'Envy' fuels real estate bubble talk
Housing still a better investment than stocks

Monday, May 23, 2021

By Lou Barnes
Inman News

Long Treasurys bottomed at 4.05 percent last week as the GM-Ford-junk-derivative-hedge mini-panic faded; they are now 4.13 percent, mortgages mostly holding 5.626 percent.

The economic data were benign: core producer prices rose .3 percent in April, but core CPI was unchanged. The nominals, up .6 percent and .5 percent were dismissed as residuals from now-fading energy costs; oil stayed under $50/bbl all week. Industrial production was on the weak side, minus .2 percent, and capacity in use fell .2 percent to 79.2 percent.

However, housing starts and new permits in April roared back from a weak March, up 11 percent and 5.3 percent, which leads to the following Housing Bubble rant.

The financial press is now on official Bubble Watch; CNBC might as well have a bubble ticker scrolling along with stock prices, and the Wall Street Journal last week ran four prominent Bubble-related stories. One had some merit, arguing The Bubble as an artifact of too easy mortgages.

The first aspect of too easy is too low, as in rates. In the last four years, fixed-mortgage rates have been on a centerline of 5.75 percent, down from 7.75 percent through the 1990s. Thirty percent of a $100,000 annual income committed to a mortgage payment ($2,500/mo., less $350 for TI = 2,150 for PI) at 7.75 percent used to borrow $300,000. Today, at 5.75 percent, it's $368,000. That 20-ish percent increase does not explain the 49 percent increase in U.S. home prices since 1999.

However, convert to interest-only, increase the TI to $400 for a more expensive house, and the $2,100 remaining for interest at 5.75 percent will borrow $438,000. That 30 percent interest-only increase, even with post-90s income growth, does not explain the 102 percent five-year run in California, or 112 percent in D.C., 99 percent in Rhode Island, and 75 percent in Florida.

How about no-proof-of-income lending as supercharger? If that were so, we would have seen a surging entrance of buyers previously shut out of the market. Not so; rates of home ownership are steady.

I have no doubt that low rates and easier underwriting (enlightened, says here) are the cause of some of the price run-up; nor doubt that interest-only loans are now facilitating higher prices. However, to be a bubble, home prices must be unsustainable; for foolish mortgage terms to be the culprit, mass default would have to be in prospect.

There is no evidence whatever that home prices are unsustainable, nor any evidence of widespread default. The bubble is in commentary coming from the financial markets, and the gas inside is envy.

After foolish lending and borrowing, the market types' critique of housing: too many investment and second-home purchases. Must be dangerous speculation. Prices are unsupported by buyer income or market rents. Tisk, tisk. The Fed should put a stop to this. Call in the regulators.

That line of argument sets a record for hypocrisy. You stock-market guys, the ones who gave us the biggest bubble in financial history, are suddenly the Bubble Cops? High prices versus lower incomes and rents? That's what you call a "healthy price-earnings ratio." Riding prices up is a crime? In your market, you call the same thing a skill, "momentum investing," and "market timing." Millions of American families are taking advantage of an epic demographic mis-match of land versus 3 million new Americans every year; you call them irresponsible Bubbleheads, while the exact same behavior among yourselves is called "value investing."

Financial-market people have a fit when clients announce they are withdrawing capital to put it in real estate: "Uh-oh. Bubble!" Say the same thing to them about their products and they will hang up on you. Stocks have staggered in their tracks since 1999; it is the soul of prudence to re-allocate some assets to a better market.

The truth hated most by stock-jockeys: invest in a home, and even if you're wrong about prices, you get to live in it. Try that with an Enron stock certificate.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at [email protected].

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Copyright 2005 Lou Barnes


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