June 24, 2021

Economic View: Housing Market Is Heating Up, if Not Yet Bubbling

In fact, according to the S. P./Case-Shiller Composite-10 Home Price Index, which Karl Case of Wellesley College and I developed, home prices in the United States were up 18.4 percent in real, inflation-corrected terms in the 16 months that ended in July. During the housing bubble that preceded the 2008 financial crisis, the largest 16-month increase wasn’t much bigger: 22.7 percent, for the period ended in July 2004.

Is it possible that we are lapsing into what I call a bubble mentality — a self-reinforcing cycle of popular belief that prices can only go higher?

Some answers arise from a study that Professor Case and I have been conducting since 2003. Under the auspices of the Yale School of Management, we’ve been sending out annual questionnaires to random samples of recent home buyers in four United States cities: Boston, Milwaukee, Los Angeles and San Francisco. Last year, we reported on our project at the Brookings Institution in a paper we wrote with Anne Thompson of McGraw-Hill Construction.

We updated the survey in May and June. The results suggest that though we are not in a bubble now, there are troubling signs that we may be heading toward one.

Out of 2,000 questionnaires sent to home buyers, we received 368 responses. We asked the respondents how much they thought home prices would rise both in the next year and in the longer term — each of the next 10 years.

The short-term expectations were somewhat high, with respondents saying they anticipated a 5.7 percent increase, on average, in the next year. (That’s close to the implied home price appreciation of 5.6 percent in the home price futures market at the Chicago Mercantile Exchange.)

These projections were much higher than those in 2011, when respondents anticipated only a 1.6 percent increase, and somewhat above those of 2012, when the expectation was 4.0 percent. Still, in 2004, just before the peak in home prices, short-term expectations were far loftier, at 8.7 percent.

What’s more, long-term expectations in the current survey remained relatively modest, at 4.2 percent a year for the next 10 years. At that rate, if consumer inflation is modest, at, say, 2 percent a year, real prices would rise only about 2.2 percent annually, and we wouldn’t return to the December 2005 peak in real home prices until 2031.

We also posed this question in the survey: “Do you agree with the following statement: Real estate is the best investment for long-term holders, who can just buy and hold through the ups and downs of the market.” In 2004, some 84.2 percent of respondents agreed. But the percentage has been generally declining ever since, bottoming last year at 66.5 percent. While that level may still seem high, we should remember that these are people who have just bought a home. (The level was up a little in 2013, to 70.4 percent.)

Here’s another indication that we are not now in bubble territory: Some 10.6 percent of respondents said they bought a home “only to rent out to others.” That proportion has been rising irregularly since 2004, when it was just 2.7 percent. The change likely reflects the recent tilt in demand toward rental housing, which isn’t likely to sustain high prices in scattered suburban housing.

The questionnaire invited readers to respond in their own words to questions like these:

• “Was there any event or events in the last two years that you think changed the trend in home prices?”

• “What do you think explains recent changes in housing prices in [name of respondent’s city]? What ultimately is behind what is going on?”

When we asked these questions near the height of the bubble in 2004, especially in the booming markets like Los Angeles and San Francisco, home buyers tended to use terms that suggested bubble thinking — phrases like “limited land,” “high demand for housing,” “population growth,” “everyone wants to be here” and “buyers willing to pay any asking price.” There was also much talk about low interest rates, and how they might soon rise, even though the 30-year mortgage rate, then at just over 6 percent, was much higher than the current level of about 4.5 percent.

In this year’s survey, the answers didn’t suggest a bubble mentality, though the theme of temporarily low interest rates remained. In summary, Americans are still relatively sober about housing. They aren’t showing “irrational exuberance” about home investing to the degree they did in the past, at least not yet.

