NYT: Assess Your Area's Real Estate Bubble

The New York Times
August 13, 2005

Do Try This at Home: Assess Your Area's Real Estate Bubble
By DAMON DARLIN

Photo:
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jpg
Caption: In Park Place, a condominium tower in San Diego, the monthly
rent on a one-bedroom unit is far cheaper than the typical mortgage
payment.

For the first time since the residential real estate marathon began 13
years ago, parts of the country are showing signs of exhaustion. But if
you rely on the experts to declare that a particular area's bubble has
popped, you may have waited too long.

So how can a homeowner tell if a market is about to go bust? This may
be one of those rare occasions when professionals parsing data are at a
disadvantage to regular people watching the market. That's because the
main driver of today's market is consumer psychology. Home prices go up
as long as people expect them to go up.

When they stop believing, prices fall - and no economist in Washington
can get wind of that faster than someone chatting over knockwurst at a
neighborhood block party. "Economists looking at the macrodata will be
the last to know," said Richard A. Brown, chief economist at the
Federal Deposit Insurance Corporation.

What you will learn from the professionals who are dutifully crunching
numbers is that prices are not falling significantly in any of the hot
markets, but in a dozen or so cities in the Northeast and in
California, they are near the peak. In Boston, for example, the time
that homes are sitting on the market has stretched to 46 days from 39
days a year ago.

An analysis of price appreciation, done for The New York Times by the
Joint Center for Housing Studies at Harvard, shows that the price
appreciation in cities including New York City; Austin, Tex.;
Philadelphia; and Providence, R.I., are decelerating. Appreciation in
Detroit and Denver has already slowed to a crawl.

"It's taking a lot longer to sell a home," says Karl A. Martone, a
Re/Max Properties agent in Providence, where homes now sit on the
market an average of 65 days, up from 14 days a year ago. The region
has almost six months of inventory, which is up 35 percent from a year
ago.

Vicki Doran, a real estate agent with Coldwell Banker in Providence,
says: "It's switching to a buyer's market. Last year buyers had to snap
things up. Now they can shop around."

Even a few markets in hard-charging California - San Diego, Orange
County and Santa Cruz - are part of the trend, according to data from
the first three months of the year. Data for the second quarter to be
released by the government on Sept. 1 may confirm the trend. But
already Christopher Thornberg, senior forecaster at UCLA Anderson
Forecast, a service of the University of California, Los Angeles, says
California has "peaked and is already coming down the back side."

On Tuesday, David A. Lereah, the chief economist at the National
Association of Realtors, said that the housing market was "probably
close to a peak right now."

Take a look at the hot San Diego condo market. In Park Place, one of
the many sleek towers of condominiums recently slung up around Petco
Park, a one-bedroom condo is offered for $719,000. Someone buying it
would expect to make mortgage payments of about $3,775 a month, plus
monthly maintenance fees.

But someone really wanting to live in the high-rise, with hardwood
floors, granite countertops and city views for a lot less, could rent a
nearly identical unit in the same building for $2,400 a month. That is
clear evidence prices have to move down. You are more apt to see that
the price of residential property no longer is connected to its
underlying value than a person looking only at spreadsheets of sales
data.

Prices in overheated markets must, by definition, come back down to the
mean. Knowing which way the market is headed before buying or selling
is extremely important to anyone who wants to protect the wealth tied
up in a house. And it certainly matters to anyone who is thinking of
buying because it never makes much sense to buy at the top of the
market. "The turning point is pretty important," Mr. Brown said,
"because the trend will play out for years."

The trouble is, economists have been wrong before when they try to call
the market. Three years ago, Dean Baker, co-director of the Center for
Economic and Policy Research in Washington, said that it would be only
a matter of months before prices began to fall. Prognosticators at the
research firm Economy.com declared that the peak was last summer. Celia
Chen, the firm's director for housing economics, is now saying that it
will come this year.

"The timing is always difficult with these things," admits Ian Morris,
chief United States economist at HSBC Securities U.S.A., who made the
same call, repeatedly.

John Karevoll, an analyst with DataQuick Information Systems, which
provides real estate data to lenders, said: "We've been told for years
that the peak is just around the corner. The economists have so much
egg on their faces."

Don't be too hard on them. It's the nature of their science. N. Gregory
Mankiw, the Harvard University professor and former head of the White
House Council of Economic Advisers, made one of the most famous
miscalls. In 1989 he wrote a paper arguing that the aging of the baby
boomers was going to undermine the housing market in the 1990's and
2000's. Whoops.

Though it appears the shift is now at hand, the end of the bubble will
not look anything like the crash in the stock market after the
technology bubble. The stock market turns frenetic when investors
scramble to get out and prices fall sharply. In housing, however, a
collapse is signaled by a sharp drop in activity as people hold off
buying. Houses stay on the market longer. Inventories grow. Only then
will prices fall, slowly. Economists say prices will lag a slowdown in
the market by four to six months.

Some of the data on where a local market is headed is available on the
Internet (links are at nytimes.com/business). In other cases, your real
estate agent is your best friend. He or she has access to a storehouse
of raw data from the local Multiple Listing Service. Here are some
indicators to look at:

Market activity How many homes are sold compared with the month before
is the earliest indicator, but it is notorious for false positives. But
if the number of homes sold starts to drop, perk up. Every county
tracks this and makes it available to the public.

Inventory Some of the most crucial pieces of information are held
closely by real estate agents. The number of houses on the market is
one of them. The national average is 4.3 months; 6 months is closer to
normal, the National Association of Realtors says. When it grows, there
is trouble coming. Time on the market Agents control access to this
information, and be warned: they know how to manipulate it. A house
that has been languishing can be taken off and put back to look like a
fresh listing. But you'll still be able to see the average time
stretching as a clear signal of cooling.

Prices It's what you care about most. But month-to-month comparisons
are nearly useless as an indicator because sales of a few houses on
either end of the market can skew the figures. DataQuick at
www.dqnews.com has some data and the Office of Federal Housing
Enterprise Oversight issues quarterly reports.

Failed to sell The super-secret indicator among agents is the number of
houses that are quietly taken off the market - usually because they are
priced too high. Wheedle the number out of them and you'll have a
strong indicator of market health.

Price-to-rent ratio This is a wonderful measure that gets at the
intrinsic value of a property, but it's a tricky tool for the layman.
Rent data include everything from studios to four-bedroom penthouses,
making a comparison with single-family homes difficult. Some of the
rent data can be found at www.realfacts. com.

Loan quality The popularity of interest-only mortgages could become one
of the best indicators of a fragile market, several economists say. Mr.
Thornberg of UCLA Anderson says it's a sign that lenders are scraping
the bottom of the barrel. "We are close to running out of shills," he
says.

Risk The PMI Group of Walnut Creek, Calif., a provider of data to the
mortgage industry, estimates how much prices could drop using an
econometric model. It publishes the list of at-risk cities at
www.pmigroup.com.

Popular sentiment To judge from the media, the housing bubble may have
peaked in June. According to a Nexis search of magazines and
newspapers, that month was the peak, with 312 references to "housing
bubble," almost six times that of a year earlier. It fell 24 percent in
July.

Of course, there is one constant: real estate agent sentiment. Most of
them will never tire of saying it's a great time to buy. Despite the
signs of a slowdown, Mr. Martone, the Providence real estate agent,
says prices are holding and he still does not have enough properties to
sell. He says, "I am the eternal optimist."