Altos Research Real Estate Insights

In the next couple of post I'd like to highlight a couple of items that I think have received all too little news attention with respect to the condition of the real estate market in the country. I'm going to start with the so-called 'creative mortgages' issue and their positive impact on the housing market, housing affordability, and ultimately as an insulator to major bubble-bursting price shocks.

The short hand argument is that lenders are unscrupulous and will lend to unqualified buyers, the whole real estate business is in collusion trying to push up prices by keeping demand high. Everyone is using these interest-only loans to buy too much house, gambling that the underlying value will go up, and when the bubble bursts, it's going to be ugly. It's easy to find news and vocal critics the interest-only loan. Calculated Risk is one of my regular reads on the subject.

What I haven't seen is any discussion of the positive, long-term effect of the 'creative mortage.' Wells Fargo (a lender, natch) released a survey last week gently pointing out silver lining of this cloud.

Here's the stats on new home sales for September:

New home sales versus a September 2004 were essentially unchanged. However, new home sales in the Northeast and West fell 29.1% and 16.2% respectively. And the South was up 14.1%.

Here's a worry sign: the inventory of new homes is at a 10-year high, 4.9 months supply at current sales rates.

Since at our company, we believe, (to ape Tip Oneil) that all real estate is local, let's look at demand levels around Silicon Valley to compare:

Here's a Washington Post article on Bernanke's views of the housing market.

U.S. house prices have risen by nearly 25 percent over the past two
years, noted Bernanke, currently chairman of the president's Council of
Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic
fundamentals," such as strong growth in jobs, incomes and the number of new households.

Since others like, Economist's View, give the topic a more complete treatment, I'll use this forum to provide illustrative data and leading indicators where we have them.

RGEMonitor has published a solid collection of the writings on newly announced Fed chairmain, Ben Bernanke. One piece, written in 2001, discusses whether the Fed should use monetary policy to mitigate large asset price swings. At the time he was writing about stock price, but since the topic of the day is a different asset price bubble, let's see if we can divine anything from the tea leaves. The good news for us is that Bernanke is a much more direct guy than Greenspan.

In esssence, he says the Fed should stick to preventing inflation and shouldn't muck with assest prices:

The inflation-targeting approach gives a specific answer to the question of how central bankers should respond to asset prices: Changes in asset prices should affect monetary policy only to the extent that they affect the central bank’s forecast of inflation. To a first approximation, once the predictive content of asset prices for inflation has been accounted for, there should be no additional response of monetary policy to asset-price fluctuations.

Basically, he says, there are two reasons to keep their hands off:

1. inflation is the most important thing. And asset prices (even big bubbles) have little impact on inflation (relative to the other knobs the Fed gets to turn)

2. pre-emptive interference in markets like the stock market (or, presumably, the real estate market) yields notoriously random results. Better to let the markets do their thing.

So I, for one, am sanguine about the new guy. Even if we are in a housing bubble, these things have to run their course.

Full paper is available here.

Let's start with a chart of San Jose single family home prices for 2005:

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