Sunday, April 02, 2006

‘Bubble, Bubble, Where's the Housing Bubble?’

Link To This Post.

The New York Times reported this weekend that Gary and Margaret Hwang Smith, economics professors at Pomona College in Claremont (which is in the LA Metro Area), have concluded that all this bubble talk is boulderdash. Not only does the couple believe there is no bubble in L.A., they actually think places like Chicago or Boston might be underpriced.

This report may force me to take back every good thing I ever said about the Claremont colleges. Get a load of this:
In a paper the two presented at the Brookings Institution this week, "Bubble, Bubble, Where's the Housing Bubble?" they said that even though prices had risen rapidly and some buyers unrealistically expected the trend to continue, "the bubble is not, in fact, a bubble in most of these areas."

They argued that the value of a home is determined by the rent it could fetch. Calculate the future rents, subtract mortgage payments, taxes and other costs, factor in a good annual rate of return of 6 percent or more, and one should be looking at the proper price of a house or condo.

Their bottom line was: "Buying a house at current market prices still appears to be an attractive long-term investment."

Speculating about bubbles — their cause, their longevity, and indeed, their very existence — occurs whenever there is a rapid rise in asset prices. When dot-com stocks pushed the stock market to record highs in the late 1990's, many people tried to explain — or justify — the high prices of the stocks by talking about how the Internet was creating a new economy, one that worked by different rules or needed valuations that did not depend on earnings but on eyeballs viewing Web sites or the "stickiness" of those eyeballs. Those justifications were proved false by the technology meltdown.

With real estate, there have been fewer attempts to justify the high prices and more of an effort to understand why it is happening and whether there is an asset bubble.
Also worth noting is a comment at the very end of the story.
The questions many people want to know about housing prices are not answered by the Smith research: when will they fall and by how much? "Some people think we are trying to predict prices and we are not," Mr. Smith said. "That's a point a lot of people get hung up on."

Sure, he said, if prices drop you would have been better off if you had waited. "But you can't time the market," he said. "If you are a house flipper, we aren't talking to you."

— The Boy in the Big Housing Bubble