Greenwich Real Estste Market Explained

What Housing Bubble?

By NEIL BARSKY

If you want to be scared out of your wits these days, you basically have two choices: go watch Steven Spielberg's latest, or listen to the hysterical warnings of economists and journalists about the imminent popping of our so-called housing bubble. Robert Shiller, the ubiquitous Yale economist, says home prices could fall 50% from their peak. Taking things a step further, The Economist recently went so far as to call the global housing boom "the biggest bubble in history."

In a free country, it is fair game for the media and economists to scare homeowners with words of gloom and doom, however knee-jerk, consensual and misguided they may be. But housing is a serious business; for most of us, it is our most valuable asset. For generations of immigrants, home ownership has represented the realization of the American dream.

The reality is this: There is no housing bubble in this country. Our strong housing market is a function of myriad factors with real economic underpinnings: low interest rates, local job growth, the emotional attachment one has for one's home, one's view of one's future earning- power, and parental contributions, all have done their part to contribute to rising home prices. Over the past quarter-century, there has been an explosion of second-home purchases, a continued influx of immigrants, and a significant reduction in existing housing inventory through tear-downs. Not all of these trends are accurately reflected in the unending stream of data published daily. Home prices on average have risen at a 6% annual pace since 1999, and 13% over the past year.

What we do have is a serious housing shortage and housing affordability crisis. Despite robust construction, unsold inventory stands at four months, well below its 25-year average. Private builders complain they can't get land permitted to meet demand. Low-income housing advocates complain housing prices are out of reach for many Americans, and that government subsidies have been slashed.

I am not an economist, though if you keep reading, you'll find I can use selective data points to my advantage with the best of them. I was a real estate reporter for this newspaper through several real estate crises, as well as a Wall Street REIT analyst; I am now a money manager. I currently own stocks in several homebuilders; so I am putting my money where my mouth is.

Of course, over the past 25 years we have seen numerous real estate busts. However, steep price declines have typically been driven by local economic factors -- oil woes lead to weakness in Texas in the '80s; aerospace and defense layoffs soften up prices in LA in the '90s; a contraction on Wall Street hurts New York co-op prices.

What we have never seen in this country is a collapse of home prices without also seeing local economic weakness or significant capacity growth. Absent those factors, housing markets just don't collapse under their own weight. Herewith are some of the myths put forth by the housing bubble Chicken Littles.

• Myth #1. There is too much capacity: According to Census data, over the past 10 years, housing permits have averaged about 1.63 million units per year -- including multifamily units. Household formation has averaged 1.49 million families per year. So far, so good. But here is where the data gets murky. Roughly 6% of the new home sales were for second homes (I have seen estimates that the number is actually twice as high), according to UBS. And while there are no precise numbers on this, approximately 360,000 units every year were torn down either because they were nonfunctional, or because they were "tear-downs." When the latter two numbers are taken into account, the real number of new homes is closer to 1.2 million, or 19% fewer than the average number of new households formed each year.

• Myth #2. Risky mortgage products are fueling house appreciation: Sages from Warren Buffett to Alan Greenspan have warned of the increased risk from the use of new mortgage products, particularly adjustable-rate mortgages and interest-only mortgages. The theory here is that buyers are extending themselves to make payments, and when their mortgages reset they will be in trouble. Put aside the fact that only a year ago Mr. Greenspan was advocating the use of ARMs ("American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," he told the Credit Union National Association last year), these concerns are wildly overstated. As virtually every mortgagee in the country knows, most ARMs are fixed rate for the first two to seven years. Virtually all have 2% interest-rate caps. The average American owns his home for seven years. Why pay several hundred basis points to lock in rates he is highly unlikely to take advantage of? Moreover, very little equity has been paid off by a homeowner in the first seven years of a 30-year loan, so consumers have been effectively overspending on interest rates for generations. As Mr. Greenspan said in his 2004 speech, "the traditional fixed-rate mortgage may be an expensive method of financing a home."

• Myth #3. Speculators are Driving Home Prices: The media today is chock-full of stories of day-trading dot-com refugees who have found their calling buying homes and condos "on spec," with the hope of flipping the property for a higher price. Earlier this month, one Wall Street analyst published an article with the catchy headline: "Investors Gone Wild: An Analysis of Real Estate Speculation." Scary stuff. Here, again, some common-sense thinking is in order. In Manhattan, where I live, friends buy apartments kicking and screaming, convinced they top-ticked the housing market. Is Manhattan special? Are speculators flipping Palm Beach mansions? Bay Area three-bedroom homes? Newton, Mass., Tudor homes? I don't think so. Yet these markets are experiencing the same price appreciation as Las Vegas, Phoenix and Florida, where real estate investors are supposedly driving prices higher.

