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Housing Bubble Bursting... Or Not

I'm not an expert in the housing market but I bet I know more than the reporters who are writing of the bursting of the housing market "bubble" today. For example:

US home sales data signal end to boom

Sales of existing US homes dropped 1.7 percent in November while the stock of unsold homes on the market climbed to a 19-year high, the National Association of Realtors said. Admitting a slowdown is now under way, the industry group said existing home sales dropped to a seasonally adjusted annual rate of 6.97 million last month, the lowest since March.

"Housing activity has peaked," said David Lereah, chief economist for the association. But he insisted the market will not implode after years of red-hot growth. "There are no balloons popping."

Inventories of unsold homes increased 1.2 percent to 2.9 million, the most since April 1986.

What is NOT said in the story is what percent of all homes are for sale now vs 1986. Sure we have more homes for sale now but we also have more homes! Raw numbers of homes are meaningless over a 20 year period.

More importantly, nowhere in this this story to they mention the effect of Hurricane Katrina. For starters, the numbers are inflated because about half of New Orleans is for sale. (And I'm not exaggerating that much.) Drive down even the good streets and you will see 3 or 4 signs.

But even that is not as dire as it looks. Many of those people are not trying to sell their homes, they are fishing.

Mythical stories of $150,000 homes selling for $300,000 because they did not flood has people all over town hammering in For Sale signs. I know a guy who would not have asked over 200K for his house 6 months ago and he is asking 250K right now. (I've considered it just to see what happens.) Truth is, in 6 months when the realtors' listings expire, so will these peoples' dream of hitting the post Katrina housing lotto. [Don't get me wrong, there are tons of people really selling, just not every sign you see.]

To be sure New Orleans does not account for all 2.9 million homes on the market but I'm sure it accounts for a fair share. I spoke to a realtor a few weeks ago who said listings are at an all time high and sales at an all time low. Considering New Orleans is (was) about the 40th largest market in the US, I'm sure that skews the numbers.

But the effects of Katrina go far beyond New Orleans. As illustrated by this consumer confidence graph:


That big hole in the graph is what happened when Louisiana oil refineries were shut down after Katrina and gas went to almost 4 bucks a gallon.

With consumer confidence numbers like that, is it any wonder that people stopped buying houses for a month or two?

And while I'm here, I can debunk the stories you see about consumer confidence being down from August levels. There was an artificial dip. What is more impressive is how fast they recovered.

I'm not saying that real estate is or isn't booming. I am saying that you won't get an accurate picture from reading the dire stories I've read today.

Comments (12)

Hmmm.So what effec... (Below threshold)


So what effect has post-Katrina had on the demographics of New Orleans? Is it still going to be that Deep South red beans & rice Creole city?

Or have so many people left that the city will be only a facade of Creole and really more Mexican than most?

If we can't keep people wo... (Below threshold)

If we can't keep people working decent jobs then how long did they think we would need to keep building new houses? We nedd new legislation that helps us keep work in the domestic United States.
Raymond B

Depending on where you are,... (Below threshold)

Depending on where you are, even an "end" to the housing "bubble" doesn't mean a crash in prices. Real Estate is local - in one area it may be a seller's market while the next big metro area over, the economy may be smaller, causing prices to stabilize or decline.

Even if there is a decline, this isn't necessarily bad - a ten-year increase in property value to, say, $250K from 50K is a good run - but the decline from the high mark of 250K to 220K or 200K may hurt, but it's no crash neither.

There's plenty of housing b... (Below threshold)
John S:

There's plenty of housing bubble Websites. (And many of the voices are pretty shrill.) There's probably a bubble in some areas; other areas won't feel a thing. But with consumer spending representing 72% of GDP growth and mortgage equity extraction driving much of that spending, anything less than the current 20% a year appreciation in home prices will slow the economy. And that will be felt nationwide.

In the late 90s the bears w... (Below threshold)

In the late 90s the bears warned that the PE ratios were so out of whack that the only outcome was a correction. Most thought they were crazy for various reasons and prices kept going up.

Now have a look at this graph
and tell me why the historical average is now irrelevant.

KirkH, the problem with you... (Below threshold)

KirkH, the problem with your statement is that the bears also warned of impending doom in 60s, 70s, 80s, 90s etc. That's why they are bears...because they are always looking for the downturn. Stocks go up and down and is mostly driven by non-linear differential equations. By that, I mean they aren't predicatable beyond a short term.

Like the weather. I can sit and scream all day long about how rain is going to fall...and if I only count my successes I can appear to be pretty accurate. Ever hear of a Texas Marksman?

That's the guy who shoots bullet holes and then draws a target around the hole claiming each one was a bullseye...

Having had a 25 year career... (Below threshold)

Having had a 25 year career in the real estate industry I have seen a number of highs and lows in real estate markets going back to the 60's.This current "hot" market has had the longest run in my memory and if history is any guide then a slowdown is definitely in the offing.Traditionally the winter months are the slowest period for sales anyway, but the jury is probably out on whether sales will rebound to previous pre winter levels. I'm of the opinion they will not, and for a variety of reasons. Whether or not there will be an actual bust in real estate overall, I believe, is how those recent buyers, in at the market top will react to any drop in value. Especially those who purchased using zero down, or interest only,or adjustable loan financing. A high default/foreclosure rate can have an adverse effect on both the real estate and finance markets.Add to the mix the high number of home owners who are up to their eyeballs in equity loan debt and it makes a pretty fair recipe for a real estate market stumble.

krkrjak,You are co... (Below threshold)


You are completely right. Many people are up to their eyeballs in the equity loan debt. All one has to do is lose their job, get sick, or get divorced and those houses will end up in foreclosure. How many people can afford to make payments on a $300,000 home? The average wage index shows most people earn $35,000 - $40,000 a year and cannot afford to make payments on a house that requires at least two incomes to maintain.

$300,000 home? Nothing lik... (Below threshold)

$300,000 home? Nothing like that around here (Los Angeles area) anymore. Average home prices passed $1,000,000 in our town a few months ago, having doubled in the last 5 years.

I'd predict a cooling of 10 - 15% nationwide in home prices, a bit more in heated areas like SoCal. And prices will likely recover fully in a few years. No reason for panic for most.

One thing not mentioned by ... (Below threshold)

One thing not mentioned by Paul is the timing of the piece. It's easy to find a slow (or slowing) housing market in the winter months. For some reason, people do not want to move around the holidays, during winter weather, or while their kids are in the middle of a school year.

The funny thing is that while there may be a lot of homes for sale, there are a lot of homes being bought also. I work for a mortgage origination company that does loans in 30 states. Usually, we would be looking are lay-offs in the next couple of weeks, but business has remained steady through the traditionally lean months this year.

The post Ivan market here i... (Below threshold)

The post Ivan market here is still fairly hot. Biggest change is that after massive rises in property values it flopped from a sellers' market to a buyers' market a few months ago. Property that was worth say $100k wasn't worth selling by the owners, but then it hit $150k and more people decided to sell, when it hit $200k, even more decided to take the money and run, etc. Result, glut on the market and prices started dropping some, but not much.

Chinese proverb: a s... (Below threshold)

Chinese proverb: a slowdown does not make for a bubble bursting. interest rates are steadying, so will the housing market.







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