But neither are they being completely realistic. In reading the most recent answers, I see no signs that home buyers have learned the lesson I tried to convey in the second edition of my book “Irrational Exuberance” in 2005. That message was that existing-home prices have shown virtually no tendency to trend upward in real, inflation-corrected terms over the last century. While land is limited, it’s only a small component of home value in most places. New construction often brings down the value of older homes, which wear out and go out of fashion, dragging down prices.

IT’S as if people are applying to housing an idea described by Frederick Lewis Allen in his 1931 book, “Only Yesterday.” Before the stock market collapsed in 1929, he said, people thought that “every crash of the past few years had been followed by a recovery, and that every recovery had ultimately brought prices to a new high point. Two steps up, one step down, two steps up again — that was how the market went.”

Well, people have certainly been right that there will always be steps up and down. Unfortunately, there is no certainty that the ups will outnumber the downs.

People who are now inclined to buy a home are most often just thinking that we are gradually recovering from a recession and that this is a good time to buy. The mental framing still seems to be about economic recovery and the likelihood that interest rates will rise. People mostly don’t seem to be prompted by the anticipation of another housing boom.

That’s the thinking at the moment. But whether these attitudes mutate into a national epidemic of bubble thinking — one big enough to outweigh higher mortgage rates, fiscal austerity in Congress and other factors — remains to be seen.

Robert J. Shiller is Sterling Professor of Economics at Yale.

Article source: http://www.nytimes.com/2013/09/29/business/housing-market-is-heating-up-if-not-yet-bubbling.html?partner=rss&emc=rss

Bernanke, the Audacious Pragmatist

“Since then,” Mr. Bernanke told his audience, “I’ve developed a view that central bankers should not try to determine fundamental values of assets.”

Indeed, Mr. Bernanke’s academic work, largely at Princeton, helped shape the conventional wisdom that central banks couldn’t spot asset bubbles and shouldn’t try to pop things that looked like bubbles. In his first speech as a Fed governor in 2002, he reiterated that trying to judge the sustainability of rapid increases in housing or stock prices was “neither desirable nor feasible.”

Over the next several years, he said repeatedly that he saw no clear evidence of a housing bubble. And in 2004, the Bernankes paid a hefty $839,000 for a town house on Capitol Hill in Washington.

It took a great recession to change his mind. The recession, prompted by the collapse of the housing bubble that Mr. Bernanke — and most other experts — failed to see coming, ended an era of minimalism in central banking. And there is no better marker than the views of Mr. Bernanke, the world’s most influential central banker, who now argues that the Fed needs to consider a range of previously unthinkable actions, including trying to pop bubbles when necessary, because sometimes the cost of doing nothing is worse.

Mr. Bernanke, who plans to step down in January after eight years as Fed chairman, will be remembered for helping to arrest the collapse of the financial system in 2008. This shy, methodical economist who had been expected to serve as the keeper of Alan Greenspan’s flame — to preserve the Fed’s hard-won success in moderating inflation — emerged under pressure as perhaps the most innovative and daring leader in the Fed’s history.

But what Mr. Bernanke did after the crisis may prove to have even more enduring influence. For almost three decades, the Fed focused on moderating inflation in the belief that this was the best and only way to help the economy. In the wake of the crisis, Mr. Bernanke forged a broader vision of the Fed’s responsibilities, starting experimental, incomplete campaigns to reduce unemployment and to prevent future crises.

The Bernanke Fed has failed to fully achieve its goals. Growth is still tepid, unemployment still too high, inflation still too low. Some critics continue to warn — so far, incorrectly — that its efforts will unleash inflation or destabilize financial markets.

Yet many of the Fed’s experiments are already being emulated by other central banks. And Mr. Bernanke’s many admirers say it is hard to imagine that anyone else could have done more under the circumstances to restore the economy. Fortunately, they say, his lifelong study of central banking under stress meant that he not only knew the available options but also understood that those options weren’t enough. And he had the credibility necessary to convince a hidebound institution to change quickly.

“It’s hard to say that the Fed has accomplished what could have or should have been accomplished,” said Michael Woodford, an economist at Columbia University. “Yet in the context of the difficulty of the challenges, the likelihood is that few other central bankers could have been as bold as Ben has been.”

