Housing Bubble? What Housing Bubble?

The following quote was penned in July of 2005 by Carl Steidtmann, chief economist and director, Consumer Business, Deloitte Research.

Bold is my emphasis. (Italicized, Wreck-Onomics comments.)

"Everywhere you turn these days the buzz is about soaring real estate prices. If you are lucky enough to be a homeowner in one of the hot markets like South Florida or New York City, owning real estate is almost as good as winning the lottery. The increase in household wealth is seen by many analysts, who can’t stand the thought that someone somewhere might be doing well in this economy, as a sign of some future catastrophe to come. All the hype about a housing bubble is an excellent illustration of Benjamin Disraeli’s lament that there were ‘liars, damned liars and statisticians.’ (You mean no-one lied about their income Carl? Or the fact that they were going to occupy the residence when they were actually going to flip it?)

While many of the housing price indexes that are published by both government and industry trade groups show prices spiraling higher, you really need to be a statistician to understand what they are saying. (Apparantly you were correct about this, because no-one else understood it either. We all saw what was coming, but you, the expert... well... according to Mr. Disraeli above, statisticians were liars to. Oh, and it turns out he was right.)

When you strip away all of the white noise around a housing bubble, what you find is a robust market for housing that is undergoing several profound changes all of which manifest themselves in higher home price indexes, none of which adds up to a housing price bubble." (Just how much do they pay you for this amazing revelation, Carl?)

Ok... so were off to the races and nothing about it seems unordinary. Mr. Steidtmann goes on to say:

"A financial bubble is first and foremost a monetary phenomenon. (This seems almost impossible to comprehend, but is he actually in denial about this?)

If you look at money growth in the US in the late-1920s or in the late-1990s you will see a sharp acceleration in the growth of the monetary aggregates. The same was true in Japan in the late-1980s during the Nikkei bubble. In the late-1990s, the Fed greatly expanded the amount of money in the banking system in part out of fear of Y2K related financial market disruptions. While those fears fortunately never came to pass, the money the Fed pumped into the banking system found its way to Wall Street where it sent internet related stocks soaring. Since the breaking of the internet bubble in 2001-2002, liquidity has expanded at a much more moderate pace with current growth in the monetary base running at just above 4%, a fraction of the 1999 bubble inducing levels. (Utterly amazing... this hack mentions the great depression, the 15 year stagnation of the Japanese economy and the Dot.com bubble as if they were merely "phenomenom" that really didn't happen. And he seems to completely ingore the fact that one of the conditions of the acceleration of each bubble's bursting was the unabashed and brazen liquidity pump by the Bank of Japan and the Federal Reserve. Sound a little familiar? If not, you will find that the similarities between today's economy and the Great Depression are scary.)

"The psychology of market participants in a bubble is also different from normal times. As a bubble reaches its peak the market participants are in search of the greater fool. Buyers buy only in the expectation that there is a greater fool out there who will pay a higher price. Eventually the greater fool is found and the price falls. As the market searches for the greater fool, the rising price brings out extra and sometimes unexpected sources of supply. It is this combination of increased supply (overbuilding) and narrowing demand (rising defaults creating a credit crunch) that results in the breaking of a market bubble and a fairly rapid descent in price. While there is some anecdotal evidence of market speculation, (Hmmm... here's an exerpt from an arctile in the Idaho Statesman in 2005 touting the fact that the Homebuilders were worried about speculation and that it comprised 50% of the local market. Where in the HELL did this guy get his information from? Some speculation? How about 50% of all new homes sold in 2005 were estimated to be speculative buys. How about the fact that some of the large homebuilders reported nearly a 50% drop in new home sales in 2007? This wasn't speculation? This wasn't a bubble? Good god.) most participants are buying houses because they still represent a very good long term value. "

Later on he mentions the supply of available homes:

"Financial bubbles come to a crashing end when the sky high prices lure a wave of supply onto the market that crushes demand. Were housing a bubble, the high price of existing housing should be fostering a boom in home building. (I guess the never-ending wave of 'McMansion' neighborhoods covering the hills in California, Arizona, Florida, New Jersey, Ohio, Georgia, Nevada, Virginia, Maryland, et. al. were no indication of oversupply. Nor were the ever ballooning profits of the McMansion builders who couldn't wait to raise prices by 10-15% per phase in each plan they built. NAAAWWWW.... no oversupply here, Carl.)

While new housing starts have risen steadily over the past couple of years, when adjusted for population, new home building is no where near the heights of building activity set back in the 1970s." (You mean when there was actually DEMAND for housing, and lenders required that you put money down and could demostrate your ability to repay the loan?)

"And finally, as interest rates have come down, the affordability of home ownership has gone up. Asset prices are high, but the actual cash flow cost of housing is near record lows due to low interest rates. (Ummm.... you mean record low TEASER interst rates on MTA Option Arms, 2/28 ARMS and No Income Verification loans) The share of an average American household income going to finance a new median priced house today is lower then it was at any time in the past two decades. Interest rates are going to have to rise more than a little to increase the cash flow cost of housing back to the levels seen in previous decades." (This is just nonsense. It was then and it is now. The median home price in this country has far outpaced the growth in income for over 5 years. Any "economist" with half a brain has access to these statistics.)

Of course, it's easy to Monday-Morning-Quarterback this. However, these were the experts that ignored the fundamentals. Can one economist get it wrong... sure. Interesting to note that it seems the link to his "employee" page at Deloitte Research yields... nothing.

Don't take our word for it... watch this and see what the other "experts" had to say, both past and present. Of note are the Realtors... hmmm....