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COMMENTARY: WE'RE FOREVER SEEING BUBBLES By Mark Lieberman, Chief Economist for the Five Star Institute The recent jump in home the decrease in home values prices (near record monthLow inventory— reduced consumer spending over-month and year-over-year by upwards of $400 billion and combined with GDP by about 2.5 percent. That increases reported for May by the National Association of low interest rates jobs fell as well only made a bad Realtors) has led to speculation worse. helping to keep situationslowdown in housing that the rapid surge in home The affordability prices could be the sign of a prices beginning in 2006 came new housing bubble similar to high—has driven just as baby boomers—born the one that led to the Great between 1946 and 1964—were up prices. Recession. approaching retirement, a time Is it? The not-so-short when they might be lookanswer is, not yet. ing to use their home as a retirement nest egg, Indeed, through May, the median price of an finding themselves with more house than they existing single-family home has risen by doubleneeded. About a year later, employment began to digits for seven of the previous eight months sag along with wages and salaries, so there were (and in the eighth, the year-over-year increase fewer people with less money to spend on buying was a close 9.4 percent). For comparison's sake, a home. note that in the run-up to the collapse in 2006, Despite the fact we still theoretically have the median price of an existing single-family more potential sellers than buyers, which should home rose by double-digits year-over-year for 11 drive prices down, the inventory of homes listed straight months. for sale has remained low. That low inventory— An increase in prices itself does not signal a combined with low interest rates helping to keep bubble. An unsustainable increase, not supported affordability high—has driven up prices. by other data, however, does. In the run-up to the That doesn't necessarily mean a bubble unless 2006 collapse, the higher prices—which had been sales increase with the higher prices, and they trending up for four years—led to a sharp uptick have even with regulatory changes in the wake of in construction, unsupported by demographics. the housing collapse designed to stop banks from Baby boomers were aging, transforming homemaking loans borrowers could not afford. Just buyers into sellers, and there weren't sufficient how effective those changes have been, though, numbers of "echo boomers" to replace them. is still open to question. According to the FedNonetheless, in the 12 months ended in May, eral Reserve's most recent Senior Loan Officers the year-over-year increase in single-family starts Opinion Survey, mortgage demand is climbing has averaged about 26 percent, four times the and more banks are easing lending standards. average year-over-year increase in the 12 months Those factors combine to drive prices still just prior to the bubble bursting in 2006. When higher in a cycle that, if incomes fail to keep the bursting resounded and housing prices fell, the construction jobs they supported disappeared pace, could inexorably lead to a bursting bubble. Perhaps more significant than the question along with hundreds of thousands of others as of whether we're in or headed to a bubble and housing wealth vanished, seemingly overnight. are we prepared for it to burst, is what happens if Even though the demographics haven't prices again suddenly and dramatically collapse? changed—the 55-plus population is growing Many analysts contend the current prices faster than the 25–34 population—builders in are justified by low rates, which keep homes the last 12 months have completed 31 percent affordable even as prices rise. This would suggest more single-family homes than they sold. Prior that as rates rise, prices will move in the opposite to the housing peak, completions were about 26 direction, a replay of the post-2006 economy. percent more than sales, adding to inventories That's not, though, what history tells us. If prices and further depressing home prices. fall in response to higher rates, it would mean While the "gap" between completions and market behavior has changed, a phenomenon for sales was wider before the 2006 collapse than which we may not be prepared. today, it has been expanding rapidly, growing in Catch Mark Lieberman's commentary on eight of the last 12 months. P.O.T.U.S. radio (Sirius-XM 124) the first Friday of So, what happened to the overall economy every month at 8:45 a.m. (EDT) and again at 12:30 when the housing bubble burst? As prices and valp.m. (EDT), or tune in at 6:20 a.m. (EDT) to hear ues dropped, so did consumer spending, a function of the "wealth effect." According to some estimates, him any other Friday during the month. 30 ARE MORTGAGE RATES TOO LOW TO THREATEN THE RECOVERY? The recent rise in mortgage rates is not enough to pose any real threat to the housing recovery, but that's not to say the increase doesn't come with some risk, according to a recent analysis from Capital Economics. By the middle of July, Freddie Mac's weekly market survey showed the 30-year fixed rate back at 4.51 percent, while the Mortgage Bankers Association reported the 30-year rate for conforming loans rose to 4.68 percent for the week ending July 5, the highest since July 2011. To put things into perspective, Ed Stansfield, chief property economist at Capital Economics, noted that on a long-term view, rates are still "exceptionally low." Also, borrowing costs are still at affordable levels and the employment situation is showing signs of improvement. Capital Economics estimates a mortgage on a median-priced home would require less than 15 percent of median income compared to the long-run average of 22 percent. However, 18 months ago, when mortgage rates hovered around the levels seen today, "house prices were at best flat, if not still edging lower, while the recovery in housing sales was very much in its infancy," Capital Economics noted. Potentially, the firm says a rise in mortgage rates could discourage home sales, hamper builder confidence, and slow housing starts, as well as trigger more delinquencies for struggling homeowners with adjustable-rate mortgages. Though, so far it appears rising rates have had the biggest impact on refinancing applications, according to the analytics firm's observations. Even with sporadic bursts of increases in refinance applications in recent months, Capital Economics stated, "the scale of previous falls meant that refinancing applications were still over a third lower than in the first week of May." At this point, the firm says, it's still early. Capital Economics points out that changes in mortgage rates can take six months before impacting demand. STAT INSIGHT $1.2 Trillion Unpaid principal balance of the 8,927,000 outstanding mortgages with "refinancible characteristics." Source: Lender Processing Services