NEWS: Betting Against the House

AHEAD OF THE TAPE
By JUSTIN LAHART

Wall Street Journal
May 24, 2005; Page C1

On Friday, Federal Reserve Chairman Alan Greenspan said that, although there are some signs of "froth" in the housing market with "a lot of local bubbles," the Fed doesn't see a bubble nationally. To many ears, that would seem like a moderate assessment.

News reports professing a housing bubble have become so frequent that James Bianco, head of investment-research firm Bianco Research, lists them in a section of his email to clients, dubbed "Your Daily Installment of 'Picking a Top in the Real Estate Bubble.' " Yesterday there were seven articles listed.

As for his take, Mr. Bianco thinks that bubbles don't end when everybody is screaming about how there is a bubble; the bubble pops when everybody has concluded that what has gone on with prices make sense.

In an online WSJ.com poll last week, 81% of respondents said they thought the U.S. housing market was in a bubble. Most of the people who responded "yes" thought the bubble would keep growing.

Such thinking can be dangerous, because often there isn't much of a step between believing that a bubble will continue and believing that not participating in the bubble will amount to lost opportunity. The late economic historian Charles Kindleberger pointed to Isaac Newton, who, convinced that price speculation in the South Sea Company had run too far amuck, sold off his shares for a profit in the spring of 1720. But he bought at higher prices later in the year, and suffered for it.

For those who would speculate in real estate, today's report on existing-home sales from the National Association of Realtors isn't likely to act as a deterrent. On average, economists expect an annualized 6.9 million homes came off the block in April, up from March's 6.89 million. Meantime, long-term interest rates have been falling -- yesterday the yield on the 10-year Treasury slipped to a three-month low of 4.07% -- giving would-be speculators the wherewithal to buy.

In the end, whether the housing boom is a bubble may matter less than the fact that the U.S. economy has become highly geared toward the real-estate market. Northern Trust economist Asha Bangalore points out that employment in housing and housing-related industries has accounted for 43% of the rise in private-sector payrolls since late 2001. If housing cools, what will take up the slack?