Bernanke's
thinking on the housing market did not attract much attention before
Bush tapped him for the Fed job Monday but will likely be among the key
topics explored by members of the Senate Banking Committee during
upcoming hearings on his nomination.
Many
economists argue that house prices have risen too far too fast in many
markets, forming a bubble that could rapidly collapse and trigger an
economic downturn, as overinflated stock prices did at the turn of the
century. Some analysts have warned that even a flattening of house
prices might cause a slump -- posing the first serious challenge to
whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan.
31.
Bernanke's
testimony suggests that he does not share such concerns, and that he
believes the economy could weather a housing slowdown.
"House
prices are unlikely to continue rising at current rates," said
Bernanke, who served on the Fed board from 2002 until June. However, he
added, "a moderate cooling in the housing market, should one occur,
would not be inconsistent with the economy continuing to grow at or near
its potential next year."
Greenspan
has said recently that he sees no national bubble in home prices, but
rather "froth" in some local markets. Prices may fall in some
areas, he indicated. And he warned in a speech last month that some
borrowers and lenders may suffer "significant losses" if
cooling house prices make it difficult to repay new types of riskier
home loans -- such as interest-only adjustable-rate mortgages.
Bernanke
did not address the possibility of local housing bubbles or the risks
faced by individual borrowers or lenders in a slowing market.
But
if Bernanke is confirmed as Fed chief, and if the housing market slows
more than he expects, he would be unlikely to use the central bank's
power over short-term interest rates to prop up falling housing prices
for the sake of individual homeowners, according to comments he has made
in numerous speeches and statements in academic papers.
Rather,
he has argued for many years that the Fed should respond to rising or
falling prices for stocks, real estate or other assets only if they are
affecting inflation or economic growth in an undesirable way. Thus, he
would advocate cutting interest rates if a reversal in the housing
market sharply dampened consumer spending, triggering job losses or a
fall in inflation to very low levels.
Lower
interest rates encourage consumers and businesses to borrow and spend,
spurring economic growth and hiring. That would also make it less likely
that very low inflation could turn into deflation, an economically
harmful drop in the overall price level.
Bernanke
believes "the Fed's job is to protect the economy, not to protect
individual asset prices," said William Dudley, chief economist for
Goldman Sachs U.S. Economics Research.
That
view mirrors Greenspan's. He and Bernanke have both said it is
unrealistic to expect the Fed to identify a bubble in stock or real
estate prices as it is inflating, or to be able to pop it without
hurting the economy. Instead, the Fed should stand ready to mop up the
economic aftermath of a bubble.
Greenspan,
for example, has rejected suggestions that the Fed should have raised
interest rates in the late 1990s sooner or higher to slow soaring stock
prices. He says the Fed got it right after that boom by cutting its
benchmark rate deeply in 2001, in response to falling stock prices, the
recession and the Sept. 11 terrorist attacks.
After
Bernanke joined the Fed board in 2002, as the economic recovery remained
sluggish and job cuts continued, he vocally supported Greenspan's
strategy of lowering the benchmark rate further and holding it very low
until mid-2004, when it was clear that both job growth and the economic
expansion were solid.
Bernanke
also warned in a November 2002 speech that the Fed would act
aggressively to prevent deflation, which had devastated the economy
during the Great Depression that followed the 1929 stock market crash.
A
former chairman of Princeton University's economics department, Bernanke
earned academic renown for his research on the Fed's role in causing the
Depression.
After
the 1929 crash, the Fed mistakenly raised interest rates to protect the
value of the dollar, which was then pegged to the price of gold,
Bernanke wrote in an October 2000 article in Foreign Policy. The higher
rates contributed to surging unemployment and severe price deflation.
The Fed then made things worse by not acting to counter the credit
crunch that resulted from the collapse of the banking system in the
early 1930s.
"Without
these policy blunders by the Federal Reserve, there is little reason to
believe that the 1929 crash would have been followed by more than a
moderate dip in U.S. economic activity," Bernanke wrote.
In
late 2000, looking ahead to the possibility of a sharp fall in
then-lofty stock prices, Bernanke concluded, "history proves . . .
that a smart central bank can protect the economy and the financial
sector from the nastier side effects of a stock market collapse."
And
in words that might come to mind if housing tanks, he said the economic
effects of falling asset prices "depend less on the severity of the
crash itself than on the response of economic policymakers, particularly
central bankers."
San Diego Not Among the 13
Riskiest Housing Markets in U.S.
Washington, D.C., September 1,
2005
PMI's 13 Riskiest U.S. Housing
Markets
So how do you know if your housing market is built on thin ice?
