July 15, 2008
Best sentences I have read today about Fannie and Freddie
From Arnold Kling:
Anyone could see that the GSE dominance of the mortgage market was unhealthy. But the political process was unable to get the job done. What the central planners tend to forget is that political failure is even more entrenched than market failure.
Maybe the taxpayers will have to pay today or maybe in some future tomorrow but the benefits of the GSEs are intimately tied to the costs - there is no such thing as a free lunch. The lunch may look free for a long time - as in the classic peso problem - but what that means is that when the bill comes due it will be big.
Better will be to simply remove these guarantees; if it pushes mortgage rates up 25-50 bp, that would simply be recognition of a subsidy that has long since lost its usefulness.
King also points to Gerald O'Driscoll:
We must also realize that, whatever the deficiencies of the mortgage market in Depression-era America, that era is over. There is no "market failure" in housing finance today, except the one created by government-backed institutions dominating housing finance. Money flows where it is rewarded. Home mortgages are plain vanilla financial instruments, perhaps partly due to Fannie and Freddie. So by all means, let us thank them for their service as we bid them adieu in their present form.
Taken together, these sentiments sum it up nicely. The GSEs served a purpose. As the credit market developed, that purpose became somewhat less relevant than it once was. Yet, because of the implicit (now made explicit) government backing, they were able to offer what looked like a free lunch. As long as things remained stable, they helped shave a few basis points off of mortgage rates by absorbing some of the risk. If they only held loans of the highest quality (creditworthy customers, 20% down payments, etc), we wouldn't be having this conversation. But if those were the only loans that they held, the irrelevance of the GSEs would be more apparent and would have been vulnerable to being legislated out of existence.
So, given that people respond to incentives (and that includes people in government agencies [i.e. regulators and Congress]), it was entirely natural that the GSEs would bite off a little more than they could chew. They traded on their name and their implicit government backing, promising a little bit of a free lunch. But when things turned sour, we saw that the lunch was not free.
We live and we learn (though some people do not get the message the first time). Fannie and Freddie are too big to be allowed to fail. They need access to that lifeline that for too long we pretended wasn't ever going to be needed. Allow them to unwind this in an orderly way rather then letting it all unravel at once.
But then, for goodness sake, learn from this mistake. There is no reason for the GSEs to ever again be as large as they were.
UPDATE: Clarified the sentence about government agencies responding to incentives. I was referring to the fact that the regulators and Congress had no incentive to get tough with the GSEs and the GSEs then in response naturally expanded their reach.
Posted by William Polley at 12:46 PM | Comments (6) | TrackBack
December 5, 2007
Martin Feldstein's two pronged approach
Also in the Wall Street Journal today is a piece by Martin Feldstein. Here are some excerpts.
Further interest-rate cuts can reduce the risk of recession and increase output and employment in 2008 and 2009. The current 4.5% fed-funds rate is essentially neutral -- not low enough to stimulate growth and not high enough to reduce inflation. Although there are risks that the rise in oil prices and the falling dollar will raise the inflation rate, the greater potential damage of an economic downturn calls for a more stimulative policy. The Fed should reduce the fed-funds rate at its December meeting and continue cutting toward 3% in 2008, unless there is a clear sign of an economic improvement.
Because of current credit market conditions, there is a risk that interest rate cuts will not be as effective in stimulating the economy as they were in the past. The current credit crunch reflects not only a lack of liquidity, but also a lack of confidence in the creditworthiness of counterparties and in the accuracy of asset prices. This problem is now being compounded by the banks' loss of capital as they recognize past losses, and by their need to use large amounts of the remaining capital to support existing off-balance-sheet credits that have to be shifted to their balance sheets. All of this implies that lower interest rates may not raise lending and economic activity to the same extent that they did in the past.
The latter paragraph is a good follow up to Greg Ip's piece. In old fashioned Keynesian terms, what we've got here by this reckoning, is the basis for a liquidity trap. Later in the article, Feldstein adds the second part of his strategy.
