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Wednesday, January 8, 2003 What housing bubble?
It's time to stop perpetuating the myth of a housing price bubble. Contrary to recent speculation among Wall Street analysts and media who might like to see housing investment dollars diverting to stocks and bonds, no such phenomenon exists. Generally speaking, price bubbles in asset markets involve rapid price gains that are fueled by speculative fervor or unrealistic expectations that ultimately prove to be unsupportable by economic fundamentals. The explosion of the high-tech component of the stock market is the most recent example of irrational exuberance, and the subsequent collapse of this market occurred when earnings expectations came back to reality. The generation of this bubble, and the subsequent bust, required massive inflows and outflows of investment capital over short periods. Could this type of thing occur in the housing market? Not likely. Take it from Alan Greenspan. The Federal Reserve chairman recently told Congress not to worry about bubbles in house prices, despite well-publicized concerns on this front. Greenspan focused on major differences between stock and housing markets that illustrate the practical impossibility of generation and deflation of large national house price bubbles. He stressed the substantial financial and emotional costs to homeowners of selling, buying and moving; in this context, he noted that the relatively low turnover rate of single-family homes is "scarcely tinder for speculative conflagration." Greenspan also underscored the fact that opportunities for successful arbitrage are quite limited, since housing markets are localized and few people can (or will) jump from market to market in order to pursue house price gains or to avoid price declines. In this regard, Greenspan noted, "the underlying demand for living space tends to be revised very gradually." Systematic analysis of measures of homeownership affordability, and of the relative costs of owning and renting homes, simply does not yield evidence of a national house price bubble. With the exception of a very limited number of local markets where unrealistic income, financial wealth or house price expectations generated a surge in demand, or where a collapse of the economic fundamentals left house prices hanging at unreasonably high levels (examples include areas that were driven by high-tech fervor and then were saddled with a high-tech collapse), the nation's housing market is in fine shape. Annual home price appreciation in the 3-to-5 percent range seems a reasonable expectation for the next few years. While that's slower than the pace of recent years, it's well above our forecasts of consumer (or GDP) price inflation, largely because spreading land use controls are placing persistent upward pressure on lot prices in places where housing demand and home building are likely to be concentrated. Over time, prices of both new and existing homes naturally gravitate toward the replacement cost of homes. The bottom line? Concerns about a house price bubble are full of hot air. (Chad Floyd, who is with Chadwick Homes, is president of the Home Builders Association of Midwest Georgia, which serves a membership of approximately 550 builders and associate members in Fayette, Coweta, Spalding, Heard, Meriwether, Pike, Upson and Lamar counties.)
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