There's more to it than simply identifying the areas with the strongest
gains in home prices. Job growth, population, median income and
affordability all play roles in determining which markets are vulnerable
to price declines. San Diego enjoys one of the strongest job
markets in the country with solid economic fundamentals set to provide
stable real estate market growth in the coming years.
Working with PMI's (Private Mortgage Insurance is the largest real
estate market risk analyst in U.S.) Housing Risk Study, the
article pinpointed the 13 most treacherous housing markets in the
U.S. The 13 riskiest housing markets are described in detail
through the link below:
Kiplinger
Personal Finance "13 Riskiest Housing Markets" article from
August 2005 edition.
"Katrina Effect"
Affects Nation's Housing Prices
Los Angeles, September 20, 2005
"The Katrina effect", as economists
call it, is that housing demand for older homes will rise due to two
factors -- increased construction costs for new homes and increased
rental demand. National Association of Realtors economist Lawrence
Yun suggests that both new and older homes will continue to rise in
costs.
"New home prices will be immediately impacted because of
increased construction costs," explains Yun, "and that will
filter down to existing home prices as well." That's because as new
house prices rise, more homebuyers will consider existing homes,
increasing the demand (and prices) for them."
According to David Lereah, NAR’s chief economist, housing inventory
is already tight across the nation. He predicts that existing-home sales
will increase over 3.5%, while new-home sales will rise nearly 7%.
He also predicts that mortgage rates will not rise as quickly as they
were forecast to, and will end the year under six percent for a fixed
rate mortgage.
"Of Course, There's No
Bubble"
New York City, March 15, 2005
The story of Barbara Corcoran is the stuff of entrepreneurial lore.
Three decades ago, she quit her waitress job, borrowed $1,000 from her
boyfriend, and started a real estate shop that eventually blossomed into
one of New York City's largest residential brokerages. It was worth an
estimated $4 billion when Corcoran sold it to national giant NRT in
2001. But she retained the post of chairman and remains the public face
-- literally, on billboards -- for a housing empire that now stretches
from the canyons of Manhattan to the shores of Palm Beach, Fla.
So what does the Big Apple's most famous real estate mogul not named
Donald think of the market? BusinessWeek Online SmallBiz Editor Rod
Kurtz recently spoke with Corcoran about what the future of the real
estate market holds for brokers and buyers alike. Edited excerpts of
their conversation follow:
Q: First things first -- bubble or no bubble?
A: Of course there's no bubble. I think we're just getting started.
But I don't expect anyone to believe me. There are so many more buyers
than there are homes to sell. Bidding and overbidding are the norm of
the day. So it's going to take a lot to slow this market. Even if it
does -- which I don't see the signs of -- it will still slow down
slowly. That's not what a bubble does.
I think the bubble theory is nothing more than an intellectual
expression of people's typical worry that good times can't last forever.
When your marriage is going well, you worry there's a problem on the
horizon. I think it's more psychological than fact.
Q: So what's causing the shrinking supply and begging demand?
A: Seven out of 10 deals are going for asking price or above. I think
it's a much scarier world that we live in. When kids are scared, where
do they run? They run home. People are staying home more. I think it's
really reassuring for people to know they own the walls around them.
People have also become more distrustful. People don't trust the
government, they don't trust Corporate America, they don't trust the
stock market. They trust their house. It's psychological. People like to
feel they can control a little piece of their destiny.
Q: So what are some of the trends you're seeing?
A: People are buying their second or third homes, retirement homes,
very early. They're saying, "Why not retire in 10 years and get my
hands on something now?" I don't really believe a majority of
those people move into them eventually, but they justify the purchase by
saying, "I'll buy now, before this goes too far."
In the last nine months or a year, I've seen a big uptick in that.
There is also a change in that most people who previously didn't think
they could buy a home for pure investment are now acting on it.
Q: What are some of the next "it" locations? Are high
prices sending people to unlikely places?
A: One of them is downtown Detroit. I think when most people think
Detroit, they think crime. The city really is reinventing itself. It has
really rallied. I think that whole riverfront area is a big
up-and-coming area. But it's for the brave of heart.
The movie 8 Mile, I believe, did for downtown Detroit what Ghost did
for downtown Manhattan. I remember a stuffy couple I took down to
Tribeca before Ghost came out. Then after the movie (premiered), they
thought it was cool.
Coeur d'Alene, Idaho -- that has got to be heaven on earth. The
average house price is $170,000. You should see what $170,000 will get
you. That is a pristine, gorgeous area, right across from Canada. When
you compare it to what you get in neighboring states, it's a joke. It's
like a mini Phoenix. Everybody's charging in there.
Then there's Del Ray, Virginia, which is right next door to
Alexandria. It's like going back to the 1950s, Leave it to Beaver. It's
being gentrified. It's like what Brooklyn was to New York 15 years ago.
