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Wednesday, November 22, 2006
No housing bubble, just a soufflé
Bubbles burst, soufflés flatten. So says University of Central Florida economist Sean Snaith, who denies that the housing market is in a bubble.
He prefers a culinary analogy: Snaith sees the run-up in housing prices as a soufflé, which rises until it’s done, then loses some hot air. Here’s his analysis of the housing soufflé, from UCF’s latest Florida economic forecast:
“The housing soufflé reached its peak in 2005. It has subsequently come out of the oven and has been cooling significantly. Housing starts will continue to fall off in 2007 and 2008, as mortgage rates continue their slow climb and housing inventories are finally sold off.
“This has been a fundamentals-driven expansion in the housing sector (as opposed to a speculative bubble), and, as long as the fundamentals remain solid, the soufflé will not collapse. There is no sign that the demographic, macroeconomic, and financial underpinnings of the housing market will completely dissipate. In terms of prices, there will be some cooling, and the highest points of the soufflé are now settling. As we look beyond 2006, the loftiness of the soufflé will continue to give way, as mortgage rates rise. Barring any reversals in the ingredients of the soufflé, the talk of a national housing bubble will just seem like a lot of hot air.
“Some economists’ dubious predictions of a housing-induced recession are being proven wrong. Currently, the most pessimistic predictions expect prices to fall 10 percent to 20 percent in some areas. If these predictions come to pass, it would hardly be indicative of a bubble bursting. If the Nasdaq had only fallen by 10 percent to 20 percent from its peak, would we be referring to it today as the dot-com bubble?”
