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Is the US Housing Boom running out of Steam?

by Alexander G Rubio Tue Aug 23rd, 2005 at 02:40:05 PM EST

When the stock markets crashed following the great Dot.com mania of the late 90s, a corrective downturn was headed off at the pass by US Federal Reserve Chairman Alan Greenspan. The markets were flooded with liquidity and interest rates driven down to levels well below the rate of inflation. Suddenly it paid to borrow money. As a result there was a boom in the primary loan based asset, housing.

New mortgages were issued with ever less collateral or money down needed. Old mortgages were refinanced from old fixed rate loans to new adjustable rate mortgages, yielding lower monthly payments while the house owner could "take out" some of the now rising value of his home as spending money to buy that home entertainment system made in China. And so the loose money from the Fed. flowed like a mighty river through the economy, overflowing borders and creating new bubbles as it went all through the industrialised world.

Of course all good things must come to an end. Housing prices can't shoot up in excess of wage growth for very long before it is out of reach for most people, no matter the terms at the bank. Two other Anglo-Saxon economies, the UK and Australia, have already seen some of the air leak from their housing markets as personal debt has climbed to unsustainable levels. And now there are signs that even the US market may have topped out.

Sales of existing U.S. homes dropped 2.6 percent in July as the pace of both condominium and single-family home purchases slowed across nearly the entire country, a trade group said on Tuesday.

Previously owned home sales fell to a seasonally adjusted 7.16 million unit annual rate last month from June's record, which was revised up to a 7.35 million unit pace, the National Association of Realtors said. That figure includes both single-family homes and condos.

Analysts had expected overall sales to decrease to a 7.25 million unit annual pace.

"There seems to be some air coming out of some of these balloons," said David Lereah, the Realtors' chief economist.

And while these numbers were north of what many expected, there is now a marked build-up of inventory.
The supply of homes available for sale increased to 4.6 months' worth in July, the highest since November 2003, from 4.4 months' worth the previous month.

``We are starting to see more houses coming into the market,'' and that is a sign of a turn, Harris said. ``First you see inventories rising, then you see a flattening of prices and then you start to see people have difficulty selling houses because buyers have more options and they get more demanding.''

A total of 2.75 million homes were for sale last month, the most since May 1988.
A 40 percent decline in prices after inflation is ``a reasonable projection for many places in the United States going forward,'' said Robert Shiller, a professor at Yale University, in an interview yesterday. ``The idea that home prices are just going to keep going up is just at odds with all historical evidence.''

Shiller said that housing has undergone the biggest speculative boom in U.S. history in the second edition of his 2000 book, ``Irrational Exuberance,'' that predicted the stock market would collapse.

Of course while this would be terrible news for people who bought into the market just lately, and would have repercussions on the wider economy, it would mean that a new generation, who never could get on the merry-go-round and never could raise the capital needed to become homeowners at today's prices, might have their chance soon.

This article is also available at Bitsofnews.com.

And so the loose money from the Fed. flowed like a mighty river through the economy, overflowing borders and creating new bubbles as it went all through the industrialised world.

Good image, and a good diary. Thanks.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Aug 23rd, 2005 at 03:24:47 PM EST
Thanks for the good diary. One thing though: you're talking about the US bubble, right? It might be worth making that clear in diaries here, since you could be talking about half a dozen countries.
by Colman (colman at eurotrib.com) on Tue Aug 23rd, 2005 at 03:38:20 PM EST
I altered the title to reflect the focus of the article.
by Colman (colman at eurotrib.com) on Tue Aug 23rd, 2005 at 03:47:58 PM EST
[ Parent ]
Yes, the main focus is on the US market, though as I pointed out, this bubble has dropped a litter of cute little puppy-bubbles all over the place, including continental Europe.

It's not been a good time to settle down for young families lately, but un-divorced baby boomers are sitting pretty.

Bitsofnews.com Giving you the latest bits.

by Alexander G Rubio (alexander.rubio@gmail.com) on Tue Aug 23rd, 2005 at 03:54:32 PM EST
[ Parent ]
You can predict what I'm going to say: "Could you please make this into a comparison of the U.S. to somewhere in Europe, say, perhaps, your own locale, Norway?"

