« Carnival of Crazy. | WILLisms.com | Social Security Reform Thursday: Week Thirty -- Reform Is A Better Deal Than The Status Quo. »

Trivia Tidbit Of The Day: Part 149 -- Housing Bubble.

Housing Bubble-

Yesterday, the Commerce Department announced that new home sales increased by 6.5% in July, and a 27.7% increase since July 2004 (.pdf). This came on the heels of news on Tuesday from the National Association of Realtors (NAR) that existing home sales dipped in the month of July by 2.6% below the record pace in June (.pdf).

The Tuesday slowdown spooked "the market/Wall Street" a bit, which is sort of silly, considering July was still the third strongest month on record for existing home sales, after June and April of this year.

All of this brings up the spectre of a housing bubble.

So is there a housing bubble in the U.S.?

The Dallas Fed notes that Texas, for one, is not at risk for a housing bubble burst:

USA TODAY, meanwhile, notes:

Fifty-three metropolitan areas representing 31% of the total U.S. housing market are considered extremely overvalued and confront a high risk of future price corrections, a study conducted by National City Corp. says. The study determines a market extremely overvalued if prices are 30% above where the study estimates they should be based on historic price data, area income, mortgage rates and population density.

The top 10 overvalued areas, according to National City Corp.:

The bottom 10 overvalued areas (or, the top ten undervalued areas), according to National City Corp.:

Economics Professor Gary Wolfram of Hillsdale College cautions against housing bubble hysteria, and explains why some areas have seen explosive housing price growth:

If you look closely at such studies, you will find that housing markets in cities that are becoming bedroom communities for larger, wealthier cities, or are becoming a substitute location for another high-priced housing market, will have prices that are higher than you would expect from current residents. But this is simply a reflection of the fact that higher-income people from nearby areas are taking advantage of the low housing prices in the target city and moving in, bidding up the price of the houses that are for sale. Since the housing prices used in these studies would be the value of the houses that are sold, but the incomes of the city will be the incomes of the current residents, it will appear that housing prices are very high relative to income.

An example should make this clear. Suppose there are 1,000 families in Suburbia. The average income of people in Suburbia is $40,000, and the average house value is $100,000. Suburbia is located 50 miles from Big City, which has 500,000 residents, an average income of $250,000, and an average house value of $500,000. Ten residents of Big City decide to take advantage of the low housing prices in Suburbia and move in. Since there are only a few houses for sale in Suburbia, they end up paying $150,000 for each of the 10 houses. It will then appear that houses in Suburbia are now worth $150,000.

The 10 new residents will only increase the average income in Suburbia by a small fraction, but it will appear that houses are now much more valuable there. Thus a study would show housing prices are rising much more rapidly in Suburbia than incomes are, and that a “housing bubble” exists.

Nearly every day, the net effect of the economic indicators (good minus bad) remains surprisingly strong. Interest rates are still historically low. Job growth has been robust. GDP growth has outpaced expectations. As long as the Fed does not suddenly jolt interest rates upward, and as long as we have a growing population and growing economy, with a limited number of places to live in the hottest housing markets, the fears of a housing crash/correction are legitimate but greatly exaggerated.

Previous Trivia Tidbit: Net Migration (Immigration/Emigration).

Posted by Will Franklin · 25 August 2005 09:42 AM

Comments

Posted by: Hoodlumman at August 25, 2005 10:24 AM

Posted by: Zsa Zsa at August 25, 2005 08:04 PM

Posted by: Hoodlumman at August 25, 2005 09:01 PM