What's really needed is a fiscal stimulus, enacted now and triggered to take effect if the economy deteriorates substantially in 2008. There are many possible forms of stimulus, including a uniform tax rebate per taxpayer or a percentage reduction in each taxpayer's liability. There are also a variety of possible triggering events. The most suitable of these would be a three-month cumulative decline in payroll employment. The fiscal stimulus would automatically end when employment began to rise or when it reached its pre-downturn level.
Enacting such a conditional stimulus would have two desirable effects. First, it would immediately boost the confidence of households and businesses since they would know that a significant slowdown would be met immediately by a substantial fiscal stimulus. Second, if there is a decline of employment (and therefore of output and incomes), a fiscal stimulus would begin without the usual delays of the legislative process.
You're probably familiar with the term "automatic stabilizers". Well this takes the concept to the next level. A tax cut conditional on economic data--that's an interesting suggestion. Unfortunately, the temporary nature of the cuts would tend to reduce their impact. Anyway, read on.
Even if the Fed decides that it should not cut rates further at the present time, it would not raise rates to offset the stimulus effect of the fiscal change. From the Fed's point of view, the tax cuts can provide a desirable short-run stimulus without the inflationary impact that would result from a lower interest rate and an increase in the stock of money.
Dust off your trusty old IS-LM model and let the fun begin.
Some reliance now on a fiscal stimulus rather than easier money would also take pressure off the exchange-rate adjustment. While further declines of the dollar are necessary to shrink the massive U.S. trade deficit, continued rapid declines might lead to counterproductive retaliatory actions by some of our trading partners.
Add a dash of Mundell-Fleming.
The excessive asset-price increases caused by some past monetary expansions -- especially the induced rise in the prices of real estate -- provide a further reason to use fiscal as well as monetary policy. By cutting the fed-funds rate to just 1% in 2003 and promising that it would be raised only slowly, the Fed contributed to the sharp rise in house prices and the market's current weakness. A mixed strategy that included a prospective fiscal stimulus would have reduced the Fed's perceived need for a sustained negative real fed-funds rate, and would therefore have produced a more balanced expansion of demand.
But didn't we cut taxes in 2001 and 2003? Yes, however those cuts were aimed in large measure at increasing long run growth--the success of which is a fair topic of debate. That's not to say that the short-run stimulative effect was nil. But the question is: would a temporary tax cut with a similar order of magnitude to the 2001 and 2003 cuts have any more stimulative effect? Or would people just save it?
Mark Thoma also mentions the permanent income hypothesis, but doesn't mention the 2001 and 2003 tax cuts. Interestingly, a lot of prominent economists opposed the 2003 tax cut because they thought it should be temporary (contrary to Thoma) in order to provide stimulus without threatening the long term budget outlook and that it should include a spending component (in agreement with Thoma).
I think temporary tax cuts won't work very well (in agreement with Thoma) and I have my doubts about temporary spending increases (more bridges to nowhere?), contrary to Thoma. So where does that leave us?
With a lower funds rate in 2008, that's where.
Posted by William Polley at 12:04 AM | Comments (1) | TrackBack
September 20, 2007
Bernanke speaks (and other assorted news)
Chairman Bernanke gave testimony to Congress on the subprime situation today. Read it on the Fed's newly redesigned website. The only mention of monetary policy is at the end, and it includes nothing new, only some quotes from the press release Tuesday.
In other related news, initial jobless claims were down, reaching their lowest level since July 28. This suggests that the employment report may have been a blip. Employment is somewhat of a lagging indicator, so don't get too worked up and thinking that the threat is over. More trouble could still be to come. Nevertheless, we'll take good news when we can get it. The Index of Leading Indicators, however, was down slightly.
Meanwhile, a certain former Fed chairman is enjoying his time in the spotlight. It is hard to get used to seeing Alan Greenspan all over the place talking to the media candidly, but get used to it we will. (Reuters)
Asked in an interview on Bloomberg television whether the Fed's half-percentage-point rate cut on Tuesday had lowered the chances of a recession, Greenspan said: "I think so, but remember that we still have a problem out there, which is a large overhang of unsold newly constructed homes."