Throwing Stuff at the Wall

Mr. Bernanke was a rising star at Princeton in 1994 when he persuaded 953 people to elect him to a second job — as a member of the Montgomery Township Board of Education. “I did think he was a little crazy” to add that second role, said Mark Gertler, a New York University economist who was a frequent academic collaborator with Mr. Bernanke during the 1990s.

But the move was instead an early sign of Mr. Bernanke’s restlessness with the theoretical world of academia and his nascent interest in public service. And the experience helped to prepare him for larger things.

For six years, he spent several nights a month in the library of the local high school, usually dressed in a sport coat with elbow patches, calmly contributing to heated debates about building new schools in his rapidly growing community.

“When I met him he was shy and awkward,” Professor Gertler said. “It developed his ability to moderate meetings and interact with people.”

Kitty Bennett contributed research.

Article source: http://www.nytimes.com/2013/08/25/business/economy/the-audacious-pragmatist.html?partner=rss&emc=rss

Economic Scene: Mexico’s 1980s Austerity Experience Holds Lesson for Europe

His approach to economics was unorthodox but creative. He tried to raise oil prices by sheer force of will — firing the director of the state oil company Pemex for having the temerity to reduce the price of Mexican crude as oil plummeted on international markets. He froze dollar accounts in local banks to try to stem capital flight.

But the canine defense didn’t work. In 1982, interest on the country’s foreign debt swallowed almost two-thirds of its export revenue. In February, the Mexican currency started plummeting. In August, Jesús Silva Herzog, Mexico’s finance minister, flew to Washington to tell Paul Volcker at the Federal Reserve and Donald Regan at the Treasury Department that Mexico could not make its coming payments to American and other foreign banks.

Tweak a few of the details and Mexico in the 1980s looks a lot like most Southern European countries today. In Mexico’s case, runaway government spending in the 1970s, fueled by high oil prices and greased by foreign debt, threatened to bankrupt the country after the Fed sharply raised interest rates to curb rampant inflation in the United States, increasing Mexico’s interest payments even as oil prices crashed to earth.

Similarly, money poured into Spain and Greece when investors persuaded themselves that the bonds of all members of the euro zone should be as safe as Germany’s, the region’s most creditworthy country. In Greece, this allowed a government spending binge. In Spain it ignited a housing bubble. Both countries were left with an unbearable burden when the world economy hit a wall, creditors took flight and the money stopped.

European decision-making during the crisis of the last few years also shares some of the erratic nature of Mexican policy under President López Portillo. Cyprus was somehow allowed to threaten the euro area’s banking system. European leaders then “solved” the problem by imposing capital controls that — like those tried by Mexico — are unlikely to work and will undoubtedly provide new headaches down the road.

But the most relevant parallel is one that European leaders refuse to see. If there is one overwhelming lesson from the debt crisis that struck Mexico and other Latin American countries so hard three decades ago, it is that countries that cannot grow will not pay. It is up to creditors, too, to allow them to grow. It took Mexico and its lenders seven years to figure that out. The European crisis is in its fifth year. You would think they might have learned something by now, but no.

Mexicans remember what happened after Mr. Silva Herzog’s flight to Washington as the “lost decade.” Miguel de la Madrid, who took over as president the following December, promised deep budget cuts in exchange for bridge loans and debt rescheduling. That didn’t work, so Mexico cut a new deal, getting new loans from commercial banks, the United States and the International Monetary Fund, in exchange for cutting government payrolls and subsidies, selling state-run companies and opening the country to foreign trade.

I started college a little before Mr. Silva Herzog’s trip. In the five-plus years it took me to get a degree (Mexican degrees take longer) the Mexican economy contracted about 2 percent. By the time I got my graduate degree two years later, gross domestic product per person was 8 percent less than it had been in 1982.

