On November 28, the National Association of Realtors
reported existing-home data for October, and although sales were
down 2.7 percent from September’s torrid pace, the median
national price rose to $218,000, a 16.6-percent increase since October
2004. CNN’s Tony Harris on “Live Today” shared
the news with his viewers: “Has the housing boom gone bust?
Just in this morning, existing home sales fell in October more than
2 and a half percent.”
Almost on cue, the Commerce Department reported
new home sales data for October on November 29, and last month’s
data set a new record. As reported by Investors Business Daily,
“Rumors of the death of the U.S. housing market must have
been exaggerated.” What are the facts? “U.S. new home
sales jumped by 13 percent in October to a record 1.42 million seasonally
adjusted annual rate. This is the biggest rise since April 1993.”
And, how do these numbers compare to others this year? “October
sales smashed the previous record of 1.37 million set in July.”
As the report continued, the following statement
stood out: “The sales figures seem to contradict anecdotal
reports that the housing market has cooled dramatically as mortgage
rates rise above 6 percent.”
Journalists have been talking about a housing bubble
since 2001. On September 3 of that year, Forbes magazine warned
its readers about the consequences of home equity values starting
“to wobble,” while stating, “There are ominous
signs that this is about to happen.” On the same day, a BusinessWeek
editorial cautioned about a “double bubble” and told
its readers, “A housing bubble may be developing – right
behind the Nasdaq bubble.” Both indicated that such an event
would be devastating to the economy.
What those reports failed to explain was that an
investment bubble occurs when an asset appreciates by extraordinary
percentages for a short period of time, culminating in a rapid decline
that wipes away most of the gains. A perfect example is the NASDAQ
stock index, which went from roughly 1,400 in October 1998 to more
than 5,000 in March 2000 (a 250-percent gain in less than 18 months),
only to fall back to about 1,400 by October 2001 (a 70-percent decline
in about 18 months). The housing market is less liquid and prices
don’t usually change quickly like stocks do.
Four of 16 media reports in 2001 that referenced
a housing bubble were either written by or cited New York Times
economic columnist Paul Krugman. Of particular note was a September
30 Times article by Krugman entitled “Fear Itself” where
he wrote: “Housing was doing better, thanks to low interest
rates, but some analysts were warning about a housing bubble –
and even if they were wrong, how solid a recovery could we have
from housing alone?”
Average housing prices ended 2001 up 6.3 percent,
despite that prediction.
By 2002, housing bubble references in the mainstream
media exploded to almost one a day and became much more commonplace
outside of business publications. Federal Reserve chairman Alan
Greenspan even was asked about this subject during his July 17 testimony
before Congress. “We’ve looked at the bubble question,
and we’ve concluded that it is most unlikely, mainly because,
one, we have a very diverse real estate market throughout the country,”
Greenspan said.
That didn’t quiet the media’s concerns.
The Chicago Tribune and USA Today ended the year by warning their
readers about the danger of a bubble. USA Today even warned of a
possible recession:
“All the fuss about whether we’re facing
a housing ‘bubble’ might be compared to the argument
over whether the world will end with a bang or with a whimper. Some
economic clairvoyants are waiting for a ‘bang’ –
for housing prices, like tech stocks, to plummet.” Chicago
Tribune, Dec. 15, 2002.
“That might be especially true now as real estate experts
and economists warn of possible housing bubbles – and a possible
crash – in the Bay Area and beyond. While home prices powered
ahead for much of the past year, there are signs of weakening. Median
U.S. prices peaked at $163,900 in June, but have fallen since. A
big decline in a handful of key markets could help drive the USA
back into recession.” USA Today, Dec. 16, 2002.
The number of reports about the housing bubble that involved or
were written by Paul Krugman increased to 17 in 2002. His August
2 column even suggested that the Fed should, or was planning to,
create a bubble. He said that to fight recession, the Fed “needs
soaring household spending to offset moribund business investment.
And to do that, as Paul McCulley of Pimco put it, Alan Greenspan
needs to create a housing bubble to replace the Nasdaq bubble. Judging
by Mr. Greenspan’s remarkably cheerful recent testimony, he
still thinks he can pull that off.”
Average housing prices ended 2002 up 5.7 percent.
