| Don’t worry about housing price bubbles
by
David F. Seiders
For Virginia Business
May 2004
The
February issue of Virginia Business included a column
titled: “The
housing bubble is going to burst: Take your profits
while you can.” The author, John Rubino, appears
to be taken by doomsday scenarios these days, having
published “How to Profit from the Coming Real
Estate Bust” and currently working on a book about
“the coming collapse of the U.S. dollar.”
Indeed, these two doomsdays are supposedly related,
i.e., a collapse of the dollar is supposed to prick
a house price bubble before long.
Homeowners who are inclined to believe Mr. Rubino might
also be inclined to take his advice — selling
their homes now and renting for a few years while shifting
available capital into things like gold and global bond
funds that might be expected to do relatively well as
the dollar and home prices collapse in tandem.
Actually, Mr. Rubino has done Virginians a tremendous
disservice, either because of honestly held erroneous
theories or because of zeal to sell books regardless
of potential damage to the housing market. For if enough
Virginians take his advice and dump their homes on the
market, prices definitely will weaken — but not
because Rubino’s theories hold water.
Theories of house price bubbles actually have proliferated
since 2000 as house values have risen persistently at
healthy rates while the securities markets have been
on a wild and destructive ride. Most of the bubble theorists
have been associated with Wall Street and the major
national financial media (such as The Wall Street Journal),
and the objective has been to damage the view that housing
is a good investment and encourage households back into
U.S. stock and bond markets.
As the U.S. economy has recovered systematically from
the 2001 recession, and as house prices have continued
their upward climb, most house price bubble theorists
have thrown in the towel — finally recognizing
that house prices are sustainable after all. But then
Mr. Rubino pops out of the woodwork, raising the specter
of a collapsing dollar that will throw the U.S. central
bank (the Federal Reserve) into panic. The panicked
Fed, he argues, will be forced to defend the dollar
with sharply higher interest rates, sending mortgage
rates up by 2 to 4 percentage points in short order.
This rate rise, in turn, supposedly will crush housing
demand and precipitate the tumble in house prices that
Rubino predicts.
It’s true that the dollar has been declining since
2002, particularly against the euro and the yen, but
the dollar got seriously overvalued earlier on and is
heading toward more sustainable valuation at this time.
There’s no way that the dollar is going into a
freefall, partly because U.S. and foreign central banks
have plenty of resources to intervene in foreign exchange
markets and smooth disorderly conditions if and when
they occur. Furthermore, Chairman Alan Greenspan and
other members of the Federal Reserve Board have made
it perfectly clear that U.S. interest rates will not
be hiked to defend the dollar, particularly when overall
inflation in the U.S. is dangerously close to zero and
the U.S. economy still has a lot of slack in labor and
capital markets.
So, homeowners, relax! Mr. Rubino’s theories don’t
hold water. Homes continue to be great investments,
aided and abetted by a host of federal policies that
encourage homeownership and support house prices, and
any sensible forecast of economic and financial market
conditions in the U.S. paints a bright future for housing.
It’s no wonder that the U.S. homeownership rate
hit a new record last year, and there’s no doubt
that healthy trend will continue for quite a while.
David Seiders is the chief economist and senior
staff vice president for the National
Association of Home Builders in Washington. The
217,000-member trade association represents more than
215,000 residential home building and remodeling industry
members.
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