Промышленный лизинг Промышленный лизинг  Методички 

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FIGURE 9.4 U.S. Vacancy Rate Is Climbing

Source: U.S. Census Bureau

bad news for landlords. It is also bad for homeowners who are not landlords. Potential buyers of homes are constantly evaluating the alternatives of buy or rent, thus the prices of all homes are influenced by the rental market.

Clue #4: Mania-Like Behavior in Some Areas

Irrational markets are at least as much psychological as they are economic. The real estate market shows at least two signs of mania beyond the statistics. First, many markets show frenzied buying that accompanies bubbles. Second, there is a widespread belief that real estate prices cannot fall.

My friends Tom and Florentien just bought a house in the Boston metropolitan area. I ran into Tom one evening and I asked how he was doing. He said, Im exhausted. I had to get up at 5 a.m. and take a one-day business trip. Now Ive got to go make a bid on a house. I inquired fur-



ther about the pressing need to make a bid immediately. Couldnt Tom go home and make a bid the next day? The answer was no.

The Boston real estate market is-as of July 2004-still in a total mania. In Toms case, the property went on the market on Saturday and he knew that in order to have a chance he needed to bid by Tuesday. As soon as a reasonable property comes on the market, multiple potential buyers flock to make aggressive bids. The winning bid generally is above the asking price.

In the case of the condominium adjacent to ours, the winning bid came in above the asking price and the deal closed within hours of the unit coming on the market! Through some inside connection, the buyers learned of the hot property and quickly made the owner an offer she couldnt refuse.

This behavior is crazy. Buyers are forced to make huge decisions with very little time for consideration. The mania is not nationwide as many markets are more subdued. Nevertheless, there are many places where this buying frenzy is common. Such behavior is typical of bubbles.

The second sign of mania is the belief that real estate prices cannot fall. When people envisage bad times in real estate, they imagine a plateau for some period of time. It seems impossible that real estate prices could actually decline. In Chapter 3, we met the trustees of my condominium who thought buying more property was a cant lose proposition.

This belief in housing price rises is shared by professional analysts. Dr. John Krainer is an economist who works for the Federal Reserve. He wrote an excellent article entitled Housing Price Bubbles. 9 In his conclusion, he writes, Following the observation that declines in nominal house prices are unusual, I hold the house price fixed at its current level. Dr. Krainer does go on to analyze the possibility that housing prices could decline. Nevertheless, it is telling that he begins by assuming that prices will not fall. When markets are at their irrational tops, people consider declines to be impossible.



If it looks like a mania and feels like a mania, its probably not a duck. The housing market shows the psychological signs of overvaluation.

Is There a Housing Bubble?

I do not believe there is a bubble in U.S. housing prices. However, there are substantial risks to housing prices and they may fall substantially.

If housing prices could decline a lot, why is this not a bubble? In a true bubble, prices become so far out of line that it would be impossible for them not to fall. In the tulip mania, for example, it was possible to buy a house for the price of a single tulip bulb.10 Because tulip bulbs can be produced in massive quantities with a bit of sunshine and water, it is impossible for bulbs to continue to sell for the price of a house.

Similarly, U.S. tech stocks in the late 1990s reached impossible levels. Cisco, for example, had a P/E in excess of 100, a figure that could not be justified by fundamentals. While irrationality can last a long time, Ciscos stock simply had to fall. I went on record with, if Ciscos stock price does not decline, I will tear up my Harvard Ph.D. in business economics, because a continued high stock price would disprove everything I have learned. (Many other people went on record as well.)

So a bubble is such a degree of irrational pricing that only one outcome is possible. There are warning signs in U.S. housing prices: It is true that housing prices cannot grow faster than rents indefinitely, and it is also true that the long-run growth in housing cannot exceed the growth in population. Thus, the boom times in housing will end. The valuation levels, however, do not justify the label of a bubble. It is possible, therefore, that a decline in housing prices may be avoided.

U.S. housing is expensive but not so high as to ensure a collapse. In addition to the unsustainable trends and the bullish psychology already covered, however, there are additional risks to the housing market.



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