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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: CalculatedRisk who wrote (15854)	6/25/2004 1:57:41 PM
From: TheStockFairy	Read Replies (2) \| Respond to of 110194

HSBC, unlike Fed, sees U.S. housing bubble Friday June 25, 1:42 pm ET By Victoria Thieberger NEW YORK, June 25 (Reuters) - Economists at HSBC on Friday waded into the debate over whether the U.S. housing market is over-inflated, declaring a bubble exists, something the Federal Reserve has been reluctant to do. ADVERTISEMENT Just a few days after the Federal Reserve Bank of New York said there was little evidence of a nationwide housing bubble, HSBC said a bubble exists and prices are likely to deflate gradually over a few years, triggered by Federal Reserve interest rate rises. "This bubble-psychology has manifested itself in very rich valuations," HSBC chief U.S. economist Ian Morris wrote. House prices relative to income, rent, replacement-cost and home-equity have all set new highs, Morris said in a report entitled "The U.S. Housing Bubble -- The case for a home-brewed hangover." "Expectations of future house price appreciation are spectacularly, and unrealistically, high," he said. The debate over whether a housing bubble exists has raged in recent years as prices have surged. But the Federal Reserve has often said it does not see a bubble. Over the four years to the first quarter of 2004, official figures show house prices rose 33 percent nationally. Over the same period, prices in Washington, D.C., were up 70 percent, in California 60 percent and in New York and Florida 50 percent. Earlier this week, the New York Fed said the decline in interest rates in recent years justified the price increases. The 12-page Fed study said the rapid increase in home prices was itself not evidence of a bubble. "Rather, it appears that home prices have risen in line with increases in personal income and declines in nominal interest rates," it said. A HARD LANDING AHEAD Some economists worry that the run-up in housing prices in recent years has created a bubble similar to the stock market excesses of the late 1990s and could jeopardize the entire U.S. economy if prices fall sharply. The 47-page HSBC report said a "hard landing" is typical after a housing bust because the wealth effects -- which can affect consumer spending -- from real estate are more powerful than from stocks. "Prices are 10 to 20 percent too high and can overshoot on the way down," HSBC's Morris said, most likely deflating gradually over a few years rather than crashing like stocks. "We think the party stops by mid-2005. A series of rate hikes will cause a reassessment of likely future house price risks and its associated debt, thereby triggering housing's fall." Morris said that as the hangover hits around the middle of next year, he expects relief in the form of renewed Fed easing will be required. Much of the difference in how HSBC views the run-up in prices compared with the Fed's assessment stems from a debate over which price measures are used. The New York Fed said it was important to adjust for quality improvements due to renovations and extensions. Unfortunately, such a price index does not exist, so the Fed uses a quality-adjusted "new" home price index. HSBC's Morris argued that this approach has pitfalls because the existing stock of housing does not improve in quality by anywhere near as much as the improvement in new homes. The data this week on housing has all been far above expectations. On Thursday, a report on sales of new homes showed a 14.8 percent surge in May, including a leap of 53.2 percent in the Northeast. On Friday, a report showed sales of previously owned homes jumped 2.6 percent to a record in May. biz.yahoo.com