Wall Street Journal / May 19, 2005
The Fed Starts to Show Concern At Signs of a Bubble in Housing
By DAVID WESSEL

In the debate over whether the housing market is a bubble about to
burst, the crowd that argues it isn't has been able to cite reassuring
utterances by Federal Reserve officials. But there are proliferating
signs that the housing market is looking a bit frothy. And now the U.S.
central bank is beginning to worry more about it.

It isn't only that housing prices keep rising faster than almost
anything else, up 10% on average nationally in 2004, according to the
U.S. Office of Federal Housing Enterprise Oversight, and up 25% or more
in the hottest markets in California, Florida and Nevada.

It isn't only that the clever mortgage industry keeps coming up with
new ways to lend people money to buy houses that involve ever-more
leverage and little -- or sometimes no -- down payment.

It's that more people are buying second and even third homes, expecting
that prices will continue to rise so they can sell the houses quickly
at a profit -- and that is drawing the Fed's attention. The National
Association of Realtors says its surveys find that 23% of all homes
purchased in 2004 were for investment, and a further 13% were vacation
homes. It's as if Americans got tired of the stock market, and decided
to look elsewhere to try to lose money.

For a long time, Federal Reserve Chairman Alan Greenspan dismissed
suggestions that the U.S. was in the early stages of a housing bubble.
He talked about the extraordinary demand for houses among hard-working
immigrants. He emphasized that housing, unlike stocks, is a local
market, so it's almost impossible to have a national housing bubble. He
explained that it's hard to speculate in a house that you own because
to sell it you have to move out.

But there has been a little more concern creeping into his commentary
in the past few months. "We do have characteristics of bubbles in
certain areas, but not, as best I can judge, nationwide," he told a
House committee in February. Mr. Greenspan speaks to the Economic Club
of New York at lunchtime tomorrow. If housing comes up in his remarks
or if he is questioned on the subject by one of the prominent
economists there, look for the Fed chairman to mention -- as Fed
Governor Donald Kohn did recently -- the upturn in people buying
vacation homes, second homes or other homes on the risky bet that
housing prices will continue to rise as they have lately.

Mr. Greenspan hasn't yet hit the "irrational exuberance" gong, the
phrase he used to warn about the stock market in December 1996. The Fed
and other bank regulators, however, this week warned banks to take more
care with home-equity loans, noting that such loans are "subject to
increased risk if interest rates rise and home values decline." (Did
you say decline? Gulp.) Even a slowing of the pace of increase in
housing prices probably would dent consumer spending, which, for the
past couple of years, has been helped by Americans tapping their home
equity.

Other Fed officials have begun to express some anxiety. In a speech
last month, Mr. Kohn said, "A couple of years ago I was fairly
confident that the rise in real-estate prices primarily reflected low
interest rates, good growth in disposable income and favorable
demographics." Mr. Kohn was a longtime adviser to Mr. Greenspan before
his appointment to the Fed board.

No longer. "Prices have gone up far enough since then relative to
interest rates, rents and incomes to raise questions; recent reports
from professionals in the housing market suggest an increasing volume
of transactions by investors, who...may be expecting the recent trend
of price increases to continue," Mr. Kohn said.

A surge in the number of people buying houses as a speculative
investment is the contemporary equivalent of the story about Joseph P.
Kennedy, father of the late president. According to the tale, he sold
his stocks a week before the 1929 crash because he heard a shoeshine
boy named Billy touting U.S. Steel and RCA. When the shoeshine boy
starts giving you tips, he is supposed to have said, it's time to get
out of the market.

The Fed, which contributed to the housing boom by keeping short-term
interest rates so low for so long -- and encouraging the bond market to
do the same with the long-term rates that determine mortgage rates --
doesn't expect a collapse of housing prices or an economic calamity.
Mr. Kohn's worst case is "an erosion of real house prices" --
translation: an increase in house prices that falls short of the
overall inflation rate -- "rather than a sudden crash."

Americans who have owned their homes for the past few years have a lot
of equity in their homes: $9.62 trillion worth at the end of last year,
up 13% from a year earlier, according to the Fed's tally. Even if house
prices fall a bit, homeowners still will have significant equity --
except for those who have hocked nearly all the increase in home values
with frequent refinancing or large home-equity loans.

But if house prices stop climbing, it won't be pleasant. Americans will
feel poorer -- and they'll spend less as a result.

"MrPepper11" wrote in message
oups.com...
Wall Street Journal / May 19, 2005
The Fed Starts to Show Concern At Signs of a Bubble in Housing
By DAVID WESSEL

[snip]
The Fed, which contributed to the housing boom by keeping short-term
interest rates so low for so long -- and encouraging the bond market to
do the same with the long-term rates that determine mortgage rates --
doesn't expect a collapse of housing prices or an economic calamity.
Mr. Kohn's worst case is "an erosion of real house prices" --
translation: an increase in house prices that falls short of the
overall inflation rate -- "rather than a sudden crash."

