The Chicago Federal Reserve has come out with a paper, The Great Turn of the Century Housing Boom by Jonas Fisher and Saad Quayyum. The paper is 16 pages and length, and filled with puzzling (if thoroughly graphed) data. Fisher and Quayyum conclude that “fundamentals” such as household formation, migration and the rising wealth of Americans caused prices to rise- not speculation. They rather thoroughly cover causes of demand- but do not address supply. Here are excerpts from their conclusion:
It appears that the housing boom has not been driven by unusually loose monetary policy. This is not to say the monetary policy has not been unusually loose, but that
to the extent it has been loose, this is not what has been driving spending on housing.
While we have so far mostly avoided discussing housing prices, our findings do suggest that to the extent that house prices have grown considerably in recent years, this is not due to unusually excessive speculation in the housing market, such as would occur in a bubble.
With many analysts maintaining that the Federal Reserve’s loose monetary policy fueled the housing bubble, the paper appears to be the Fed’s attempt to say, in layman’s terms: “It ain’t no bubble, so it ain’t our fault.“
Fisher and Quayyum’s assertion flies in the face of mounting evidence. In May of last year Alan Greenspan stated, We don’t perceive that there is a national bubble, but it’s hard not to see that there are a lot of local bubbles.
Housingdoom has previously focused on Phoenix and Las Vegas- arguably two of the local bubbles to which Greenspan was referring. But let’s take a look at a market that has been considered more bubble resistant. Seattle, with it’s strong job growth and restrictive building policies is a good candidate- because it’s “bubbling” too. In many respects, Seattle is quite literally behind the curve- trailing down the lead of other bubble markets.
Speculative bubbles are symmetrical- they have a front and back side. The front side is marked by rising prices, a reduced supply, and increased demand. The top of the bubble is marked by lessening demand and increased inventory. In all the bubble markets thus far, prices have continued to rise in this period, as the make up of the buyers changes. The backside of the bubble is marked by continued high-supply, low demand and declining prices lag behind. Too many people make the mistake of assuming they have no speculative bubble in their market, when they are in fact on the front side.
Bob Toll, Chief Executive Officer of Toll Brothers, Inc. succinctly defined this housing market, as opposed declining markets of past years. According to a report in philly.com, He said it had not been brought on by a recession, high unemployment, excessively high interest rates, or other major economic factors. But rather it seems to be the result of an oversupply of inventory and a decline in confidence.
First- oversupply of inventory:
This is a graph of sales vs. listings in 2006. While the difference is not as large as in other “hot” markets- the trend is clear. Sales are declining as inventory increases- typical for a market reaching it’s peak. (Data for both graphs from Bubbletracking.Blogspot)
Let’s examine the sales trend more closely:
The Northwest Multiple Listing Service offers an interesting theory on the low sales numbers for July: Brokers attribute the slower sales to a combination of factors, including July’s heat wave, which brought 12 days of temperatures above 80 degrees in the Seattle area. Vacationing agents, buyers and sellers also contributed to slower activity. Uncertainty about interest rates and inventory shortages in some price ranges were also factors.
For us here in Phoenix, twelve sizzling 80+ days doesn’t seem like much of a deterrent. Assuming that the brokers are right though, and folks in Seattle don’t hold up well under that kind of heat, that hardly accounts for five straight months of year-over-year lower sales. The length of the decline also makes the “vacation as a factor” claim unlikely as well. (Or are we to assume that 11% more of Seattle was vacationing this year than last year?)
And the continued rise in prices in Seattle? Also typical bubble behavior, caused by a number of factors.
Conclusion: Seattle can look to markets such as Phoenix and San Diego for it’s future. With fewer speculators in the Seattle market than other metro areas, the bubble is smaller- but it’s there. A look at the Desperate-O-Meter, (Craiglist) doesn’t have as many desperate ads as Seattle’s more bubbly counterparts, but you will find them in the list.
And as for the Chicago Federal Reserve- they must be talking about another planet, because this one’s got bubbles popping up all over.
FYI, an excerpt of an article from central California.
http://www.centralvalleybusinesstimes.com/stories/001/?ID=2790
“Both Las Vegas and Phoenix were impacted by speculators,” says Ms. McGee, and more than 25 percent of new home sales in both markets were going to out of state investors who had no intention of ever occupying the homes they purchased.
Now those who came late to the party find themselves squeezed by rising interest rates and resulting negative cash flows, she says.
“The speculators are definitely on the run, and walking away from properties they cannot afford to hold and cannot sell at a profit,” says Ms. McGee.
metroplexual -
I’ve thrown the central CA story onto the side-bar. The flood of significant bubble stories is just so great this month it’s hard to keep up. Samuelson’s op-ed (just under your story) is significant in that it has a widely syndicated economic pundit calling an end to easy credit in America. Interesting times indeed!
The Fed’s report is a classic example of lies, d**n lies and statistics.
This cartoon from the New Yorker is too good not to merit special attention. This is for the “Real Estate Always Goes Up” crowd:
http://www.cartoonbank.com/product_details.asp?mscssid=PUTS7C4AXCVS8LL3E2EWPCV2663PAK7E&sitetype=1&did=4&sid=24852&pid=&advanced=1&keyword=lemmings&artist=§ion=prints&caption=&artID=&topic=&pubDateFrom=&pubDateTo=&pubDateMon=&pubDateDay=&pubNY=&color=0&title=undefined&whichpage=1&sortBy=popular
John M.