Yet despite the enforced austerity, Mexico’s foreign debt in 1988 still amounted to 56.5 percent of Mexico’s economic output, more than it had six years before.

This must sound familiar to Europe’s unemployed. If anything it’s far worse there. The Greek economy has shrunk more than a fifth over the last five years. Government debt amounts to about 170 percent of the economy; it was 100 percent when the crisis started. The economies of Ireland, Portugal, Spain and Italy are smaller, too, than they were five years ago. Their debt burden is heavier. And still, European leaders insist that more of the same must be the solution.

E-mail: eporter@nytimes.com;

Twitter: @portereduardo

Article source: http://www.nytimes.com/2013/04/10/business/mexicos-1980s-austerity-experience-holds-lesson-for-europe.html?partner=rss&emc=rss

U.S. Home Sales Highest in 5 Years

The National Association of Realtors said on Tuesday that home sales declined in December to an annual rate of 4.94 million. That rate was down from 4.99 million in November, which was revised lower but was still the highest in three years.

Total home sales last year increased to 4.65 million. That is 9.2 percent higher than 2011 and the most since 2007. Sales finished below the roughly 5.5 million that is consistent with a healthy market. Still, most economists say that home sales are improving steadily and that the gains should continue this year.

Stable hiring, record-low mortgage rates and a tight supply of homes available for sale have helped increase sales and prices in most markets.

”We remain convinced that the housing recovery is well under way and should continue through 2013,” said Dan Greenhaus, chief global strategist at BTIG, an institutional brokerage.

The market is being held back by the shrinking supply of homes for sale. The inventory of available homes on the market dropped to 1.82 million in December, the lowest in 12 years.

And first-time buyers, who are critical to a housing recovery, made up only 30 percent of sales in December. That is down slightly from a year ago and well below the 40 percent that is typical in a healthy market.

Since the housing bubble collapsed six years ago, banks have tightened credit standards and are requiring larger down payments. Many would-be buyers are unable to qualify for the lowest mortgage rates on record.

The rate on the 30-year fixed mortgage averaged 3.66 percent in 2012, the lowest annual average in 65 years, according to Freddie Mac.

Sales are rising faster for more expensive homes, the Realtors group said. Sales of homes priced $1 million or more surged 62 percent in 2012, while sales of homes below $100,000 fell 17 percent.

Home prices rose 7.4 percent on an annual rate in November, the real estate data provider CoreLogic reported. That is the biggest annual increase since 2006, when the housing bubble burst. CoreLogic forecasts that home prices will rise 6 percent nationally this year.

Article source: http://www.nytimes.com/2013/01/23/business/economy/existing-home-sales-decline.html?partner=rss&emc=rss

Home Prices Up in Half of Major U.S. Cities, Survey Shows

The Standard Poor’s/Case-Shiller index showed Tuesday that prices increased in August from July in 10 of the 20 cities tracked. That marked the fifth straight month that at least half of the cities in the survey showed monthly gains.

The biggest price increases were in Washington, Chicago and Detroit. The greatest declines were in Atlanta and Los Angeles.

The August data provides a “modest glimmer of hope” that some areas may have bottomed out and could be turning around, said David M. Blitzer, chairman of SP’s index committee.

He noted that cities in the Midwest — Chicago, Detroit and Minneapolis — have shown some strength since May.

In Detroit, the recovering auto industry has helped lead a small rebound in the housing market. Home prices have risen 2.7 percent since August 2010, making it one of only two cities to show a year-over-year gain in that time. The other was Washington.

Detroit was one of the hardest hit after the housing bubble burst more than four years ago. Home prices there are coming off 1995 levels. So the gains are relatively small compared to how far prices have fallen.

In Minneapolis and Chicago, fewer homes are being put up for sale, leading to higher prices and better sales figures. That’s likely due to fewer foreclosures in those cities. September’s drop in homes for sale in the Twin Cities was the largest decline in inventory in more than seven years, according to the Minneapolis Area Association of Realtors.

