[Mb-civic] CBC News - IS U.S. HOUSING MARKET A 'BUBBLE' WAITING TO BURST?

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IS U.S. HOUSING MARKET A 'BUBBLE' WAITING TO BURST? 
WebPosted Fri May 27 15:19:42 2005

Washington---U.S. network newscasts all featured cautionary stories this
week on the white hot U.S. housing market, raising warning flags that
house prices may be ripe for a correction that consumers are not
expecting.

The stories were prompted by figures from the U.S. National Association
of Realtors that showed the median price of a resale home had risen 15.1
per cent in the last year – its biggest gain in almost 25 years.

Last week, U.S. Federal Reserve chairman Alan Greenspan made reference to
what he called "a little froth" in the U.S. housing market. "We don't
perceive that there is a national bubble, but it's hard not to see that
there are a lot of local bubbles," he said.

Greenspan said he didn't see signs of a worrisome bubble, noting that
most Americans still have a lot of equity in their homes. Still, the Fed
recently urged lenders to tighten their mortgage lending practices.

In Canada, resale home price increases have been solid, but more subdued.
The average residential home in Canada was $243,779 in March, according
to national MLS data. That's up 9.1 per cent year-over-year.

As in Canada, rising U.S. home prices have been driven by low mortgage
rates. Even though the Fed has raised its key interest rate by 2
percentage points over the last year, "monetary conditions remain far too
accommodative," in the view of TD Bank economist Carl Gomez.

In a report Friday, Gomez predicted that in the absence of significant
rate increases, "U.S. consumers will continue to believe that housing
will remain a one-way bet to riches."

U.S.consumers believe because they see that their homes have appreciated
much more steadily and rapidly than other investments. While home prices
were going up up better than 15 per cent (and much more in some markets),
the stock market has been stagnant. As of the end of March, for instance,
the one-year increase in the Dow Jones Industrial Average was a miserly
1.4 per cent.

Whether the U.S. housing scene amounts to a national bubble or a bunch of
local bubbles, there's no doubt that American consumers are increasingly
tapping into their rapidly-rising home equity. "Many Americans no longer
think of their home as just a place to live," a story in the Wall Street
Journal said this week. "Instead, it's a cash machine that can be used to
rapidly build wealth."

Some consumers are using their home equity to renovate, pay down higher
interest debt, or invest in the stock market. Some are leveraging the
equity in their principal residences to buy income properties.

Some U.S. lenders will finance up to 125 per cent of a property's
appraised value, far more than what Canadian lenders will finance.

Some observers say the heat in the U.S. market is now driving many other
economic trends.

"Housing wealth, with even the Fed acknowledges is more important than
stock market wealth to consumers, continues to escalate, pumping
spending, inflation pressures and the trade deficit," BMO Nesbitt Burns
chief economist Sherry Cooper wrote in a commentary this week.

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