Economist: at Least 20 Big Cities Face Housing Bubble

There is definitely a housing bubble out there, according to at least one economist. Scott Franklin, the featured lunch session speaker at the MBA's Commercial Asset Administration & Technology Conference here, said that the good news is that he sees a bubble in only 20 big cities. However, these cities contribute 50% of housing wealth in the United States overall, according to him.

About the prospects for the economy going forward, he said that there are two distinct views, one bullish and the other bearish.

The bulls believe that inflation is going up, considering that the decline of the U.S dollar, especially against the euro and the yen, has rendered exports to Europe and Japan cheaper for consumers in those countries. And commodity prices are also going up. Corporate profits are on the upswing, too, and this is likely to translate into increased hiring and hiking up of inventory levels by corporate America.

Also, the inventory-to-sales ratio is very low right now, which means that firms will need to start replenishing their inventories.

To the bulls, all this indicates that interest rates are going to start going up, Mr. Franklin said. If they start going up though, they will go up gradually and not in increments of1%, the way the Federal Reserve acted to raise interest rates in the recovery of 1994, according to Mr. Franklin.

As for those in the bear camp, they say, "Wait a minute, this recovery is not built on rock. It may not even be built on sand," he noted.

The bears point to factors such as a high debt-to-income ratio for customers. And they say that many homebuyers are using adjustable-rate mortgages, leaving economists speculating about whether they have long-term plans for the properties they are buying. And ARMs are all right when interest rates are at all-time lows, but what will happen when they start going up? Another point of concern is that buyers are now paying prices that are out of line with property values, causing some to speculate about a conspiracy among appraisers.

The bears are also very concerned about inflation, he said, considering that commodity prices are on the rise, with consumption by China behind a big part of it. They also wonder what will happen when President Bush's tax cuts expire in 2005. And if something were to go wrong in the next four to five months, the Federal Reserve does not have much leeway to cut interest rates further, considering that they are already at very low levels.

Mr. Franklin wonders if "America's love affair with homeownership" is good for everyone. Some economists are questioning if people who have taken on homes in low-cost areas with low prospects for home appreciation are going to benefit. They ask, why not devote more resources towards developing low-cost multifamily housing, rather than on trying to increase homeownership levels.

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