Real Estate Chronicle

In light of the recent stream of statistical and economic data coming from the Feds, it can be safely asserted that, rather than popping up with a loud burst, the real estate bubble has now sunken. Just like I forecasted in December, 2005.

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All those illustrious ‘bubbleologists’ out there are not going to like this one bit: not all real estate bubbles burst. Some of them actually sink – just like The Titanic.

Only a few weeks ago the real estate bubble captured the attention of a great many bloggers, authors, even news commentators all of which had in common a very dire prediction, which can be encapsulated into what has become known as the ninth note of the musical diatonic scale, right after Do-Re-Mi-Fa-Sol-La-Ti-Do: ‘Pop’, with all the consequences that such novel high-octave implied, including a cataclysmic price crash, Armageddon and, possibly, the end of life on Earth (save and except, perhaps, for a handful of protozoa).

At the root of the Theory of The Bubble, it will be recalled, were the notions that U.S. consumers have too much already and want more, that they do not save enough, that the trade deficit is too large and bound to become even larger and that the American economy is far too dependent on housing. Absent from the minds of the bubbleologists, however, was the fact that much of this debt is anchored on the built-in equity of real property assets, which thus far has been growing steadily. So therefore, to make the monthly debt burden onerous enough to cause a bubble to burst - that is a cascade of mortgage defaults with a flood of foreclosures on the market, which in turn would bring prices down - one would have to look not to higher interest rates but, rather, for a big drop in family income. As monthly debt payments remain the same, a drop in income would quickly dry up the cash reserves of many consumers, so that the predicted avalanche of mortgage defaults would start rolling down.

Unfortunately for the doomsayers, however, not only nothing of the kind has happened but, furthermore, data released by the Federal Reserve System and the U.S Department of Commerce indicate that consumers are far, far away from suffering a catastrophic drop in family income for a very long time to come. As a matter of fact, the US economy has created 211,000 new jobs in March, according to the Labor Department, which have contributed to an overall drop in the unemployment rate to 4.7 percent, annualized. This level of activity, furthermore, has caused consumer spending to rise by 0.6 percent, up from the 0.2 percent growth seen in February. Which rise in spending, the bubbleologists should be made aware, was aided by an increase in family income, up 0.8 percent in March compared to the 0.3 percent jump in February.

This past week, in fact, Ben Shalom Bernanke, the new Feds’ boss has announced that the economy grew at an annualized rate of 4.2 percent in the January-to-March quarter, the highest level in these past two and a half years. This marks a vast improvement from the anemic 1.7 percent growth rate in the final quarter of 2005. And on April 19, 2006 the US Department of Commerce has released data showing that the benchmark median housing price has increased at an annualized rate of 3.2 percent for the First Quarter of 2006 ending on March 31.

The Bureau of Labor Statistics, moreover, is pegging the Consumer Confidence Index at 109.6 in April, up from 107.5 in March and higher than the 103.8 of December, 2005, when I published the Article entitled “Breaking The Real Estate Bubble Myth”, which has earned me an interview on local TV and that has been praised by many for its thoroughness and, now, rightfulness. The Consumer Confidence Index is now at the highest level since March, 2002 {figures released by Statistics Canada, incidentally, are equally positive). Finally, in line with the inflation-targeting approach announced by Prof. Bernanke in February, the Feds has raised interest rates again by a quarter of a percentage point to 4.75 percent. Rates have increased from 1 percent over the past 20 months, and are now at the highest level since April, 2001. And, finally, the Greenback rose against most currencies on the prospect of higher borrowing costs, which tend to enhance its attractiveness to foreign investors. This signals a renewed influx of foreign capitals into the United States and, by reflection, Canada – both still the most economically secure, politically stable, most trusted and better defended investment arenas of the entire world.

A note of caution was made by the Feds’ Chairman, to the extent that “while prices at the pump have yet to impact confidence, further increases (of gas prices) could dampen consumers' mood". Should that come true, however, and should cost of crude and prices at the pump hamper spending and reduce – or even halt growth, that would have nothing at all to do with a real estate bubble bursting, since the whole economy would be affected. In fact, all world economies would be affected.

So therefore, there is no valid reason to believe, under the circumstances, that consumer confidence applies to everything but real estate and that an economic bubble would affect only real estate markets and nothing else. It is furthermore evident now, in light of the foregoing deluge of statistical data, that all those bubbleologists, Sunday-afternoon crystal ball readers and part-time economists out there have been completely wrong. So much so, in fact, that merely to cite another example, in the Summer of 2004 the long-term bond treasury yield was 5 3/8 percent, whereas right now it is 5 1/8 percent. This is another clear indication that the US Treasury does not envision rates to climb much higher, contrary to what the bubbleologists have been prophesying all along.

It is, therefore, pretty difficult to foresee a collapse of the real estate market with interest rates which, in the long run, are actually dropping.

Perhaps some of those Hollywood big movie producers should ask Leonardo Di Caprio to star in “The Bubble”, a sequel to “The Titanic”, where one could enjoy watching another transatlantic ship sink right to the bottom of the ocean, with all those bubbleologists jumping overboard to meet their destiny into the frigid waters of their economic ignorance.

Luigi Frascati

luigi@dccnet.com

www.luigifrascati.com

Real Estate Chronicle

# posted by Luigi Frascati @ Tuesday, May 02, 2006