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More Economists Discount Doomsday Housing Bubble Scenarios

A report appearing last month in a publication of the Federal Reserve Board of New York — “Are Home Prices the Next ‘Bubble’?” — concluded that there is no imminent danger of a collapse in housing prices that would harm the U.S. economy.

If the economy falls into recession, which does not appear to be a prospect for the immediate future, then there could be some moderate housing price declines, the report says, primarily along the East and West Coasts, where it is difficult for the housing supply to keep up with demand because of a restrictive environment for new construction.

“Our analysis of the U.S. housing market in recent years finds little evidence to support the existence of a national home price bubble,” write Jonathan McCarthy, a senior economist, and Richard W. Peach, a vice president, at the Federal Reserve Bank of New York.

“Rather, it appears that home prices have risen in line with increases in personal income and declines in nominal interest rates,” they write. “Moreover, expectations of rapid price appreciation do not appear to be a major factor behind the strong housing market.”

While low mortgage interest rates have provided a major boost to the nation’s housing markets, even under the Federal Reserve Board’s new policies, mortgage interest rates are expected to remain at fairly affordable levels, NAHB President Bobby Rayburn told members of the press at PCBC in San Francisco last month.

Even in a state that would appear to be most susceptible to a bubble problem because of a surge in home prices in the past few years and extremely formidable regulatory barriers for new residential construction, Alan Nevin, chief economist for the California Building Industry Association, discounts fears of a collapse.

“Based on the state’s population growth of nearly 600,000 a year, combined with the continuing lack of enough homes and apartments to meet the demand, there is little chance that the housing market will collapse,” Nevin said. “Standing inventories of new homes are essentially zero. You can’t have a housing bubble if we aren’t building enough houses to handle the demand.”

Speaking at a PCBC presentation on the state of the nation’s housing, William Apgar, senior scholar, Harvard Joint Center for Housing Studies, said there will be no significant erosion nationwide in home prices, although they will slow down from last year’s increase of 5.9%.

Apgar also reminded his audience that “homes are being bought by people at the top half of the income distribution,” where incomes did not decline during the recession. Incomes should now be growing faster as economic growth moves forward.

Also on the PCBC panel, Kenneth Rosen, chairman of Rosen Consulting Group in Berkeley, CA, suggested that inflation could move into the 4%-5% range, which might result in higher interest rates than currently anticipated.

With housing prices rising by 60% and more over the past three years in California’s best markets, Rosen said that he believed that the state’s housing industry has just about reached its peak levels.

However, he acknowledged that it will take another recession and higher interest rates to trigger a significant adjustment in prices.

In California and elsewhere, the high cost and limited availability of land have been driving housing costs upward, Apgar added.

Mark Your Calendar for NAHB's Fall Construction Forecast Conference

Get the latest forecasts on housing starts, project budgets and other economic bellwethers of the housing industry at NAHB's Fall Construction Forecast Conference at the National Housing Center in Washington, D.C. on Oct. 27. Click here for more information.

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