Real Estate "Bubble"?
By George M. DeMello, Senior Vice President Residential Lending, Bank of Canton

June 2006- The National Association of REALTORS® predicts 2006 to be the third strongest year in home sales on record.

In December 1996, then-Chairman of the Federal Reserve Alan Greenspan delivered a speech before the American Enterprise Institute. These words became his most famous observation on the booming securities market:

"…But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions? We, as central bankers, need to be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs and price stability."

"Irrational exuberance" was probably the most memorable phrase to emerge from Greenspan's 19-year tenure as the nation's premier economic soothsayer. However, there's another word in this quote that gives pause. In this case, the "bubble" label applied to the speculative fever that drove high-tech and dot.com stock prices to "exuberant" heights throughout much of the 1990's. That surge was indeed a bubble, and when the realization set-in that profitless enterprise cannot prosper for long, the bubble "burst."

Today, we keep hearing about a different kind of bubble. Newspaper and magazine headlines, televised business commentaries and radio talk shows are indicating a quick-cooling housing market and predicting an imminent collapse in residential housing prices.

Actually, the more precise word to describe today's residential real estate market is "cooling," and that happens to be a positive development. If the stock market of the 1990's had experienced more "cooling-off periods," these "hot stocks" may have experienced better stability. However, that dot.com stock that sold for a paltry $10 a share at its initial offering, before shooting up to $100 a share, might still be around at $13 -14 a share.

If the increasing annual gains in housing values slip from double-digit rates, where they've been churning for several years, down to a more modest single-digit pace, is that a harbinger of a bursting bubble? I don't think so. Instead, I would maintain that the current housing market - with its rising inventories, easing prices and the transition from a seller's to a buyer's market - has settled at a temporary "plateau."

David Lereah, chief economist for the National Association of REALTORS® (NAR), agrees that there is no bubble bursting, but rather a "soft landing" for a nationwide housing market that has been expanding rapidly during an era of historically low interest rates that were reined-in by Greenspan's aggressive anti-inflationary policies of the Federal Reserve. "We may see some minor slowing in home sales as interest rates rise, but the market is clearly stabilizing," said Lereah, commenting on NAR's most recent figures (March) on existing home sales. Still, Lereah stresses, 2006 is likely to be the third-strongest year in home sales on record.

According to NAR, total existing home sales nationwide, including single family, townhouses, condominiums and co-operatives, in March of 2006, were 6.92 million units, or 0.7 percent below the 6.97 million units sold in March of 2005. Total sales of existing homes in 2005 posted a record of 7.08 million units, and while NAR sees this year's total sales of existing homes dropping by around six percent to 6.65 million, the decline, while significant, hardly falls into the category of "bubble bursting."

NAR reported slippage in other areas as well: new home sales are expected to fall significantly just under 11 percent to 1.14 million from last year's all-time record 1.28 million; and housing starts are forecast at 2 million this year, or 3.2 percent below the 2.07 million starts last year.

In Massachusetts, the decline in sales of single-family homes was slightly more than double the national average from March 2005 to March 2006, but the decline nevertheless was modest. According to The Warren Group of Boston, the preeminent provider of real estate and financial data throughout New England, single family house sales dropped 1.5 percent, with 4,416 units sold in March 2006 versus 4,482 in March 2005. However, condominium sales increased 1.4 percent to 4,554 units sold in March 2006 compared to the March 2005 figure of 4,482.

The median sale price of a Massachusetts house in March 2006 slipped 1.5 percent to $325,000 from $330,000 a year ago, while the median sale price of condos jumped 6.2 percent, from $260,000 to $276,119.

Admittedly, these figures differ markedly from the comparable statistics we became accustomed to throughout the Greenspan era of basement-level interest rates. To categorize what is happening in today's real estate market as a "bubble burst" that is on-par with Wall Street's high-tech collapse, rather than as the modest correction that it actually is, is far-fetched.

I began this column with a quote from one retired Federal Reserve official. Let me close it with remarks from another: Richard F. Syron, formerly President of the Federal Reserve Bank of Boston and currently Chairman and Chief Executive Officer of Freddie Mac, a vital link in the nation's residential mortgage market.

Noting in a recent speech that housing has accounted for approximately 20 percent of the nation's Gross Domestic Product growth in the past three years, Syron said: "My own view is that we do not have a national house price bubble today. We will see a significant slowdown in housing, but this slowdown is from record-level highs. Housing starts and home sales will stay strong. Prices will likely rise at rates more in line with long-term historical averages, not at the double-digit rates we've seen recently. And a nationwide decline in housing prices remains highly unlikely, based on both history and the underlying fundamentals."

Isn't it about time all this "real estate bubble" talk just floated away?