G-khan
10-09-2003, 10:55 PM
What Housing Bubble??
http://www.goldismoney.info/html/housing_files/image001.jpg
Now isn’t that house a beaut? I am still looking for a buyer at list price. By the way the list price is a cool $1M! I can see you now, laughing at me, but if there is truly a housing bubble, then this fine piece of floating real estate is worth the fiat. By the way, this baby comes with full power and air conditioning and no real estate taxes!
What is a bubble? In my context, I consider a ‘Bubble’ to be something very special, a unique event. By this we assume a bubble to be a quantifiable major historical event. We further agree that a bubble does not occur often. A bubble is rare indeed, and you may be able to put a value to the event using historical analysis through the use of technical factors such as charts, and fundamental factors such as economic viability.
Let’s get started by looking through some charts to see where we have been. Then maybe we can get an idea of where we are heading. The first chart is of median prices from 1980 to 2001.
http://www.goldismoney.info/html/housing_files/image003.gif
The median prices start at about $65,000 back in 1980 and in 2001 this number had risen to $175,000. This is roughly an 8.05% rise per year over this period on a continuous basis. That is the perfect ‘Bull’ chart on house prices you will ever see. Any technician knows that a 45 Degree rise in prices is neither too fast, nor too slow over the long term. You will notice that in the late ‘80’s prices got a little ahead of trend. This was corrected during the 90-91 recession. Next chart is the M1 money supply from 1970 to the present.
http://www.goldismoney.info/html/housing_files/image004.gif
From the fiat supply chart, we can readily determine where the money is coming from for the increased prices in housing. M1 has risen from $200B to $1.2 Trillion over this period. This results in an incredible increase of 15% per year over this period. This also coincides with the beginning of the non-convertibility of gold for fiat period. We can all see what the Feds have done to the value of the $US over this period. It is now the $us. You may also pick out the beginning of the Clinton years with the almost vertical rise in the pace of M1 after the recession of ’91. Interestingly, the M1 starts to show a decline with the advent of the ‘afterburners’ phase of the SM bull market in ’95. After the bubble burst, the pace has again increased on the volume of M1 in the economy.
So far we are beginning to see the signs of pricing pressure related to the money supply. We have seen increased prices on a steady pace and an explosion of M1 money supply. Moving on, we will look at the Total housing inventory over this period.
http://www.goldismoney.info/html/housing_files/image005.gif
Isn’t that interesting? The housing inventory chart is a trend replica of the housing prices chart and the M1 chart. Total housing inventory has risen from 65 Million to 120 Million over a 36 year period, or a 2.3% increase per year. This is somewhat equal to the population increase over this period. No help here finding proof of a housing bubble. Taking a closer look, from 99-01 on the new home inventory and not total housing inventory, we see the following:
http://www.goldismoney.info/html/housing_files/image007.gif
With this chart, we can see that the near term inventory of homes has been rising by the value of 13.7% since the nadir in early 2001. This might constitute something we can use. From here you can see that an initial inventory peak was during the last stages of the stock market bubble. The inventory declines during the first stages of the SM bubble bursting. People are moving money to real estate and buying up the supply. This continues until March of ’01 when it seems as though people are starting to realize the SM’s are not coming back in a hurry. At this time Greenspan is dropping rates continuously, thereby giving builders the ‘Green’ light to continue to build. The new home inventory has been rising dramatically ever since. There was a bump in the road near 9-11-01, but the inventory build continued shortly thereafter. We will back up here and take a look at the mortgage rates through part of this period.
http://www.goldismoney.info/html/housing_files/image008.gif
Now we are getting somewhere. This chart is virtually an inverse of the prices and inventory charts. As mortgage rates decline, prices and inventory accelerate. There appears to be a direct correlation. We are getting there, so hang in there. Next up is a chart of housing starts, as in how many new homes being built.
http://www.goldismoney.info/html/housing_files/image010.gif
This chart represents starts for single family housing. From here we can see that housing starts in volume are actually down from 1978. The mid to late 70’s period was inflationary and housing prices rose dramatically until the increase in interest rates put an end to the housing market. That was the end of the last major push in housing. The decline during the tight money years in Volker and Reagan first term is very evident in the early ‘80’s. Inflation of the late ‘70’s was put in a vice to purge the economy of this excess. Again, this happens during the minor recession of 90-91. The trend was up from there until the last few years, in which starts have flat lined. We are starting to approach the peak monthly housing starts from the ‘70’s period. This is resulting in constantly increasing supply.
