You agree that your house is worth too much, don't you?
In the past week, two business-minded newspapers, The Wall Street Journal and The Financial Times, rarely accused of sensationalism, used the word "bubble" in their headlines concerning housing prices. Which is to say, real estate prices have bubbled so much in recent years that the bubbling doesn't even count as news anymore.
But what about ordinary Americans, 68 percent of whom own their own home, which for most of them is their biggest asset? In the past few years, the value of folks' stock portfolios has bubbled up and then popped down. So should people be listening for a similar giant popping sound in regard to home values? If top financial players -- who usually get out of the market first, taking the most out with them -- are a guide, then maybe it's time to give the ominous data a hearing.
To be sure, the early warning signs of bubblefication are uneven. Home prices continue to rise, up 7.4 percent in June 2002 from June 2001, according to the National Association of Realtors. Yet this year, home sales dropped 11.7 percent from May to June, and June's sales activity was 4.3 percent below the sales-rate of a year before.
But wait: Isn't it illogical for prices to rise when demand falls? Sure it is, and illogic is one of the warning signs of a bubble.
Of course, the housing market is a lot less liquid than the stock market. One can't log on to ETrade, buy or sell a house at the click of a mouse, and then be in or out the next minute. But even so, housing has displayed a champagne-like fizz lately, at a time when other investments have fallen flat. Residential housing prices have surged by 34 percent over the past five years, from a nationwide median price of $121,800 in 1997 to $163,500 in June 2002. That's an upside of 34 percent -- not bad if you can keep it.
And that's the question: At a time when other values are down, can home prices stay up? After all, during those same five years, the stock market has given back all its bubble-icious gains, and then some.
The housing industry dismisses talk of a bubble. Interest rates are down, they say. And yes, the current national average mortgage rate is about 6.65 percent, the lowest in at least three decades. But how low can it go? And how long can it stay down? That's mostly a matter for Federal Reserve Board Chairman Alan Greenspan to determine. He will probably cut rates in the near term -- further puffing up prices and also second mortgages, as recession-battered Americans pull out cash to meet expenses -- but eventually, what goes down must come up.
Higher rates might be the right policy for the country over the next few years, but try explaining that to an over-leveraged, sell-crazed homeowner. So expect a major political fight over home-equity preservation.
Meanwhile, data points keep spiking. Ian Morris, an economist at HSBC Securities, argued earlier this year that the ratio of personal income -- about $7.4 trillion -- to the total value of individually owned resident real estate -- about $12 trillion -- was becoming unsustainable. That ratio, 1:1.6, is about 25 percent higher than the historical average, he observed, leaving real estate nowhere to go but down. Indeed, the last time the income-to-value ratio reached so high was in 1989, just before the price-pop of the early '90s.
But that's the bottom line: Housing runs on its own cycle, but it can't be disconnected from the larger economy. If the economy double-dips into another recession, homeowners will take a bath, too. And the remains of the bubble will not keep them afloat.
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