Anyone waiting for prices to collapse before buying a home is likely to be in for a disappointment. According to the Homeownership Alliance, new household formation, replacement demand and second-home demand will require about two million homes per year to be built over the next decade. This year, the number is likely to be around two million, the highest number since the 1970s -- even as the number of households has grown by over 50% since 1975. Therefore, there is a large cumulative deficit in housing that will take years to correct even if annual housing starts continue at these record levels.

To the cynical, it is seductive to claim that every piece of good news is a bit fraudulent. And real estate has certainly been subject to boom and bust cycles. But bubbles happen when prices become unhinged from intrinsic value. Homes are not stocks; their "intrinsic value" can only be in the eye of the beholder. A house has utility. Rational people might be willing to pay more for a water view, or for living close to work, or for a larger loo. Such voluntary economic decisions are neither irrational nor exuberant.

It's time to stop being alarmist about home prices. To the extent policy makers want to modulate home-price appreciation, they would do well to relax zoning laws, or stimulate development of low-income housing through tax subsidies. Since those things are not likely to happen overnight, housing prices are likely to cool off slowly, if at all.

Mr. Barsky is managing partner of Alson Capital Partners, LLC.

Greenwich Real Estate Market Explained

DEJA VU AND THE HOUSING BUBBLE

THE FINANCIAL PRESS IS PERENNIALLY BEARISH ON HOUSING—AND PERENNIALLY WRONG
by DAVID M. MICHONSKI

The popular press is full of speculation that the United States, as well as other countries, is in a “housing bubble” that is about to burst. Barron’s, Money magazine, and The Economist have all run recent feature stories about the irrational run-up in home prices and the potential for a crash. The Economist has published a series of articles with titles like “Castles in Hot Air,’ “House of Cards, “Bubble Trouble”, and “Betting the House.” These accounts have necessarily raised concerns among the general public…..”

Sound familiar? It should. It was written about the coming housing crash. When? September of 2003, about two years ago.

Marc Faber, the well known Zurich based money manager, and frequent contributor to Barron’s, suggested that a 10% to 20% drop in housing is in the offing. That was in the January 2003 Barron’s Market Roundtable, 30 months ago. Or in terms of price appreciation about 25 percent ago.

Jonathan Laing of Barron’s staff wrote a piece about bubbles and financial manias. He frets about the US housing bubble that, he says, “could explode.” That was January 18, 2003.

It is all déjà vu. It also just keeps recurring.

The financial press (not just Barron’s) seems to be perennially bearish on housing and therefore perennially wrong. Just look at what most of them were writing at the time of the last great buying opportunity, back in 1989 to 1991.

In May/June 1989 Money printed an article titled “It’s time to rethink your biggest investment.”

Aren’t you glad you didn’t? 1989 was a great time to buy.

Jonathan Laing of Barron’s wrote a piece in December of 1989 about “Crumbling Castles” and unbelievably how “demographics” would worsen a collapse of home prices.

Demographics? The demographics of housing were just changing positively for the next 30 years as the Baby Boomers were heading into peak earnings. Barron’s in that year also ran a front page article quoting a study that predicted housing prices could fall as much as 3% a year during the 1990’s.

In February of 1990 Forbes ran an article called “Home, no-so-sweet home” followed by Fortune in July of that year who ran an article titledincredibly, “Does it still pay to own a house?” Uhh, yeah.

In October of 1990 Newsweek ran a cover story about the housing bust, complete with “special section” titled “The Big Bust.” Aren’t you glad you didn’t keep that “special section?”

The negativity continued, all the way into 1992. Business Week published another head turner when it titled an article in April 1992: “Those huge hikes in home values are built on quicksand.”

That was 13 years ago and at least 100% ago in terms of price appreciation.

The ultimate article, however, was the cover story with picture that Barron’s ran in its August 22, 1988 issue called “The Coming Collapse of Home Prices” featuring a house poised on a cliff ready to fall off. It featured an interview with Comstock Partners’, Stan Salvigsen and Michael Aronstein, two of the hottest gurus on the Street back then. Aronstein’s prediction was for a decline of 50% in housing values. Salvigsen’s advice in 1988? “Sell and rent.” To make you feel better he told Barron’s readers in the interview that “I rent in Manhattan and so does Mike.” Now don’t you feel good that you didn’t buy then?

