One more question

[Sabri Oncu <soncu@xxxxxxxxxxx>]

Friends,

I read Nader, left, public ownership, etc., discussion with great
interest and hope that it doesn't end here. But now, I would like
to ask an unrelated question that you may want to discuss in
paralel.

Here is that unrelated question, not necessarily for our American
friends only: Is there a real estate/housing buble in the US and
if there is, what are its potential implications for the
"ongoing"  US recovery?

Again, let me give the credit to where it is due: I became aware
of the article below through Ergin Yildizoglu's Monday column at
Cumhuriyet, as well as, got the motivation to ask this question.

As you see, "little brothers" are watching you, I being one of
them,

Sabri

+++++++


THE ECONOMY
Is Housing the Next Bubble?
Sure, there's some pretty scary stuff going on. But things aren't
as crazy as the last time the property market heated up.
FORTUNE
Monday, April 1, 2002
By Anna Bernasek

The signs of recovery are so obvious that only an Olympics
figure-skating judge could miss them. The manufacturing sector
rebounded in February after an 18-month-long tailspin. Activity
in the all-important services sector has now accelerated to its
fastest pace in more than a year. Productivity growth has just
been revised up to 5.2% for the fourth quarter, a level that's
causing 1990s flashbacks. And on the jobs front, employment grew
for the first time in seven months. Even capital spending, a
longtime trouble spot, seems to be reviving. In fact, the news
has been so good that Alan Greenspan, our famously cautious,
usually indecipherable Federal Reserve chief, recently proclaimed
in plain English: "An economic expansion is already under way."

So is that it? Have we just had something like a 15-minute
recession, and is it all smooth sailing from here? Not so fast,
says a chorus of economists--plenty can still go wrong. Leaving
aside such nightmare scenarios as further terrorist attacks,
all-out war in the Middle East, or an oil embargo, the thing that
spooks some economists the most is housing. That's because while
the economy has been on the down escalator over the past several
months, the property market has been going in the opposite
direction, and that's just not supposed to happen.

In fact, housing didn't just hold its own during the slump. It
zoomed. Activity has been so strong that sales of new and
existing homes hit all-time records last year. Not exactly what
you'd expect when around two million people were losing their
jobs, is it? What's more, we've seen record growth in mortgage
refinancing, and annual home-price increases between 6% and 8%
nationally for three years in a row. "That's unsustainable by any
measure,'' says David Levy, chairman of the Jerome Levy
Forecasting Center. "Especially now that mortgage rates are on
the rise." And that's the problem, according to Levy and others.
The one sector we've relied on to keep the economy afloat is
unlikely to hold up much longer. Worse still, housing could even
turn out to be the next bubble--and we all know how that usually
ends.

So are the worrywarts right? Probably not, but it's certainly
worth hearing them out, because even if they're a little right, a
weak housing market could help make this recovery pretty darn
anemic. There are already signs that housing activity is starting
to cool. For the first time in seven years, national home prices
fell in the last three months of 2001, by 1.9%. The market for
second homes has also weakened since the end of last year. And
some banks are tightening up on their mortgage lending. Ken
Hackel, chief fixed-income strategist at Merrill Lynch, says one
major bank has admitted to recently changing the rules on
refinancing, requiring appraisals on every application regardless
of whether one had been done in the past year--a telling sign
that some lenders expect home values to soften. True, January
sales remained incredibly strong, but economists argue that those
numbers were probably exaggerated by the unseasonably warm winter
across much of the nation.

Certain regional markets may already be in trouble. According to
data from Case Weiss Shiller, home prices in San Francisco have
been dropping precipitously. In the first quarter of 2001 the
average price of a single-family home there rose 4%, but by the
end of the year had fallen 7%. "We're seeing a bubble bursting
right now in San Francisco," says Robert Shiller, an economics
professor at Yale University and partner at Case Weiss Shiller.
"We've never seen such a sharp drop, and we're expecting it to
fall even more." Shiller, who warned of a stock market bubble in
the late 1990s and coined the phrase "irrational exuberance,"
believes there's the risk of a housing bubble in other major
cities. At the top of his watch list are Portland, Ore., Seattle,
Denver, and New York.

If you thought the tech bubble's bursting was bad for the
economy, just imagine what a housing bubble could do. Around
two-thirds of households own their home, while only half have
exposure to the stock market. That means the wealth effect we
heard so much about during the 1990s is even more pronounced when
it comes to housing--in fact, according to a study by Shiller and
a colleague, it's twice as large. A 10% increase in home values,
for instance, would result in a 0.6% increase in consumption,
they found, while a 10% increase in stock prices would lead to a
0.3% increase in spending. "People see their home as a source of
wealth," says Shiller, "so they haven't felt the need to save.
That's sustained our high level of consumption, but it's made the
economy more vulnerable."

How did we get here? Simple: Interest rates on 30-year mortgages
have fallen from a peak of 8.7% in May 2000 to a low of 6.5% in
November 2001. That sharp drop encouraged a record wave of
refinancing even as the economy slowed down. Douglas Duncan,
chief economist at the Mortgage Bankers Association, calculates
that so far households have taken out at least $80 billion in
equity after refinancing their mortgages. From that total, he
estimates $50 billion has been spent and $30 billion used to pay
off debt. It's that extra $50 billion in consumer spending that
has kept the economy from sinking further in this downturn. (To
put that number in perspective, $50 billion is about the same
size as President Bush's 2001 income-tax cut.)


