A somber mood settled over Wall Street last week as traders observed the fifth anniversary of the topping-out of the technology “bubble.” Investors who jumped on board in March 2000 saw their holdings gradually deflate, dropping in value by about two-thirds. There has been only a modest rebound.
Could a similar trip from peak to valley lie in store for housing? News that nearly one-fourth of all units are being bought by investors (read: speculators), has sent a shudder through the nation’s real estate markets.
For now, however, few are ready to declare the end is in sight.
Analysts expect Wednesday’s report of February housing starts to show a pullback of 1 percent or less, from a rate of 2.16 million units annually in January, near a two-decade high.
Economist Richard DeKaser, who has studied the nation’s real estate markets, says that, “on the whole, there is no bubble.” However, about 20 percent of cities are showing excessive price valuations, meaning they face a correction, he said.
“Eight of the top 10 overvalued markets are in California, and other highly priced areas include Miami and Sarasota, Fla.,” said DeKaser, of National City Corp. in Cleveland.
Elsewhere, including most of the Midwest, he said, “there is some froth, but no indications that prices are white-hot.”
DeKaser is looking for a gradual decline in housing starts. From current levels above 2 million units, he sees them falling to 1.81 million in the fourth quarter. By next year, he sees a rate of 1.77 million.
Beyond that, he says, “the housing cycle is not as volatile as it was in the past. We aren’t likely to see either a boom or or a bust.”
Fears that consumers may be growing tired of their free-spending and free-borrowing ways have been common, but thus far the only speed bumps have affected Detroit. Since the beginning of the year, auto sales have decelerated, slipping into the slow lane, forcing layer upon layer of costly incentives.
Chicago economist Brian Wesbury expects Tuesday’s report of February retail sales to show a gain of 0.5 percent, or 0.8 percent when car sales are excluded.
“Aside from the auto industry, which has grown dependent on offering an endless array of deals, purchases are booming,” said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm.
“Incomes are rising faster than inflation, the job market is improving, and consumers are in fabulous shape,” he said.
However, he added, because Americans are showing no signs of slaking their appetite for shopping, and because commodity prices are nearing a 25-year high, the Federal Reserve may soon decide to step up its campaign of boosting interest rates.
For now, Wesbury expects the central bank to hike its short-term barometer by a quarter-point, to 2.75 percent, when policy-makers meet March 22.
The tightening of credit will continue, according to Wesbury, “so consumers who are thinking of locking in a long-term mortgage or other forms of debt are wise to act.”
The stock market pushed to 31/2-year highs earlier this month, only to slip on an oil patch. The next challenge will be first-quarter corporate profits, which begin rolling out in about three weeks. For now, investors, already leery from a rapid run-up in long-term interest rates, are on watch for company warnings of earnings embarrassments.
Wall Street analysts expect profits this year to grow at nearly a double-digit rate, enough to keep the bull charging forward at a modest rate.
However, if oil company profits are factored out of the equation, profits will grow by only about 5 percent. At such a pokey pace, further price gains may be muted at best.
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