Bubble, Boom or Bust?
Media confuse the housing issue by comparing real estate to the stock market and stoking fears of a national ‘bust.’

By Amy Menefee
May 26, 2005

     Media reports on housing have flared recently following Federal Reserve Chairman Alan Greenspan’s admission of “local bubbles” and the National Association of Realtors’ release of figures on soaring home sales.

     The print media are correctly reporting that housing “bubbles” – where home prices rise to levels the market eventually can’t sustain – happen in local areas, not on a national scale. Articles in the May 25, 2005, Washington Times, Washington Post and New York Times made this point. Unfortunately, some broadcasters aren’t giving the same explanations and are relying on fearful predictions of national economic gloom.

     ABC’s Betsy Stark, for instance, focused on real estate speculators in her May 24, 2005, “World News Tonight” segment. “One of the scary things about real estate right now is almost everyone assumes that prices will keep rocketing up,” she said.

Houses vs. Stocks: Different Bubbles

     Also on ABC, Elizabeth Vargas made a dire allusion on the May 19, 2005, “World News Tonight”: “The run up in housing prices is now beginning to look something like the boom in Internet stocks, and we know what happened there.” Stark added, “Elizabeth, housing prices do seem to be defying gravity the same way stocks did not so long ago. And the Federal Reserve is watching with an increasingly worried eye. If the housing boom goes bust, there could be risks to the entire economy.”

     Likewise, the Los Angeles Times’ Annette Haddad wrote on May 21, 2005, that Greenspan’s May 20 remarks about housing were “reminiscent of his statement in 1996 that the then-hot stock market was afflicted with ‘irrational exuberance.’” Haddad later reiterated the connection: “What is uncertain, experts say, is just when these bubbles might burst. The stock market didn’t crash until 2000, four years after Greenspan’s ‘irrational exuberance’ comment.”

     The housing market isn’t irrational, said Free Market Project adviser Bruce Bartlett, and that’s what makes such a comparison faulty.

     “People were buying stocks then for companies that had no earnings,” said Bartlett, a senior fellow at the National Center for Policy Analysis. “It was crazy. The economic calculation of whether to buy a house is completely different from the calculation to buy a stock.”

Economy Drives Boom Cycle

     Accelerated job growth and low mortgage rates are widely acknowledged as two of the main factors driving home sales. And when demand for houses goes up, prices go up.

     Despite this natural cycling of the industry, John Burns, a housing analyst and founder of John Burns Real Estate Consulting, said the media tend to favor a return to an average. They act as though “if anything’s better than average, then people should be warned,” he said. Burns said he thinks people should pay attention to the housing market, because if mortgage rates begin to rise, then the buying boom should slow. Still, he said he hasn’t seen anything that made him think that’s coming too soon.

     “I don’t see a downturn this year,” Burns said.

     Whenever the downturn does come, it’s the speculative buyers who engage in “flipping” -- buying properties to turn them over for a quick profit -- who stand to lose. Banks could also be at risk if they have issued many loans to people who might default if interest rates rise, Bartlett said.

     “For individuals, anyone who buys a house in today’s market and plans to live in it for a reasonable amount of time should be okay,” Bartlett said. He added that individuals should refinance their mortgages to lock in low fixed rates, not to fund extra spending.
 

Resource: Analyzing Housing Bubbles