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.