...
Greenspan said the chances for a recession in the United States were still "somewhat more" than 1 out of 3, despite the cut in the Fed's overnight federal funds rate to 4.75 percent, but cautioned it was hard to be more precise.
"We are often wrong but never in doubt on too many issues," he said.
Indeed.
We're watching history unfold here, folks. The unwinding of the subprime mess is without precedent. But the monetary policy action has parallels in the past. Will this episode be more like 1998 (heading of systemic risk, short lived easing and a return to previous levels in a year) or like 2001 (the beginning of a series of cuts and the re-inflation of a bubble)?
To apply the wisdom of Greenspan, someone who doesn't have some doubt stands a good chance of being wrong.
Posted by William Polley at 9:48 AM | Comments (2) | TrackBack
August 2, 2007
Bad news about the housing market has everyone down
It's probably a good thing that the determination of a recession is not subject to a majority vote.
Via Reuters:
NEW YORK (Reuters) - Just over two-thirds of Americans believe the country is either already in recession or headed for one over the coming year, according to a new poll conducted jointly by The Wall Street Journal and NBC.
Nearly half the survey respondents, 46 percent, believed a recession was already under way.
The conviction comes despite a 3.4 percent rebound in economic growth during the second quarter, according to Commerce Department data released last week.
A recession is generally defined as two consecutive quarters of declines in gross domestic product.
Turning points in the economy are notoriously difficult to predict. In 2001, many Wall Street and government forecasters waited until growth had already turned negative before acknowledging a period of contraction.
Can we lose the definition of "two consecutive quarters of declines in GDP"? By that definition, we didn't have one in 2001. What we had was three quarters of negative growth, but they were every other quarter. One down, one up... one down, one up.... one down, one up. Definitely a recession, there's no question about that. But the standard textbook definition is obsolete.
Likewise, even though the most recent quarter posted growth above 3% doesn't mean that this is a trouble-free economy. Just about everyone acknowledges that growth for the rest of 2007 will be weaker, perhaps significantly weaker. If we have two quarters of growth around 1%, will it feel like a recession? Perhaps in many ways, yes. Would it meet the textbook definition? No.
This is not your father's economy, and the textbook definitions that worked in the '70s and '80s to explain the malaise of the time are not applicable now. We need to get out there and educate the next generation as to the subtleties of economic statistics, lest they become disillusioned that economists and the media are out of touch with their textbook definitions from the '70s.
At least we don't wear bell-bottoms.
Posted by William Polley at 4:52 PM | Comments (11) | TrackBack
July 17, 2007
It's the real rate of return that matters
David Leonhardt explains why records are made to be broken and why one must always adjust for inflation. (NY Times)
The S.& P. 500, which is a much better measure than the Dow, closed yesterday at 1,549, just 1.4 percent higher than the peak it reached in March 2000. Think about what that means. While the price of nearly everything has risen over the least seven years — while the price of bread has increased almost one-third, for instance — stocks have barely budged. They have only marginally outperformed cash sitting in a bureau drawer. So if we are going to talk about a stock market record, we should be doing the same for a whole lot of other things: Loaves of Bread Surge to New Highs
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May 4, 2007
Other shoe poised to drop?
Last week, James Hamilton led off a post with the line,
Let's admit it-- the other shoe is not yet dropping.
Opinions differ on what it will sound like when it does. April employment numbers came out day (+88,000 non-farm payroll jobs), and PGL doesn't like what he heard.
The fall in the household survey reporting of employment was 468,000. The unemployment rate would have risen even more had it not been for the fall in the labor force participation rate (LFP). The decline in the employment to population ratio (EP) was disappointing. Maybe it’s time that the Federal Reserve lower interest rates.
Then Craig Newmark points us to a Bloomberg article that says,
April 30 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's assertion that interest rates may need to increase to curb inflation is wrong. That's what Goldman Sachs Group Inc., Merrill Lynch & Co. and UBS AG are saying.