Houses are not inexpensive there, probably about $400,000, but that's
compared to $800,000 next door. It's like a mini Greenwich Village --
you've got a lot of professors, interesting people. That's a typical
situation where fringe backs into fashionable.
Q: Any advice for sellers?
A: Sellers don't need any advice. The one thing: If you want to be
overpaid, underprice by 10% and see what happens. It creates a feeding
frenzy. Have your home priced by three brokers, go with the lowest, and
knock 10% off that. Only 1 in 10 people maybe has that chutzpah, but it
works again and again and again.
Q: What about tips for buyers?
A: For buyers, No. 1, I guess, is that cash is king. You have to
think like a competitor. Over and over again, people say, "I'll
give you the higher price, but I need five days."
Q: What does the future hold for independents?
A: I think the future belongs to small brokers, and I'm one of the
(few) people to say that. The big guy clearly has the corner on the
money, and that's the downside to being little. But the little guy has
the corner on creativity. Our business is a transaction business --
wham, bam, thank you ma'am. We need to be responsive to a changing
market. And more often than not, the little guy can move. The big guy is
still thinking about it.
I just think we have a pattern here -- that little people will always
find a home in real estate, because it's cheap to get in. When they grow
to middle size, half fall off because it's hard to maintain, and the
other half grow, get tired of it, and sell to the big guys.
If a big brand comes in that everyone knows, it's intimidating and a
formidable competitor (for small players). But the fact of the matter
is, as long as a local broker can make a big brand in a local market,
national and everything else doesn't matter.
Q: Do you believe your path -- from tiny startup to eventual sale --
is emblematic?
A: After you've built a big money machine, you can of course hang
onto it and keep laying the golden eggs. But what do you do then? The
real estate business is very much a business where the mom has to be in
the kitchen cooking every day. It's a person-to-person relationship
business. So if you reach a point where you don't totally want to be
involved, you have to make a decision.
Q: Many successful entrepreneurs struggle with that decision and its
aftermath. How have you adjusted?
A: Other than my boyfriend and business partner marrying my
secretary, it has been my hardest transition. And I think it's hard for
any high-energy personality to hang up the holster. I knew it was going
to be hard, because I knew many older brokers who sold their businesses.
It's very different when you have to walk those steps yourself.
But I have learned more about myself over the past couple of years
than ever before. It just underlined for me that the joy is getting
there, not the goal itself.
Local
Real Estate Prices Still Stable
Carlsbad,
October 21, 2004
Although
market times have increased for houses actively offered for sale,
the closed sales prices are not yet decreasing.
"Some
sellers were getting ridiculous, asking exorbitant prices for
their homes," reports Tom Gulihur, managing broker of Cal
Coast Realty. "If the last house to sell in their
neighborhood closed for $400,000 then they would want to price
theirs at $410,000 to $420,000 and expect to get it."
This
pricing tactic might work if there are no other houses for sale in
that or substitute neighborhoods and in a declining interest rate
environment and during June or July, but what if it's September
and interest rates are increasing and there are three to five very
similar homes for sale in the same neighborhood at the same time?
Each of these factors can play a significant role in making an
appropriate real estate pricing decision and if they're all in
sync then they cause a major impact.
However,
San Diego still enjoys one of the healthiest real estate markets
in the nation because we have very strong fundamental
factors. We have an economy that is balanced with the
following strong industries: telecommunications, biotechnology,
military, government, tourism, construction, high tech, sporting
goods & attire. We also have very limited land resources
surrounded and limited by: the Pacific Ocean, Camp Pendleton, the
Laguna Mountains and Mexico. There is no area left for us to
"sprawl". Additionally, the limited remaining in-fill development
sites require rigorous local governmental approval
processes. SANDAG estimates that San Diego County will have
a net inflow migration of new residents that will continue to
support our real estate values for at least the next twenty
years. These same factors also support our strong rental
real estate market.
Although
localized soft markets may occur, it is anticipated that overall
market price declines in the Fall/Winter of 2004 will be
modest, if they occur at all. However, the market is
expected to grow modestly in 2005, returning to sustainable
appreciation rates of about 3% to 5% annually.
Housing Boom Could End Soon
San
Diego, Dec. 8, 2004
OK.
This time they mean it, really. Economists in San Diego and around
the country are saying the biggest housing boom in the region's
history is slowing and may be finished by the end of 2005.
"The
phenomenon of doubling your money in three years is over for this
cycle," said Jim Teak, a San Diego-based economist with
Prudential Realty of California.
A
lot of people agree with Teak. The influential UCLA Anderson
Forecast says in a report out today that 2005 could be the year
that "reality and reason" finally cool off the housing
market.