There are so many places on the Internet to talk about this crisis or that crisis in America, and I keep hoping that this blog of Jerome's will provide some comparative insight into the situation here versus there. That's why I'm so sensitive to "America bashing." It's not because I really care about the bashing--it's common enough on this side of the pond, too--but because I keep hoping and hoping to find insight into the European situation to provide context or contrast. A bare statement about an American fiasco doesn't help me understand the RELATIVE problem of housing price trends around the globe.

So once again I will dig under some rocks and try to find out for myself what is going on in the European housing market, an almost impossible task given only English-language sources. Here's what I found in what is presumably an acceptable Norwegian source.

"All in all, the financial situation of the household sector has deteriorated over the last six months. The wealth position of the household sector as a whole is nevertheless satisfactory. However, high house prices and house sales continue to stimulate strong growth in debt from an already high level. A situation where debt growth is much stronger than growth in income cannot be sustained over time."
(This seems to be from 2003, but I'm not sure...)

So what does it mean (one asks, expecting to be accused of proposing disingenuous rhetorical questions)? Is the housing market in Norway also in a bubble? Or perhaps the problem is confined only to the Anglo-Saxon community: United States, Britain, and Australia.

by asdf on Tue Aug 23rd, 2005 at 04:16:12 PM EST
Yes, as I've mentioned above, this thing is not limited to the US, though it in some (though not all) ways originated there. The bubble has lifted not only the coastal areas of the US, but Oslo and Shanghai too.

Too many people now have too much to lose if the bubble deflates, and too many people will be permanently in debt or outside the housing market if it doesn't. And it's a global problem at this point.

The reason the article is focused on the US is that the numbers today were from the US; and the centrality of the US monetary policy in keeping the bubble going and the sheer weight of the US economy, means that it is the bellwether for what is to come other places. No US bashing intended. It's just the old truism that is Wall Street has a sniffle, the rest of the world catches pneumonia transcribed to real estate.

Bitsofnews.com Giving you the latest bits.

by Alexander G Rubio (alexander.rubio@gmail.com) on Tue Aug 23rd, 2005 at 04:30:47 PM EST
[ Parent ]
I always thought the US was late to the party when it comes to property. In  much of the US, you can still buy property quite cheaply. The median price for a home is still far below that in Europe. When people talk about housing bubbles in the US (and there is one in Boston, San Fran, LA and NY) I ask them to travel to Padova, Italy, or Barcelona, Spain, or Glifada, Greece. The prices int hese areas in the mid 1990s were astounding. I'm not even going to mention Tokyo or Hong Kong or Vancouver.

That being said, there have been housing booms and busts before but unless you live in hot spots like San Francisco and that area, a housing bust rarely yields appreciable deflation. What we call a bust in the US is really a long period of stagflation.

Even in densely populated and prosperous Connecticut, you can still buy a decent sized home for $270,000. Which sure beats buying a home in Italy and Greece.

by Upstate NY on Wed Aug 24th, 2005 at 09:22:36 AM EST
[ Parent ]
I haven't researched house prices in any detail, however, I suspect a direct comparison is problematic: European housing is probably more expensive without any market trends, because of more expensive building materials and more scarce area to build on.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Aug 24th, 2005 at 09:33:24 AM EST
[ Parent ]
I think you hit on the essential differences. However, it is important to note that the European example shows us that people will pay very high prices for property and that housing prices can remain this high because of the demand. The price of a flat in Athens exceeds the average income by much more than the 2, 3 or 4 to 1 factor we've become accustomed to in the US.
by Upstate NY on Wed Aug 24th, 2005 at 09:45:55 AM EST
[ Parent ]
I again don't have statistics on this, but I seem to recall that there is a stark US-European difference in the ratio of homeowners and flat renters. If that is so, then high house prices do make a difference, and would in the USA too.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Aug 24th, 2005 at 10:20:49 AM EST
[ Parent ]

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