Tuesday, April 26, 2005

Blog To Experts: It's A Bubble

New home sales are out and the analysts have it wrong again. "Consumer confidence declined in April for the third consecutive month, signaling Americans' concerns that economic growth is leveling off.The government said sales of new homes shot up 12.2 percent last month to the highest level in history"

"The Commerce Department said new single-family homes were sold at a seasonally adjusted annual rate of 1.43 million units in March, confounding the consensus forecast of a small decline in sales in March. Sales of both new and existing homes have set new records for four straight years, but analysts are expecting demand to cool off a bit."

With a worried consumer and a soft economy, the experts can't understand why sales haven't slowed down. That's because they refuse to see it's a bubble! People act irrationally in a financial mania and that is what we have.

This from MarketWatch, "The median price of a new sold home fell 9.3% month-over-month in March to $212,300." Some discounting going on?

20 Comments:

At 8:31 AM, Blogger Chintan K. Amin said...

This isn't just an american pheonmenon. There's a nice article in The Economist and at Economist.com, which details the international bubble. "America is not the only country that has been experiencing a big run-up in prices. Its market isn’t even the most frothy. Between 1997 and 2004, house prices more than doubled in Australia, Britain and Spain, and nearly tripled in South Africa and Ireland (see table)."

 
At 8:35 AM, Anonymous Anonymous said...

People love to say that the US is not as frothy as some of these other countries, but I think our coasts are right on par with the frothiest of them all.

 
At 8:35 AM, Blogger Ben Jones said...

Chintan,
Good points, thanks for commenting.

 
At 8:36 AM, Anonymous Anonymous said...

Ben,

Prices fell by 9.3%... that's a liquidation sale, my friend...

 
At 8:40 AM, Blogger tageinn said...

Sales in the Northeast are down almost 9%.On my 2 minute ride to the store today I saw 7 for sale signs.The homes for sale North of Boston in my neighborhood are starting to pile up.

 
At 8:41 AM, Blogger Ben Jones said...

(Prices fell by 9.3%... that's a liquidation sale)

Probably, we'll see if some more detail comes out this morning. The govt. numbers are notoriously bad and subject to revision.

 
At 8:45 AM, Anonymous Anonymous said...

How can you guys say that there is a bubble in housing??? The resale numbers came out yesterday and both sales price and median price are up.

And today's sales numbers came out for new housing and they are at an all time record pace. Before there can be any significant drop in median price there has to be a sales slowdown which isn't going to be any time soon.

 
At 8:50 AM, Anonymous Anonymous said...

condo sales are keeping this market up... as i've said before, the existing home sales number now includes condos sales... this year is the first time ever that they are lumping together single family detached homes and condos...

 
At 8:50 AM, Anonymous Anonymous said...

"How can you guys say that there is a bubble in housing??? The resale numbers came out yesterday and both sales price and median price are up.

And today's sales numbers came out for new housing and they are at an all time record pace. Before there can be any significant drop in median price there has to be a sales slowdown which isn't going to be any time soon."

How can you guys say there's a bubble in dot com stocks? The quarterly number are out and prices are way up. ...

Conventional Wisdom, 1999

 
At 8:50 AM, Anonymous Anonymous said...

Speaking of the international aspect of this. I live near a new home development in Santa Clara, CA where 1 million gets you 4BR, 3000sf, and 700K gets you a 1300sf townhouse. On Sunday there was a large barbeque in the public park area of the development. It was mostly european, with English being spoken in heavy accents with French, Belgian, Italian, and British, and others present and their young children everywhere. Can it be that the favorable exchange rate actually makes these houses look cheap when paid for in Euros?

 
At 8:51 AM, Anonymous RentBoy said...

Anon,

Median price on new homes declined significantly. Median on existing up only slightly, while the volume over the first quarter is down.

Of course, gradually falling prices would potentially ameliorate the bubble. Skyrocketing prices only make the fall off the cliff worse....

http://www.ntrs.com/library/econ_research/daily/us/dd042505.pdf

 
At 8:51 AM, Anonymous Anonymous said...

