The Economist: U.S. Housing Bubble May Be Worst in History
We’ve talked at length about how the Florida housing market has banged its head on the ceiling… and how investors and homeowners alike now wonder how hard (and soon) it will crash down to the floor.
July home prices of previously owned properties rose at their slowest pace in more than 11 years. In the past 12 months they are still (just) up in nominal terms, but down in real terms. The number of home sales fell 11.2 percent and the stock of unsold homes reached its highest level since 1993.
According to The Economist, the softness is enough to stoke the worries that have been mounting about how badly the end of the housing bubble will hurt the rest of the economy.
Falling demand is not just taking its toll on people who own homes, but those who build them. In fact, it’s pounding the construction industry. Housing starts, fell by 2.5 percent in July and were 13.3 percent lower than a year earlier. Building permits for privately owned houses, meanwhile, were down by 20.8 percent, year over year.
- While the number of homeowners applying for mortgage refinance help has risen over the past five weeks, the demand for loans to buy new homes has fallen by nearly 25 percent in the past year.
- It is little wonder, then, that an index of home builder confidence has plunged by 56 percent since June 2005.
So far, the slump has been especially harsh at the high end, because rich buyers were at the forefront of the housing boom over the past few years. If most of the pain remains confined to those bits of the economy, we will probably emerge from the end of the boom in decent shape. What spooks us are the risks of slowing demand for homes that’s so drastic as to really alter consumer confidence.
The biggest worries involve the parts of America that have seen the biggest run-ups in prices. You got it. Right here. Now that Florida home mortgage demand has lessened considerably, the pace at which condos and single-family homes are selling is tortoise-like. And there’s no relief in sight for the rest of 2006, if not longer.
Stable is one thing. It’s not going to kill you if your home doesn’t make 20 percent a year in appreciation. But what if prices tank? How far might values fall? What if sales are abysmal for years on end? Since they (sales) are so dependent so much on the wider economy, especially incomes and Florida home mortgage loan rates, the opinions vary greatly on this subject.
Housing worriers chiefly ponder two important measures:
- The ratio of home prices now equals 3.8 times the median income, which seems far too high by historical standards.
- The difference between the rental market and home prices seems too low to offer property owners a decent return, suggesting (once again) that houses are badly overpriced.
Just about everyone expects prices to level off for a bit and slow the economy, but the high ratio of house prices to incomes is less alarming, some argue, because low Florida mortgage rates have held down the real cost of owning those homes.
That has not changed much, despite a long period of significant interest rate hikes over the past couple of years. American homeowners remain exposed to a sharp rise in long-term interest rates — say, if foreign investors in U.S. treasury bonds head for the exits — but otherwise are not obviously in trouble.
Also, although rents have failed to keep up pace with the rising price of equivalent houses, that comparison partly reflects a failure to adjust for the growing quality of the homes people in the U.S. have been buying. As real estate prices peak, moreover, Americans seem to be more willing to rent.
Another argument of optimists is that house-price weakness in Britain and Australia, two other countries that worried bubble watchers, has proved much less damaging than many expected. Barclays Capital in Londonpoints out that both countries’ economies performed snicely after house prices peaked — so much so that their central banks found it necessary to raise interest rates again.
Yet we have depended particularly heavily on buoyant purchase prices as a source of jobs, and also cash that can be extracted through equity withdrawals, for so long that the impact may be much more wide-ranging than people are prepared for. For now, even if prices do fall hard, forecasters do not think that will trigger a recession. Yet.
Everyone is certainly hoping, however, that we don’t have to find out.
