- "What About the Housing Bubble?" Dan Denning asks
provocatively in a weekly e-mail missive to his Strategic
Investments subscribers.
- Denning writes: "Business Week, ever the author of inane
questions, poses this latest doozy: 'Housing: Is It a
Bubble If it Doesn't Pop?'" Denning's answer is a definite
"Yes."
- "The housing market appears to be strong," he concedes.
"In June, new home sales hit an annualized rate of 1
million units for the first time ever. And figures show
that at the current rate of demand, the stock of existing
and newly built homes would be 'consumed' in 3.9 months."
- But Denning finds no comfort in the housing market's
blistering rate of price appreciation. Rather, he sees the
troubling signs of a housing bubble about to burst.
"Ceteris paribus, the housing market is like the Nasdaq in
1999 - growing to an infinite sky," he observes. "[Since]
home prices are rising faster than incomes, new buyers must
borrow in the belief that home prices will keep rising. In
other words, new home buyers must count on a greater fool
in order to make the investment profitable.
- "But rising home prices are already discouraging buyers
from taking the plunge," says Dan. "In California, the
front-runner in national trends, the California Association
of Realtors reports that only 27% of those surveyed could
afford to buy a median-priced home. Can anyone say
'Unsustainable?' About the only way to sustain consumption
when such a large portion of income goes to mortgage
payments is to withdraw equity from the house. It's a
Faustian bargain."
- During the second quarter of 2002, according to the
gifted bank analyst Charles Peabody, 67% of households who
refinanced their existing mortgages increased the loan
amount by at least 5%. In other words, they extracted an
additional 5%, or more, of equity from their homes.
- "The heart of the rising price trend is in the
refinancing phenomenon," Denning continues, "which is the
last remaining crutch to consumer spending in the U.S.
economy. Something has got to give. As Peabody puts it,
'Leverage against an asset that can deflate in value is a
recipe for disaster.' Houses can fall in value just like
stocks. And when they do, those who have bought too much
house and extracted too much equity will find themselves
paying for an asset whose resale value is less than the
value of the mortgage. Upside down, out of luck, and no
more trips to Home Depot."
- Thanks for the uplifting observations, Dan. See you in
the bread lines.
(taken from the Daily Reckoning) |