Still, Robert Shiller, the co-founder of the index and a Yale economics professor, said in an interview on CNBC that overall home prices were “flat” and a recovery in the struggling housing market was not on the horizon.

The index, which covers half of all U.S. homes, measures prices compared with those in January 2000 and creates a three-month moving average. The August data are the latest available.

Prices are certain to fall again once banks resume millions of foreclosures. They have been delayed because of a yearlong government investigation into mortgage lending practices.

“We certainly believe the bulk of the decline in housing is behind us and indeed, one might even say that ‘housing’ is more likely to improve from here,” said Dan Greenhaus, chief global strategist for BTIG. “But given the overwhelming level of inventory that remains on the market … further price declines seem almost assured to help clear the market.”

Home prices have stabilized in coastal cities over the past six months, helped by a rush of spring buyers and investors. But this year, home prices in many cities, including Cleveland, Detroit, Las Vegas, Phoenix and Tampa, have reached their lowest points since the housing bust more than four years ago.

Many people are reluctant to purchase a home more than two years after the recession officially ended. Even the lowest mortgage rates in history haven’t been enough to lift sales.

Some can’t qualify for loans or meet higher down payment requirements. Many with good credit and stable jobs are holding off because they fear that home prices will keep falling.

Sales of previously occupied home sales are on pace to match last year’s dismal figures — the worst in 13 years. Sales of new homes fell to a six-month low in August and this year could be the worst since the government began keeping records a half century ago.

Foreclosures and short sales — when a lender accepts less for a home than what is owed on a mortgage — makes up about 30 percent of all home sales last month, up from about 10 percent in past years. The large number of unsold homes and foreclosures are sending prices lower and hurting sales.

Article source: http://feeds.nytimes.com/click.phdo?i=02eae5d9e5317c789dfc33ab22e459af

California Quits States’ Talks With Banks on Mortgages

The proposal being sought by the big banks “is not the deal California homeowners have been waiting for,” wrote Kamala D. Harris, the state attorney general, in a letter to those leading the talks. It is “inadequate,” she wrote.

California is among the states whose homeowners have suffered the most in the housing market collapse, and because of its size, officials involved in the negotiations said banks, including Bank of America, Wells Fargo and JPMorgan Chase, would want its participation before agreeing to settle and to pay substantial sums.

The talks have been led by the attorney general of Iowa as well as an associate general counsel at the Justice Department’s headquarters. The negotiations have evolved from disputes over so-called robo-signing and other improper foreclosure practices into a battle over nearly every aspect of the banks’ roles in the housing bubble and subsequent collapse.

If a deal were reached, it could provide billions of dollars for the Obama administration and states to distribute in assistance to homeowners, free banks from some of the mortgage claims that have caused their stocks to sputter, and score a victory for the Justice Department, which has been criticized for pursuing very few cases related to the financial crisis. A spokeswoman for the department said Friday evening that the negotiations would continue.

“We continue to work with the state attorneys general, including California, to ensure that the banks are held fully accountable for their actions,” said Tracy Schmaler, the spokeswoman.

The main sticking point has been the banks’ desire for a broad legal waiver covering future claims over their mortgage practices.

They would like the waiver to cover not only robo-signing and other foreclosure practices but also potential claims related to their creation of mortgage securities before the financial crisis.

A broad deal might help banks reassure investors that they have a good handle on their potential payouts.

But Ms. Harris said in her letter that she was running a full investigation into the creation and sale of mortgage securities. She said she did not want to participate in the deal partly because it would limit her investigation. Though she is the first state official to back out of the negotiations entirely, attorneys general from several states have expressed reservations about a broad waiver, including New York, Delaware, Massachusetts and Nevada.

New York has been among the most vocal in its critiques of such a deal, and New York’s attorney general, Eric T. Schneiderman, was kicked off the lead committee of officials negotiating the deal.

