September 7, 2006

Fun with Tom and Rex: A Discussion of the Housing Market Situation

Note: The following e-mail exchange between me and Rex Nutting of MarketWatch began when I informed Mr. Nutting of the publication of this BizzyBlog post (“Existing-home Sales ‘Plunge,’ But This Is NOT an ‘Implosion’”) in response to his MarketWatch article (this link and others cited later requires free registration) about the housing market.

Since the last e-mail quoted at this post, I informed Mr. Nutting that I would be posting on the housing market after Labor Day. This morning, as I was posting this entry, I informed of this entry and the two related ones that preceded it:

  • September 7 — Unseen Housing Headline: “Home-Price Growth Returning to Normal”
  • September 6 — Bubble, Schmubble (so far)

I also sent the e-mail at the very end of this post after it went up.

I’ll let the exchange below stand as is without further comment, and you can decide who is more reality-based. I added MarketWatch links to the e-mail from Mr. Nutting where he cites previous articles so readers who wish can read the full articles he wrote.

I’ll update if there are any additional communications of interest. Click “more” if you are at the home page to begin reading the exchange.


UPDATE: Do read the exchange, but don’t miss Mr. Nutting’s comment #2. Mr. Nutting also separately sent an e-mail containing a number of graphs designed to prove his point that only go to prove mine. So many errors, misconceptions, and misunderstandings — so little time. I’ll deal with it tomorrow Saturday in a new post. It should be fun.


(August 24 – Tom e-mail to Rex through the MarketWatch site)

(Your report) wasn’t balanced. If you had shown your readers the 2003-2006 chart that is HERE and considered it in light of what everyone was saying in 2004-2005 (“this isn’t sustainable”), it becomes clear that there is no “implosion” going on.


(August 24 – Rex e-mail to Tom)

Everyone was saying it wasn’t sustainable and now we are getting the proof of that.


(August 24 – Tom to Rex, shown at an update at the original BizzyBlog post)

Fine. Then what is happening isn’t an “implosion” (“a violent collapse inward”).

And I missed where you told readers that 2004-2005 “wasn’t sustainable,” or that annual sales level(s) are still above what they were before the 2004-2005 boom.


(Comment #1 left by Rex at post)

Just to set the record straight.

I wrote this in May 2005:

“Critics of the Fed have charged that its low interest rate policies are driving investors into real estate, fueling an unsustainable bubble in housing prices that could become a large drag on the economy if prices were to collapse.”

Here’s a quote from my Sept. 2004 report (BizzyBlog note — author is someone else.) about a drop in home sales:

“‘It is a correction from unsustainable levels,’ said Ian Shepherdson, chief U.S. economist at High Frequency Economics.”

Here’s something I quoted in July 2004 about a drop in housing starts:

“‘We’re coming off some unsustainable numbers,’ said David Seiders, chief economist for the homebuilders.”

And here’s a headline from a story I wrote on March 1, 2003:

No housing bubble, Fed’s Kohn says
(In which I wrote) “Many critics have said the Fed’s easy money policies are pushing home sales and prices too high, just as low rates in 1999 and 2000 encouraged investors to pump too much money into tech stocks in the Nasdaq. The economy is still recovering from that debacle nearly three years later.”

There’s more, but why bother? I’ve been writing about this bubble from the beginning.


(Comment #2 left by Tom at post)


(you said) I have been writing about this bubble from the beginning.

Unless I am misinterpreting, that sentence indicates a belief that, from the very beginning, the *bubble* was an inevitability, and now, that *this bubble* is an established fact.

The definition of a real estate bubble is here:

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.

I do not like that definition, as I would expect declining prices to be characteristic of any kind of bubble.

But since I do not write dictionaries (yet :–>), I will just say that even based on its criteria, there are two years until ANYONE, and that includes you, can declare that there has been real estate bubble.


(August 25 Rex e-mail to Tom)

Prices have already fallen in real terms. And for many reasons, the reported median prices likely mask the true prices being paid.

I don’t think the bubble was inevitable in 2003, but there were clear signs then, as even Fed Gov. Kohn recognized by specifically denying the existence of the bubble in his 2003 speech.
I’m fairly certain that it was a bubble in 2005 and that the bubble has now collapsed. What the impact of that will be no one can know for sure.

But I am very loathe to accept the reassurances of those who look at past U.S. cases and conclude that consumer spending will hold up just fine. This episode has been quite different, mostly because of the extremely loose lending policies and because many many consumers took advantage of new financial products to withdraw equity from the homes so they could maintain a higher living standard than could be supported by the income they earn by the sweat of their brow.

Negative savings cannot be supported for long. I guess that’s another way of saying spending is “unsustainable.”

If I were you, I’d worry less about the definitions of words such as “bubble” and “implosion” and worry more about what we can do right now to turn this into a soft landing.


(August 25 Tom e-mail to Rex)

The core statement from your last e-mail was this:

I’m fairly certain that it was a bubble in 2005 and that the bubble has now collapsed.

It’s fine to feel that way, but you don’t have the objective evidence to support your feeling that the definition demands (3-5 years of flat nominal prices).

If you still feel it’s a bubble, you’re obligated to label your feelings. You may feel that there’s a “continued implosion,” but (again) you have no evidence.

