The Real Estate Soufflé

Monday, January 30, 2006 | 05:15 AM

We have a decidely nuanced view of Real Estate: While not neccessarily a bubble, it has been the prime driver of the economy since rates were slashed to half century lows 3 years ago.   

Our expectation for the slow motion slow down rests on Real Estate cooling (which its been doing since August), home construction and sales slipping, and prices slowly sliding. That may stop the Fed from tightening appreciably further (2 and through?). Mortgage rates staying below 6.5% allows Real Estate to maintain a moderate level of activity -- but one that is obviously way off its prior white hot pace.

I suspect this could happen more slowly than those who think Real Estate is a full blown bubble ready to pop. Indeed, one of the comments in "Top Ticking Real Estate is Different Than Stocks" notes that:

"Last weekend I first heard the term "real estate soufflé" proposed on the radio to replace the term "real estate bubble." Even when the soufflé falls as it comes out of the oven, it doesn't pop like a bubble."

That seems to make a lot of sense to me. Its consistent with last month's final Home Sales slipping to to a minus 0.3%, from a prior 3 month average gain of 4.6%. While down on a month to month basis,  the absolute levels still remain historically high. Mortgage Rates have been bouncing between 6 and 6.25% -- still historically cheap.

Barron's Alan Abelson is even more Bearish than I on the prospects for Housing & Real Estate:

"On that score, our conviction has been mightily strengthened by clear signs that the great housing boom is rolling over. Exhibit A is last month's steep drop in the sales of existing houses -- 5.7%, to be precise. Yes, we're well aware that the Commerce Department reported that sales of new single-family homes rose 2.9% in December. But the figures don't jibe with the rather downbeat findings of the housing industry. And as to which we find more credible -- Uncle Sam's or the builders themselves -- it's no contest."

Merrill Lynch's David Rosenberg has become a regular in his column. His views on the end of the housing boom, and its impact on the macro economy are also pretty bearish:

"To that astute economic observer David Rosenberg of Merrill Lynch, the startling collapse of sales of existing single-family homes in the October-December span -- they fell at a 36% annual rate -- is persuasive proof that the bull market in housing has metamorphosed into a bear market.

What marked the extended and powerful cycle, he reminds us, is that it was built on cheap credit and incredibly relaxed loan standards. Some 43% of first-time buyers, David recounts, put zero money down on their home purchases last year; by contrast, two years earlier, 28% bought a house with no down payment. Well over a quarter of the mortgages in '05 were of the dicey "buy now, pay later" variety. Not exactly sturdy underpinnings for a boom, especially with credit likely to get increasingly less cheap and the regulators fretting over lending standards.

The backlog of unsold inventories in the resale housing market last month shot up 26% above the December '04 level to a 5.1 months' supply; that compares with the low of 3.8 months in January of last year. Inventory of new homes stands at its highest level in nine years. The overhang of unsold units in the condo market constitutes a formidable 6.2 months' supply. And pricing is beginning to reflect the inventory bulge: December's median price of $211,000 for an existing home was virtually unchanged from last spring and down 4% from the August peak."

There's little there I disagree with; If anything, we only differ on how long this will take. I have no clue, but I suspect it will be a more gradual process than many expect.

"For the economy, David asserts, the end of the housing boom could be a serious drag on economic growth. Considerably more serious, we might interject, than most of the sunshine gang, whether in Wall Street or D.C., care to admit. In the past three years, the surge in housing prices, he calculates, accounted for nearly 40% of the expansion in household spending via home equity cash-outs. Merely stagnant home prices, by his reckonings, would shave a full percentage point off consumer spending growth in the coming year. An outright decline obviously would have that much more of an impact.

Just the direct effects of the raging bull market in housing, he figures, chipped in 25% of the overall growth in GDP since 2003. The real-estate boom, he goes on, was responsible for a cool 20% of the rise in total retail sales, while enlarging the nation's payrolls by around a million jobs.

As David wonders, "So who picks up the baton now that the housing parade is over?" Who, indeed?""

The sunshine crowd will tell you that Business is ready to pick up the baton; they certainly sang that from on high after Q3 GDP showed a big uptick in Corporate Capex. Of course, they have been saying that for years now. And as Q4 GDP has revealed, Q3 capex is looking more and more like an outlier . . .


Barron's MONDAY, JANUARY 30, 2006

Monday, January 30, 2006 | 05:15 AM | Permalink | Comments (24) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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Its been subtle, but there has been a change in housing market terminology over this past year. There have been several distinct segments to the trend, in terms of how what terminology is used to describe it. Housing Boom [January to Ju... [Read More]

Tracked on Jan 29, 2006 10:49:04 PM


I'd say at least half of the real estate bubble crowd believes it will take a few years for the air to escape. So the souffle argument, while it may be a better metaphor, offers a distinction without much of a difference.

Posted by: ross | Jan 29, 2006 11:10:02 AM

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