While Bernanke warned last month that the odds of worsening inflation have increased, chief economists at the three firms say the worst housing slump in a decade may drive the U.S. economy into a recession and stifle consumer prices. Their chief economists say the Fed will cut its target for overnight loans between banks at least three times this year.
...
Bernanke is missing ``the linkage between residential housing investment and the broader economy,'' Jan Hatzius, chief U.S. economist at New York-based Goldman, the world's most profitable securities firm, said in an interview. ``The housing downturn is of the first order of importance.'' Hatzius says the Fed will cut rates three times this year, to 4.5 percent from 5.25 percent.
Kash says it's too early to tell if and when rates will fall.
While disappointing, it is hard to imagine today's data having any impact on the outcome of next week's FOMC meeting, at least in terms of the policy action. Whether it will cause policymakers to prepare to soften their stance in the coming months is another question. My guess is, not yet. The change in language in the last FOMC statement made a lot of people thing that rate cuts are now off the table. I don't think that is the case, but rather that a rate cut in 6 to 9 months is more likely than it was a few months ago.
After today's employment report, my subjective probability assessment for the funds rate in 6 to 9 months has edged even a bit more towards a rate cut.
So as we head into the week of the FOMC meeting, the question is whether and when they will make a more direct reference in the press release acknowledging that the risk of slower growth is greater than the risk of inflation. Predicting when and if that will come is like predicting when "measured pace" would disappear last year. Lots of people will call it before it happens, and a few will be surprised. But the Fed knows that they have to choose their words carefully, and in this instance it may mean that a rate cut will come without a lot of advance warning provoking speculation in the financial markets. The relevant reference for you is January 2001. If a rate cut comes, it could very well take us by surprise in terms of its timing. If, on the other hand, things improve this summer and a rate hike becomes necessary, the signs will be much more clear.
And so we sit, still waiting for the other shoe to drop.
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April 25, 2007
Block 37
I've often wondered about the big vacant lot in the Chicago Loop bounded by State, Washington, Randolph, and Dearborn. Just what are they going to put in there? I don't need to wonder any longer. (NY Times article on Block 37.)
More on the history of Block 37, and a construction cam.
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November 17, 2006
Ouch (Housing market edition)
The latest housing statistics, released yesterday by the Commerce Department, suggested that the months ahead would be equally bleak. The number of building permits issued in October fell for the ninth straight month, dipping to the lowest rate since 1997.
The report deepened concerns that the slowdown in the housing market could brake economic growth more than analysts have anticipated.
The number of new homes that builders started in October was down 14.6 percent from September, at seasonally adjusted annual rates, to 1.49 million. The number of building permits issued fell 6.3 percent, to 1.54 million.
James Hamilton has more. I don't think this is over. All eyes will be on next month's data to see if this rate of decline holds up. By itself, this does not necessarily mean a recession, but it does shift the balance of risks. Combined with yesterday's CPI news which were lower than what most were hoping, but not outside the range I had in my head, this is enough to get me to raise my probability of a Fed rate cut in early 2007 by a little bit. Earlier this week, I would have said that a rate cut in the first 3 months of 2007 had about a 1 in 4 probability. Today I'd go up to 1 in 3.
The charts at the Cleveland Fed show a small rise in the probability of a cut in January as well as a perceptible rise in the probability that the rate in March will be 4.75%. Chew on that over the weekend.
Source: Cleveland Fed
Posted by William Polley at 10:55 PM | Comments (1) | TrackBack
July 25, 2006
Refinancing those ARMs
The NY Times has a good article on the re-fi boom.
It is the latest twist in the gravity-defying world of the high housing prices and exotic low-rate mortgages: As monthly payments on adjustable-rate mortgages are starting to balloon, many Americans have found a way to put off the day of reckoning.
...
When that happens, for instance, a typical borrower with a $200,000 A.R.M. could see his monthly payments increase nearly 25 percent when the A.R.M. adjusts from 4.5 percent to 6.5 percent. In total dollars, that is an increase from $1,013 a month to $1,254.