In fact, from OFHEO’s reports (
– 1Q 2006; Quarterly appreciation, +2.03%; 12 months, +12.54%
– 4Q 2005; Quarterly appreciation, +2.86%; 12 months, +12.95%
– 3Q 2005; Quarterly appreciation, +2.86%; 12 months, +12.02%
– 2Q 2005; Quarterly appreciation, +3.20%; 12 months, +13.43%
– 1Q 2005; Quarterly appreciation, +2.21%; 12 months, +12.50%
– 4Q 2004; Quarterly appreciation, +1.69%; 12 months, +11.17%
– 3Q 2004; Quarterly appreciation, +4.62%; 12 months, +12.97%

At least nationally, until the OFHEO releases their next report after Labor Day, there’s no evidence that a bubble period has even begun! Implosion? Please. Yes, there are some problematic markets, and more than I would like to see, but there is no evidence of a big national problem.

So I’ll have to amend what I said previously and tell you that BY DEFINITION you have a THREE-year wait in store before you can say “bubble” (maybe 2 years and 7 months if the next OFHEO report shows stagnant prices) — Unless you get the authority to rewrite the dictionary.

I’m not saying there aren’t reasons to worry, some of which you mentioned: lending standards that got too lax, lots of interest-onlys and ARMs due for adjustment, lots of people highly leveraged and not saving, certain markets going very soft, the new bankruptcy law causing more homes to be foreclosed on), but that’s all they are now is worries.

Your job is to tell us what’s really happening in full historical context, and to keep your feelings out of it. If you want to tell us what your feelings are and label them, I suppose you’re free to do so, but I suspect Dow Jones would not appreciate your clearly identified unsubstantiated feelings being reported in what is supposed to be hard business news.


(August 28 Rex e-mail to Tom)

If you don’t see that the housing market is falling into a severe recession, then you need to pull your nose out of your dictionary and look around. Sales are way down, prices are flattening or falling, inventories are rising. And this isn’t because the Fed raised interest rates; mortgage rates have barely budged.

This is a matter of psychology and oversupply: Builders and buyers have gone from unrealistically optimistic to unrealistically pessimistic. And it’s not just in bubbly areas like the coasts: New home sales in the Midwest are down 35% year-over-year, while prices are down 5.4%.

Your comments about having to wait three years before we know if there was a real estate bubble are laughable to anyone but an historian. In three years, it’ll be too late to do anything. The real issue is what will happen to the U.S. and global economies because of the housing recession.

Denial doesn’t help.


(September 7 Tom e-mail to Rex)

I have done three posts on the housing situation, and they are here:

  • September 7 — Fun with Tom and Rex: A Discussion of the Housing Market Situation
  • September 7 — Unseen Housing Headline: “Home-Price Growth Returning to Normal”
  • September 6 — Bubble, Schmubble (so far)

In light of the second quarter OFHEO’s reported 1.17% national average home appreciation, the lack of significant price retrenchment in what have been seen as the bubble areas, and analysts’ beliefs that the stocks of homebuilding and mortagage industry players have probably bottomed out, I don’t see where the claims of a housing recession or a bursting bubble hold water. That isn’t to say a recession might not come, but one quarter with an increase that is well above the average quarterly increase during the entire decade of the 1990s does not a recession make.

I believe that you reached your conclusions about the existence of a housing bubble and/or recession well before any evidence existed to support it. One clue of that is your use of the following phrases in the articles you cited, plus several others relating to different matters that I located at MarketWatch:

  • (above) “Critics of the Fed have charged that….”
  • (above) “Many critics have said….”
  • (May 12, 2004) “Some critics say all the government’s statistics are padded with various fertilizers, but that’s a different subject.”
  • (July 8, 2003) “Some critics of the current system, which allows companies to record the cost of options in a footnote, say options helped fuel the stock market bubble and the accounting scandals ….”
  • (January 24, 2003) “Critics say John W. Snow’s main product all these years has been himself.”

I believe that at least in some cases, when you make a reference to “critics,” you really should be saying “In my opinion…”



  1. [...] The second post is an interesting email exchange with Dow Jones Marketwatch housing reporter Rex Nutting. [...]

    Pingback by Pundit Review » Blog Archive » Old and new media debate the housing bubble — September 7, 2006 @ 2:40 pm

  2. Clearly, I won this “debate.” Unlike Tom, I do not have my mind made up before I see the facts. Unlike Tom, I looked at the evidence and followed where it led me. Unlike Tom, I am not fixated on dictionary definitions, but on what’s happening in the real world. Unlike Tom, I can call a spade a spade. Unlike Tom, I don’t see this as some sort of media or political conspiracy, where the only thing that matters is whether you’ve scored a debating point against the hated MSM or DNC.
    It’s not a liberal or a conservative view to see that the housing market is in a free fall. Just look at a few facts: Starts down 13% y-o-y; new home sales down 21.6%; existing home sales down 11.2%; home builders stocks down 40% y-o-y.
    If Tom had had his way, I suppose we’d have seen lots of headlines in 2001 saying: The Nasdaq hasn’t been in a bubble; it’s just returning to normal!!!!
    Or this one in 1638: “Don’t worry about losing your life savings!!! Tulip prices are just returning to normal!”

    “Normal” can be a long ways down, my friend. A lot of money can be lost on the way to “normal.”

    One more thing: If home prices are now returning to “normal,” what were they before? Maybe…. abnormal??

    Comment by rex — September 7, 2006 @ 4:01 pm

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