Excerpted from Alan Abelson's Barron's column:
By far, the most persuasive brief we've yet seen assembled in support of the case for a housing bubble is that dawn up by David Rosenberg, Merrill Lynch's man about economics. We don't know David personally, but we devour his stuff and, despite a peculiar ocular deficiency that prevents him from recognizing inflation when he sees it, his commentary is consistently first-rate. In any case, last week he offered a kind of roundup of the evidence of a housing bubble and its enormous influence on the economy as a whole. We'd like to share as much of David's review as we can and replicate the staccato format he used to such good effect.
Under the bold-face heading "Housing is Dominating Economic Activity," he offers these facts and figures, each set preceded by a proper bullet-point:
• Real estate has accounted for 70% of the rise in household net worth since 2001.
• Over 40% of private-sector jobs created since 2001 have been housing-related.
• Excluding housing, real final sales slowed sharply in the first quarter of 2005 to a 2.4% annual rate, from 3.2% in the fourth quarter and 4.9% in the third quarter, of 2004.
Under the heading "Over-leveraged," he points out:
• Subprime market has accounted for a 28% share of new mortgage funding in the past six months (vs. 5% five years ago).
• The Fed's loan-officer survey shows that mortgage standards have eased a massive 13 percentage points in the past three years.
• An estimated 42% of first-time buyers made no down payment on their home purchases last year.
• In the hottest price areas, adjustable-rate mortgages (ARMs) now account for over 50% of new mortgage originations.
• Over 60% of new mortgage loans in -- where else? -- California this year have been in interest-only loans or option ARMs.
Under the heading "Affordability Stretched," David notes:
• According to the FDIC, 38 of 50 states in the past year have seen home- price appreciation far outpace personal incomes -- and nationwide, home prices grew 6.7 percentage points faster than incomes.
• From 1955 to 1995, home prices rose with inflation, or basically 0% in real terms. Since 1996, home values have risen 45% in real terms. End result: a $5 trillion increase in housing-bubble wealth.
• Over a third of homeowners are devoting over a third of their income to monthly mortgage payments; 12% are devoting over half their income.
• Homeowner affordability is now at a 13-year low and total household debt-service ratio in the first quarter hit a peak 13.40%.
• Oversupply may be a looming risk to prices -- housing starts at two million units per year are now outpacing new household formations of 1.6 million. Could the excess supply, David muses, reflect speculative buying?
• And, finally, under the heading "Speculation Rampant," he ticks off the following:
• National Association of Realtors data show 23% of home sales in the past year were "investor" (read: speculative) based; another 13 were second property.
• A proxy for speculative buying, he reports, namely units sold but not yet started, are up 47%, year over year, a record high. Nearly one in four Americans polled in the University of Michigan Consumer Confidence survey believe that now is a good time to buy a home because it's a good investment and/or prices will continue to appreciate. That represents a 25-year high in bullishness.
• His research shows that 60% of the country is currently in a housing bubble (where the ratio of house price to income is greater than one standard deviation from the historical mean). And that includes the Northeast, the Pacific Coast and any number of pockets in between.
• He calculates that a decline from double-digit growth in home prices to no growth would trim at least 1% from GDP next year (which, he reports, is the current experience in the U.K.). Of course, if we might put our two cents in here (that's all we have on us on us at the moment), such a drastic change in the trend of housing prices would reverberate through the length and breadth of the economy, and its real effects would be as profound as they are unfathomable.
But, there's no housing bubble. We know that because that's what our friendly real-estate broker and every home builder and would-be home seller we talk to tells us. So it must be true.
Link:Housing is Dominating Economic Activity