Yet instead of paying more now, many borrowers are refinancing into their second or third adjustable-rate mortgage, loan data indicate and industry experts confirm.
So far, the number of borrowers refinancing this way is relatively small — several hundred thousand in the estimate of the credit ratings firm Fitch Ratings — but mortgage industry officials and analysts expect the numbers will surge next year. In doing so, these borrowers are pushing out any eventual shock of higher payments by another two or three years, if not longer.
“They get another two- or three-year hybrid with a low introductory rate to keep payments down,” said Frank E. Nothaft, a vice president and chief economist at Freddie Mac, the mortgage buyer. “They’re trying to put it off forever, which is O.K. as long as interest rates are low. But when they start to spike, then it’s going to be more problematic.”
Obviously they are chasing after the low "teaser" rates that come with a new ARM, which, though higher than a year ago, are still reasonable. They'd just better hope that Bernanke does a good job of warding off inflation...and that their house continues to appreciate. Do you feel lucky? The article continues...
But the refinancing also represents a doubling-down on a bet that housing prices will continue to rise on the West and East Coasts and in other hot markets. If the value of the home falls closer to the amount of the loan, that could curb the ability to refinance, and may prompt the homeowner to either invest more in the home or to sell it.
Such would be the case if you had an interest only ARM and a high loan-to-value ratio.
With his new loan, his third adjustable-rate mortgage, Mr. Perry, a former technology project manager, cashed about $200,000 out of his home’s equity and is investing it into his four-year-old financial planning business. “I could have sold my house and made my family move,” said Mr. Perry, 42, who lives with his wife and a 3-year-old son in Danville, about 20 miles east of Oakland. “But I didn’t do that. I said, ‘Look, I want to start a new business,’ and this product allowed me to do that.”
He said he was taking on more risk than many of his clients would be willing to because he believes his business will continue to grow. After spending 15 years in the technology industry, which put him on the road constantly, Mr. Perry said that being self-employed allowed him to spend more time with his family, which he also expects to grow. As far as the house, he said: “I am not going to be here for 30 years. Why is it important to have a fixed mortgage?”
And who am I to fault a person for taking a risk. This strategy can pay off, and it is quite possible that the subject of the article is just the type of person who can really benefit from this. It all depends on a person's willingness to take on a risk and their fallback position if things don't work out as planned. That is a highly individual decision. I predict that these stories will be told with increasing frequency. Some will turn out better than others.
However, there is one piece of this story that the Times left out. I was about to write that they omitted the fees that go along with refinancing. But a new blog worth reading, Credit Slips, beat me to it. (Hat tip to Stephen Bainbridge for calling attention to this new site.)
The Times article does not emphasize how expensive this re-refinancing is. Closing costs and fees all get lumped back in to increase the outstanding balance. Keep in mind that these buyers couldn’t make market-based payments on the old, lower balance. The odds of making those payments on the new, higher balance are worse than those in any Las Vegas gambling parlor.
In the industry, these mortgages are called 2/28s. The numbers refer to the teaser period (the 2) and the real payout period with the higher-than-market interest rates (the 28). How can the “2” be profitable for the lender, if the debtor re-fi’s the loan without paying the high 28 period? Many of these loans carry a pre-payment penalty, along with up-front fees and closing costs that make them instantly profitable. Even if the debtor refi’s immediately, the amount paid off includes all these costs, making the effective interest rate for the “2” ten or twenty times higher than the stated interest rate. In the 2/28 game, the lender nearly always wins.
Could re-refinancing be the knife that will cleave what is left of the middle class? There will be those who have fixed-rate mortgages, who pay off their homes, and who have something for retirement or savings if a catastrophe hits. And then there will be those who live in houses, paying high rent, always vulnerable to rate hikes, flat real estate markets, job layoffs, etc. That last group will nominally be called "homeowners" just like the first, but they won't really be. They will play the 2/28 game until they go bust.
