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Real estate bubble adds more suds

March 11, 2005

Reports notes similarities between housing and Internet boom days


Inman News

A word of caution: economic fundamentals associated with the housing bubble debate are "eerily similar" to the dot-com bubble in the late 1990s, say analysts at financial advisory giant Merrill Lynch.

In an economic commentary, "Housing Bubble Getting More Bubbly," the company compares the ratio of household equity ownership relative to GDP in the opening months of 2000 with the ratio of household real estate assets to GDP in the last few years, which now is skyrocketing toward 140 percent.

The lesson, they say, is to be wary when anything begins to approach or exceed 140 percent of GDP.

"We get nervous when we see things move parabolically north because no asset class at any time ever failed to mean-revert after such an upside move," the report notes.

Looking back to the ratio of household equity ownership and GDP just before the Internet bust, the statistics show that number falling sharply in early 2000.

There's no doubt that factors such as easier access to mortgage money, historically low interest rates, the government's push to increase home-ownership levels and the income boost in recent years have contributed to the sharp rise in the ratio of household real estate assets to GDP, the report notes.

Meanwhile, population trends, such as increasing immigration levels -- often cited as contributors to the housing surge – should also be adding to GDP. But the analysts see no reason for this to cause such a sharp rise in the real estate assets to GDP ratio.

What disturbs the analysts at Merrill Lynch is the magnitude of the shift in resource allocation towards residential real estate. They say loose financial market conditions and an increasing level of exuberance for real estate have contributed more to the housing bubble than increasing incomes.

The level of consumers who now believe housing is a good investment is at a 25-year high, according to University of Michigan consumer confidence reports. Merrill Lynch notes this "exuberance, whether 'irrational' or not."

And just because the housing bubble hasn't burst doesn't mean that it doesn't exist, the report states.

Merrill Lynch is keeping a close eye on new housing supply levels, suggesting that a backlog of unsold new homes are beginning an upward trend. According to Census Bureau statistics, the ratio of unsold supply was at 3.9 percent in October, then increased to 4.7 percent in November and reached 4.8 percent in December, a five-year high.

"It's with this inventory backdrop in mind that we were less than ecstatic to see that near-5% run-up in housing starts last month – reminds us of the 'build it and they will come' mentality in the tech space circa 1999-2000," the report concludes.

Copyright 2005 Inman News



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