Housing Bubble: Fed Chairs Speak As One But Best Sellers Plug a Different View

The Federal Reserve in the persons of both its recently retired long-time chairman Alan Greenspan and his newly minted replacement Ben Bernanke have assured America that the housing bubble would not burst "on a national basis." The two, in fact, spoke as one last week on the subject as part of a concentrated effort on the part of the Fed to assuage inflation fears as the stock market took a major tumble.

But their upbeat assessments are in sharp contrast to several books, some of which are starring on best seller lists, warning of a coming cataclysm in the housing industry.

Amazon.com is currently featuring 16 titles dealing with the "bubble," most predicting a more-or-less devastating end to the exponential increase in home prices over the last few years. Chief among the doomsayers is John R. Talbott, a former investment banker with Goldman Sachs and a visiting scholar at the highly respected UCLA Anderson School of Management. His recent book Sell Now! The End of the Housing Bubble is an update of his 2003 best seller The Coming Crash in the Housing Market. Talbot obviously has been predicting Armageddon in the housing sector for several years. That he has not been right yet does not preclude that he will be.

Among the other authors and their books which warn of problems are:

House Poor: Pumped Up Prices, Rising Rates, and Mortgages on Steroids: How to Survive the Coming Housing Crisis; June Fletcher.

Cash in on the Coming Real Estate Crash: How to Protect Yourself From Losses Now, and Turn a Profit After the Bubble Bursts; David Decker.

Irrational Exuberance: Second Edition; Robert J. Shiller (perhaps the dean of housing research.).

Empire of Debt: The Rise of an Epic Financial Crisis; William Bonner;

and from the odd contrarian: Why the Real Estate Boom Will Not Bust - And How You Can Profit From it: How to Buy Wealth in Today's Expanding Real Estate Market; David Lereah. (Mr. Lereah, incidentally or maybe not so, is chief economist for the National Association of Realtors.)

We have not read all of these books but several have received very disparaging reviews from critics and readers alike about shoddy or cut and paste research or a lack of meaningful analysis. Talbot, however, has done some excellent research (building to an extent from data compiled by Shiller) and offers some interesting theories about the reasons for the bubble in the first place and why we should expect a total price collapse.

But, first, the views of the chairpersons.

Greenspan made his comments on May 18 as part of his first public speech in the U.S. since he retired after nearly two decades as Chairman of the Federal Reserve. Speaking before the Bond Market Association in New York he said "Home sales are off, applications are off, everything is going in the same direction. The boom is over, and you can say that with a fairly strong degree of confidence."

But, Greenspan said, there is no danger of a total collapse of the housing market and that prices would not fall nationally. Instead, he said that stable prices would replace the boom. As evidence, Greenspan cited earlier experiences in Australia and the United Kingdom. "Prices just flattened," Greenspan said, "and they had bigger booms than the U.S."

His successor, Ben Bernanke spoke earlier in that same day at a Chicago Federal Reserve conference on banking regulations and, in a question and answer session after the speech, made comments similar to Greenspan's. He referenced the increasing lack of affordability of housing due to both rising prices and increasing interest rates and said that one would expect to see cooling in the markets. Sales are slowing, he said, as are housing starts and there are signs that prices are not rising as quickly as they have been for the past few years. However, "it looks to be a very orderly and moderate kind of cooling at this point." Basically, the Chairman said, the market looks poised for a soft landing."

And Talbott?

Soft landing is not in his vocabulary. He is predicting a nose dive from current sales and price levels, sometimes naming cities and the level of danger. But then he does not believe that this current boom has been long-lived but rather a recent aberration. Among the many theories set forth in his book is that the housing bubble has only been around since about 1997 and that real estate has, for a hundred years of its previous history, been flat rather than a place to make a fast buck.

And the cause of this nine-year price spike? Mr. Talbot is not shy and the word "conspiracy" even makes it into a chapter heading.

He may be dead right or he may be manipulating statistics to prove many points, but his book is a fascinating and disquieting read. We will look at his many thoughts and predictions in a subsequent article.