Anon, you don't have to see the bubble pop to recognize that we're in one.

Claiming there is a bubble doesn't mean you're claiming it has already popped. You are confusing the two claims.

We are making the first: that the mania we are seeing (and the data you cite is evidence of the mania) is evidence that we are IN a bubble that has not yet popped.

 
At 8:53 AM, Anonymous The Angry Attorney said...

Foreigners are buying up property because of the great exchange rate they are getting...it is cheap to them.

For one "local" example, look at the Naples/Ft. Myers area.

 
At 8:56 AM, Anonymous RentBoy said...

Ben,

For your research -- a report put together by the inimitable Jeremy Grantham. You have to register on the GMO site to access, but it seriously takes about two seconds and is worth it:

https://www.gmo.com/NR/rdonlyres/E5E95346-EA7F-4583-9A8B-9939A9789615/460/JGLetter_1Q05_ALL.pdf

 
At 8:56 AM, Anonymous Anonymous said...

That is the purpose of marketing. People it is now clear to me, are conditionned like little automats, to adopt thes destructive behaviors. Skinner was right finally. It's possible to program people to do anything especially if they are in a crowd.

 
At 9:11 AM, Anonymous punchbowl said...

Remember, today's numbers were new home sales, yesterday's were existing sales. Of these two groups, which is more likely to adjust price to reflect the market? What we are seeing is not at all surprising: the home builders are slashing prices in an effort to be able to keep their volume up; individuals -- refusing to stomach the slash in price -- are having eat a drop in volume. I would expect both trends to continue, probably to extremes: the home builders have a huge amount of stock coming on stream, and their cost basis is presumably quite a bit lower than the current price point, so I would expect them to eat more and more of their margin just to be sure that they maintain volume. Similarly, the cost basis of individuals is much higher, and the self-deulsion is such that they will wait it out longer -- at a price above the market price. This will all end once the pricing expectation has finally been purged from the system. Something that will help: my bones tell me we're going to see a 50 basis point jump on May 3rd -- or perhaps my bones are telling me that we'll see a 25 basis point increase with some very strong language about the certainty of future increases. I think May 3rd will be doomsday, anyway...

 
At 10:20 AM, Anonymous Anonymous said...

Punchbowl,

Good points. I'd like to add that existing home sales have been slightly lower or flat for the past 4 months. And flat sales usually translate into lower prices... but we'll see...

 
At 12:04 PM, Blogger Ben Jones said...

(the home builders have a huge amount of stock coming on stream, and their cost basis is presumably quite a bit lower than the current price point)

Excellent points. We have discussed the actual cost of building a home several times. These guys are making out like bandits. And I agree also that the price psychology is more fragile than folks think. Once cracked, it will soon collapse. Look at Denver. Thanks for the comment.

 
At 3:43 PM, Anonymous Anonymous said...

Folks, price in new home sales dropped 9.3% as the gov. reported today. This is the largest monthly drop in the history of the data dating all the way back to 1963.

Of course sales volume would go up. It's kindergarten supply/demand economics. Media is making a big deal out of the volume without mentioning the almost 10% price drop at all in all of the reporting I checked.

This drop goes hand-in-hand with the 12% drop in new home housing-start reported last week.

Folks, the balloon is deflating. This high volume sales is the first wave as buyers got excited with the first price drop by builders in this cycle. As price continues to drop over the coming months, you will see buyers will sit on the side line and wait out (so they can buy it cheaper!) so we will see the second wave down.

Watch next month's housing-start and new-home sales( make sure you check the price pattern, not just the volume as most journalists did today :) ) for more clues. As someone mentioned earlier, May03 will be interesting with the Fed rate announcement. This could be an important day.

 
At 6:49 AM, Anonymous Anonymous said...

May 3rd isn't going to mean much... the fed is going to raise rates another 1/-4 point... big deal... greenspan is retiring in january... he's too lame to do anything and he doesn't want another popping bubble to tarnish his record... i believe that there is a bubble and that it will pop... but this party isn't over yet...

 

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