"Danielle DiMartino: Bubble in housing will burst
09:44 AM EST on Monday, March 28, 2005
Someday,
Merrill Lynch chief economist David Rosenberg will be considered the most prescient forecaster on the housing bubble we now face.
"Just because it hasn't burst," he writes, "doesn't mean it doesn't exist."
For the better part of a year, Rosenberg has been a self-proclaimed "bubble bear."
No doubt, we both contend with the same criticisms, and for that, I feel for him. It's hard enough to stick to an unpopular position, especially when the data keeps putting the word "wolf" in your mouth.
Pondering this uncomfortable position brought a more seasoned "bubble bear" to mind.
Dean Baker, co-director of the Center for Economic & Policy Research, a Washington think tank, was one of the first to identify the bubble in the housing market.
I asked him for guidance on holding my ground.
My first question: Why the heck hasn't the housing bubble burst yet?
"I've been surprised that interest rates have stayed as low as they have for as long as they have," he said. "[Federal Reserve Chairman Alan] Greenspan's in the same boat. It's a mystery to him as well."
Another cause of the bubble's staying power, he said, is homebuyers' "willingness to use exotic forms of financing, despite low interest rates, to pay more than they would otherwise."
Of course, he refers to the increasingly aggressive versions of interest-only, zero-down, adjustable-rate financing vehicles that homebuyers use to squeeze into the most house that money can't quite buy.
No doubt, the housing boom has smoothed many economic hiccups in the last five years.
It's contributed a full 25 percent of the economy's growth in that time. That doesn't mean the economy's been on a free ride. The longer that bubbles are allowed to inflate, the messier the cleanup after they burst.
"What's changed in the last few years?" Baker asked. "People are much more in debt and there are a lot more who've bought into the bubble, which means a lot more people will be hurt."
Then I asked Baker to address the popular notion that the bubble was limited to the coasts.
"Sure, there are big areas of the country that haven't seen much in the way of appreciable house inflation," Baker said. "But the pockets that are undeniably bubbles are big enough to impact the economy as a whole."
All strings attached to the housing bubble lead to how low interest rates have been and remain. That lands this reader question in my e-mail inbox with regularity: "What's the tipping point?"
Baker said he figures 6.5-percent mortgage rates would do the trick. They're already above 6 percent now, so we may be close. But then, interest rates have flirted with these levels before, only to stage a retreat that sends homeowners into yet another refinancing frenzy.
This back-and-forth is another inflator of the bubble, and gives the Federal Reserve one heck of a good reason to remain diligent in its rate-raising campaign.
"Clearly people are stretching to get into these houses," Baker said. "I really don't think a lot of people know what they're doing, so I don't blame them. It's just unfortunate they're being purged by the real estate agents and lenders."
Clearly, a good number of homes will be lost as a result of so many people being misled to purchase houses they can hardly afford.
As to why lenders seem to have no qualms about their risky behavior, Baker says it's the moral hazard borne of the mortgage-backed securities market -- something that wasn't prevalent before the S&L scandal broke.
There is literally no risk associated with lending these days as the mortgages are sold off the books to bigger financial institutions before the ink is dry.
"You would expect lenders to be more responsible but they don't care; they're just throwing the loans into a big pool," he said.
The unspoken consequence of many of these mortgages eventually turning bad is that someone will have to pay the piper. Baker is one step ahead of that inevitability as well.
"If we weren't prepared to let the S&Ls go," he said, "we certainly won't allow the much bigger mortgage-backed securities market go."
Danielle DiMartino is a financial columnist for The Dallas Monring News and may be e-mailed at ddimartino [at] dallasnews.com"
Online at:
http://www.projo.com/business/content/projo_20050328_28dimart.20487fd.html