In Vegas, the odds always favor the house. In banking, transaction costs can make it difficult (though not impossible) to get free money. Those prepayment penalties can be steep. So shop around for the lowest fee structure. With good credit, there are probably still some to be had. However, many of these people do have less than perfect credit. They will end up paying the fees. While I stop short of condemning these types of mortgages, it suffices to say that one has to weigh the risks carefully, and check the fee structure on the loan. Such loans do increase the housing opportunities for many people, and many will use them to their long-run advantage. However, the bank needs its cut, and someone, somewhere will pay the freight.
Or, as economists are fond of saying, "TANSTAAFL!"
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August 25, 2005
The title says it all: "Rents Head Up as Home Prices Put Off Buyers"
Read it here (NY Times). Much has been made lately of the apparent bubble in housing in certain areas of the country. As a measure of that bubble, we can look at the price-rent ratio. Calculated Risk, for one, has been keeping track of it. The Times article indicates that the tide might be turning, at least in some areas.
Throughout the South, in cities like Atlanta and Charlotte, N.C., fewer apartments are empty, building managers say. Nationwide, the vacancy rate for rentals fell to 9.8 percent in the second quarter after having climbed early in 2004 to 10.4 percent, the highest level since the Census Bureau began keeping statistics in 1956.
That might reverse the trend that I noted here.
Posted by William Polley at 10:32 AM | Comments (3) | TrackBack
July 18, 2005
How a housing boom ends
From the NY Times:
But for other homeowners, the calculus of the 1990's that might have led them to trade up quickly no longer applies. "When the market was strong, somebody would move up to a nicer home in two years because they had so much equity," said Karen Snyder, an owner of Metro Brokers Right Realty in Centennial, a suburb southeast of Denver. Now, she said, "they're just staying put."
That really encapsulates what seems to have driven the housing market in the frothy areas. Buy a $100,000 house with 10% down. In a couple years it's worth $110,000. Sell and use the profit to put 10% down on a $200,000 house. Repeat. That can't go on forever. It also can't even get started everywhere. These are regional bubbles driven by a number of factors. Low interest rates were only part of the puzzle.
Of course, by the latter part of the boom, 10% down seems such a quaint idea, doesn't it?
Posted by William Polley at 12:23 AM | Comments (0) | TrackBack
July 6, 2005
Now that's one pricey trailer park
From USA Today
A two-bedroom, two-bathroom mobile home perched on a lot in Malibu is selling for $1.4 million. This isn't a greedy seller asking a ridiculous amount no one will pay. (Photo gallery: Mobile home boasts of spectacular views)
Two others sold in the area recently for $1.3 million and $1.1 million. Another, at $1.8 million, is in escrow. Nearby, another lists for $2.7 million.
"Those are the hottest (prices) I've ever heard," says Bruce Savage, spokesman for the Manufactured Housing Institute. He says prices in another hot spot, Key West, Fla., top $500,000. As if the price isn't tough enough to swallow, trailer buyers:
•Don't own the land. As with most mobile homes sold in Malibu, the land is owned by the proprietor of the trailer park, in this case, Point Dume Club.
•Still pay rent. Not owning the land means paying what's called "space rent" that is as high as or higher than many mortgages in other parts of the USA. On the $1.4 million trailer, space rent is $2,700 a month.
•Can't get mortgages. Since the buyers don't own the land, most of the mobile homes are paid for in cash or with a personal property loan that usually amounts to $100,000 or less, says Clay Dickens, mortgage loan agent at Community West Bank.
...
Developers are partially driving the rise. Janet Levine at Maliblue Holdings has bought several old homes and is installing high-end "mobile villas" to put up for sale. Levine and others bristle at the term "trailer." To be permitted in the park, the home must be perched on piers (a high-end version of up on blocks).
A high-end version of "up on blocks"?!
Words fail me.
