* From Inman News Features
Bottom line, there is no housing bubble.
That was the conclusion David Seiders, chief economist of the National Association of Home Builders, and Maury Harris, chief economist of investment banking firm UBS Warburg, touted last month at a housing market press conference organized by the builders group.
Seiders said housing has been one of the few bright spots in the economy through last year’s economic recession and this year’s gradual economic recovery due to not only the usual home sales, home building and home-related purchases by new and existing homeowners, but also strong consumer spending driven by cash-out refinancings of home mortgages.
Price appreciation already has given homeowners a $1.25 trillion windfall in capital gains on home equity since the end of 2000. A large amount of that gain has been realized through cash-out home equity loans, and those cash-outs have been translated into economy-boosting consumer spending.
Seiders believes those trends are likely to continue. He said untapped home equity has increased to an all-time high despite the boom in cash-out refinancing and as a result he expects the cash-out-and-spend process to continue this year and next year.
Seiders aimed to debunk a number of theories that have been proposed to predict a forthcoming period of home price deflation. Analysts have suggested that today’s housing price levels might be unsustainable on the basis of historical trends in home price cycles relative to consumer price inflation, affordability constraints of rising home prices relative to household income levels and comparisons of home purchase prices to apartment rental prices.
“If we do the analysis right, use the right concepts and properly incorporate interest rates into the various calculations, then (look at) house prices nationally and in the nine U.S. Census regions, it’s difficult—if not impossible—to find prices looking out of alignment from underlying economic fundamentals, meaning, I don’t see any price bubbles nationally or regionally,” he said.
Seiders said some pockets of the housing market could experience a decline in house prices, but those limited instances are unlikely to impact the overall market.
“We are already seeing some deceleration in house prices at the national level and in some of the regions. We will see the house prices flatten or even decline in a limited number of local markets. But if the overall economic environment and the interest rate environment remain positive, I think we are going to be in pretty good shape on this topic,” he said.
The economist used the opportunity to blame securities investment analysts for trying to create the impression of a housing bubble to match the bubble that already burst on Wall Street.
“Some of the Wall Street presence really does want to get people to not think about housing as a good investment, but to be looking back towards the securities markets. That’s a disgraceful way to go about this,” he said. “Hopefully most of the discussion is well-founded on honest analytical questions, not scare tactics.”
Harris echoed Seiders’ debunking effort.
He said real house prices (i.e., without the effect of inflation) almost always decline during a recession and the reasons why that didn’t happen last year are the same reasons why it’s unlikely to happen this year or next year. He cited the National Association of Realtors’ housing affordability index and pointed to rents relative to the after-tax cost of home ownership as evidence of his argument.
“When you look at housing from an affordability standpoint, you could argue that if something gets so expensive, it is unaffordable and the demand is going to fall off. That hasn’t happened in the case of housing,” he said.
Harris also said the 1997 changes in capital gains tax assessments on the sale of a personal residence and relatively lower yields on alternative investments in the last two years have made housing a relatively more attractive investment from a tax standpoint.
But Harris’ longer-term outlook depends the indeterminate balance between the likely upwards and downwards effects of the strengthening economy. He said a stronger stock market, a slower rate on increases in house prices, higher mortgage interest rates and a good employment sector would create a “close call for the housing industry.”
“For the time being at least, investors have decided that housing is probably going to be a better investment than stocks, bonds, deposit certificates or gold,” he said. “If stocks go up and pull some money out of housing and if interest rates go up and make housing a little less affordable, how does that balance with the fact that income goes up? It’s a tough question to answer.”