July August, 2004





Guest Columnist

Bursting Bubbles and Other Housing Myths

Mick Pattinson, is president of Barratt American, a homebuilding company in Carisbad, California, as well as the former president of the California Building Industry Association.

As bankers talk of rising interest rates, some financial journalists are starting to murmur about a “housing bubble.” Again. These guys have more bubbles than Lawrence Welk. This might shock these amateur economists, but housing prices are not primarily a function of interest rates. Housing prices are set by two forces (stop me if you’ve heard this one): Supply and demand. We pretty much know what demand is going to be: Nationwide, it’s about 2 million homes a year.

In California, it’s about 250,000 units annually. That part of our housing destiny is set by demography, and will not change soon. Not as long as people keeping having babies that grow up and want their own homes. What changes is supply. In California, we build nowhere near the number of homes that our customers demand. The headlines tell the story. Day after day we are assailed with news stories that describe the ‘environmental victories’ of local governments taking tens of thousands of new homes off the drawing boards. Off the market.

In California, it is now fashionable to talk about a housing crisis while ignoring the environmental restrictions that created it. Strip away the word crisis, and what is left is the truth: What we have is a man-made shortage, not a crisis. The shortage of new homes is the fundamental factor driving prices higher and higher. Not interest rates – high or low. Make no mistake, interest rates matter. But not as much as a new family willing to commute 100 miles a day just to find an affordable house. Not as much as NIMBY’s determined to stop new construction, new roads and new schools for whatever reason they can make up at the time. For those still talking about a bubble, let them come to Murrieta.

Two years ago, my company opened an affordable condo project that sold faster than we could build it. Today, these same units, after experiencing a 30 percent annual increase in value, disappear in hours when they are put up for re-sale. It’s not the interest rates causing this almost desperate hunt for new, especially first, homes. It’s the shortage. Almost every housing market in America has seen the crushing aftershocks of these environmental “victories.” Many of these areas have also seen a healthy increase in prices. We are seeing lots of reasons why, all supporting the same irrefutable fundamental: Anywhere we stop building homes, prices will rise. Alan Greenspan recognized the long term stability of housing prices when he said recently: “It is worth bearing in mind that any sustained increase in rates presumably would occur only in the context of a more vigorous upturn in the pace of business activity, suggesting that the net effect on housing might be relatively limited.”

He went on to say: Clearly, after their substantial run-up in recent years, home prices could recede. A sharp decline, the consequence of a bursting bubble, however, seems most unlikely.” Houses are not pork bellies or tulips. People buy them – and hold on to them -- because they need them. The overwhelming majority of home buyers are not speculators or even investors. They just want a nice place to live. That doesn’t change because interest rates might tick up, or environmentalist discovers a new species of rat. Long before any bursting bubble, we will see more rental vacancies; housing taking longer to sell; foreclosures staying on the resale market longer; and other indications of economic anemia. We are not even seeing a hint of these indicators today.

The housing market will not stay the same forever. At some point, the demand for multi-million dollar estate homes on view lots may diminish. But for every couple seeking that kind of high-end trophy home, thousands of young couples with children in strollers patrol our models every weekend looking for their first home. Thr first step on the ladder of home ownership. These people are not going to disappear like some bubble. Their desire for a new home, their first home, their willingness to do anything to get it, is just about real and solid and lasting as a rock. And rocks don’t burst.


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This page was last updated on Tuesday, November 02, 2004