September 6, 2006

Bubble, Schmubble (so far)

Note: This post was inadvertently published before completion and pulled earlier today. I apologize for that occurrence.


Here’s the definition of “real estate bubble” (or “crash”) that I mentioned in a comment at this post a couple of weeks ago:

A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in the valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic indicators, followed by decreases that can result in many owners holding negative equity (a mortgage debt higher than the value of the property). Unlike a stock market crash following a bubble, a real-estate *crash* is a slow process, because sellers just decide not to sell. Historically due to inflation, prices did not fall in nominal terms, rather they stayed *flat* for a period of 3-5 years. However, due to low inflation in most countries, future corrections may result in a fall in both real and nominal house values.

The WORMs (Worn-Out Reactionary Media, known to most as the formerly Mainstream Media, also to be known from now until early November as “The 527 Media”) have already been chronicling/celebrating a housing “implosion,” “housing chill,” “taking something of a dive,” and the like, as if it’s already in progress. One writer informed me last week that “it was a bubble in 2005 and the bubble has now collapsed.”

Oh come on. It’s worth reminding folks what the real numbers have been for home-price increases in the last eight quarters, as reported by the Office of Federal Housing Enterprise Oversight (OFHEO). Yesterday’s report is here (PDF); quarterly reports, all PDFs, can be found by going through the press releases at

2Q 2006 — Quarter, +1.17%; previous 12 months, +10.06%
1Q 2006 — Quarter, +2.03%; previous 12 months, +12.54%
4Q 2005 — Quarter, +2.86%; previous 12 months, +12.95%
3Q 2005 — Quarter, +2.86%; previous 12 months, +12.02%
2Q 2005 — Quarter, +3.20%; previous 12 months, +13.43%
1Q 2005 — Quarter, +2.21%; previous 12 months, +12.50%
4Q 2004 — Quarter, +1.69%; previous 12 months, +11.17%
3Q 2004 — Quarter, +4.62%; previous 12 months, +12.97%

One relatively flat quarter, does not a bubble make. The current quarter’s result, given the overall annual inflation rate of about 4% (1% per quarter), isn’t even flat (close, but not quite); it barely qualifies as a “blip.”

(Note: Actual 2nd quarter inflation for all items was 1.3%; excluding food and energy, it was 0.7%. So for long-term analysis, split the difference, especially considering recent energy-price drops, and 1% is a reasonable benchmark for the level of quarterly inflation that is really taking place.)

Given the definition above and the OFHEO data noted, NOBODY will be able to credibly claim that, as a nation, we’re in the midst of a “bubble” until there are at least four quarterly performances that are worse than the 2nd quarter’s, i.e., the middle of 2007. And, given that stubborn definition above that The 527 Media wants to pretend doesn’t exist, no one will be able to say that a bubble actually, really, positively occurred until 2009.

And for the heck of it, when you look at the OFHEO results by state, you find that the states bringing up the rear this quarter were NOT the “bubble” candidates everyone thinks of (California, Nevada), but Indiana, Ohio, and Michigan, all three of which were never frothy in the first place.


ALSO RELEVANT: Here are a couple of informal indicators that whatever is happening in the housing market is not a long-term problem –

  • Biz Weak (known to most as Business Week) had this to say (link appears to be free for now) in its September 4 issue, which came out before the OFHEO report, which mostly negates the article’s contention that there is a lot of “downward pressure” on home prices:

    RIGHT NOW, EVEN a passel of strong data cannot draw attention away from the weakness in housing, the economy’s most visible and most vulnerable sector. The worry is the housing slump, which appears to be getting worse, will drag down the entire economy.

    However, this housing cycle is different. In the past, housing downturns have been the result of high interest rates and broad economic weakness leading to rising unemployment. This time, housing is going through its own cycle, largely independent of wider economic conditions. The economy outside of housing remains solid: Unemployment is low, household incomes are growing, and 30-year fixed mortgage rates, at a bit over 6.5% in mid-August, are hardly onerous.

    This housing recession is primarily an inventory correction, as builders adjust to the aftermath of the demand frenzy in previous years. This is squeezing prices of new homes, with attendant effects on existing home prices. However, the sharp drop in housing starts of more than 20% so far from the January peak implies builders are moving quickly to realign their stocks of unsold properties with the lower level of demand. The faster the adjustment takes place, the quicker the downward pressure on home prices will ease.

  • Supporting the contention that builders haven’t gone wild is Barron’s August 28 cover story (”Housing Ripple”; free link not available). Page 1’s first tease sentence is “As home prices sink, stocks in the sector are falling to attractive levels.” Never mind that the headline writer fell for the “falling prices” meme, which was written before the OFHEO report was released, and obviously hasn’t played out to the extent predicted — If there was rampant overbuilding, Barron’s wouldn’t be suggesting that the stocks of Pulte Homes, Whirlpool, and Countrywide Financial are good buys.


  1. Hi Tom,

    Can these blips/bubbles/crashes or whatever, be limited to one geographical area, such as California or Florida, where the rest of the nation does not see the same flat or even downward trend in valuations? The reason I ask is because I hear that the bubble has burst in California but have not heard such jargon from folks say, in Texas. I’m not sure if what I’m hearing is because of geographical reasons or I’m hearing stories of economic woes from liberals.

    Comment by snowballs — September 6, 2006 @ 5:13 pm

  2. I think the state list tells most of the tale. CA went up 1.25% in the past quater. FL went up 2.51%. They’re above the average. No statewide bubbles there. TX is at 1.93% for the quarter.

    I decided to look at individual cities (quarter/year):
    - OFHEO has a Worst 20 list for the past 12 months. NONE of the worst areas is what people might consider a bubble candidate state.
    - Bakersfield CA +2.26/+22.24
    - Ft. Lauderdale FL +0.69/+20.83
    - LA-Long Beach +2.20/+19.19
    - Miami +4.72/+25.36
    - Oakland +0.93/11.13
    - Orlando +3.71/+26.25
    - Sacramento -0.38/+6.51
    - San Diego +0.15/+5.61
    - San Fran +1.23/+9.27
    - San Jose +1.79/10.29

    Anyone looking for a true disaster area, even on a quarterly basis, is going to be hard-pressed to find one. I think *economic woes from liberals* is the operative phrase.

    Comment by TBlumer — September 6, 2006 @ 5:41 pm

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