The New York Times
August 14, 2005
Do Try This At Home: Assess Your Area's Real Estate Bubble
By Damon Darlin
For the first time since the residential real estate marathon began 13 years ago, parts of the country are showing signs of exhaustion. But if you rely on the experts to declare that a particular area's bubble has popped, you may have waited too long.
So how can a homeowner tell if a market is about to go bust? This may be one of those rare occasions when professionals parsing data are at a disadvantage to regular people watching the market. That's because the main driver of today's market is consumer psychology. Home prices go up as long as people expect them to go up.
When they stop believing, prices fall - and no economist in Washington can get wind of that faster than someone chatting over knockwurst at a neighborhood block party. "Economists looking at the macrodata will be the last to know," said Richard A. Brown, chief economist at the Federal Deposit Insurance Corporation.
What you will learn from the professionals who are dutifully crunching numbers is that prices are not falling significantly in any of the hot markets, but in a dozen or so cities in the Northeast and in California, they are near the peak. In Boston, for example, the time that homes are sitting on the market has stretched to 46 days from 39 days a year ago.
An analysis of price appreciation, done for The New York Times by the Joint Center for Housing Studies at Harvard, shows that the price appreciation in cities including New York City; Austin, Tex.; Philadelphia; and Providence, R.I., are decelerating. Appreciation in Detroit and Denver has already slowed to a crawl.
"It's taking a lot longer to sell a home," says Karl A. Martone, a Re/Max Properties agent in Providence, where homes now sit on the market an average of 65 days, up from 14 days a year ago. The region has almost six months of inventory, which is up 35 percent from a year ago.
Vicki Doran, a real estate agent with Coldwell Banker in Providence, says: "It's switching to a buyer's market. Last year buyers had to snap things up. Now they can shop around."
Even a few markets in hard-charging California - San Diego, Orange County and Santa Cruz - are part of the trend, according to data from the first three months of the year. Data for the second quarter to be released by the government on Sept. 1 may confirm the trend. But already Christopher Thornberg, senior forecaster at UCLA Anderson Forecast, a service of the University of California, Los Angeles, says California has "peaked and is already coming down the back side."
On Tuesday, David A. Lereah, the chief economist at the National Association of Realtors, said that the housing market was "probably close to a peak right now."
Take a look at the hot San Diego condo market. In Park Place, one of the many sleek towers of condominiums recently slung up around Petco Park, a one-bedroom condo is offered for $719,000. Someone buying it would expect to make mortgage payments of about $3,775 a month, plus monthly maintenance fees.
But someone really wanting to live in the high-rise, with hardwood floors, granite countertops and city views for a lot less, could rent a nearly identical unit in the same building for $2,400 a month. That is clear evidence prices have to move down. You are more apt to see that the price of residential property no longer is connected to its underlying value than a person looking only at spreadsheets of sales data.
Prices in overheated markets must, by definition, come back down to the mean. Knowing which way the market is headed before buying or selling is extremely important to anyone who wants to protect the wealth tied up in a house. And it certainly matters to anyone who is thinking of buying because it never makes much sense to buy at the top of the market. "The turning point is pretty important," Mr. Brown said, "because the trend will play out for years."
The trouble is, economists have been wrong before when they try to call the market. Three years ago, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said that it would be only a matter of months before prices began to fall.
Prognosticators at the research firm Economy.com declared that the peak was last summer. Celia Chen, the firm's director for housing economics, is now saying that it will come this year.
"The timing is always difficult with these things," admits Ian Morris, chief United States economist at HSBC Securities U.S.A., who made the same call, repeatedly.
John Karevoll, an analyst with DataQuick Information Systems, which provides real estate data to lenders, said: "We've been told for years that the peak is just around the corner. The economists have so much egg on their faces."
Don't be too hard on them. It's the nature of their science. N. Gregory Mankiw, the Harvard University professor and former head of the White House Council of Economic Advisers, made one of the most famous miscalls. In 1989 he wrote a paper arguing that the aging of the baby boomers was going to undermine the housing market in the 1990's and 2000's. Whoops.
Though it appears the shift is now at hand, the end of the bubble will not look anything like the crash in the stock market after the technology bubble. The stock market turns frenetic when investors scramble to get out and prices fall sharply. In housing, however, a collapse is signaled by a sharp drop in activity as people hold off buying. Houses stay on the market longer. Inventories grow. Only then will prices fall, slowly. Economists say prices will lag a slowdown in the market by four to six months.
Some of the data on where a local market is headed is available on the Internet (links are at nytimes.com/business). In other cases, your real estate agent is your best friend. He or she has access to a storehouse of raw data from the local Multiple Listing Service. Here are some indicators to look at:
Market activity: How many homes are sold compared with the month before is the earliest indicator, but it is notorious for false positives. But if the number of homes sold starts to drop, perk up. Every county tracks this and makes it available to the public.
Inventory: Some of the most crucial pieces of information are held closely by real estate agents. The number of houses on the market is one of them. The national average is 4.3 months; 6 months is closer to normal, the National Association of Realtors says. When it grows, there is trouble coming. Time on the market Agents control access to this information, and be warned: they know how to manipulate it. A house that has been languishing can be taken off and put back to look like a fresh listing. But you'll still be able to see the average time stretching as a clear signal of cooling.
Prices: It's what you care about most. But month-to-month comparisons are nearly useless as an indicator because sales of a few houses on either end of the market can skew the figures. DataQuick at www.dqnews.com has some data and the Office of Federal Housing Enterprise Oversight issues quarterly reports.
Failed to sell: The super-secret indicator among agents is the number of houses that are quietly taken off the market - usually because they are priced too high. Wheedle the number out of them and you'll have a strong indicator of market health.
Price-to-rent ratio: This is a wonderful measure that gets at the intrinsic value of a property, but it's a tricky tool for the layman. Rent data include everything from studios to four-bedroom penthouses, making a comparison with single-family homes difficult. Some of the rent data can be found at www.realfacts.com.
Loan quality: The popularity of interest-only mortgages could become one of the best indicators of a fragile market, several economists say. Mr. Thornberg of UCLA Anderson says it's a sign that lenders are scraping the bottom of the barrel. "We are close to running out of shills," he says.
Risk: The PMI Group of Walnut Creek, Calif., a provider of data to the mortgage industry, estimates how much prices could drop using an econometric model. It publishes the list of at-risk cities at www.pmigroup.com.
Popular sentiment :To judge from the media, the housing bubble may have peaked in June. According to a Nexis search of magazines and newspapers, that month was the peak, with 312 references to "housing bubble," almost six times that of a year earlier. It fell 24 percent in July.
Of course, there is one constant: real estate agent sentiment. Most of them will never tire of saying it's a great time to buy. Despite the signs of a slowdown, Mr. Martone, the Providence real estate agent, says prices are holding and he still does not have enough properties to sell. He says, "I am the eternal optimist."