Wednesday, March 15, 2006

Glass Half Empty or Half Full?

Glass Half Empty or Half Full?
It seems to me that the ones making out like bandits right now when it comes to the housing bubble are the bulls and bears with new books about the housing market.

Thanks to the entertaining Burbed, I read two opposing articles in the San Francisco Chronicle, one bullish forecast from the chief economist for the National Association of Realtors and the author of "Why the Real Estate Boom Will Not Bust: And How You Can Profit From It," and one bearish prophecy of doom from author of "Sell Now! The End of the Housing Bubble".

I think you know which one I find more plausible. But I'll let you judge for yourself from these two excerpts:

David Lereah, Chief Economist, National Association of Realtors
There will be a little slippage in the Bay Area, he says, but demand and a lean housing supply will keep it to a minimum. By 2007, he predicts, a stronger rate of growth will resume.

In the meantime, he expects the market to shift slightly in favor of buyers. Sellers may need to adjust their attitudes and expectations a bit, as the hot and heavy bidding wars recede.

But the doomsayers, Lereah says, are mistaken in their dire predictions. Their big mistake, he says, is basing their forecasts by comparing housing appreciation with income growth. Instead, he says, they should look at the percentage of mortgage debt as it relates to income.

Lereah says it would take a "perfect storm" to swamp the real estate industry. There would have to be a slumping economy, job losses, a large inventory and a significant increase in interest rates to create that storm. The closest and most recent example of that occurring, he says, is Boston, which lost 15 percent of its labor force in 1990 and '91.

He sees no such storm gathering in the distance. Instead, he sees a slight contraction in the real estate balloon throughout 2006 and a healthy expansion in 2007.

And that, he says, is more important than most people realize.

"The only way to build wealth, for 80 percent of Americans, is real estate. If the balloon bursts, then 80 percent of Americans will have trouble with retirement."

John R. Talbott, Financial Consultant
The problem, he says, is that home prices are way overvalued -- just as Internet stocks were during the 1990s before that sky collapsed. As evidence, he points to the growing discrepancy between Bay Area home prices and rents, an indicator commonly used by economists to determine a property's true value.

Novato's RealFacts puts the average Bay Area apartment rent in the fourth quarter at $1,324; DataQuick calculates that the typical home buyer in December committed to a $2,867 mortgage payment.

"It paints a very scary picture," Talbott says. "Something has economic value because it has cash flow. If you discount for general inflation and go back 120 years in history, you'll discover that, in real terms, housing prices were relatively flat until 1997 -- then (they) shot up about 70 percent."

To buy these overvalued homes, he says, many consumers overextend themselves financially by borrowing more from banks. They end up paying an inordinately high percentage of their monthly income on mortgages. In Los Angeles, he points out, the average new homeowners, usually a young couple, are spending 55 percent of their monthly income on a mortgage payment.

Which argument do you find more believable? I'm planning on collecting that dinner from you, Bill!

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