Relax, There Is No Housing Bubble

June 3, 2017

Trader Scott

Three heavy hitters in real estate – Darius Bozorgi, Veros CEO, Mike Fratantoni, Mortgage Bankers Association chief economist, and Douglas Duncan, Fannie Mae chief economist – all agree, “There is no housing bubble“. These real estate experts are all in agreement, and they believe the relentless house price increases are just from good old steady growth: “housing market progress really will be slow and steady”. And for “proof” of that slow and steady progress, the Case-Schiller Index rose to a 33-month high in March.

More industry experts are weighing in about why there is absolutely nothing to be concerned about in the US housing market because houses are a great deal: “Home values are likely to keep rising in 2017, but mortgage rates are still low. Plus, lenders are approving more loans than during any period this decade. Home values are on a tear. Not adjusted for inflation, prices are nearly 9% above the March 2007 peak. But as a home buyer, don’t let rising prices scare you. According to a recent report by First American Title Company, homes are still 33% cheaper than they were in 2006, in real terms – the typical buyer can afford 1/3 more home today than they could eleven years ago. Homes are only about 1/14 more costly now, homes are still a good deal.”  

 Even the one-and-only Warren Buffet has proclaimed that the housing market is not a bubble. The Oracle of Omaha believes it’s a good time to buy a house, even as median home prices are at record highs, and the dreams of being a house Flipper are in full gear. And you certainly shouldn’t be concerned with real estate when the totally unbiased says everything is fine. So should we be worried, as once hot real estate markets, like Miami, are cooling off? San Fransisco home sales in February were the lowest for any month in nine years. And prices are plunging in Manhattan, and even Ivanka Trump wants out.

We’ve heard from several real estate experts in this post proclaiming that US real estate is in great shape, underpinned by strong fundamentals, and there’s absolutely nothing to worry about. In fact, if you’re concerned about a bubble in real estate, you are ignorant of the facts. You only need to listen to the experts, and you can be reassured. Just like before the housing bubble 10 years ago, you should have just listened to the real estate experts, and gone all in on a house.

 All of the arguments (excuses) for the rising home prices into 2006 are eerily similar to the current environment in 2017. We keep hearing arguments like, the higher prices – appear grounded in good fundamentals, are based upon good employment trends and low interest rates, are because it’s cheaper to buy than to rent, are reasonable because there is not enough supply for the demand. Sound familiar?:

1. (January 8, 2005) Alan Reynolds, Senior Fellow, Cato Institute: “No Housing Bubble Trouble,”Washington Times : “In short, we are asked to worry about something that has never happened for reasons still to be coherently explained. ‘Housing bubble’ worrywarts have long been hopelessly confused. It would have been financially foolhardy to listen to them in 2002. It still is.” “Recession Fairy Tales,” Townhall (October 5, 2006): “When it comes to homes . . . many people have spent the last four years fretting that the ‘housing bubble’ might end. That is, they worried that overpriced homes might become more affordable. This is not quite as nonsensical as worrying the price of oil might fall too much, but it’s close.”

2. (July 25, 2004) Kevin Hassett, Director of Economic Policy Studies, American Enterprise Institute: New York Times : “Another bubble-skeptic is Kevin Hassett, director of economic policy studies at the American Enterprise Institute and co-author of the fabled ‘Dow 36,000,’ which was published in 1999 when the Dow Jones index was around 11,000. Mr. Hassett says there is an ideological component to the belief in bubbles. Liberals, who tend to believe that government must step in to protect people from market imperfections, will likely see more of them. Conservatives, who like their markets unfettered, will see less. “Mr. Hassett of the conservative American Enterprise Institute thinks housing prices will be pretty much O.K. He acknowledges there might be some bubble dynamics at play in some regions. But he argues that for the most part people are paying more for homes because their incomes are higher and interest rates are lower, reducing the cost to own a home. “Mr. Hassett expects that rising interest rates would raise this cost and home prices would then decline proportionately. But he sees no reason to expect a catastrophic decline. ‘I don’t think a catastrophe is very likely,’ he says.

3. (May 24, 2005) James K. Glassman, Senior Fellow, American Enterprise Institute: “Housing Bubble?,” Capitalism Magzine: “[W]hile such signs of speculation are troubling, there is little solid evidence that a real estate bubble is puffing up. “Even in places where prices are soaring, worries of a bubble could be overblown because higher prices appear grounded in good old fundamentals.”

