Economist: Home prices will follow stocks lower
Posted on Sun, Sep. 15, 2002
bayarea.com
Home prices nationwide -- particularly in the Bay Area -- are a bubble ready to burst, warns Ian Morris, chief economist of HSBC Securities USA. And, he says his pessimistic prediction has ample support in the recent history of Japan and the United States.
Morris says that when a stock market implodes -- as it has here in the past 2 1/2 years -- home prices are likely to follow, but with a delayed reaction. He cites several examples, focusing on two: the United States in 1987 and Japan in 1989.
Morris, 34, works out of the New York office of HSBC Securities, which is part of the London-based financial conglomerate HSBC Holdings. He spoke recently with Mercury News Staff Writer Mark Rosenberg.
Q You compare the current rise in U.S. home prices with events here and in Japan more than a decade ago. What happened then?
A U.S. stock prices were rising in 1987 and then crashed in October, falling 23 percent in one day. Home prices in the U.S. had been rising along with stock prices, and they continued rising for nearly two years after stocks crashed, peaking in August 1989, then they fell or stagnated for the next five years.
In December 1989, Japan's Nikkei stock average hit a peak of 39,000 and then began a long decline, leading the Nikkei to its current level below 10,000. Property prices in Japan continued to inflate for more than a year after stocks peaked, then began a long and steep decline.
Q Stock prices fell, then home prices fell some time later. But does that mean one caused the other?
A Stock market collapses are a signal of serious economic problems and erase enormous amounts of wealth. With less money available to purchase homes, one would expect home prices to fall or stagnate, but instead they rise -- temporarily -- for three reasons:
• After a stock crash, fearful investors divert their money into real estate, which they regard as safe.
• Those same fearful investors also move money into savings accounts and money market funds, increasing the supply of money available for lending. At the same time the central bank is cutting interest rates to stimulate the weaker economy that follows the stock market drop. These concerted reactions cause mortgage rates to fall.
• In the weaker economy, lenders prefer making home loans rather than business loans, increasing the availability of mortgage money.
These three reactions cause home prices to rise before they follow the stock market lower.
Q You say the delayed reaction in home prices took about two years after the U.S. crash of 1987 and about one year after the Nikkei's peak in 1989. Now, 2 1/2 years have passed since the U.S. stock market peaked in 2000. Is the delayed reaction overdue this time?
A One to three years is the usual situation. We have a longer time frame now because the Federal Reserve has been very aggressive in cutting rates, and mortgage rates have fallen to the lowest level in a generation. The delay has been elongated partly because inflation wasn't a problem during the run-up in stock prices.
Over the long term, housing prices can only rise about 2 percentage points above the rate of inflation. We've been rising faster than that for five or six years now.
Q Are there regions of the nation where the housing bubble is especially inflated?
A The most bubblish situation is occurring on the West Coast and smack dab where you are. San Jose and San Francisco are among the most inflated real estate markets. A collection of states clustered in the Pacific, Mountain and North-Central regions can now probably be considered bubbles.
Q The Silicon Valley area has had a housing shortage for more than 10 years. It seems unlikely that prices here could drop significantly. What are the chances that your theory is wrong -- that home prices aren't going to follow stocks?
A One indicator I look at is the ratio of home prices to disposable income, which is like the price-earnings ratio for houses. U.S. homes are worth about 1.6 times Americans' disposable personal income -- a ratio virtually identical to levels when U.S. home prices peaked in 1989. That ratio is even more stretched in your area.
It is possible that prices could continue to rise for a while longer if mortgage rates stay low. But this would only make housing values even richer. So when mortgage rates finally do rise by an amount sufficient to tip the housing market over, another post-bubble deflationary headache will emerge, this time in residential real estate instead of the stock market.
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Contact Mark Rosenberg at mrosenberg@sjmercury.com or (408) 920-5918. |
