Housing Bubble? What Housing Bubble?

Despite months of talk about an impending housing bubble, home sales remain at record level despite a glut of homes on the market.

U.S. resale housing market keeps getting hotter (Globe and Mail, B14)

U.S sales of previously owned homes surged unexpectedly in August, and prices reached a record high, defying predictions that the housing market was peaking. Existing home sales rose 2 per cent to a 7.29 million annual pace last month, the second-highest on record, the National Association of Realtors said yesterday. The median price rose 15.8 per cent to a record $220,000 (U.S.) and the supply of homes for sale increased.

“These are tremendous numbers,” said Kevin Harris, chief economist at Informa Global Markets in New York. “There is nothing solid in the latest round of existing home sales data to show that we’re slowing down.”

The housing market has been the main driver of the U.S. economy this decade, accounting for 50 per cent of overall growth and more than half of private payroll jobs created since 2001, Merrill Lynch said in an August report. Price appreciation helped add $5.2-trillion to Americans’ balance sheets during the current expansion, or 68 per cent of all wealth creation, the U.S. Federal Reserve Board said. The increase in median home prices in August was the strongest rate of appreciation since July, 1979.

Though mortgage debt is rising, most Americans have built up so much equity in their homes that they could weather a price drop without serious harm. Fed chairman Alan Greenspan said. “The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices,” Mr. Greenspan told the American Bankers Association. The Fed chief’s remarks on housing prices were more reassuring than a month ago, when Mr. Greenspan told a Fed seminar the housing boom will “inevitably” cool and that there might be declines. But yesterday, he said some parts of the country may be seeing unsustainably large price gains.

Quite impressive. I just sold my townhouse in the D.C. exurb of Ashburn, despite there being 150-odd similar homes up for sale in that market. While the market has cooled somewhat in terms of pace—it took nearly two weeks to get an offer rather than the several offers the first day pace when I bought it two years ago—the prices continue to skyrocket. As I’ve joked many times, my home made more money than I did over those two years.


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Housing Bubbles and Rent Ratios
Real Estate Bubble Economy?
The Housing Bubble?

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College. He's a former Army officer and Desert Storm veteran. Views expressed here are his own. Follow James on Twitter @DrJJoyner.


  1. DC Loser says:

    James, you are lucky to take advantage of the appreciation of your home. Unfortunately, I’m one of many trapped in this market. I was lucky enough to buy a single family home when it was affordable, now I can’t afford to move anywhere within a decent commute to my work unless I decide to quit DC altogether. Yes, it’s nice to have equity in my home, but the only thing I’ve gotten out of it so far is the higher property tax bill every year.

  2. Larry says:

    Yeah, the market may have cooled some, but it’s still way too hot for us first time buyers. Living near Annapolis is far beyond my price range, even for townhomes and condos.

  3. James Joyner says:

    DCL and Larry,

    I sympathize. On my own, I couldn’t afford to buy back my townhouse in Ashburn, let alone something comparable closer in, even with the huge down payment I would be able to make based on the equity increase.

    Of course, while that condition may eventually spark a bubble burst it would seem proof that the bubble is currently expanding.

  4. darren smith says:

    New Home Sales Fall Sharply in August

    New Home Sales Fall by Largest Amount in 9 Months in August As Housing Industry Gives Mixed Signals
    The Associated Press
    Sep. 27, 2005 – Sales of new homes plunged in August by the largest amount in nine months as the nation’s housing industry continued to flash mixed signals about whether the boom is starting to fade.

    The Commerce Department reported that new home sales declined by 9.9 percent last month to a seasonally adjusted annual rate 1.24 million units. Even with the slowdown in sales, the sales price rose by 2.5 percent from July’s level to $220,300.

    The bigger-than-expected drop in new home sales could be an indication that the nation’s red-hot housing market is beginning to slow, but reports so far are mixed. On Monday, the National Association of Realtors said that sales of previously owned homes rose by 2 percent in August to 7.29 million units, the second-highest level on record.

    In other economic news, the Conference Board in New York reported that consumer confidence plunged in September to a reading of 86.6, down from the August level of 105.5.

    It marked the lowest level for consumer confidence in nearly two years, since October 2003. Various consumer confidence measures have shown sharp drops recently, reflecting the surge in energy prices including gasoline that topped $3 per gallon right after Hurricane Katrina shut down Gulf Coast refineries.

    The 9.9 percent decline in new home sales was more than double what analysts had been expecting. The government also revised the July sales pace lower to an annual rate of 1.37 million units, still a 5.3 percent increase from June.

    The decline in sales in August was the biggest drop since a 10 percent fall in November 2004.

    Many economists believe that rising mortgage rates are finally starting to have an impact on the booming housing market. They are still forecasting that sales for all of this year will set all-time highs, the fifth straight year that sales of both new and existing homes have set records.

    But analysts are forecasting a slight decline in sales for 2006 with prices moderating and possibly even declining in some of the hottest markets.

    Federal Reserve Chairman Alan Greenspan has been raising concerns about what a cooling housing market might do to the country’s banks and overall economy.

    In a speech Monday to a convention of the American Bankers Association, Greenspan warned that the growing use of more exotic mortgage products such as interest-only loans could expose borrowers and the banks that loaned to them to “significant losses.”

    Greenspan’s concern is that borrowers who made only small downpayments to buy their homes could be faced with a mortgage that is higher than the value of the home if home prices start declining, putting them at risk if they had to sell the home.

    Greenspan is also concerned that the use of adjustable rate mortgages by homeowners who stretched to buy could expose them to payment shocks if mortgage rates keep rising. If those borrowers are unable to meet their mortgage payments, that will expose the banks that are carrying the loans to default risks.

    But Greenspan also said in Monday’s speech that “the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in home prices.”

    The report on new home sales showed that the weakness last month was widespread around the country, led by a sharp 22 percent drop in the Northeast, the biggest setback in that area since last December.

    Sales fell by 17.9 percent in the West, the biggest decline since last November, while sales were down 10.6 percent in the Midwest, the largest drop in that region since January.

    Sales in the South, where Hurricane Katrina hit at the end of August, were down a smaller 2.2 percent.

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