Friday, May 20, 2005
Pangloss Glassman is at it again, No Housing Bubble!
Back in 1998 James Glassman co-authored a book called Dow 36,000 which you can pick up for $2.85 on Amazon. In retrospect, it is easy to see why this was a monumentally bad call. At the time, it looked like genius. Actually no, even in the hothouse market of the 90's it was not hard to see that his prediction was based on bad suppositions. Now he is doing the same with housing bubble and history is repeating as farce.
Certainly, individual housing markets can suffer boom-and-bust cycles. (Look at
Houstonduring the 1970s and during the 1980s.) But real estate prices as a whole have been remarkably stable. The housing market has characteristics, such as sales commissions and transfer taxes, that tend to dampen volatility. Skipping in and out of a house in a day or two isn't particularly feasible, and the vast majority of home buyers, unlike stock buyers, are in for the long haul. California
The National Association of Realtors says its surveys find that 23 percent of all homes purchased in 2004 were for investment, and a further 13 percent were vacation homes. It's as if Americans got tired of the stock market, and decided to look elsewhere to try to lose money.
In other words, people are speculating on housing. That 23% were homes bought for the purpose of flipping for a quick profit or for rental income. Which explains why rental incomes relative to house prices are falling. Glassman is wrong, people are buying homes as a speculation. Many do not pay any commission, right now the Justice Department is stepping in to keep real estate brokers from stopping cut rate commisions. The speculation is fueling the building of more housing. Surging housing starts are not a sign of a strong housing market when people are buying homes for speculation. They are homes that will glut the market in the future.
But let's be clear: The house you live in is not an investment. It's an asset that produces nontaxable personal income, in the form of comfort and joy. When you sell your home, you have to buy another one. By contrast, if you sell your General Electric stock, you can do anything you want with the cash. And selling a home when prices are relatively high inevitably means buying a home when prices are relatively high.
What happens when people buy more home than they can afford? That is happening a lot these days and the reason is because of adjustable rate mortgages (ARMs). And, boy, are they popular.
In California, the traditional fixed-rate loan is in danger of becoming extinct. According to recent LoanPerformance data, the percentage of new loans that are adjustable in Santa Rosa was 85 percent; in Oakland, 84 percent; in San Diego and Santa Cruz, 83 percent; in Los Angeles, 74 percent.
About two-thirds of these loans are also interest-only, compounding borrowers' risk of "payment shock."
So you get situations like this:
Amy Matz and her fiance, Chris, a restaurant manager, are closing this month on their first house, a three-bedroom in Palm Springs that cost $495,000. They're borrowing $60,000 from their parents for a down payment, and financing the rest with an adjustable-rate loan that is interest-only for the first three years.
"We will be extremely nervous if we decide to stay longer than three years in that house and interest rates skyrocket," Matz said. "We are just banking on the hope that the home will gain enough equity by the time we sell."
Amy and her fiance are now speculating on real estate and interest rates. What do you think the chances are that interest rates won't rise if housing prices keep going up? Well, if the economy improves interest rates will go up and if the economy goes south housing prices will go down. Sounds like a no win situation for people who buy more house than they can afford. Imagine what will happen if interest rates go up and housing prices go down? Uuhhh doggy.
Even in places where prices are soaring, worries of a bubble could be overblown because higher prices appear grounded in good old fundamentals. Garrett Thornburg, who heads Thornburg Mortgage, pointed out to me that in hot markets, such as
You know, if it were only houses in Aspen and San Franicisco I would have to agree. But it's not! Neighborhoods in Chicago where I no economic growth has been recorded in a generation are having new homes built in them. I don't need to tell people in most big cities in the US that real estate is exploding but the international market is just as frothy. The lie is that land is scarce. It isn't. Sure, the best properties and locations might be scarce but you can always move a little farther away or make do with less house.
I am, however, annoyed and concerned when I hear my friends, who have made big, unrealized profits on their condos, talk about putting together pools to buy and sell real estate. As if it's so easy! Sure, consider buying a few rental properties for income and holding them for 20 years. But making money in real estate is no cinch. You're up against some very smart competitors who do it for a living. If you're convinced that prices will continue to climb, it's better to join the experts than to try to outsmart them.
You've got speculation all around you, even your friends are getting caught in the frenzy and you can't see it?! After this he gives suggestions of 'safe' ways to invest in the bubble. Ha.
But the main question about a real estate bubble is, why should you care? If you own a house for the right reason -- to live in it -- then short-term fluctuations are meaningless. If you are thinking about a first purchase or a trade-up, then the main issues are whether you can afford what you want on your income and whether you want to spend the dough on a house or on something else. If you do buy, don't expect the value of your house to rise much faster than inflation. Remember, it's not an investment. It's something better.
This is why you should care. Ever have to sell your house to relocate? Ever lose your job? Ever hope to sell your house to pay for your retirement? A housing bubble means that you will take a big loss if you have to do this if you are on the wrong side of the pop. I don't blame Glassman for the bubble but he should know better and I certainly hope his sit back and relax attitude doesn't cause anyone to make a potential life destroying financial decision.
I should say that I have no idea when the housing bubble will end. The fact that we are hearing stories about rampant speculation and buyers behaving like they must buy no matter what is a sure sign that we are inside of it. Also, the stock market bubble is still deflating. So when the bubble pops, we will know. Just sit back and enjoy the show.
Housing bubble news:
-Britain is experiencing the same phenomenon. Their housing market is cooling off.
-Young man talks about his families lust for real estate on NPR.
-Bill Fleckenstein compares our bubble with Japan's.
-Robert Schiller, author of Irrational Exuberance, talks about the housing market. Consider him the anti-Glassman.
-Patrick Killelea's housing bubble blog, all you need to know about this bubble and its consequences.