4. (August 13, 2005) Jude Wanniski, former associate editor of the Wall Street Journal & adviser to President Reagan: “There is No Housing Bubble!!,” The Conservative Voice 

5. (July 5, 2006) Jerry Bowyer, Author of The Bush Boom: “Hate to Burst Your (Housing) Bubble: But there isn’t one,” National Review 

6. Jim Cramer, Host of CNBC’s “Mad Money” & Co-Founder, “House Beautiful,” New York Magazine (December 8, 2003): “Housing bubble? What housing bubble? The signs are in place for a further run-up in real estate. Breathe easy, mortgage holders. There’s still no place like home.”

7. Christopher Flanagan, Head of ABS Research, J.P. Morgan: “Housing Outlook,” J.P. Morgan Research, June 17, 2005 (no link): “[B]ased on what we know and see in terms of employment and interest rates, it is extremely difficult to see how five years from now we could be looking back and observing a historical 5-year growth rate of, say, less than 5%. That should be more than adequate to support the continued good credit performance of sub-prime mortgage pools. “It is important to understand — we can contemplate home price growth rates declining, albeit modestly, but we do NOT envision home prices declining!”

8. Neil Barsky, Alson Capital Partners, LLC: “What Housing Bubble?,” Wall Street Journal (July 28, 2005): “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. “What we do have is a serious housing shortage and housing affordability crisis.”

9. Chris Mayer, Professor of Real Estate, Columbia Business School, and Todd Sinai, Professor of Real Estate, Wharton School: “Bubble Trouble? Not Likely,” Wall Street Journal (September 19, 2005): “For the past several years, Chicken Littles have squawked that the sky — or the ceiling — is about to fall on the housing market. And it’s tempting to believe them…“Yet basic economic logic suggests that this apparent evidence of a bubble is anything but. Even in the highest-price cities, housing is, at most, slightly more expensive than average.”

10. Jonathan McCarthy, Senior Economist, New York Fed, and Richard W. Peach, Vice President, New York Fed: “Are Home Prices the Next Bubble?,” FRBNY Economic Policy Review (December 2004): “Home prices have been rising strongly since the mid-1990s, prompting concerns that a bubble exists in this asset class and that home prices are vulnerable to a collapse that could harm the U.S. economy. “A close analysis of the U.S. housing market in recent years, however, finds little basis for such concerns. The marked upturn in home prices is largely attributable to strong market fundamentals: Home prices have essentially moved in line with increases in family income and declines in nominal mortgage interest rates.”

11. David Malpass, Chief Economist, Bear Stearns: “So This is a Weak Economy?,” Wall Street Journal (June 28, 2005): “[T]he litany against the U.S. economy is so ingrained and familiar that few disputed this spring’s ‘slowdown.’ When strong data on income, employment, consumption and profits showed 3.5% first-quarter GDP growth and a continuation into the second quarter, the headlines shifted to other attacks — adjustable-rate mortgages, a housing ‘bubble,’ the distribution of income — rather than revising the slowdown story.”

12. Steve Forbes, CEO, Forbes, Inc.: Global Leaders Speakers Series (November 10, 2005): “[Forbes] maintained that there was no ‘housing bubble’ in the U.S. but there was an ‘oil bubble’ driven by speculators.”

13. Brian S. Wesbury, Chief Investment Strategist, Claymore Advisors: “Mr. Greenspan’s Cappuccino,” Wall Street Journal (May 31, 2005): “These nattering nabobs expect a housing collapse to take down the U.S. economy. But excessive pessimism is unwarranted: Fears of a housing bubble are overblown.”

14. Carl Steidtmann, Chief Economist, Deloitte Research: “The Housing Bubble Myth,” Economist’s Corner (July 2005): “When you strip away all of the white noise around a housing bubble, what you find is a robust market for housing that is undergoing several profound changes all of which manifest themselves in higher home price indexes, none of which adds up to a housing price bubble.”