Why does the financial press think they know anything about housing?

The question has dogged me for 20 years. I don’t understand why they think they do. At your peril you will look to and listen to what Barron’s and the rest of the financial press prints about housing or buying a home.

What is it about housing and real estate that the financial press just doesn’t get?

Maybe it is that Wall Street is just too analytical and rational in its thinking. Wall Street is about being unemotional and looking objectively and analytically at everything. It is about doing your research. The guys on the street think they can figure it all out if they just do their “homework.”

Most consumers, especially first time buyers, however, approach real estate differently. They just want a home. They want a place to live. They do crazy things like empty their savings accounts, scrape together every last nickel and hit up all their relatives for a down payment, all primarily because they are motivated by the desire for home ownership. The first time homebuyer wants his own place. It is, after all, quintessentially human to love one’s own. Loving one’s own and therefore wanting to own it may not be the most rational of choices and may not be quantifiable by analysts, but it is the drive behind most home ownership.

Housing is thus one of the most personal and emotional decisions consumers ever make. Further, it is full of taste and subjectivity, adding to the emotionality. It is the opposite of Wall Street thinking. Might it not stand to reason that Wall Street’s quantitative models just may not be able to understand what drives housing? Adding to the emotionality, housing is a status symbol, both for the first time buyer and for the wealthy buyer. For the wealthy it is perhaps the biggest status symbol of all. Bigger than the car. Bigger than the club. Bigger than the jewelry and the kids’ schools. People buy and sell houses to demonstrate where they are on life’s pecking order. People want us to know what town they live in, how big their house is, or how prestigious their building is. Housing is a measure of how far you have come in the world. It is a way for people to put a sign out that says “I made it. Come see.” That does not exactly lend itself to Wall Street “quant” analysis.

Perhaps it is this emotional and status aspect to housing that is at the heart of why the crash that Wall Street keeps predicting is so unlikely. And there are other reasons why Armageddon may be put off, for a few generations.

There is the investment issue. The Wall Street lens through which it wants always to look at everything is whether it is a good investment. My observation is that most people’s stock portfolios do not fare as well as their housing “investment.” It is usually that home, which someone bought fearing it was the top of the market, fearing the next crash, fearing the leverage, and for which they emptied their bank accounts and aggravated their “liquidity ratios”, it is that house that pays for the kids’ college, the daughter’s wedding, that serves as the retirement nest egg for its occupants, not their IRA account.

Most people know this. Common man knowledge asserts at parties and on street corners that “my house was the best investment I ever made.” And common man knowledge has its roots in fact. Because the fact is that since the end of World War II when the National Association of Realtors started keeping records, the average price of a US home has never gone down. Not in the recession of 1974, not during the high interest rates of 1980, not after the stock market crash of 1987. No, not ever. Yes, pockets of overbuilding and thus oversupply have led to declines locally. For instance, the overbuilding of the 1980’s in Manhattan led to the downturn of 1990-1992. The aftermath of the oil boom led to housing price declines in Texas and Denver. But the national average price of homes has never declined. Can anyone on Wall Street say that about their investment portfolios?

The very nice lady in the periodicals department of the library who helped me research this article asked what it was about? I told her it was about the folly of the financial press in always predicting a crash in the housing market. “I wish it would crash,” she said. “Then maybe I could buy a home. It certainly would do better than my 401K.”

Could it this competition for funds that makes Wall Streeters always so bearish on housing? Wall Street makes its money by attracting your money. Your 401K, your IRA. Surely our friends on the Street prefer that your money not go out of their hands into something called real estate. Of course that does not shade people’s judgment on Wall Street, right?

Aronstein and Salvigsen, in that famous 1988 Barron’s article with the house falling off the cliff, were both renting. Is it possible that someone predicting a 50% decline in housing was secretly hoping to “buy on the dip”? Of course not because as we all know so well there are no conflicts of interest on Wall Street, right?

I just read that someone called Michael Swanson has written a tome called ‘Housing Market to Crash.’ It is a “full report on the coming wipe out…..” It emanates from a website called www.wallstreetwindow.com. I wonder if he rents, too.

Déjà vu.