Such discussions became even more commonplace on
TV in 2003. NBC’s “Today” began the new year on
January 2 with Financial Editor Jean Chatzky stating: “A lot
of people are looking at the housing market right now and saying,
‘Has it gone too far? Are we in a housing bubble?’”
This question dogged Greenspan in 2003. After he
spoke at the Ronald Reagan Presidential Library on April 10, the
Associated Press reported Greenspan as having said, “I personally
don’t think there is a housing bubble similar to that that
exists in stocks.”
Average housing prices ended 2003 up an amazing
8.5 percent, despite bubble fears.
By 2004, housing bubble discussions, as well as
predictions of an imminent collapse in prices, were showing up throughout
the media. As a result, any bad housing report became important
news. Kitty Pilgrim of CNN interjected this during her December
23 stock market report on “Inside Politics”:
“But now there are new signs of weakness
in real estate. New home sales fell 12 percent last month. And that
was the biggest decline in nearly 11 years. The new home sales report
is the second in a week, signaling a possible slow down. Last week
housing starts posted the biggest decline in 11 years.”
What was Pilgrim’s conclusion? “Economists
say that the drop in sales, weak construction numbers – that
could be a warning sign of trouble ahead in the real estate market.”
That November 2004 report ended up being an anomaly, and real estate
sales continued strong in the months that followed, as did the economy.
ABC’s Mellody Hobson also went against Wall
Street’s wisdom on the issue, saying she was “a little
skeptical” on the December 22 “Good Morning America.”
“They say that Wall Street analysts who are
surveyed are more bullish than they've been since January of 1987.
Now we know what happened at the end of that year,” Hobson
said. “But there’s some things that worry me. This deficit
is out of control, the war has not been going so well. Oil remains
a wild card. Interest rates, and rising interest rates specifically,
could be the pin that bursts the housing bubble.”
Average housing prices ended 2004 up a whopping
9.3 percent – again defying predictions.
That Was Then; This Is Now
As Alan Greenspan approached a well-deserved retirement,
a new Federal Reserve chairman was nominated in October 2005. He
too questioned the existence of a housing bubble. As The Washington
Post reported on October 27: “Ben S. Bernanke does not think
the national housing boom is a bubble that is about to burst, he
indicated to Congress last week, just a few days before President
Bush nominated him to become the next chairman of the Federal Reserve.”
Instead, these increases “‘largely reflect strong economic
fundamentals,’ such as strong growth in jobs, incomes and
the number of new households.”
Still, the higher housing prices have gone, the
gloomier the press accounts have become. The Associated Press reported
on Nov. 11, 2005: “A downturn in housing could mean more than
1.3 million lost jobs, Goldman Sachs Group Inc. predicts, bumping
up the national unemployment rate by 1 percent and the unemployment
rate in house-mad California by 2 percent.” Even more disturbing
in the article was this scary claim: “The Center for Economic
and Policy Research predicts worse, saying a bubble burst would
mean the loss of 5 million to 6.3 million jobs.”
Three days later, CBS’s Julie Chen reported on the “Early
Show”: “Mortgage rates are at their highest in more
than two years, and many home owners are worried that the real estate
boom has finally gone bust.”
Almost on cue, the National Association of Realtors the
following day released housing numbers for the third quarter
of 2005, showing anything but a “bust”: “The
national median existing single-family home price was $215,900
in the third quarter, up 14.7 percent from the third quarter
of 2004 when the median price was $188,200.”
Conclusion
It’s been more than four years since
the media began reporting bearish housing predictions in earnest.
Yet real estate values have forged ahead. As a result, the
net worth of the average citizen is now at an all-time high,
well exceeding what Americans enjoyed during the stock bubble
years of the late ’90s and early 2000s. In addition,
and maybe most importantly, close to 70 percent of residential
dwellings are now owned by one or more of the inhabitants,
also an all-time high.
So who’s right about real estate –
the media that have been predicting a crash for more than
four years, or past and future Federal Reserve chairmen along
with millions of Americans who have bought a piece of the
American dream during this run-up?
So far, the answer is clear. However, given
the seriousness of this issue, and just how much impact the
housing market has on the rest of the economy, the media should
learn from this and present even-keeled reports that deal
with how people should invest their money. -one-
Copyright 2005 Noel Sheppard
