Saturday, August 27, 2005

Bubble Sitters

Long time winterspeak reader WC sends in this excellent post about "bubble sitters" -- people who have decided that their housing market is overpriced and decided to sit the bubble out.
Bubble sitters vary in their reasons and tactics:

Warren and Sarah Bland sold their Los Angeles house ahead of retirement so their biggest asset wouldn't abruptly lose value at precisely the wrong time.

Jordan and Linda Celkupa decided to bubble sit so they could move to grander accommodations in Hoboken, N.J.

Vicki and Steve Sweeney sold their house in suburban Denver to flee a declining neighborhood; renting affords Vicki the chance to stay home with the children.

Baker sees himself as a pragmatist, motivated by reality-based self-preservation. "I'm pretty sure the prices around here will plummet," he says from his two-bedroom rental in Washington, D.C. "We felt it would have been foolish to stay there."
Amid their diversity, bubble sitters hav
Renters are doing more than sitting the bubble out, they are short housing. Unlike other goods, everyone needs someplace to live so be truly "neutral" housing you need to own the amount of housing you actually need. Renters own *no* housing so they are effectively "short" housing (will benefit if the price falls, will lose out if the price rises). Homeowners, though, are only *neutral* with respect to housing, because if the price goes up they are richer, but they will have to spend more on comparable housing somewhere else, and the gain in value of their own house is precisely offset by the increase in price in their next house. Same thing if prices fall -- they are poorer, but houses are cheaper too. To be truly long housing, you need more house than you actually need with plans to sell or rent out the extra.

What's interesting about the article is the way it seems to understand the importance of the the price/rent ration one second, and dismiss it the next. Compare this paragraph
As evidence that home values have moved out of whack, bubble partisans note that house prices have far surpassed rental rates in some markets. Take San Francisco. From the first quarter of 2000 to the first quarter of 2005, average residential rent in the Bay Area rose 18 percent. Over the same period, the average home value in San Francisco rose 63 percent. To return to a more realistic balance, one of two things must happen: Either rents will rise while home prices stagnate, or home prices must fall. Whichever way, rapid price appreciation has to end.
with this one
Bubble skeptics attribute the divergence between rents and prices to an earlier imbalance. They say that home prices once were too low in comparison with rents in some markets, so prices are merely bouncing back. They point out that values have risen fastest along the coasts, where developers have trouble finding land to build on. And when developers do find land, they run up against environmental and land-use rules that make it expensive to build.

"Prices are supply-and-demand driven, and we have record housing demand going on in the economy today, and in many parts of the country, increasing supply constraints," says David Berson, chief economist for mortgage giant Fannie Mae. "There's no surprise that housing prices are strong."
The supply constraint argument is totally bogus because it may explain high prices but does not explain high prices and low rents. If supply is constrained then you would expect both prices *and* rents to be high. The fact that the "chief economist" of Fannie Mae is making such statements suggests that Fannie Mae ought to be privatized.


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