Greenspan Predicts Housing Bust

On May 18, Greenspan all but assured a housing collapse was coming with his statement, “Stable Prices Replacing Boom”:

“Former Federal Reserve Chairman Alan Greenspan said the five-year housing ‘boom is over,’ though prices won’t fall nationally.

“‘We’re not about to go into a situation where prices will go down,’ Greenspan, 80, said in response to questions Thursday evening at a reception in New York hosted by the Bond Market Association. There is ‘no evidence home prices are going to collapse.’

“Greenspan echoed comments earlier in the day by his successor, Ben S. Bernanke, who said housing is undergoing a ‘very orderly and moderate cooling,’ and that central bankers are monitoring the market to help shape their analysis of the economy’s performance.”

With his “permanently high plateau” call, Greenspan all but assured prices are about ready to collapse. Bear in mind there was no evidence of a Nasdaq crash in spring of 2000 either. But given that Greenspan has been wrong at every critical juncture in his entire career, we know housing will collapse sooner or later.

Actually, his position is peculiar, to say the least. He claimed there was a bubble in stocks in 1994; he embraced the productivity miracle in 1999-2000, looking for upside in the economy as shown by Fed minutes; then, after the bubble burst, claimed that bubbles could only be detected after they pop. Now he is claiming “very orderly and moderate cooling…where prices will not go down.” This is, of course, reminiscent of esteemed economist Irving Fisher’s statement in October 1929: “Stock prices have reached what looks like a permanently high plateau.”

Head Cheerleader

Of course, Greenspan has company with his call. Please consider statements made by David Lereah, head cheerleader for the National Association of REALTORS: “There Is No Real Estate Bubble”:

“More than 50 people turned out for an investor seminar recently hosted by Keyes Company/Realtors and held at Belaire Boca, a community of luxury condominiums and townhomes in Boca Raton.

“The featured speaker for the evening was David Lereah, senior vice president/chief economist for the National Association of REALTORS. Lereah is also the author of Why the Real Estate Boom Will Not Bust — and How You Can Profit From It: How to Build Wealth in Today’s Expanding Real Estate Market .

“Lereah was quick to make his message clear: ‘You don’t need a boom for real estate to roar. The real estate boom is over but the real estate expansion is still here.’ Although homes are not selling as quickly right now, prices are still up. ‘There are no real estate bubbles, only balloons that expand and contract,’ he said.

“Lereah substantiated that good news by presenting numerous facts. The 14-year real estate expansion (1991-2005) resulted in a U.S. mortgage market that increased 10-fold during that time. Low mortgage rates resulted in a refinancing boom, as consumers became more comfortable with the process.

“He said the real estate boom was caused by factors such as lenders being able to reduce financing costs; baby boomers reaching their peak earning years and trading up or buying second, third, and vacation homes.

“‘Forty percent of all home sales in 2005 were second homes — investment properties and vacation homes — compared to about 9% 10 years ago,’ Lereah said…

“‘Real estate is not an irrational investment, but speculators purchased irrationally during the boom, especially in areas like Miami. This drove prices up, and many speculators took out interest-only loans. This produced a vulnerable real estate market,’ Lereah explained. ‘In 2006, we are cleansing the market of speculation.’

“In 2007, Lereah believes that the real estate market will continue to expand even if mortgage rates increase to 7%. ‘That is still low,’ he said…

“He added that he is bullish on Florida, Arizona, and Nevada because of even greater population increases. ‘The law of supply and demand works.’

“All of Lereah’s real estate investments are in condominiums and townhomes because he doesn’t want to be involved in maintaining them. ‘If you’re Mr. Fix It, then it’s OK to invest in a single-family home,’ he said.”
Cheerleader Review

Let’s analyze some of Lereah’s statements, shall we?

“The law of supply and demand works.” Yes, the law of supply and demand works. It is, in fact, one of the reasons Florida is crashing and will continue to crash. 50,000-100,000 condos being built in Miami-Dade should be proof enough. It is why people are walking away from $80,000 deposits. The market is saturated with condos and you are still recommending them.

