Up and Down Wall Street

If you’re worried about the housing bubble bursting — relax! Pay not the slightest mind to those envious know-nothings who are wailing that house prices today are where stock prices were in March 2000. We can absolutely guarantee that this once-in-a-lifetime boom has at least seven or eight more gloriously bubbly months to go.

So, we urge you, there’s not a moment to lose! Put down this magazine immediately! Run, don’t walk, to your friendly neighborhood real-estate broker and join the thousands of other shrewd investors madly scrambling to buy second, third or fourth houses.

Our confidence in the continuing boom in residential real estate — which admittedly is a complete reversal of our previous stance — springs not from any fresh epiphany about housing or a greater appreciation of its potential rewards. And we’re not temporarily in leave of our senses from the shock of having sold our present homestead for a vast fortune; we haven’t (maybe because we inhabit a cave, but, if we do say so ourselves, it’s a quite nice cave).

Rather, our view that the housing bubble is destined to stay intact and aloft and, indeed, if anything, may get bigger and go higher, is ground in our long, close and continuing study of Alan Greenspan and the often dramatic impact of his actions and utterances on markets.

Mr. Greenspan, of course, is not as versed in real estate as he is in equities. Nonetheless, of late he has been making up for lost time, offering observations on the state of that market and even a bit of casual advice to home buyers. On the latter score, for example, he indicated that adjustable-rate mortgages were the way to go. The suggestion seemed a little strange, if only because it was proffered just when interest rates were about to go up. As a matter of fact, it seemed doubly strange in light of the fact that Mr. Greenspan was the conscious agent of their going up. But then, Mr. G acts and speaks in mysterious ways.

More recently, on more than one occasion he seized the opportunity to address the vexing issue of whether there is a housing bubble by saying not really, although there may be little bubbles — sort of bubblettes, we guess — here and there.

And last Friday, in a question-and-answer session following a speech on energy to the Economic Club of New York, he developed this theme more definitively. While expressing skepticism as to the existence of a national bubble, he allowed as “it’s hard not to see a lot of local bubbles.”

What’s more, he took note of such undesirable elements as “speculation” and even, heavens to Betsy, “froth” sneaking into the housing market. (One of the few instances in which undesirable elements moving into the neighborhood raise, rather than lower, property values.)

And he also cautioned that housing prices couldn’t keep rising forever (an insight that electrified the audience, or at least that part of it that hadn’t succumbed to post-prandial slumber).

But in his usual becomingly becalming manner, Mr. Greenspan was quick to point out there was only a “little froth” in the housing market. And even were the unthinkable to happen, he observed reassuringly, only those unfortunates who purchase homes just before prices actually drop “are going to have problems.” All the more reason, obviously, you’d better hurry and buy now before prices head south in a big way.

Divining meaning from the chairman’s verbal meanderings is always a chancy endeavor. But our sense is that he’s quite aware that there is a housing bubble; that it has the potential to do serious damage to the economy were it to go the way of the equity bubble in 2000; and that he feels obliged to keep it from popping on his watch. And he intends to do so through the standard Greenspan formula mixing caveat and denial.

His comments last Friday can thus be equated to his famous “irrational exuberance” pronunciamento on the stock market back in December 1996. As you doubtless remember, it took over three full years and many, many points before that bubble popped.

So why not a repeat performance? Why, in other words, shouldn’t the housing bubble also endure at least another three years? Why only eight months?

Simply because Mr. Greenspan in 1996 rightly anticipated he’d be around for many years. But come early in 2006, he’s gone.

So, as we say, if you’re hot to buy a house before prices hit the skids, you really don’t have all that much time.

As it happens, across our desk last week came a communiqué on housing from Darren Pollock, who labors for Cheviot Value Management, which he describes as a “value-biased money-management firm.” We don’t know Darren, but we liked what he has to say and the efficient and clear manner in which he says it. We thought you might, too, so we’ll pass along a few of his observations, if only as an antidote to Mr. Greenspan’s equivocations.

He points out that among the spurs to the recent swift rise in home prices, besides the collapse of the stock market that sent investors scurrying to real estate, were the Fed’s unyielding push to drive down rates; lax, to put it mildly, mortgage lending standards; novel and problematic financing (interest-only loans and the like), and speculation, not only by the usual suspects but foreign punters, as well.

The bubble market in housing, he warns, is “fraught with peril.” As housing prices skyrocketed, homeowners cashed out their rising equity at a dizzying rate; between 2001 and 2003, homeowners with conventional loans, Darren reports, took out a cool $341 billion. That mass turning of homes into ATMs worked wonders for the economy, but the price of such continual leveraging can be stiff, even catastrophic, when prices turn down.

And prices will go down. When they do, the story will be all too familiar, Darren comments.

The confidence of homeowners and eagerness of would-be buyers alike will shrivel. The pain of leverage will begin to make itself felt. The supply of houses for sale will expand slowly and then exponentially. Foreclosures will rise sharply and banks will anxiously dump those foreclosed houses, as banks are prone to do, further depressing a reeling market.

“At this point,” Darren sighs, “the same reinforcing mechanism that propelled prices higher is now working in reverse to orchestrate their decline.”

He notes acerbically that insiders of homebuilding companies have not been shy about selling their company’s stock while the selling is good.

Robert Toll, for one, Chief Executive Officer of Toll Brothers, between the middle of December of ’04 and the end of February unloaded 2.4 million shares, roughly 20% of his holdings, worth a cool $268 million-plus.

As we’ve said before, there are any number of perfectly good reasons for insiders to sell, but expectations that the stock will go up is not typically one of them.

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