Housing Bubble Lurks Among the Levered - By Bill Fleckenstein - 09/10/2002 06:03 PM EDT
Wreck Rooms Carpeted in Mania Mauve:Turning to the in-over-their-heads department, today's Wall Street Journal ran a wonderful article titled "Foreclosures Hit Record Levels," which illuminated many of the risky lending practices that have helped to increase housing demand and housing prices. I don't see how anyone can read this article and feel terribly sanguine about what is going on. I see a lot of debate on the issue of housing vs. stocks, and why a bubble in the housing market does not exist because it doesn't resemble the recent bubble in the equity market. The people who say that the housing market can't be seeing a bubble argue that it's more heterogeneous, whereas the equity market is more homogeneous, in terms of money flowing back between different securities. (This is one of the arguments promoted by the man whose name we don't mention anymore.)
It is true that real estate is more of a regional market, but it can still turn into a bubble. I recall what the real estate market of the late 1970s looked like. It was a bubble -- just not as big as our most recent equity bubble. I think that's one of the things that confuses people. Our equity bubble was so large that nothing looks like a bubble by comparison.
The Check's in the ... Checkbook: But the Journal story gives some statistics that certainly describe reckless behavior in progress. The second quarter saw a record 1.23% of all home loans in the foreclosure process. (The previous record was set in the first quarter of 1999.) In addition, 4.77% of all home loans outstanding were at least 30 days past due -- one of the highest rates in the last 10 years, though not as high as the 6.07% recorded in 1985. The article also cites a quadrupling of phone calls to Auriton Solutions, a nonprofit credit counseling agency in St. Paul, Minn.
Pop Quiz: So, cracks are appearing in the dike. That doesn't necessarily mean there's going to be a problem in the housing market tomorrow. The timing of when bubbles burst is always elusive; witness what happened in our stock mania. Also, given the aforementioned fact about housing markets not being homogeneous, the bubble is more pronounced in some areas than others, and at different price points. Here in Seattle where I live, things are rather muted in certain areas of the market because of the fallout from the stock bubble, but in other places, that is not the case. In any event, it's important to understand that we do have a bubble occurring in the housing market.
Semidetached Housing: Further, it's worth emphasizing that housing prices require some income stream to support the prices that people pay, and therefore, housing prices cannot be completely detached from current average income levels. The latter may receive a boost from stock options, or from equity that people have built up in other areas, enabling them to reduce their monthly payments. Nevertheless, what strength we are seeing is a remnant from the stock bubble being directed toward inflating a housing bubble. If one pictures a pig working its way through a python, that's kind of what's happening.
Shacking Up With Reality: But I don't expect those benefits will necessarily remain available to the housing market going forward. At the end of the day, you cannot have housing prices that are totally out of whack with what underlying income levels generate -- which appears to be the case today. To me, it seems impossible that the housing market is not going to have some sort of a large setback. When, I don't know, but I feel fairly certain it is going to happen. |