15. Margaret Hwang Smith, Professor of Economics, Pomona College, and Gary Smith, Professor of Economics, Pomona College: “Bubble, Bubble, Where’s the Housing Bubble?,” Brookings Papers on Economic Activity (2006): “Our evidence indicates that, even though prices have risen rapidly and some buyers have unrealistic expectations of continuing price increases, the bubble is not, in fact, a bubble in most of these areas in that, under a variety of plausible assumptions, buying a house at current market prices still appears to be an attractive long-term investment.”

16. Charles Himmelberg, Economist, New York Fed (with Columbia professor Chris Mayer and Wharton professor Todd Sinai—see #10, above): “Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions,” Federal Reserve Bank of New York Staff Reports (September 2005): “As of the end of 2004, our analysis reveals little evidence of a housing bubble. In high appreciation markets like San Francisco, Boston, and New York, current housing prices are not cheap, but our calculations do not reveal large price increases in excess of fundamentals.”

17. Jim Jubak, Investing Columnist, MSN Money: “Why There is No Housing Bubble,” MSN Money (June 10, 2005): “Housing bubble? What housing bubble? With the 10-year U.S. Treasury bond yielding below 4% and 30-year mortgages available at 5.1%, there isn’t a housing bubble.”

18. James F. Smith, Director, Center for Business Forecasting: “There is No Housing Bubble in the USA: Housing Activity Will Remain At High Levels in 2005 and Beyond,” Business Economics (April 2005): “There is no evidence of a housing ‘bubble’ in the United States and housing demand should stay strong for years to come.”

19. Kathryn Jean Lopez, Editor, National Review Online: “Don’t be Myth-Understood,” National Review (December 21, 2005): “[T]he so-called housing bubble has yet to pop, and likely won’t as long as home ownership remains a tax-advantaged event. Even the New York Times — no parrot of White House talking points — has had to admit that the economy is ‘booming.’”

20. Samuel Lieber, President, Alpine Woods Capital Investors: “Housing Bubble? The Market Won’t Pop, Experts Predict,” Wall Street Journal (April 12, 2006): “We don’t see a bubble. Historically, home prices just don’t go down nationwide unless we are in a significant recession. The last time home prices fell nationwide was in 1990. It’s employment that really counts. The underlying fundamentals of real estate are still very positive. Job creation and household formation drive housing.”

21. Mark Vitner, Senior Economist, Wachovia: “There is No Housing Bubble, Says Senior Economist,” The Virginia-Pilot (January 19, 2006): “‘Everybody is looking for evidence of a housing bubble,’ [Vitner] said. ‘There is not a housing bubble. The supply had not kept up with demand.’”

22. George Karvel, Professor of Real Estate, St. Thomas University: “Housing bubble?,” Minneapolis Star Tribune, October 4, 2005 (via LEXIS): “‘There’s no housing bubble,’ said George Karvel, a professor of real estate at the University of St. Thomas. ‘This is a media-induced frenzy. If I wanted to say there is a housing bubble, I’d have Time and Money magazine camped on my door. They’ve called, and I’ve told them there’s no bubble. Panic sells.” “There is absolutely nothing in any market in the country to indicate there’d be any kind of collapse in housing prices,’ he said.”

23. Glenn Hubbard, Professor of Finance and Economics, Columbia Business School: Face the Nation (August 21, 2005): I think we do have a great deal of froth in housing markets. There’s no doubt about it. I don’t think we’re likely to see a large nominal price collapse, that is largely falling house prices, but I think we’ll see much slower rates of growth in house prices after 2005.

24. Alex Tabarrok, Professor of Economics, George Mason University: “Was there a Housing Bubble?,” Marginal Revolution (Feb. 13, 2008): In the shift to the new equilibrium there was some mild overshooting, especially due to the subprime over expansion, but fundamentally there was no housing bubble [emphasis in the original].

25. Larry Kudlow, Host of CNBC’s “The Kudlow Report” & Economics Editor, National Review: “The Housing Bears Are Wrong Again,” National Review Online (June 20, 2005): All the bond bears have been dead wrong in predicting sky-high mortgage rates. So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.

And we saved the best for last – in October 2005  the Pre-Fed Chairman version of Ben Bernanke was interviewed. This is before his Fedspeak speech impediment took hold, and he was very easily understood: “There’s no housing bubble to go bust”. And then just to reconfirm that becoming Fed Chairman would not alter his cluelessness, in February 2006 he proclaimed: “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.

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