Sunday, March 27, 2005

Housing boom may go bust, economists warn

Eager investors are buying up real estate; parallels to dot-com frenzy raise red flag

New York Times

Real estate-crazed Americans have started behaving in ways that eerily recall the stock market obsession of the late 1990s.

In a version of day trading, some houses in Naples, Fla., have been bought twice in a single day. Buying stocks on margin has morphed into buying homes with no money down. The over-the-top parties of Internet startups have been replaced by flashy gatherings where developers pitch condos to eager buyers.

Five years ago, the cable channel CNBC sometimes seemed like a backdrop to daily American life. Its cheery analysis of the stock market played in offices, in barbershops, even in some bars. Today, Dude Room, Toolbelt Diva and other home-improvement shows are the addictive fare that CNBC's exuberant stock shows once were.

``It just seems like everyone is doing it,'' Laurie Romano, a 26-year-old self-described real estate investor, said with a giggle as she explained why she was attending an open house this month for the Nexus, a 56-unit building going up in Brooklyn's chic Dumbo neighborhood. She and her fiance, a dentist, had already put down a deposit on a Manhattan condo earlier in the week and had come to look at another at the Nexus.

Nobody can know whether the housing boom of the last decade will end as the dot-com frenzy did. But the parallels are raising alarms among many economists, even those who acknowledge that there are important differences between homes and stocks that significantly reduce chances of another meltdown. For one thing, houses are not just paper wealth: You can live in them.

Perhaps the most troubling similarity, some analysts say, is the claim that the rules have somehow changed. In an echo of the ``new economy'' investors' blase attitude toward unprofitable companies, the growing ranks of real estate investors are buying houses they never expect to be able to rent at a profit. Instead, they think the prices of houses will just keep rising.

Indeed, the government reported Thursday that nationwide sales of new homes jumped sharply in February in the biggest monthly increase in four years. A strong national economy and an improving job market contributed to the gain, as did speculative fever. But many were also trying to beat rising mortgage rates, which could eventually cool the market.

Robert J. Shiller -- a professor of economics at Yale whose prescient book on stocks, Irrational Exuberance, appeared just a few months before technology stocks began their slide -- has returned as a doomsayer on the housing market.

``We're going through something very similar in real estate that we did with stocks,'' he said. ``It's driven by the same forces: that investments can't go bad, that it has the potential to make you rich, that you'll regret it if you don't do it, that it looks expensive but is really not.''

A new edition of Shiller's book will be published next month. The cover promises an ``analysis of the worldwide real estate bubble and its aftermath.''

Bullish on real estate

Premonitions of a bubble on the verge of popping do not ruffle those who are bullish on real estate. In Miami, Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors, predicted that a limited supply of land coupled with demand from baby boomers and foreigners would prolong the boom indefinitely.

``South Florida,'' he said, ``is working off of a totally new economic model than any of us have ever experienced in the past.''

The can't-miss aura has helped nudge many families to invest more of their personal wealth in real estate by buying more expensive homes and taking on riskier mortgages -- much as ordinary workers used their 401(k) plans to bet on company stocks.

There are certainly serious reasons to believe that house prices will not suffer the fate of technology stocks. Not only are houses more tangible, but people do not sell their homes as quickly as stocks, making a panic much less likely. And because of tax advantages, few owners are likely to sell and rent something else simply because local house prices start to decline.

And as high as they might seem now on the coasts, home prices have not even doubled over the last decade; during the 1990s, the Standard & Poor's 500-stock index more than quadrupled. In Ohio, for example, the price rise has been much more modest than in other regions.

In Summit County, a lot of homes are on the market, but home sales volume has remained healthy and overall values have been solid.

For January and February, sales were up slightly -- to 646 from 633 in the same period in 2004. Inventory levels fell to 3,013 at the end of February from 3,177 in 2004. The median sales price was $183,225 in February versus $176,000 for February 2004, which are modest gains compared to those seen on the coasts.