While that's been a boon for the economy, it could have
unpleasant consequences in the long term. Never before have
consumer debt levels been as high as they are now. Total
household debt stands at $7.4 trillion, almost double what it was
at the beginning of the 1990s. In part that's because more people
are buying homes, but it's also the result of the refinancing
boom, which has encouraged households to borrow more against the
increased value of their home. "Debt is fixed, while asset values
aren't," says Levy. "If we have a sharp weakening in the housing
market as we did in parts of the country in the 1980s and 1990s,
suddenly all that leverage causes problems for consumption and
lending." And debt as a percentage of home asset values has been
steadily increasing. In the early 1990s, mortgage debt to home
values stood at 35%. Today it has jumped to 45%.

That's why economists like Levy and Shiller are worried about a
housing bubble. They see it playing out like this: As interest
rates rise, housing becomes less affordable and demand slows. As
demand slows, prices can't be sustained and may even fall, as
they have in San Francisco. Then, as home prices stagnate, owners
cannot tap into equity gains and borrow money, so they curtail
their spending. Worse, households with high debt levels may find
it increasingly difficult to sustain mortgage payments, leading
to more homes on the market and further price declines.

The housing bubble theory relies on one of two things happening.
Either interest rates have to rise high enough to choke off
demand or some other factor must reduce our appetite for real
estate. And in today's volatile world, it's not hard to imagine
some sort of shock to the property market--the U.S. entering a
war with Iraq, say. That could prove a big enough blow to
consumer confidence to dampen demand for homes and lead to a huge
drop in prices.

So how can you tell when there's a bubble? One sure way is to
wait until it bursts and see how far prices plunge. But by then,
of course, it's too late to do anything about it. Another is to
monitor the market for signs of speculative behavior. Craig S.
Davis, president of Home Loans and Insurance Services at
Washington Mutual, explains his trusty bubble test. "First, you
get a lot of cocktail chatter. Everyone's talking about how much
money they're making on housing," he says. "Then you see multiple
bids and offer prices jumping above asking prices. That's when
you have a bubble." But Davis says he doesn't see any evidence of
that kind of activity right now. Nor is he worried about a
housing bubble around the corner.

For Davis and other home lenders, the exceptionally strong
housing market has been driven by solid fundamentals, not
speculation. The drop in mortgage rates to a 30-year low, growing
real disposable income during the downturn, an increase in the
number of households across the country, and new mortgage
products like hybrid adjustable-rate loans go a long way toward
explaining the housing phenomenon. Economists like Christopher
Wiegand at Salomon Smith Barney also emphasize that the supply
side of the equation doesn't at all resemble a bubble. Normally,
in past housing bubbles such as the one in the late 1980s, supply
from overbuilding flooded the market. Today, the supply of homes
is at its lowest level since the early 1970s. "Many builders have
had to finance their capital through the markets and banks, which
have been guarded," he says. "As a result you haven't seen a big
speculative burst in residential construction."

Perhaps most reassuring of all, while prices have risen
consistently in most regions across the country, they haven't
risen nearly as much as during the last housing bubble. For
instance, look at Massachusetts. In the past three years home
prices have averaged a 12.6% annual increase, while during the
mid-1980s they averaged 23.3%. The story is much the same in
areas like California, where prices seemed totally insane in the
late 1990s. During the past three years home prices have
increased at an average annual rate of 11.3%, compared with 16.7%
at the height of the late-1980s bubble.

There are other encouraging signs too. Delinquencies, which
started to rise last year, have turned down again more recently.
According to the Mortgage Bankers Survey, delinquencies fell in
the fourth quarter and remain at a fairly low level. The most
encouraging news is that the job market has finally started to
recover. Jobless claims have been falling for several weeks in a
row now, and the latest employment report, for February, showed
that 66,000 new jobs had been created. And though economists
expect unemployment to continue to creep up this year, the
consensus is that the worst of the layoffs is probably behind us.

As long as inflation remains subdued, interest rates should also
stay low, and that's good news for the housing market too. While
rates for 30-year mortgages have already started rising and are
currently around 7%, most economists are forecasting limited
gains this year. David Berson, chief economist at Fannie Mae,
expects mortgage rates to remain between 7% and 7.5% for the
remainder of the year. Other economists, like Salomon's Wiegand,
believe they could go a bit higher but not above 8%.

So where does that leave the housing market? Even mortgage
lenders who are optimistic about the market expect activity to
slow this year and price gains to be more modest. Duncan from the
Mortgage Bankers Association expects average home prices to rise
by 2% to 4% in coming years, rather than the 8% rate we've been
seeing. Hackel from Merrill Lynch agrees. "Normally, we get a
ramp-up in housing prices and then a long flat period," he says.
"I think prices will be flat for the next three to five years."

Obviously, that won't do much for what already promises to be a
sluggish recovery. Of course, if the worriers are right and the
housing market collapses, we won't have a recovery at all. But
with a bit of luck, the sector will cool down in an orderly
fashion--and, economically speaking, we've been rolling a lot of
sevens recently.