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June 3, 2005

Up, Up & Away
Bird nest for sale

Copyright 2005, Brian Fairrington

The median price of a home in the United States has now passed $200,000 for the first time in history. That is the kind of fact that makes millions of American homeowners happy, and makes others worry that something has got to give. Most Americans own homes, and for the vast majority it is their single most important asset. So, all the talk about a housing bubble that may be about to burst is frightening.

First, to define what people are talking about when they talk about a housing bubble. A housing bubble can form when prices are driven up by favorable economic forces. Today, increased buying power, fueled by low interest rates, continues to foster record demand for houses. Cheap money has made homeowning widely affordable: 69 percent of Americans now own their own home, more than own stocks.

And they have done better. The median price of an existing home rose more than 15 percent in just the last year. But should interest rates go up, adjustable rate loans that helped people get into those bigger and better homes could become very expensive. Owners could become sellers. Expensive money would mean fewer buyers. Supply would exceed demand. Prices could plummet.

By some estimates, the housing sector accounts for 25 percent of all activity in the economy, construction nearly five percent by itself. Bursting a bubble that large just might be big enough to send the economy into a recession. So far, however, long-term interest rates are holding steady. So, is there a bubble? Many say no, there is no bubble. Until it bursts.

Joining the panel is Brian Wesbury, chief investment strategist of Claymore Advisors, who has written for the JOURNAL editorial pages.
Paul Gigot
Paul Gigot
"I asked each of our panelists to look at all the statistics and choose one that struck them as particularly important in understanding the issues."
Robert Pollock
Robert Pollock
"The average inflation-adjusted home price is at an all-time high and it is rising rapidly. That doesn't necessarily mean there is a bubble. There could be changes in the supply/demand fundamentals to justify this, but I'm hard pressed to think of what kind of changes could justify double-digit year-on-year increases in many markets, as we've been seeing."
Brian Wesbury
Brian Wesbury
"The Federal Reserve Bank has been holding interest rates too low, adding a great deal of liquidity to the economy. Thus the value of the dollar is falling relative to home prices. Another factor is the demographics of our country. There are 49 million 50-to-64-year-olds in the United States, 17 percent of the population. Eighty percent of that group owns their own home. As our nation ages, we are going to own more homes."
Bret Stephens
Bret Stephens
"I think there is a danger in talking about a bubble, or in thinking about a housing bubble in the same way that there was a NASDAQ bubble or a high tech bubble. Real estate isn't something you trade overnight, in instantaneous transactions. It is a much more rational investment than the kinds of Internet start-ups that had huge market caps during the late 1990s and then came crashing because they were based on nothing. We are talking about real assets."

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ARCHIVE: WSJ - Paul Gigot Commentary

BIO: Claymore - Brian Wesbury