He has not, however, pulled out of the talks completely.

Bank analysts said that hopes for a deal had been fading for some time and that banks had little reason to participate without California.

“The banks aren’t going to be interested in settling unless it removes future liabilities,” said Jeffrey Harte, a bank analyst with Sandler O’Neill, “and here you have population-wise a very big state — one of the states with a larger portion of mortgage issues — not going along with it.”

Mr. Harte said an agreement that covered only foreclosure missteps, like robo-signing, would be unlikely to generate the amount of money that federal and state officials had been seeking for homeowner aid. The banks may want to hold onto some of those funds to settle claims about their mortgage securities as well as future losses on mortgages they own.

It remains possible, of course, that California could rejoin the settlement talks, but Ms. Harris said in her letter Friday that the effort was not worth their continued resources.

One tricky issue has been how much aid would be awarded to homeowners in California. Any money collected under a national deal would be distributed among the 50 states, and officials in California and other states that have been hit hardest are under political pressure to obtain significant sums.

Opposition to a deal has grown as well.

A coalition called Californians for a Fair Settlement has been working to block a deal. Among other things, it wants the banks to pay a far higher penalty than the $20 billion that has been floated.

They also want the deal to include widespread principal reduction for the state’s homeowners who owe more than their houses are now worth.

Complicating the situation, the housing market in many parts of the country has deteriorated further as the states have been discussing a settlement.

Ms. Harris pointed to the housing weakness in California in her letter. She said that in the 11 months of talks, more than a half-million homes had entered foreclosure in the state. While California used to have five cities ranked on the list of the 10 highest in foreclosures, it now has eight such cities.

Article source: http://feeds.nytimes.com/click.phdo?i=b4d33adb44587cab5b6a60e7b4f4afc6

Economix: Stocks Are Still Expensive



Thoughts on the economic scene.

The main problem for the stock market is obviously the economy. But it’s not the only problem. Stocks are also under pressure because they are fairly expensive right now relative to earnings.

GraphicGraphic: P/E Ratio (Click for Larger Image)

My favorite way to look at stock prices is to compare them to corporate earnings over the previous decade. By this measure, the price-earnings ratio for the Standard Poor’s 500-stock index over the last 50 years has been 19.5. After today’s market drop, the ratio was 20.7.

So stocks would have to fall another 6 percent from their current level to return to the 50-year average.

This version of the P/E ratio is not the most popular one. You’re more likely to see a ratio based on one year of past earnings or on a projection of future. But the 10-year measure has several advantages over the other versions.

It was first recommended, as far as we know, by Benjamin Graham and David L. Dodd, in their classic 1934 textbook, “Security Analysis.” Mr. Graham was an important mentor to Warren Buffett. More recently, Robert Shiller, who correctly called both the dot-com bubble and the housing bubble, has argued for using a measure like the 10-year ratio. The data in this post comes from Mr. Shiller’s Web site.

In their book, Mr. Graham and Mr. Dodd urged investors to use a price-to-earnings ratio — that is, stock prices divided by average annual corporate earnings — based on at least five years of earnings and, ideally, closer to 10. Corporate profits may rise or fall in any given year, depending on the state of the economy, but a share of stock is a claim on a company’s long-term earnings and should be evaluated as such.

Future earnings are even more flawed than short-term past earnings, because Wall Street projections have a pretty weak track record.

Of course, saying that the 10-year P/E ratio is historically high is by no means guaranteeing that stocks will fall. Stocks can remain historically expensive or cheap for many years.

But the 10-year ratio does have a pretty good track record. In 2007, when many Wall Street traders and economists were claiming that stocks were still a great buy, the 10-year ratio knew better. Likewise, it helped predict the market’s rebound in early 2009, when optimists were not easy to find.

That stocks remain expensive is one more reason to be concerned about the economy.

Article source: http://feeds.nytimes.com/click.phdo?i=65831ce267fe50cfda6a63c6130fec7c