Thursday, 31 January 2008

How wrong can you be? Take a look at this article and you might get some idea.

Two years ago, Businessweek wrote article arguing that the US housing bubble will not burst. Well, we know what happened since then. The housing data has been just appalling; prices are falling in virtually every city, home starts are down, and sales volumes have tanked. However, the most shocking number must be the one for foreclosures; at the moment, one house in a hundred in the US is in some form of repossession process.

Of course, we find the same kind of deluded "the bubble can't burst" thinking here in the UK. Far too many people have too much faith in the property market. While the reality of an overpriced, over-inflated market is starting to impose itself, the majority of UK homedebtors are in denial.

Anyway, here is the article; read it and weep.

Why The Housing Bubble Won't Burst

Type the words "falling housing prices" into Google and more than 8 million citations pop up. Michael Youngblood's name won't be among them. Despite all the fear that single-family home prices will decline, the managing director of asset-backed securities research at Friedman Billings Ramsey & Co. (FBR ) in Arlington, Va., thinks residential real estate is a lot stronger than most people suspect. He bases this assessment on a new economic model he created that forecasts housing prices in 379 metropolitan statistical areas. Associate Editor Toddi Gutner spoke with Youngblood about his upbeat view and his surprising prediction that the greatest price appreciation will be coming in so-called bubble markets.

What makes you more optimistic than other housing experts?

I look at two economic indicators that I think drive the housing market: the growth in employment and the growth in personal income. Getting a job or a salary increase is what motivates people to buy their own home. This is different from the data the National Association of Realtors and other organizations rely on. They are more concerned with technical indicators such as the inventory-to-sales ratio and the number of months a house is on the market. These aren't leading indicators. Instead, they move with current changes in the market, rather than predict those changes.

Do you think the housing bubble argument is overblown?

Absolutely. It's overblown because there is no national housing market, so there can't be a national house-price bubble. However, there are bubbles in 75 of the 379 markets I studied. A bubble exists when the ratio of the median existing house price to per capita personal income exceeds 6.8 times. This definition is based on historical data of when other markets, like Houston and Boston, had bubbles.

Where are the bubbles?

Most of the bubbles exist on the East and West coasts in such markets as New York City, Los Angeles, Washington, Phoenix, Honolulu, and Tacoma, Wash. Only 12 of the 75 cities are located inland: Boulder, Colo., Coeur d'Alene, Idaho, Flagstaff, Ariz., and Las Vegas among them.

What markets are likely to show the biggest price gains and declines this year?

We expect the greatest gains in Bakersfield, Calif. (43%), Fort Myers, Fla. (42%), Stockton, Calif. (39%), and Punta Gorda, Fla. (35%); the biggest declines in Harrisburg, Pa. (8%), Odessa, Tex., Roanoke, Va., and Utica, N.Y. (all 6%).

But most people think that Florida and California are overpriced. Why would markets there show the greatest gains?

There is clearly speculation taking place in these areas. But bubbles can persist for very long periods of time, and it typically requires a downturn in the local economies to burst them. Then they can deflate for a long time, too. Given the expected gains in employment and income in both states, I don't expect the housing prices to fall in 2006.

How can investors play this information?

Investors should not necessarily fear homebuilders who are operating in bubble markets. House prices don't plunge immediately in economic downturns the way stock prices do. There is typically a one-year lag after the local economy sees a decline in average employment and income. Thus, the homebuilder stocks may continue to perform well for a while longer.


Anonymous said...

UKHB: "Far too many people have too much faith in the property market."

You have to remember, that some economic cycles have longer timeframes than the human lifespan. If your experience is that for all of your life the price of real estate rises, then your experience has greater weight than some odd bod with nothing but 'ifs' and 'buts' to gainsay.

Mohnish said...

Dude! You missed the important factors like "shortage of 3 million homes every year", "increase in immigration", "decreasing marriages", etc. The housing bubble will not end anytime soon. Its gonna take years before the bubble bursts. All the figures are preety positive. Secondly, in the year 2005 some analysts provided their opinion that the property prices are gonna fall. And well here we are.

Although I live in India, I have studied a lot about the property markets of U.K. since I get a lot of projects about em (I am a writer, specialization - Finance, Stocks, Forex, "Property").

My Man! I was recently involved in a project on the property markets where I had to find out the factors that affect the property markets the most using the regression method.
The result wa absolutely amazing, the current trend of the property markets resembles to the trend in the 1980's when a big boom had begun for the real estate markets. In 2007, the correlation of all the variables resembles, so according to me the boom will continue for about another 7-10 yrs.

Would like to get in touch with you, need to learn a lot from you. Mail me.

Best Regards,
Mohnish Sapra