Does the Florida Housing Bubble Even Exist?

What bubble?

Josh Wasik, a columnist for Bloomberg Media, asks this question amid the constant worrying over inflated prices in the nation’s hottest areas. Is there really any cause for concern, or are all the people fearing a real estate “bear market” just growling needlessly?

Maybe we’re looking at traditional gauges in the wrong way, Wasik says. It is clear that there is an “orderly and moderate kind of cooling” going on, with no huge crash in prices expected, as Federal Reserve Chairman Ben Bernanke suggested on May 18.

Moreover, an essay titled “Assessing High House Prices, Bubbles, Fundamentals and Misperceptions” appears in the April edition of the National Bureau of Economic Research Digest and casts further doubt on a theory that a bubble is inflating the Florida housing market and other U.S. hotspots.

The article is authored by Charles Himmelberg, senior economist at the Federal Reserve Bank of New York, along with Christopher Mayer of the Columbia University Business School and Todd Sinai of the Wharton School of the University of Pennsylvania. This essay takes issue with traditional measures of housing growth.

Interestingly, the authors assert that the bubble theory holds little water, as common ways of looking at it are misleading. Typical gauges fail to take into account long-term interest rates and predictable differences in the long-run growth rates of house prices across local markets.

Proponents of the bubble theory claim that home prices in the most torrid segments of the U.S. housing market — Boston, Las Vegas, and N.Y., in addition to California and Florida real estate — are inflated because they are vastly outpacing personal income growth. If this theory is correct, then the psychology of the bubble keeps prices artificially high because buyers are willing to pay unsustainable prices based on the myth of indefinite appreciation.

Himmelberg and his colleagues beg to differ, for the following reasons:

• The price of a house is not the same as the annual cost of ownership, so it doesn’t necessarily follow that ownership is becoming more expensive.
• High price growth is not necessarily evidence that housing is overvalued. That is, local markets can exceed national averages over long periods of time where there are building restrictions and land is dear, such as in San Francisco and Southern California.
• The price-to-rent ratio may be a poor signal of bubble-like conditions due to high home-appreciation rates. In some areas, especially at a time of low Florida home loan rates, there are often more buyers than renters.

To gain some historical perspective, the researchers looked at real estate data in various markets going back 25 years. They concluded that Boston, Los Angeles, New York and San Francisco were overvalued in the late 1980s — resulting in price declines — but they see prices in those cities as reasonable now.

However, the researchers are worried about San Diego, which had valuation ratios approaching those of the 1980s, as well as Miami-Dade, Broward and Palm Beach counties in South Florida. Additionally, Mayer and colleagues note that just because the data does not indicate bubbles in most cities does not mean that prices can not fall.

Every real estate market is largely subject to local economic conditions. Declines in job growth, increased speculative buying (along with flipping) and increases in mortgage rates and the cost of living are key indicators.

“We have argued consistently for several years that there is no housing bubble in most markets,” Mayer said. “Instead the risk to the housing market is rising real rates and that risk is greatest in the priciest markets. The fundamentals of supply, demand, and interest rates are what matter the most.”

Large-scale economic theories aside, if you’re an investor or looking to buy a first or second home, you’re probably wondering if the property market is headed for a soft landing. Signals are mixed.

In April, new-home sales rose by 4.9 percent, slightly more than the March rate, according to the U.S. Commerce Department. While new-home sales seem to be holding up, prices are not. Median home values fell 3.3 percent in the first quarter, according to the National Association of Realtors.

Additionally, housing starts fell 7.4 percent in April — the lowest level in 17 months — according to the National Association of Home Builders.

In the Sunshine State, existing-home sales, which fell again in April, are slowing due to the combination of higher borrowing costs on Florida home loans and the large number of homes on the market. The state’s inventory of homes has been climbing for months.

The Realtors’ chief economist, David Lereah, said appreciation for 2006 will cool to 5.7 percent, and that the next year or two will see sharp drops in sales in areas of California and Florida real estate.

As for the overall economy, things look fairly robust now — but all eyes are on the Fed’s inflation-taming policy, which has pushed mortgage rates higher for months. Some 25 million home buyers have been priced out of the market due to recent increases in 30-year home loan rates from around 6 percent to the 6.5 percent range. Estimates suggest that 1 million buyers drop out of the market for every quarter-percentage-point increase.