Sorry I did not see the link. I agree, we live in interesting times. Btw, isn’t that a curse in Chinese?
I have a question to pose to readers. Since I know I am not a genius, nor am I a finance guru, how is it that I saw this coming and saw the bad loans out there ready to blow up in owner’s faces? My only mistake as I see it was in guessing someone would be responsible and put the kibash on it sooner. Imho, 1/4 BPS moves by the fed was too timid for too long.
How do other “Doomers” see this thing playing out over the next 3-5 years. The part of the article above suggests that the fall is symetrical to the rise. I do not see it that way at all. I think that applied in previous RE cycles when conventional loans were the norm. They did not need exotic loans as an affordiblity vehicle. People did not have IO or ARM resets biting them in the butt and people did not use them in the same numbers. So I submit to the “Doomers” that it will be a hard and fast landing because of the stress of making payments on the resets. I also think lenders and Congress knew this cataclysm was in the making and saw this coming when they passed the new bankruptcy laws.
Metroplexual-
Seattle has not seen the level of speculators that some of us in the formerly “hot” markets have- so I think they may be a little more symmetrical in their drop than Phoenix, San Diego, etc.
However, I have been looking hard at the vacancy numbers. Inventory in Phoenix is north of 53,000- vacancy is at 44%. There are nearly 5000 empty builder inventory homes as well. Given all the nearly completed inventory here, and the amount being built- that number is undoubtedly low.
If you consider the housing market to be like the stock market- who is the largest “shareholder”? The builders. They need to dump those homes to survive. The high numbers of vacant home sellers will need to follow in order to unload their homes. That is going to drive the market for everyone else. (Check out these numbers from the NAR)
http://www.realtor.org/rmodaily.nsf/pages/News2006082202
The serious potential for a “dead cat drop” is here.
Mike-
Sorry- the ever prudish Twist and her asterisks strikes again. I have to admit though, the same thought crossed my mind.
Twist,
I think it is going to hit places where little speculation has occurred because I believe the people buying with IO’s and ARMs are themselves speculators. I am sure Seattle has had a number of those.
Small aside, I am going out to PHX with my brother in law in about 3-4 weeks. I will be meeting some of the big developers out there, I will report back to you all (youse if you are from NYC, y’all for the southerners)on what they are saying.
“Brokers attribute the slower sales to..heat wave..Vacationing agents..”
My goodness, is that ever a lame excuse.
Of course, you realize that many real estate brokers are going to deny the existence of any bubble until it has finished popping.
“Bubble, what bubble? Oh, pish-posh! Our people was on vacation, is all..!”
Then, once the bubble is done… “Oh yeah! THAT bubble! Well, now that it is over, it is time for you to BUY!”
Top hit songs of:
1929 — “Prosperity is Just Around the Corner”
1931 — “I’ve Got Five Dollars”
1933 — “Brother, Can You Spare a Dime?”
(Dr Demento used to have a period parody of “Prosperity is Just Around the Corner” with a bubblehead spouting prosperity platitudes being answered by a Depression homeless man in the street.)
Interesting that you chose to focus on Seattle. Many people up here seem to think that we’re “different” or “special” and will experience nothing more than a return to 3-5% appreciation, or at worst, a flat market for a few years. It’s mind-boggling that they can come to that conclusion looking at the same data that I am looking at.
By the way, I just recently discovered your blog, and am now linking to it on Seattle Bubble. Keep up the good work!
Tim-
My husband got in an argument with someone from Seattle, who assured him that the Seattle market remains “stable”- there is no bubble. I felt obligated to try and rise to the challenge.
Thanks for the link. I ran into Seattle Bubble while doing my research- I enjoyed your site- and you’ve joined the blogroll on our sidebar.
Well, I know that in Reno, NV there are 6k houses for sale and only 350 sales in the month of July. That is nearly a year and a half of inventory, and the adjustable panic has not yet hit!!! The cities with speculators and adjustables will really be hit, and that psychology may extend nationwide. When other people see RE prices tanking, they may decide to get out, forcing up inventory everywhere. I believe that even in places where there was little speculation, there was plenty of interest only and adjustable that will soo hit. That means you SF and LA!!! Inventory is starting to rise there as well.
re: asterisks in d**n
Sorry, I didn’t realize that was a bad word.
re: The Chicago Fed’s “there is no bubble!”
The Dallas Fed disagrees.
Full transcript here:
http://dallasfed.org/news/speeches/fisher/2006/fs060816.cfm
Excerpt:
…
The key area of concern in the real estate markets is the housing market. You know the facts here, so I’ll make this brief by repeating what a friend who has been a major homebuilder since 1973 recently told me: “This is the roughest, most sudden correction we have ever seen in the housing market.”
…
mike -
That quote struck me too. The senior Fed guys seem to be all over the place. Every once in a while they come up with something really important. Other times, it’s hard to say just what they were thinking.
Nobody really knows how much speculation has occurred in Seattle. So lets not count those chickens before they hatch.
As to the funky loans, Seattle is in the top SEVEN cities in the US for Neg Am’s and risky ARM’s BOTH!