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Kagan's Column: One Bubble's Stretching, Another's Just Getting Pumped Up

I have good news. The residential real estate bubble isn't ready to burst. I know this for a fact because in the last week of May, the front pages of The Wall Street Journal, The New York Times and USA Today all told us it is. But they neglected to put "no end in sight for house prices" in their headlines, which gives us some breathing room. I have no doubt that prices in Boston, New York, Washington, Florida, California, Arizona, Nevada and in almost all resort areas are in the clouds, but don't tell that to your relatives in places like Columbus, Ohio, or Greenville, S.C., where values have risen less than 3% a year since 2000. So, like a contestant on The Price Is Right, to answer the question, "How much should you pay for a house?" I'll take "anything above today's price," and I'll probably be right. To a newspaper editor, that may sound irrationally exuberant, but consider these points:

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If the housing bubble is punctured now, it will happen in broad daylight, with everyone expecting it. Just like the stock market crash, right?

The bubble has been inflated primarily by superlow, long-term interest rates, which have not been increasing despite the Fed's pressures on short-term rates.

Sending rates too high would slow down our domestic economy, which, except for real estate and defense contractors, isn't exactly roaring.

The bubble is also partly based on the fact that the first $500,000 of a married couple's home sale profits are tax free. That makes it, for most people, the best investment there is. Our government could bust the bubble by raising residential home taxes. Do you think this government will?

Consider this scenario: Republicans and Democrats alike have figured out they can make their constituents happy by feeding them local pork and keeping prices and taxes low.

Even with a war on. Ask John Kerry. He lost the election because he piggybacked on George Bush's platform. Debates rage among the people on social issues, but economically, the majority isn't complaining. So the bubble gets stretched out. Former Fed chairman Paul Volcker, famous for the "hard landing" higher interest rates that made Jimmy Carter a one-term president, calls the bubble "dangerous." But current chairman Alan Greenspan, a soft-lander by birth, sees it as a regional problem. Personally, I know the trend is extended, and it's going to be corrected. But Greenspan said he didn't see the Credit Crunch of 1990, either, even though it was real. It took him three years to turn that one around. Ask any cable operator.

Speaking of which, D.C. already has started the gradual process of doing something about the bubble, by advising banks to toughen their mortgage-lending standards. That's one reason why you've been getting so many cold calls at home from maverick brokers about refinancings. This is the way credit was crunched starting in late 1989, with bankers telling their commercial real estate and cable TV borrowers that the party was over. The difference then: There was a concerted effort to pull the plug (a really hard landing) on Mike Milken/Drexel Burnham, corporate raiders, savings & loans, developers and aggressive acquirers (mostly in media). The president then was the current one's dad, who had forgotten what restricted credit did to Carter a decade before. I think we've seen this mortgage boom, in part, because George II didn't forget what happened to George I.

P.S.: Houses aren't the only expensive toys people have been buying. Look up a timely piece in the Sunday Styles section of the May 29 Times about the rabid buying of consumer electronics devices by America's youth, due to peer pressure, and subsidized almost entirely by their parents. On the one hand, it means kids could be spending more time with telephones, computers and messaging, and less time watching TV or listening to the radio. On the other, they're becoming addicted to high-speed access to the Internet. Isn't it ironic? The government, in using digital to get back and auction off the analog spectrum, is pushing a legal narcotic.

Analyst/investor Paul Kagan is chairman/CEO of Kagan Capital Management, Inc. in Carmel, Calif. Information in his columns is not intended to be a recommendation to buy or sell securities.

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Kagan's Column: One Bubble's Stretching, Another's Just Getting Pumped Up

Cable World, June 20, 2005

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