A MAJOR CHANGE IN FINANCIAL MARKETS OCCURRED in April when surprising news on job growth and inflation sent long-term interest rates upward and hastened the day the Federal Reserve will start hiking short-term rates.
The sudden change in the interest rate environment prompted widespread allegations that the long housing market expansion is just about over and that the strong house price increases of recent years will quickly turn into stunning declines. The house price story recalls bursting regional or local bubbles in the early 1980s and early 1990s and insists the same pattern is developing now, particularly in the Northeast corridor, California, and Florida. But things really are different this time, and single-family builders need not fear the doomsday scenario.
Strained Analogies House price declines were recorded in various regional and local markets in the early 1980s and early 1990s. However, attempts to draw analogies to the current situation put great strains on credibility.
The first issue is a simple matter of fact. Although the peak rate of national house price increases in this cycle looks similar to the peak in the late 1980s, it's far less than the peak in the late 1970s. And the recent peaks for regions, states, and metro areas are nowhere close to the peaks that preceded price declines in the early 1980s or early 1990s. Prices simply haven't bubbled out of control this time.
The second major difference relates to inventory overhangs. Recent price increases haven't involved hastened house prices and unsold inventories at the same time, a combination that suggests unhealthy speculation in regional or local housing markets. That combination was a striking feature of the earlier episodes, particularly in the Northeast and West, but the pattern has been avoided this time because of better inventory management by builders and better real estate lending practices by depository institutions. Those practices followed the implementation of uniform real estate lending standards established by federal regulators in the early 1990s.
Finally, the earlier price reversals occurred during periods of serious economic dislocation, when job losses were mounting and markets were experiencing out-migration. We're almost two and a half years past 2001's economic recession, employment growth is picking up, and employment levels have bottomed out in most markets. And our central bank is committed to substantial improvement in the labor market that will lift all boats next year and beyond.
The Rental Market Stab When confronted with powerful counterarguments, some bubble theorists point to high vacancies and rent concessions in rental housing and contend that shifts from ownership to rental tenure will upset the supply-demand balance in the single-family market and lead to price declines. But how many homeowners will give up their dream homes, tax advantages, and low mortgage payments to grab at temporary rent concessions down the street? Precious few, I'd bet.
David F. SeidersChief Economist
NAHB Washington, D.C.