[snip]
Have they (Fed) ever expected any crash?
ML

Day Brown writes:
Michael Lehrman wrote:
The Fed, which contributed to the housing boom by keeping short-term
interest rates so low for so long -- and encouraging the bond market to
do the same with the long-term rates that determine mortgage rates --
doesn't expect a collapse of housing prices or an economic calamity.
Mr. Kohn's worst case is "an erosion of real house prices" --
translation: an increase in house prices that falls short of the
overall inflation rate -- "rather than a sudden crash."

[snip]
Have they (Fed) ever expected any crash?
Good point! That being the case, what do you recommend we do?

Robert Shiller's second edition of his book "Irrational Exuberance"
mostly rewrites what was in the first edition. He now has a new
chapter 2 which specifically describes the bidding up of housing
prices. He claims that some of this started as many people were
exiting the stock market with at least some of their investments.

He is concerned that (in terms of real dollars) home prices have
jumped 52% between 1997 and 2004, after having been roughly flat
for the preceeding half century, and building costs and interest
rates have actually been declining since the early 1980's.

He also talks about the risk that officials take if they announce
that there will be problems in any market in the near future.

This isn't easy reading but it does describe the similarities between
the current housing market situation and the prior stock market.

I'd like to find a book on the same subject, but that my mother
could understand, perhaps something similar in tone to "The Oil
Factor" by Stephen Leeb. Actually I was a little surprised that
thus far I haven't found any mention of the effects that oil might
have on investment uncertainty in the future in Shiller's book.

"Don Taylor From:" wrote in message ...
Day Brown writes:
Michael Lehrman wrote:
The Fed, which contributed to the housing boom by keeping short-term
interest rates so low for so long -- and encouraging the bond market to
do the same with the long-term rates that determine mortgage rates --
doesn't expect a collapse of housing prices or an economic calamity.
Mr. Kohn's worst case is "an erosion of real house prices" --
translation: an increase in house prices that falls short of the
overall inflation rate -- "rather than a sudden crash."

[snip]
Have they (Fed) ever expected any crash?
Good point! That being the case, what do you recommend we do?

Robert Shiller's second edition of his book "Irrational Exuberance"
mostly rewrites what was in the first edition. He now has a new
chapter 2 which specifically describes the bidding up of housing
prices. He claims that some of this started as many people were
exiting the stock market with at least some of their investments.

He is concerned that (in terms of real dollars) home prices have
jumped 52% between 1997 and 2004, after having been roughly flat
for the preceeding half century, and building costs and interest
rates have actually been declining since the early 1980's.

He also talks about the risk that officials take if they announce
that there will be problems in any market in the near future.

This isn't easy reading but it does describe the similarities between
the current housing market situation and the prior stock market.

I'd like to find a book on the same subject, but that my mother
could understand, perhaps something similar in tone to "The Oil
Factor" by Stephen Leeb. Actually I was a little surprised that
thus far I haven't found any mention of the effects that oil might
have on investment uncertainty in the future in Shiller's book.

If you're talking about dollar hegemony, here's an interesting
read:
http://us.altnews.com.au/nuke/print.php?sid=4645

As for housing prices, the Chinese are laughing all the way
to their banks:
http://www.jsonline.com/bym/news/dec...p?format=print

"Have they (Fed) ever expected any crash?
ML "

Yes, Greenspan correctly addressed the stock market bubble prior to the
disaster of 2000. He was about two years early, but clearly correct in
his warnings. When he gave his irrational exuberance speach, the
market was already ripe with speculation. Just like housing, no one
can predict the exact top, but he was certainly right about the stock
market.

Michael Lehrman wrote:
The Fed, which contributed to the housing boom by keeping short-term
interest rates so low for so long -- and encouraging the bond market to
do the same with the long-term rates that determine mortgage rates --
doesn't expect a collapse of housing prices or an economic calamity.
Mr. Kohn's worst case is "an erosion of real house prices" --
translation: an increase in house prices that falls short of the
overall inflation rate -- "rather than a sudden crash."


[snip]
Have they (Fed) ever expected any crash?
Good point! That being the case, what do you recommend we do?

thanx for the feedback Don. Regarding Schiller and the housing market,
I'm in the midst of a local housing boom in the backwoods of Arkansas
Ozarks. Downsized, early boomer retirees are moving in, displacing the
bootleggers, dope growers, and methlabs... which havta move out of the
woods and into the overgrown brush left from clearcuts.

There is some concern that their investments may not return well, and
they are going into livestock and field crops, and more interested in
the functionality of a homestead than its marketability.

but I really dont know how prevalent this sort of thing is in other
regions. I also see folks who make money online, doing it from very
remote locations, with insignificant commuting costs. The expected oil
price rises are creating more home offices, and I can see that at some
point, there will be so much less commuting that the demand for oil will
go down.

Lots of small towns now have high speed access, low housing costs, local
retail, and safe environments to raise kids. When the town is small
enuf, 'strangers with candy' are spotted right off because everyone
knows what everyone else drives, and so the kids walk home from school,
and get sent 'down to the store' to get milk and eggs, and nobody much
drives anywhere. No WMD worries either.