Hat tip: Calculated Risk
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June 8, 2005
Evidence of regional housing bubbles
Calculated Risk links to this interesting paper by two physicists on the real estate bubble. Being that the authors are physicists, the model is more physics-like than economics-like, but don't let that stop you from taking a look. There are advantages to looking at bubbles through a physics lens, at least to try to identify them--and that is what the authors do. I'm not sure how far I'd try to run with the analysis (as far as predicting when the bubble will burst), but it is interesting to see what the data says.
Calculated Risk displays a map from the paper showing the bubble states and the non-bubble states. According to the authors, Illinois (along with a good swath of the midwest and south) is a non-bubble state. Of course, there is good reason to be wary any time housing prices get above their fundamentals in large areas of the country. Even in areas where there is presently no bubble, the situation bears watching. There is a frenzied nature to the market in places like California and Florida that is unsettling indeed.
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May 28, 2005
Housing bubble? Not in the midwest
Brad Setser is visiting Kansas (which, we learn in today's post, is where he grew up) and finds no housing bubble. As a lifelong midwesterner, I can tell you the same thing. I haven't harped on it in this blog, but I have commented on some other blogs, like Calculated Risk. I don't know if there's a lot to be gained by my telling you that there isn't a housing bubble in most of the rural areas of the country. But I am glad that Brad agrees.
Brad does make an observation that I would like to expand upon.
To paraphrase Paul Kasriel's summary of Greenspan, there is no housing bubble in Manhattan KS (where I grew up), but there is one in Manhattan New York (where I now live). That characterization is a bit off. Manhattan KS (a growing university town and regional medical center) is far more frothy than say Stafford or St. John's KS, but it has a grain of truth.
Likewise, Peoria, IL is far more frothy than smaller communities in central Illinois. But I would not say Peoria is a bubble market. As I said in a comment on Calculated Risk, referring to data on this site,
I see that Wichita is near the bottom of the list with only a 2.48% appreciation for 2004.
I visit Wichita now and then. I can tell you there is a new construction boom going on there too. I see this as pretty strong support for my hypothesis that new construction in small/medium midwestern cities is biasing their median price listed in the NAR report.
Peoria comes in with a respectable 5.27%. Since their methodology includes refinancing, I'd go along with that as quite realistic from my experience. I would guess that the "purchase price" for a refi is the appraised value, which is a little higher than the price it might actually command on the market. Excluding refis might shave a percent or two, don't you think?
Definitely not a bubble. Whether 2 to 5% is a boom is your call.
That's 2 to 5% nominal return, subtract a couple points for inflation and it's 0 to 3% in real terms. But real estate sales in the Peoria area are brisk. There is a pretty massive building boom in the bedroom communities, mostly in the $200,000 range. Thus, the sales of those new homes are pushing the median price up. Rural areas are not seeing that kind of boom.
We just aren't seeing the kind of speculative mania that the coasts appear to be seeing. People buying houses in Peoria actually plan to live in them. As long as that is the case, there is less to worry about. "Flipping" of properties, such as is happening in the more bubbly areas, is disturbing to me indeed. The pundits who decry this behavior have a point. (See here for one of my statements on the subject.) A lot of statements about the housing market in the bubble areas sound like statements about the stock market in 2000, or dare I say 1929. But does that imply that a crash is around the corner? No. Houses are different from stocks in some important ways (even though modern financial markets have caused them to behave in some similar ways). I do think, however, that there will come a time (if I knew when I wouldn't tell you anyway) when the market will slow down from this torrid and, by all accounts, unsustainable pace.
What does worry me is that many people, especially in coastal metro areas are leveraged to the hilt on these properties. Interest only loans, ARMs, and so on, could potentially bite some of the last ones in on the bubble. And I worry a little bit that even in small/medium midwestern cities like Peoria, people are buying those cute little $200,000 homes (that would probably sell for $500,000 or more where many of you live) using the same interest only loans and ARMs.
There are reasons to be concerned, even about the midwest, and reasons to be downright worried about the coasts. Ultimately, this situation demonstrates yet again that the U.S. is a large and diverse economy. The mechanisms driving real estate in Miami are very, very different from those at work in Peoria.
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