Jump to content



Photo

Being Street Smart 5/28/4


  • Please log in to reply
No replies to this topic

#1 TTHQ Staff

TTHQ Staff

    www.TTHQ.com

  • Admin
  • 8,597 posts

Posted 31 May 2004 - 11:42 AM

BEING STREET SMART
____________________

By Sy Harding


IS THERE A BUBBLE IN REAL ESTATE? May 28, 2004.

Many investors disillusioned by the bear market in stocks are standing aside, mostly leaving the stock market to short-term traders. That is evidenced by the fact that trading volume on the major stock exchanges is running at barely half the pace of the late 1990s, and a record $2.2 trillion has piled up in money-market mutual funds.

But real estate has been in a super bull market. Even though the stock market plummeted, and the economy sank into the 2001 recession, and year after year of frightening job layoffs continued, home sales and home construction took off for the stratosphere, and have surged almost continuously to ever higher record levels. Home prices have surged upward right along with the record demand. Every once in awhile warnings have come out that it couldn’t continue. But reminiscent of Alan Greenspan’s warnings in 1996 about the “irrational exuberance” in the stock market, the bull market in real estate roars on.

As we all know, the catalyst is the record low interest rates, coupled with the willingness of banks to lower their lending standards. Most banks are no longer concerned about the credit quality of the mortgages they provide, since they no longer hold those mortgages for the long-term themselves. They package them as mortgage-backed securities that are sold to investors seeking income. Home-buyers aren’t concerned about credit risk, or being forced to sell their home if rising interest rates make their variable rate mortgages unaffordable, confident that even though their initial down payment is small, rising home prices will bail them out by providing ever increasing equity in their home. So far, just like the stock market in the late 1990s, it’s been working out great.

However, this year there have been increasing signs of the excess confidence and froth usually seen in investment bubbles. Real estate is a bit more refined investment and trading area than some others when it comes to froth. You won’t see the equivalent of housewives standing in line for half a day because a store is about to receive a shipment of Cabbage Patch Dolls, or getting in shoving matches in the aisles over Beanies Babies, or investors bidding the price of an Internet stock up 200% the first day it opens for trading. But it is interesting that real estate agents now have customers bidding against each other to pay more than the asking price for homes, and buying out-of-state houses over the telephone, sight unseen, for fear that by the time they travel to see it someone else will have snapped it up. It does bring back memories of similar conditions in California just before the real estate collapse in the late 1980s.

As with all markets, real estate investing is a game of supply and demand. As long as demand grows faster than supply, prices will rise. But as soon as something causes demand to slacken, prices inevitably fall. In the case of stocks, demand usually dries up as a result of concerns about the economy or stock valuation levels.

In real estate, demand usually slows as a result of rising interest rates, or when something acts to sap consumer confidence. This real estate boom was not fazed by the 2001 economic recession, nor the decline in consumer confidence that accompanied the stock market plunge and 9/11 terrorist attacks.

So perhaps it will not be fazed by the rise in interest rates that began in March when stronger than expected economic numbers came out, and the Fed began making noises about raising interest rates to ward off inflation. The real estate industry put a positive spin on the situation, noting that even with a Fed rate hike or two, mortgage rates would still be at very low levels that should not affect home buyers. And indeed that seemed to be the situation when mortgage rates began to rise in anticipation of Fed rate hikes, yet home sales surged again in March to a new record high.

But a few spoil sports claimed it was just a temporary surge in March as home buyers had rushed in to buy before mortgage rates went even higher. They may have been more right than the real estate industry, since this week it was reported that new home sales plunged a big 11.8% nationwide in April. That was the largest monthly decline in 10 years, while at the same time new mortgage applications, and mortgage refinancing applications, have been dropping in May.

One month does not make a trend, but it may be time for those betting on a continuation of rising home prices, to remember what happens to prices of anything when previous hot demand slows.

Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.