http://www.goldismoney.info/html/housing_files/image011.gif
A choppy looking chart, to be sure. Yet, we can see that sales were down into the SM bubble peak, trended upwards as people shifted assets into real estate after the bubble burst, then trended down again as the reality of a minor recession became apparent. This culminated with the 9-11 of 2001, when Greenspan really turned on the heat on interest rates. With the flow of easy money, sales again started rising once again. The final chart is the supply of housing expressed in number of months it would take to sell the current available inventory.
http://www.goldismoney.info/html/housing_files/image012.gif
With this chart we are also finding some evidence of a housing bubble. It looks as though the supply of new homes is declining in ‘months supply’ form. Remember the inventory charts and how they were increasing? This chart also represents the speed at which that inventory is sold at. As the number of housing sold/month increases, the amount of months it takes to clear inventory decreases. The supply of housing has actually been somewhat constant in this form since Jan of ’99 at plus or minus 4 months of forward inventory. The NAHB has stated that 6 months inventory is ‘healthy’.
Since September 11, 2001, the activity in the housing markets has quickened, resulting in a greater pace of turn. This is representative of people leaving paper assets and converting to ‘real’ assets.
Where does this leave us? While inventory has been increasing, sales have also been increasing. Recently, the sales pace has increased resulting in a shorter period to clear the inventory of new homes, even with a greater number of homes available on a monthly basis. There have been some areas of the country that have experienced ‘bubble’ type events in the housing markets. This has been very localized and is related to other factors such as the dot.com bubble or the bubble on Wall Street.
What we can conclude is that the prices of homes are directly related to what the Fed is doing with interest rates and the flow of fiat. From the charts we can see the normal ebb and flow of a market as it moves from boom to bust during the economic cycle. We can further relate the fact that the Fed has been printing money at a furious rate for a very long time, with some of this money finding its’ way to the housing markets. The excessive flow of fiat into the Stock Markets was the cause of the bubble in those areas. Sooner or later, this flow of money will create a bubble in the overall housing markets also.
Which brings me to a conclusion. With the advent of ‘cheap’ money by Greenspan, the increases in house prices are fully attributable to an increasing money supply. With the Stock Market comatose for the average person’s investments, be it 401k’s or IRA’s, the fiat continues to flow and is now showing up in housing prices. The most recent data shows supply of housing trending up even as starts have started to plateau at a high level. Builders should be cautious to prevent a replica of the late 70’s. At that time, interest rates were very high. This caused the market to collapse, with builders sitting on a significant amount of unsold inventory. Many builders were forced into bankruptcy due to the carry costs of finished homes.
We are at the beginning of a ‘Housing Bubble’ in the overall market. There are pockets of extraordinary activity, but they are not representative of the overall market. There is evidence of a demand increase due to the drop in interest rates. This demand increase is currently capable of exhausting inventory on a less than ‘healthy’ basis. When the turn up in interest rates arrives, that will then mark the end of the housing ‘miracle’.
For all of you that are looking at REIT charts and assuming that this applies to all real estate, and consequently there is a real estate bubble, don’t be so hasty. The REIT market is only part of the real estate market, and the reason for the disparate increases in REIT’s is simple….Safe Haven Status after the bubble burst on Wall Street. They paid dividends, so they were bid up at times beyond book values. You could make the argument that there is a mini bubble in REIT’s, but this does not apply to the overall housing market.
It looks as though we could near the end of a major investment into real estate over the past 20 years. If interest rates were to stay low, housing will continue to grow for the near future anyway and put off the inevitable decline in prices. From a macro perspective, the housing market is definitely heating up, yet I do not see a top forming as of yet.
Again, a ‘Bubble’ in my book would be something dramatic. The one item that stands out in the above charts is the capability of the Feds to destroy the $us through the printing of fiat. During the dot.com bubble, there was a distinct trend of terrible companies coming to market with stock offerings, ie increased supply. When the builders are sitting on many months of inventory and interest rates are rising, watch out, because then you will have the top of the real estate market pegged. This would mean they are overbuilding and the pace of sales is declining.
Expect further housing gains into the near future, followed with an eventual collapse in prices long term as the demographics of our population change with the retiring of the baby boomers generation. In a follow up to this essay, I will take a look at how this move to real assets affects Precious Metal investments in my next installment.
Frank A Lechner
Questions or Comments:
Fire Away At:
whynotgold@msn.com (whynotgold@msn.com)
Statistics were gleaned mainly from the NAHB (National Association of Home Builders) and the US Government published data. From these, I was able to create the above charts.
Lechner is an independent business owner and investor who has studied the markets over the past 20 years, dating to the last major bull run in precious metal investments. We had a mini bull market in the early 90’s and he believes we are currently in the early stages of an equivalent bull market to the late 70’s and early 80’s.
