confidence numbers, weather and many other influencers and speculate what it all means sending dozens of stocks up and down on a day to day basis. New mortgages and refinancings, new construction, housing starts and permits are all closely watched by the analysts on Wall Street and the media.
The statistics released yesterday; US construction spending for April jumped by 0.5% to another record high seasonally adjusted annual rate of $1.067 trillion. A separate report by the National Association of Realtors said pending sales of existing US homes hit a record in April. The Pending Home Sales Index stood at 128.2, up 3.6% from March and 9.2% from a year ago. Add in lower long term interest rates and we saw many of the home related stocks go north in a down market.
In the end, regardless of the availability of good jobs, water views or perfect weather and other vacation-style amenities, there is a finite amount of land, and therefore a finite amount of houses and other dwellings that can be built. Historically, home values rise over time. Many boomers cringed when their parents appraised or sold there homes for 5-25 times what they paid in a massive wave of buying and construction after WWII through the 1960s, 1970s and 1980s. But people are inventive. They have figured out ways of parceling land out and squeezing new houses onto limited land. We now see knockdowns and rebuilds, permits for additional rooms to houses, whole apartment complexes being renovated or replaced with newer, taller, better and higher priced construction.
Here in Manhattan, this author bought at the top of the market in 1991 only to see prices rise most years, some years at a dizzying pace. Of course most gains are only on paper unless one is willing to move. However, some people have tapped in to their paper gains through home equity loans, some for home improvement or expansion and some for debt consolidation, some for vacations and non-equity building pursuits. This has helped fuel consumer spending in some of the sectors mentioned above and much of the overall economy.
Is there a bubble you ask? We believe that no rate of price appreciation in any one sector is sustainable forever. So we ask, does this bubble exist for only this one sector? New data shows that almost 50% of new mortgages are either interest only or adjustable, what will happen if interest rates go up or an even mild new recession hits?
Too many people say there is no down turn until it hits them. Obtaining the American Dream of home ownership should not mean that people should risk losing everything for that extra 2,000 square feet.
On the other hand; based on the data available today, it may be that these markets will continue to enjoy expansion even if somewhat slower for some time to come. Odds are that home prices will be higher in 10 and 20 years then they are today. We suggest not putting all your investments in any one bucket -- diversify. Do not invest over your head in any one asset class and watch the market carefully. If you live in your home and its resale price drops for 2-4 years it may not impact your lifestyle. If your mortgage rate increases, that may have a greater impact. We suggest; understand the facts about your situation clearly and invest wisely for the long term.
|
|
|
|
 |
|