“Speculators purchased irrationally during the boom, especially in areas like Miami.” Hmm…It seems that contradicts the reasons to be bullish on Florida condos, doesn’t it? Besides, were you admitting “irrational buying” a year ago, or were you humming a different tune then?

“Forty percent of all home sales in 2005 were second homes — investment properties and vacation homes — compared to about 9% 10 years ago.” Seems to me this is evidence of a bubble. Who hasn’t bought that is going to do so now at these inflated prices. Not only are rental prices four standard deviations above norm, purchasing second homes for investments seems wildly above normal as well.

“The 14-year real estate expansion (1991-2005) resulted in a U.S. mortgage market that increased 10-fold during that time.” Hmmm, you are proclaiming a 10-fold increase in the mortgage market, huh? It seems you ought to be writing reasons for Professor Piggington on why this is a bubble, instead of denying it.

“There are no real estate bubbles, only balloons that expand and contract.” Even if this nonsensical statement were true, why would one be touting Florida, a market in clear contraction, with enormous inventory and insurance problems, instead of areas with less speculation?

“If you’re Mr. Fix It, then it’s OK to invest in a single-family home.” Even this seems like poor advice. In every boom I have seen, condos are the last to rise, the first to fall, and heaven help anyone who buys a poorly constructed condo. You may not have to fix it yourself, but someone has to, and typically at rates far greater than you might find for yourself. Tuck-pointing repairs and the like are horrendously expensive, and that is for Chicago. I can only begin to imagine the problems in hurricane zones.

At times, David Lereah appears to have a grasp on the underlying facts, yet manages to come to all of the wrong conclusions about what is happening and why. No one should be surprised by this. David Lereah is a paid cheerleader for the National Association of REALTORS, not a real economist.

Regards,
Mish
May 26, 2006

Greg’s cross-country travel note, with transcontinental companion, the Rude Awakening’s Joel Bowman:

Despite its recent volatility, we remain long-term gold bulls. So when a nondescript gas station in the middle of outback Missouri presented us with an opportunity to make a little gold investment, we jumped at the chance.

One ‘Gold Bar’ lottery ticket, please, ma’am,” we said to a well-fed, mustachioed cashier as we piled the counter high with energy drinks and beef jerky. ‘Have you seen any decent returns on gold recently?’ we asked.

‘Oh, sure,’ came the hoarse but enthusiastic reply. ‘The first weekend these gold tickets came out I sold one for $600 and another for $400.’

‘Wow. That’s some serious profits on a $5 lottery ticket.’

As we reached over to choose our lucky penny from the community tray, another, slightly more homely attendant quietly sauntered over. ‘We’ll tell you what,’ we said, ‘if we bag anything close to that, the four of us are going to the races.’ We shook the penny as if it were dice and held it out for the ladies to blow on. They obliged.

The first of three rows of numbers yielded nothing. Tension mounted. Second row…nothing. The suspense was palpable as the promised day at the races hung in the balance. We drew our lucky penny across the final row and everyone held their breath, tense with anticipation.

‘Gold bar! Gold bar!’ the wobbly ladies were practically leaping out of their floral muumuus. ‘That means you get four times the amount shown under the – the gold bar, under the gold bar. Scratch under the gold bar!’ We had the feeling this was the most excitement this gas station had seen for a while.

Four times five makes for a crisp twenty-dollar note headed our way. That’s a 300% profit in less than ten minutes. Once again, gold comes through with the goods.

We stashed our winnings in our pocket and bid farewell to our fair ladies. Perhaps if we were ever at this gas station again we’d crack the $600 mark and enjoy that day at the races.

It wasn’t until we arrived at Hayes, our eventual rest stop for the night, that we realized the true cost of our lottery ticket delay. Some sly vagrant had busted into the unattended U-haul cab and fleeced us of a camera and a cell phone for a loss of $400. Less the fifteen dollars in winnings and we were looking at a net loss of $385. Then and there, we decided no more lottery-ticket gambling.