mark nottingham

Bubble News Roundup

Monday, 20 June 2005

This week the Economist continues casting doubt upon the notion that housing prices will continue going up, up, up:

This boom is unprecedented in terms of both the number of countries involved and the record size of house-price gains. Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history. The bigger the boom, the bigger the eventual bust.

They then continue to meticulously rip through the common excuses for continued inflation in prices (e.g., “land is limited,” “housing is different,” and my favourite, “house prices have never dropped here.”). In a companion article, they continue to stick the boot in;

The rapid house-price inflation of recent years is clearly unsustainable, yet most economists in most countries (even in Britain and Australia, where prices are already falling) still cling to the hope that house prices will flatten rather than collapse…> Indeed, a drop in nominal prices is today more likely than after previous booms for three reasons: homes are more overvalued; inflation is much lower; and many more people have been buying houses as an investment. If house prices stop rising or start to fall, owner-occupiers will largely stay put, but over-exposed investors are more likely to sell, especially if rents do not cover their interest payments. House prices will not collapse overnight like stockmarkets—a slow puncture is more likely. But over the next five years, several countries are likely to experience price falls of 20% or more.

Even Fannie Mae is concerned; in a recent (unpublished, natch) speech to the National Association of Home Builders, the mega-mortgager’s Senior Vice President for Risk Policy said that the possibility of a housing bust has “risen sharply in certain parts” of the U.S., thanks to lower standards for lending. Considering that 2/3 of loans sold in the Bay area are interest-only, and a quarter of homes sold nationwide were for investment, not occupation, this isn’t exactly rocket science.

It’s interesting to see how the housing and lending industries are reacting. A bubble that inflates too fast is more likely to pop, so it’s in their best interest to keep the pressure (somewhat) slow and steady; witness the NAHB’s piss-weak measures against speculation.

Another interesting development is the collapsing spread between long-term fixed and adjustable mortgage interest rates. Whereas before you got a substantial advantage by going with an adjustable-rate mortgage (allowing you to borrow more for your dollar, thereby pushing housing prices up by supplying more capital into the market), recently the difference between these instruments has become minimal.

This has economists scratching their heads; such a thing is rare, to say the least. It’s tempting to think that this is the lending industry trying to stabilise its foundations, since the Fed can only exert indirect control over long-term interest rates.

There’s also growing debate about how “localised” the bubble is. According to an IMF paper [pdf] (as summarised by the WSJ),

40% of house-price movements around the world were driven by global factors that translate across borders, like interest rates and economic growth. “Just as the upswing in house prices has been mostly a global phenomenon,” Mr Terrones argued, “it is likely that any downturn would also be highly synchronized, with corresponding implications for global economic activity.”

It’s interesting to see how quickly coverage of the risk here has become widespread; seemingly every news outlet — from USA Today to the Burlingame Daily News — has caught on to the idea that maybe, just maybe, houses are a little overpriced right now.