This is not meant as investment advice. This is only an opinion. Past performance is no guarantee of future results.
http://www.goldismoney.info/html/housing_files/image001.jpg
Now isn’t that house a beaut? I am still looking for a buyer at list price. By the way the list price is a cool $1M! I can see you now, laughing at me, but if there is truly a housing bubble, then this fine piece of floating real estate is worth the fiat. By the way, this baby comes with full power and air conditioning and no real estate taxes!
What is a bubble? In my context, I consider a ‘Bubble’ to be something very special, a unique event. By this we assume a bubble to be a quantifiable major historical event. We further agree that a bubble does not occur often. A bubble is rare indeed, and you may be able to put a value to the event using historical analysis through the use of technical factors such as charts, and fundamental factors such as economic viability.
Let’s get started by looking through some charts to see where we have been. Then maybe we can get an idea of where we are heading. The first chart is of median prices from 1980 to 2001.
http://www.goldismoney.info/html/housing_files/image003.gif
The median prices start at about $65,000 back in 1980 and in 2001 this number had risen to $175,000. This is roughly an 8.05% rise per year over this period on a continuous basis. That is the perfect ‘Bull’ chart on house prices you will ever see. Any technician knows that a 45 Degree rise in prices is neither too fast, nor too slow over the long term. You will notice that in the late ‘80’s prices got a little ahead of trend. This was corrected during the 90-91 recession. Next chart is the M1 money supply from 1970 to the present.
http://www.goldismoney.info/html/housing_files/image004.gif
From the fiat supply chart, we can readily determine where the money is coming from for the increased prices in housing. M1 has risen from $200B to $1.2 Trillion over this period. This results in an incredible increase of 15% per year over this period. This also coincides with the beginning of the non-convertibility of gold for fiat period. We can all see what the Feds have done to the value of the $US over this period. It is now the $us. You may also pick out the beginning of the Clinton years with the almost vertical rise in the pace of M1 after the recession of ’91. Interestingly, the M1 starts to show a decline with the advent of the ‘afterburners’ phase of the SM bull market in ’95. After the bubble burst, the pace has again increased on the volume of M1 in the economy.
So far we are beginning to see the signs of pricing pressure related to the money supply. We have seen increased prices on a steady pace and an explosion of M1 money supply. Moving on, we will look at the Total housing inventory over this period.
http://www.goldismoney.info/html/housing_files/image005.gif
Isn’t that interesting? The housing inventory chart is a trend replica of the housing prices chart and the M1 chart. Total housing inventory has risen from 65 Million to 120 Million over a 36 year period, or a 2.3% increase per year. This is somewhat equal to the population increase over this period. No help here finding proof of a housing bubble. Taking a closer look, from 99-01 on the new home inventory and not total housing inventory, we see the following:
http://www.goldismoney.info/html/housing_files/image007.gif
With this chart, we can see that the near term inventory of homes has been rising by the value of 13.7% since the nadir in early 2001. This might constitute something we can use. From here you can see that an initial inventory peak was during the last stages of the stock market bubble. The inventory declines during the first stages of the SM bubble bursting. People are moving money to real estate and buying up the supply. This continues until March of ’01 when it seems as though people are starting to realize the SM’s are not coming back in a hurry. At this time Greenspan is dropping rates continuously, thereby giving builders the ‘Green’ light to continue to build. The new home inventory has been rising dramatically ever since. There was a bump in the road near 9-11-01, but the inventory build continued shortly thereafter. We will back up here and take a look at the mortgage rates through part of this period.
http://www.goldismoney.info/html/housing_files/image008.gif
Now we are getting somewhere. This chart is virtually an inverse of the prices and inventory charts. As mortgage rates decline, prices and inventory accelerate. There appears to be a direct correlation. We are getting there, so hang in there. Next up is a chart of housing starts, as in how many new homes being built.
http://www.goldismoney.info/html/housing_files/image010.gif
This chart represents starts for single family housing. From here we can see that housing starts in volume are actually down from 1978. The mid to late 70’s period was inflationary and housing prices rose dramatically until the increase in interest rates put an end to the housing market. That was the end of the last major push in housing. The decline during the tight money years in Volker and Reagan first term is very evident in the early ‘80’s. Inflation of the late ‘70’s was put in a vice to purge the economy of this excess. Again, this happens during the minor recession of 90-91. The trend was up from there until the last few years, in which starts have flat lined. We are starting to approach the peak monthly housing starts from the ‘70’s period. This is resulting in constantly increasing supply.
