The Federal Reserve in the persons of both its recently retired long-time chairman
Alan Greenspan and his newly minted replacement Ben Bernanke have assured America
that the housing bubble would not burst "on a national basis."
The two, in fact, spoke as one last week on the subject as part of a concentrated
effort on the part of the Fed to assuage inflation fears as the stock market
took a major tumble.
But their upbeat assessments are in sharp contrast to several books, some of
which are starring on best seller lists, warning of a coming cataclysm in the
Amazon.com is currently featuring 16 titles
dealing with the "bubble," most
predicting a more-or-less devastating end to the exponential increase in home
prices over the last few years. Chief among the doomsayers is John R. Talbott,
a former investment banker with Goldman Sachs and a visiting scholar at the
highly respected UCLA Anderson School of Management. His recent book Sell
Now! The End of the Housing Bubble
is an update of his 2003 best seller
The Coming Crash in the Housing Market
. Talbot obviously has been predicting
Armageddon in the housing sector for several years. That he has not been right
yet does not preclude that he will be.
Among the other authors and their books which warn of problems are:
House Poor: Pumped Up Prices, Rising Rates, and Mortgages on Steroids:
How to Survive the Coming Housing Crisis; June Fletcher.
Cash in on the Coming Real Estate Crash: How to Protect Yourself From Losses
Now, and Turn a Profit After the Bubble Bursts; David Decker.
Irrational Exuberance: Second Edition; Robert J. Shiller (perhaps
the dean of housing research.).
Empire of Debt: The Rise of an Epic Financial Crisis; William Bonner;
and from the odd contrarian: Why the Real Estate Boom Will Not Bust - And
How You Can Profit From it: How to Buy Wealth in Today's Expanding Real Estate
Market; David Lereah. (Mr. Lereah, incidentally or maybe not so, is chief
economist for the National Association of Realtors.)
We have not read all of these books but several have received very disparaging
reviews from critics and readers alike about shoddy or cut and paste research
or a lack of meaningful analysis. Talbot, however, has done some excellent research
(building to an extent from data compiled by Shiller) and offers some interesting
theories about the reasons for the bubble in the first place and why we should
expect a total price collapse.
But, first, the views of the chairpersons.
Greenspan made his comments on May 18 as part of his first public speech in
the U.S. since he retired after nearly two decades as Chairman of the Federal
Reserve. Speaking before the Bond Market Association in New York he said "Home
sales are off, applications are off, everything is going in the same direction.
The boom is over, and you can say that with a fairly strong degree of confidence."
But, Greenspan said, there is no danger of a total collapse of the housing
market and that prices would not fall nationally. Instead, he said that stable
prices would replace the boom. As evidence, Greenspan cited earlier experiences
in Australia and the United Kingdom. "Prices just flattened," Greenspan
said, "and they had bigger booms than the U.S."
His successor, Ben
Bernanke spoke earlier in that same day at a Chicago Federal Reserve conference
on banking regulations and, in a question and answer session after the speech,
made comments similar to Greenspan's. He referenced the increasing lack of affordability
of housing due to both rising prices and increasing interest rates and said
that one would expect to see cooling in the markets. Sales are slowing, he said,
as are housing starts and there are signs that prices are not rising as quickly
as they have been for the past few years. However, "it looks to be a very orderly
and moderate kind of cooling at this point." Basically, the Chairman said, the
market looks poised for a soft landing."
Soft landing is not in his vocabulary. He is predicting a nose dive
from current sales and price levels, sometimes naming cities and the level of
danger. But then he does not believe that this current boom has been long-lived
but rather a recent aberration. Among the many theories set forth in his book
is that the housing bubble has only been around since about 1997 and that real
estate has, for a hundred years of its previous history, been flat rather than
a place to make a fast buck.
And the cause of this nine-year price spike? Mr. Talbot is not shy and the
word "conspiracy" even makes it into a chapter heading.
He may be dead right or he may be manipulating statistics to prove many points,
but his book is a fascinating and disquieting read. We will look at his many
thoughts and predictions in a subsequent article.