Bubble discounted by officials
Regulators at the Federal Deposit Insurance Corp.
frowned on the notion that the recent rise in housing
prices is a speculative fluke.
WASHINGTON - Bubble, what bubble?
Top officials at the Federal Deposit Insurance Corp.,
which regulates national banks, on Monday dismissed
fears that rising home prices nationwide reflect a
speculative bubble ready to burst.
Nationwide home prices grew by more than 12.5 percent in
the first quarter of this year, 11 percent last year and
8.4 percent over the past five years. The nation's
hottest markets have had price gains exceeding 30
percent in the last three years. Some economists believe
that housing prices are being driven by speculative
investment based more on faith that prices will rise
even further than on economic fundamentals.
FDIC officials, however, frowned on the notion that the
recent rise in housing prices is a speculative fluke.
The banks the FDIC regulates hold 30 percent of the
credit risk on outstanding U.S. mortgages. Today the
agency will release new state-by-state economic
profiles. Taken together, the profiles conclude that
most booming U.S. housing markets are sustained by
strong growth in new jobs.
''In general, that is where home prices are rising most
rapidly,'' said Barbara Ryan, associate director of the
FDIC's research division.
For example, she said, Nevada recorded a 31.22 percent
rise in home prices for the first quarter in 2005 over
the same quarter in 2004. In the same period, it posted
job growth of 6.7 percent, far higher than the 1.6
percent year-over-year national average.
Arizona had the seventh-fastest climb in home prices in
this year's first quarter -- and the second-fastest
increase in jobs. Florida had the fifth-fastest climb in
home prices and jobs.
In December 1996, Federal Reserve Chairman Alan
Greenspan famously warned of ''irrational exuberance''
when describing a bubble in stock prices that collapsed
in 2000. He's using softer language today regarding the
housing market, describing excessive home-price jumps in
some markets as ``froth.''
Many economists believe that ''froth'' is primarily in
California, and statistics suggest as much. California
posted the second-fastest growth in first-quarter home
prices over the previous year, but ranked 26th in job
growth.
Even in markets with steep price gains, busts don't
necessarily follow booms, cautioned Richard Brown, the
FDIC's chief economist.
FDIC researchers examined data from 55 metropolitan
areas that saw a boom at some time between 1978 and 2004
-- defining a boom as an inflation-adjusted rise in home
prices by 30 percent or more over a three-year period. A
bust followed the boom in only nine instances -- with a
bust defined as a drop in nominal prices by 15 percent
or more over a five-year period.
The few busts that followed booms came after significant
external factors such as the mid-'80s collapse in world
oil prices that rocked the Houston market, or the loss
of jobs when a huge employer goes out of business.
Some pessimistic economists believe that creative
financing with interest-only and exotic adjustable-rate
loans have enticed many Americans to purchase homes they
can't afford. When long-term interest rates finally go
up, they predict, many borrowers using such loans -- the
fastest-growing segment of the mortgage market -- will
be unable to make payments, and foreclosures will soar.
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