http://www.goldismoney.info/html/housing_files/image011.gif
A choppy looking chart, to be sure. Yet, we can see that sales were down into the SM bubble peak, trended upwards as people shifted assets into real estate after the bubble burst, then trended down again as the reality of a minor recession became apparent. This culminated with the 9-11 of 2001, when Greenspan really turned on the heat on interest rates. With the flow of easy money, sales again started rising once again. The final chart is the supply of housing expressed in number of months it would take to sell the current available inventory.
http://www.goldismoney.info/html/housing_files/image012.gif
With this chart we are also finding some evidence of a housing bubble. It looks as though the supply of new homes is declining in ‘months supply’ form. Remember the inventory charts and how they were increasing? This chart also represents the speed at which that inventory is sold at. As the number of housing sold/month increases, the amount of months it takes to clear inventory decreases. The supply of housing has actually been somewhat constant in this form since Jan of ’99 at plus or minus 4 months of forward inventory. The NAHB has stated that 6 months inventory is ‘healthy’.
Since September 11, 2001, the activity in the housing markets has quickened, resulting in a greater pace of turn. This is representative of people leaving paper assets and converting to ‘real’ assets.
Where does this leave us? While inventory has been increasing, sales have also been increasing. Recently, the sales pace has increased resulting in a shorter period to clear the inventory of new homes, even with a greater number of homes available on a monthly basis. There have been some areas of the country that have experienced ‘bubble’ type events in the housing markets. This has been very localized and is related to other factors such as the dot.com bubble or the bubble on Wall Street.
What we can conclude is that the prices of homes are directly related to what the Fed is doing with interest rates and the flow of fiat. From the charts we can see the normal ebb and flow of a market as it moves from boom to bust during the economic cycle. We can further relate the fact that the Fed has been printing money at a furious rate for a very long time, with some of this money finding its’ way to the housing markets. The excessive flow of fiat into the Stock Markets was the cause of the bubble in those areas. Sooner or later, this flow of money will create a bubble in the overall housing markets also.
Which brings me to a conclusion. With the advent of ‘cheap’ money by Greenspan, the increases in house prices are fully attributable to an increasing money supply. With the Stock Market comatose for the average person’s investments, be it 401k’s or IRA’s, the fiat continues to flow and is now showing up in housing prices. The most recent data shows supply of housing trending up even as starts have started to plateau at a high level. Builders should be cautious to prevent a replica of the late 70’s. At that time, interest rates were very high. This caused the market to collapse, with builders sitting on a significant amount of unsold inventory. Many builders were forced into bankruptcy due to the carry costs of finished homes.
We are at the beginning of a ‘Housing Bubble’ in the overall market. There are pockets of extraordinary activity, but they are not representative of the overall market. There is evidence of a demand increase due to the drop in interest rates. This demand increase is currently capable of exhausting inventory on a less than ‘healthy’ basis. When the turn up in interest rates arrives, that will then mark the end of the housing ‘miracle’.
For all of you that are looking at REIT charts and assuming that this applies to all real estate, and consequently there is a real estate bubble, don’t be so hasty. The REIT market is only part of the real estate market, and the reason for the disparate increases in REIT’s is simple….Safe Haven Status after the bubble burst on Wall Street. They paid dividends, so they were bid up at times beyond book values. You could make the argument that there is a mini bubble in REIT’s, but this does not apply to the overall housing market.
It looks as though we could near the end of a major investment into real estate over the past 20 years. If interest rates were to stay low, housing will continue to grow for the near future anyway and put off the inevitable decline in prices. From a macro perspective, the housing market is definitely heating up, yet I do not see a top forming as of yet.
Again, a ‘Bubble’ in my book would be something dramatic. The one item that stands out in the above charts is the capability of the Feds to destroy the $us through the printing of fiat. During the dot.com bubble, there was a distinct trend of terrible companies coming to market with stock offerings, ie increased supply. When the builders are sitting on many months of inventory and interest rates are rising, watch out, because then you will have the top of the real estate market pegged. This would mean they are overbuilding and the pace of sales is declining.
Expect further housing gains into the near future, followed with an eventual collapse in prices long term as the demographics of our population change with the retiring of the baby boomers generation. In a follow up to this essay, I will take a look at how this move to real assets affects Precious Metal investments in my next installment.
Frank A Lechner
Questions or Comments:
Fire Away At:
whynotgold@msn.com (whynotgold@msn.com)
Statistics were gleaned mainly from the NAHB (National Association of Home Builders) and the US Government published data. From these, I was able to create the above charts.
Lechner is an independent business owner and investor who has studied the markets over the past 20 years, dating to the last major bull run in precious metal investments. We had a mini bull market in the early 90’s and he believes we are currently in the early stages of an equivalent bull market to the late 70’s and early 80’s.
This is not meant as investment advice. This is only an opinion. Past performance is no guarantee of future results.