Is Housing a New Bubble? Homes Fetch Prices in My Neighborhood That Are 30 to 100 Percent Higher Than a Few Years Ago. I Wonder How There Could Not Be a Bubble

Article excerpt

Byline: Robert J. Samuelson

If every silver lining comes wrapped in a dark cloud, housing could be the economy's next big head-ache. Just recently, the Labor Department reported a hefty 308,000 increase in payroll employment for March and also revised upward previous figures so that monthly job gains have averaged 108,000 since September. Good, though not spectacular, news: the recovery hasn't been "jobless." Now, the bad news. Assuming job creation continues--a big if--the Federal Reserve will ultimately raise interest rates and threaten the cheap credit that's bolstered home sales and prices. If there's a housing "bubble," higher interest rates may pop it.

Surveying my neighborhood, outside Washington, D.C., I wonder how there could not be a bubble. Homes fetch 30, 50 or even 100 percent more than they did a few years ago. We live in a hot real estate market (median-priced homes in the Washington area rose 14 percent in 2003 to $286,000 and are up 57 percent since 2000), but we aren't all that different. Since 2000, the national median price for existing homes has increased 23 percent to $170,000, and many gains are much larger: 31 percent in Boston to $413,000; 64 percent in Los Angeles to $355,000; 32 percent in Minneapolis-St. Paul to $200,000; and 74 percent in West Palm Beach-Boca Raton to $241,000 (all figures from the National Association of Realtors).

Speculative fever also shows up in a widespread euphoria about future prices. Economists Robert Shiller of Yale and Karl Case of Wellesley surveyed recent home buyers in four cities. In the next decade, these home buyers think real estate values will rise from 11.7 percent annually (Milwaukee) to 15.7 percent annually (San Francisco). These expectations are absurd, as Shiller and Case say. Even annual gains of 11.7 percent would triple prices in a decade--far beyond any plausible income gains. Who'd buy those homes? But if people believe, they'll borrow more against homes, and torrents of credit will temporarily bolster prices. Sure enough, home borrowing has surged. In 2003, homeowners' equity (the amount not covered by loans) was only 55 percent of home value, a record low. In 1990, the figure was 61 percent; in 1945 it was 86 percent.

Still, Shiller and Case doubt there's a big bubble--and they could be right. Lawrence Yun of the National Association of Realtors points out that since World War II median national home prices have never declined from one year to the next. At worst, there have been localized "bubbles." In Houston, home prices dropped 23 percent over five years after oil prices collapsed in the mid-1980s, he says. …