Double Double Toil and Trouble; Is the Housing Market a Bubble

Many economists consider the housing market to be the saving grace of an otherwise troublesome economy, as the number of homeowners continues to grow, along with home purchase prices. As Chief Economist and co-founder of Economy.com, Dr. Mark Zandi said at a recent FDIC conference, “Thank God for the housing market, otherwise we’d be in a real mess.” The purpose of the conference, which was took place in Washington D.C. on November 15 and was co-sponsored by the National Association of Business Economics, was to address growing concerns that the success enjoyed by the housing market may actually be a bubble, poised to burst in coming months.

 
 

Many economists consider the housing market to be the saving grace of an otherwise troublesome economy, as the number of homeowners continues to grow, along with home purchase prices. As Chief Economist and co-founder of Economy.com, Dr. Mark Zandi said at a recent FDIC conference, “Thank God for the housing market, otherwise we’d be in a real mess.” The purpose of the conference, which was took place in Washington D.C. on November 15 and was co-sponsored by the National Association of Business Economics, was to address growing concerns that the success enjoyed by the housing market may actually be a bubble, poised to burst in coming months.

Dr. Dean Baker, macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington D.C, likened today’s housing market to the stock market bubble of just a few years ago. Baker noted that home purchase prices have risen nearly 30 percent more than the rate of inflation in the past seven years. He then pointed to a similar bubble in Japan’s real estate market in the late eighties. “The collapse of the housing bubble,” warns Baker, “will destroy between $1.3 trillion and $2.6 trillion in housing wealth.”

But others argued that such fears, while understandable, are largely unfounded. According to Frank E. Nothaft and David W. Berson, Chief Economists at Freddie Mac and Fannie Mae, respectively, there are a number of factors affecting today’s housing market that likely preclude it from experiencing a bubble. Both economists stressed the fact that home buying behavior is significantly different than stock speculation, and that the demographic outlook of the next few years does not support a decline in home purchase prices. Similarly, both reminded their audience of the importance of inventory, stating that we will not experience a bubble unless supply begins to surpass demand. Given the demographic outlook, and the fact that the supply of homes on the market is “lean,” this seems unlikely. And because the purpose of homeownership is primarily consumption, rather than investment, the average length of ownership extending 12-14 years. This means that the housing market experiences little of the speculation that is often indicative of a bubble. Both Nothaft and Berson suggest that although we should not expect the housing market to maintain its current levels of growth, there is little chance of a national bubble burst. In the coming months and years we should expect lowered levels of growth and modest recovery, but not a dramatic drop in prices on the national level.

What should be of concern to credit unions, however, is the potential of regional bubbles bursting. Because the housing market is so regionally specific, all four warned that if any areas do experience a bubble, it will likely be those that are currently undergoing particularly dramatic growth, namely major coastal cities in California and the Northeast. However, the biggest issue for mortgage lenders may be in those areas least likely to experience a bubble. In regions where prices are already low, lenders should be wary of marketing their mortgage products too aggressively, as mortgage credit quality may be a problem. This has already created difficulties in some areas of the South and Midwest, where lenders, eager to stimulate the housing market by offering easy approval loans, have been experiencing higher delinquency rates.



For more information on the housing market and mortgage activity, check out Callahan & Associates’ 2002 Credit Union Mortgage Research Report: Strategies and Practices in a High Growth Environment.

 

 

 

Nov. 25, 2002


Comments

 
 
 
  • The article does not consider the effect that lower interest rates have had on values, and what the outcome would be if rates were to rise.
    Anonymous
     
     
     
  • I'd like so see more articles on housing and mortgages. Mika Mills
    Anonymous
     
     
     
  • Excellent! 12-14 year home occupancy may be too long. The figure for family relocation is 5 years, so you would have to have rental families moving avery other year to get to a statistic of owner-occupied turning over only every 12-14 years. The article could have presented concepts to counter the potential bubble burst with investment strategies. George Schneider, Supervisory Committee, Point West Credit Union Portland, OR
    Anonymous
     
     
     
  • Good forward-looking article. Be interesting for Callahan to look at foreclosures on a CU-regional basis...any spikes? Related to major CU sponsor company layoffs? Hmmm. I wonder...
    Anonymous