|
|
 |
|
|
ONLINE FEATURES
Book Reviews
BW Video
Columnists
Interactive Gallery
Newsletters
Past Covers
Philanthropy
Podcasts
Special Reports
BLOGS
Auto Beat
Bangalore Tigers
Blogspotting
Brand New Day
Byte of the Apple
Deal Flow
Economics Unbound
Fine On Media
Hot Property
Investing Insights
New Tech in Asia
NussbaumOnDesign
Tech Beat
Working Parents
TECHNOLOGY
J.D. Power Ratings
Product Reviews
Tech Stats
Wildstrom: Tech Maven
AUTOS
Home Page
Auto Reviews
Classic Cars
Car Care & Safety
Hybrids
INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads |  |
MAY 15, 2006
Why The Housing Bubble Won't Burst Veteran analyst Michael Youngblood explains his unusually optimistic take on the real estate market Type the words "falling housing prices" into Google and more than 8 million citations pop up. Michael Youngblood's name won't be among them. Despite all the fear that single-family home prices will decline, the managing director of asset-backed securities research at Friedman Billings Ramsey & Co. (FBR ) in Arlington, Va., thinks residential real estate is a lot stronger than most people suspect. He bases this assessment on a new economic model he created that forecasts housing prices in 379 metropolitan statistical areas. Associate Editor Toddi Gutner spoke with Youngblood about his upbeat view and his surprising prediction that the greatest price appreciation will be coming in so-called bubble markets. 
What makes you more optimistic than other housing experts? I look at two economic indicators that I think drive the housing market: the growth in employment and the growth in personal income. Getting a job or a salary increase is what motivates people to buy their own home. This is different from the data the National Association of Realtors and other organizations rely on. They are more concerned with technical indicators such as the inventory-to-sales ratio and the number of months a house is on the market. These aren't leading indicators. Instead, they move with current changes in the market, rather than predict those changes. Do you think the housing bubble argument is overblown? Absolutely. It's overblown because there is no national housing market, so there can't be a national house-price bubble. However, there are bubbles in 75 of the 379 markets I studied. A bubble exists when the ratio of the median existing house price to per capita personal income exceeds 6.8 times. This definition is based on historical data of when other markets, like Houston and Boston, had bubbles. Where are the bubbles? Most of the bubbles exist on the East and West coasts in such markets as New York City, Los Angeles, Washington, Phoenix, Honolulu, and Tacoma, Wash. Only 12 of the 75 cities are located inland: Boulder, Colo., Coeur d'Alene, Idaho, Flagstaff, Ariz., and Las Vegas among them. What markets are likely to show the biggest price gains and declines this year? We expect the greatest gains in Bakersfield, Calif. (43%), Fort Myers, Fla. (42%), Stockton, Calif. (39%), and Punta Gorda, Fla. (35%); the biggest declines in Harrisburg, Pa. (8%), Odessa, Tex., Roanoke, Va., and Utica, N.Y. (all 6%). But most people think that Florida and California are overpriced. Why would markets there show the greatest gains? There is clearly speculation taking place in these areas. But bubbles can persist for very long periods of time, and it typically requires a downturn in the local economies to burst them. Then they can deflate for a long time, too. Given the expected gains in employment and income in both states, I don't expect the housing prices to fall in 2006. How can investors play this information? Investors should not necessarily fear homebuilders who are operating in bubble markets. House prices don't plunge immediately in economic downturns the way stock prices do. There is typically a one-year lag after the local economy sees a decline in average employment and income. Thus, the homebuilder stocks may continue to perform well for a while longer. 
BW MALL SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | 
|
 Copyright 2006, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
