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Bubble

[ 0 ] May 28, 2005 |

On Thursday, good old Neil Cavuto interviewed a pair of real estate CEOs on the potential existence of a housing bubble in the United States. Set aside, for a moment, the question of whether interviewing real estate CEOs is a good way of attacking the problem, and read the interview. It’s genuinely entertaining.

CAVUTO: When you say frothy, what would happen, then, if there were a correction?

ZELL: Well, I think there’s a question as to what would happen. In other words, a correction…

CAVUTO: Some say crash.

ZELL: Crash. I just don’t see how you have a crash. I mean, you have a crash when you have a whole bunch of people selling stock on the same day. I have never seen a housing — quote — “crash,” as you put it.

And I have been in this business for 40 years. And the reality is that, number one, I think that the savants on TV and radio are major contributors to the concept of a bubble…

CAVUTO: You’re not referring to FOX.

ZELL: No, God forbid.

CAVUTO: No, no, God forbid.

ZELL: But the more you guys talk about it, the more likely it is that you are going to create the bubble.

CAVUTO: Self-fulfilling it.

ZELL: By virtue of what you’re talking about it.

CAVUTO: There’s something to that, Sam.

What?

If I’m reading this right, Sam Zell thinks that there is no bubble, because he’s never seen one in forty years in the business, and because people can’t sell houses as quickly as they can sell stock. Whatever. What I really don’t understand is his second point, the one about the role of the media in creating a bubble. Correct me if I’m wrong, but if a lot of people are worrying about the creation of a bubble, doesn’t that drive prices down, thus reducing the chance for said bubble? People, after all, don’t like to have their entire life savings wiped out, and that’s what a bubble can do. So, I’m just a touch uncertain about the causal logic. Fox News talking about a bubble can’t, to my mind, create a bubble. It could, on the other hand, hasten a crash, but you need a bubble to have a crash, and we don’t have a bubble, because Sam has never seen one, and now I’m getting really confused. . .

After finishing up with Sam, Neil moved on to Donald Tomnitz, building industry honcho. I guess Sam, real estate mogul, was the fair, and Don, building industry mogul, was the balanced. Anyway. . .

CAVUTO: So, I guess what I’m saying is, if you are up 58 percent in Florida, if you’re up 79 percent in Arizona, if you’re up 40 percent in California, that pace is hard to maintain, right?

TOMNITZ: No question about it, but ask yourself, three to four years ago, we were up those percentages. We were up those kind of percentages in Denver. We were up those kind of percentages in Tucson. We were up those kind of percentages in Atlanta, that kind of percentage in Dallas-Ft. Worth.

So, as I say, what drives those percentages is simply where jobs are being created.

CAVUTO: All right, very well put.

So, job growth is responsible for a 79% increase housing prices in Arizona? And 40% in California? Given that I’ve lived the last eight years in Seattle, and that housing prices have gone up pretty much without regard for variations in the job market, I have my doubts. But more importantly, doesn’t a 79 percent increase in housing prices present problems regardless of current job growth? Recognizing that job growth in an area will decline, and thus that prices will cease to increase, thus also seems to imply that the people taking out unfavorable mortgages on the assumption that the value of their investment will continue to increase are going to get destroyed when job growth stops.

In fairness, I’m not precisely sure what the 79% number is supposed to represent; it could be housing prices, and it could be housing starts. Neil never gets around to telling us, but it’s problematic either way. However, it’s good to always try to take something away from interviews like this, so here’s Rob’s lesson of the day:

Watching Fox News will create a housing bubble, which will cause a housing crash, which will precipitate the collapse of Western civilization. Think of the children!

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