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  1. #1
    Join Date
    Mar 2006
    Boston, Mass.

    Default Groundhog day in the housing market

    Groundhog day in the housing market

    Economists' reactions to the latest housing market news makes me feel like Bill Murray in the
    1993 movie Groundhog Day

    In case you never saw the movie, Murray plays a weather man who is sent to cover a story in Punxatawney about a weather forecasting groundhog, which he refers to as a "rat," for a fourth year in a row. Classic Bill Murray sarcasm conveys his frustration about having to cover the cutesy story again. His producer and love interest is played by Andie MacDowell.

    On awaking the next day, and each morning thereafter, he finds that it's Groundhog Day again, and again, and again. He finds himself doomed to spend eternity in the same place, seeing the same people do the same thing every day. He experiences the same events over and over. Everything happens the same way. The waitress at the local diner has the same conversation with Murray and spills a cup of coffee at the exact same moment each day. To Bill, the repetition is maddening, but to the waitress and other people in his day the events are new each time. Here's the trailer.

    Last few years, talking to most economists about the housing market has gone like Murray's conversations with MacDowell in Groundhog Day. Events unfold with maddening predictability, yet to most economists they are new and fresh... every single time. We've been having the same conversation, with minor variations, since August 2002 when iTulip was one of the first to make the case (Google search claim verification: housing bubble 2002).

    August 2002

    We said: Yes. It's a Housing Bubble.
    The historical average for the cost of a mortgage is 25% of gross income. That's what the banks used to recommend, before they got desperate for households to sell mortgages to. In bubbly real estate market like Boston's today the average mortgage has reached 44% of income. That's a housing bubble. Period.

    Why is income growth rate versus price a valid measure of a housing bubble? The out-of-whack relationship between income and price reveals the disconnect between price and risk in a housing market bubble the way the out-of-whack relationship between P/Es and price do in equity market bubbles. An indication of the top of a bubble is a change in the tactics of sellers as they run out of buyers. In the case of the stock market bubble, we saw the marketing of equity product in more and more rarefied packages, a mutual fund marketed to women, for example. An example is Women's Equity Mutual Fund (FEMMX), a fund that's holding it's own well, by the way. In the case of the housing bubble, the sellers are banks and mortgage companies. When they start running out of mortgage buyers, they naturally start selling mortgages to more and more people who are less likely to pay them back.
    They said: A Boom but no Bust
    After watching their stock portfolios disintegrate over the past two years, homeowners can be forgiven for wondering if perhaps housing will be the next bubble to burst. Home values in many places have risen at a quickening, double-digit pace in recent years, and a few economists warn darkly that a collapse in housing is not only possible but likely. Yet the vast majority of analysts see little reason for concern, and history is on their side.
    January 2004

    We said: Housing Bubbles Are Not Like Stock Market Bubbles
    If you're looking for the housing bubble to end like the stock market bubble, you'll be surprised. Housing bubbles may run on the same fuel as stock market bubbles, excess money from the Fed, but they grow and collapse according to a different set of functions and dynamics.
    They said: Freddie Mac: No Housing Bubble
    Amy Crews Cutts, the deputy chief economist at Freddie Mac, argued that there is no housing bubble in the U.S. today.
    January 2005

    We said: Housing Bubble Correction - Ten to fifteen years to revert to the mean
    Housing bubbles don't collapse suddenly. They go through a long series of self-reinforcing deflationary stages that typically last five to seven years. Given the extreme and unprecedented nature of the current housing bubble, I expect a ten- to fifteen-year downturn to follow this boom. The government will step in with all manner of supports and bailouts along the way, similar to those that created the bubble in the first place, so the exact trajectory of the decline is impossible to predict. Here I estimate how and over what time period the decline may occur.
    They said: No Housing Bubble Trouble
    The start of each year is prime time for economic pessimists, who try to persuade us terrible things are about to happen. A perennial favorite is the "housing bubble" about to burst, with a supposedly devastating impact on household wealth. This has been repeatedly recycled since June 2002 by bearish economic forecasters like Ed Leamer of University of California-Los Angeles and Stephen Roach of Morgan Stanley.

    And the same scary story has proven handy for policy wonks who abuse it to rationalize their agendas, such as lecturing the Fed to keep interest rates too low or lecturing Congress to push tax rates too high.

    Although the overworked analogy between housing and tech stocks sounds dramatic, it is quite preposterous. "The downside of this [housing] bubble," said Mr. Roach last month, is "potentially far worse than that of the equity bubble. Really?
    June 2005

    We said: Dancing, Booze, and Overpriced Houses
    The housing bubble is reaching absurd, bacchanalian heights, which can only mean one thing: it's getting ready to collapse.
    They said: Housing Bubble -- or Bunk?
    I don't foresee any national decline in home price values. Freddie Mac's analysis of single-family houses over the last half century hasn't shown a single year when the national average housing price has gone down. The last consistent drop was during the Great Depression, when the unemployment rate got up to 25%, or five times the level we're at now. - Frank Nothaft, chief economist, Freddie Mac
    March 2006

    We said: Housing Bubble Correction Update - Geographic cascade effect
    After a year or so, broad regions covering metropolitan areas out to rural areas that experienced real estate bubbles will experience simultaneous price declines. The extent of price decline in any area will depend on several factors, but most importantly the diversity of the local economy. A local economy that is dependent on one or two industries, and especially one or two employers, is vulnerable to significant housing price declines.
    They said: Is the Real Estate Market in Bubble Trouble?
    You can't go anywhere without hearing people talk about "the real estate bubble." Such talk drives me to distraction, and I'll tell you why. It's because there is no real estate bubble. Bubbles are for bathtubs.
    June 2007

    Here we go again, with our first major update to our housing bubble analysis since March 2006, Fueling the FIRE Economy - Part III: Impact of Disappearing Fictitious Value ($ subscription). Using the Fed's Flow of Funds data, our analysis indicates $12 trillion in fictitious value has accumulated in the US housing market since 1997 when the pre-bubble stage of the housing bubble started; the hyper-growth bubble stage lasted from 2001 until mid 2005.

    How will most economists react to our most recent housing bubble analysis? Groundhog day all over again.

    We say:
    All asset bubbles are mean reverting, including the housing bubble. All $12 trillion will disappear, eventually. The only issue is how quickly, and how much in nominal versus real price declines.
    They will say: Housing Bubble or Slow Deceleration of Housing Market?
    Freddie Mac and its Office of the Chief Economist took on the doomsayers in its January 2006 Economic Outlook released late last week and concluded that the housing bubble is not going to burst.
    We say:
    A total of $5 trillion in fictitious value disappeared from the stock markets in two years from 2000 to 2002 during the collapse of the stock market bubble. We project a ten year mean reversion process for the US housing market as the fake $12 trillion dissipates, or slightly more than $1 trillion a year on average.
    They will say:
    We say:
    The reversion of the housing market to the mean will occur as a combination of nominal and real price adjustments as the dollar depreciates. To dissipate all of the fictitious value, the 20% to 30% nominal price correction in US homes predicted by Robert Shiller will occur along with a 40% depreciation of the dollar.
    They will say:
    We say:
    New asset bubbles will develop as a result of government policies designed to reflate the US economy, which we predicted in October 2006 was due to fall into recession by Q4 2007.
    They will say:
    Nuts! Bubbles are accidents, they can't be predicted.
    We shall see. As usual, you heard it here first.

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    Last edited by FRED; 11-14-07 at 12:44 AM.



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