Some optimism exists

``I just don't think we have what it takes to prick the bubble,'' said Diane C. Swonk, chief economist at Mesirow Financial in Chicago. ``I don't think prices are going to fall, and I don't think they're even going to be flat.''

Such optimism about real estate has created a stampede of new investors in some regions. The night before the Nexus party, Patrick Cullert, 31, and Jennifer Mathews, 29, who are engaged, camped out to ensure they would be near the head of the line for one of 16 condos to be sold at the party.

Many former stock market enthusiasts are turning to housing. Douglas Paul, a 46-year-old former analyst, left AT&T in 2002 to buy and sell stocks on his own. But he soon decided that real estate could be another way to make quick profits. Paul owns two condominiums around Fort Lauderdale and one in Miami Beach that he bought during the last year, in addition to the one where he lives. He plans to sell one of the Fort Lauderdale condos in June for what he believes will be double his investment.

``It really is a very hot real estate market and I don't know how long it's going to continue,'' he said. ``But in the short term, why not profit from it?''

House as an investment

Paul's path is an increasingly common one. The National Association of Realtors estimates that nearly one-quarter of home purchases last year were made by people who thought of the house as an investment rather than a place to live. Seminars promising to teach amateurs the tricks of real estate speculation have proliferated.

Even at Harvard Business School, where students have traditionally gravitated to careers in investment banking and corporate marketing, real estate is suddenly hot. About 25 graduates have taken real estate jobs in each of the last two years, up from only six in 2001.

It is not quite the gold rush of 2000, when almost 200 Harvard MBA graduates flocked to technology companies. But even if they are not working in real estate, some of those graduates are now investing in it.

Andrew Farquharson, a member of the class of 1999, said he recently teamed up with a high school friend to buy a home in the Central Valley of California ``out of pure speculation.'' He knows three other classmates who have made similar investments.

``I look at this as a short-term investment,'' said Farquharson, 36, who works for a venture capital firm, ``and plan to unload it as soon as things look dangerous.''

Another lingering echo of the stock market boom is the role of the Federal Reserve. In the 1990s, the Fed kept interest rates relatively low because it saw little risk of rising inflation despite a booming economy, helping feed a fever for stocks.

Alan Greenspan, the Fed chairman, famously asked aloud in 1996 whether ``irrational exuberance'' was driving the stock market, but then backed off from second-guessing investors.

After the market plunged and the economy weakened, the Fed pushed interest rates down to near 50-year lows, helping to fuel the housing boom. This month, Greenspan made some comments about housing that offered a pale echo of his 1996 musings.

``Analysts have conjectured that the extended period of low interest rates is spawning a bubble in housing prices in the United States that will, at some point, implode,'' Greenspan said in a speech in New York, adding that real estate speculation had shown a ``marked increase.'' Nevertheless, he said he did not expect a ``destabilizing'' drop in prices, in part because home prices across the country have never fallen significantly.

But by one measure, houses in at least a few metropolitan areas are as expensive as telecommunications stocks were in 1999, relative to their underlying value.

Pricey San Jose homes

The average house in San Jose costs 35 times what it would cost to rent for a year, according to, a research company. In New York and West Palm Beach, this ratio -- a rough equivalent of the price-earnings ratio for stocks -- is almost 25.

In March 2000, the price-earnings ratio of the Standard & Poor's 500 -- the combined price of the stocks, divided by their profits per share -- peaked around 32, as it did for telecommunications stocks. The S&P's PE ratio has since fallen to around 20; it is down even more for the telecommunications industry.

Still, no matter how expensive real estate might be, it continues to provide many owners a return worth boasting about.

At dinner parties in Manhattan, Holly Peterson, who is writing a novel about the idiosyncrasies of New York's rich, said she frequently hears complaints about high home prices, followed by claims of quick profits. ``They always hit you with their last jab: `Of course my money's doubled three times over since I got married,' '' she said.

Five years ago, she said, friends at parties were crowing about ``making millions of dollars on paper with $25,000 and $50,000 investments.'' But ``most of those people,'' she added, ``got wiped out.''