California's Foreclosures.com Reports Housing Bubbles on Both Coasts.

Business/News Editors

SACRAMENTO, Calif.--(BUSINESS WIRE)--Sept. 13, 2002

Despite a spate of recent news stories denying the existence of a bubble in the U.S. residential housing market, Foreclosures.com, a Sacramento, Calif.-based publisher of pre-foreclosure data, reports that leading housing economists see severe bubbles in three major housing markets: Boston, Mass.; San Diego, Calif.; and FT Lauderdale, Fla. Other overpriced markets with lesser bubbles include San Francisco; Orange County, Calif.; San Jose, Calif.; and Phoenix, Ariz.

Alexis McGee, president of Foreclosures.com, cited findings by economists Edward Leamer of UCLA, Dean Baker of the Center for Economic and Policy Research, and John Burns, head of a private real estate consulting firm based in Irvine, Calif.

"If you look at the housing market on a national basis," said McGee, "you could make the argument that there is no bubble." She pointed out that Daniel Kadlec reported in Time magazine in late July that there was no bubble in the U.S. housing market, that, in the U.S. as a whole, housing prices had never declined in a calendar year since the '60s. But in the same piece, he conceded that there had been "plenty of regional busts." She added, "The reference to regional collapses tells the tale. There really is no such thing as a national housing market. There are hundreds of micro-markets around the country that have local dynamics driving local housing prices."

Foreclosures.com has been publishing daily updated pre-foreclosure data in California for more than a decade and recently expanded their service to the metropolitan areas of Phoenix, Ariz.; Chicago, Ill.; New York City; and all 21 counties of New Jersey.

"While our primary mission," said Elizabeth Orio, Foreslosures.com director of research, "is to provide distressed property investors with accurate, current data on defaulted properties, we also watch housing economics in order to forecast foreclosure trends."

McGee said that one thing all three housing experts had in common was the observation that in "bubble" markets, prices are rising much faster than rents. One reason for this, she said, was that homebuyers were apparently beginning to put investment ahead of shelter as the primary reason for buying a home. "People are seriously disenchanted with the stock market," she pointed out, "and those with cash to invest seem to be socking the extra money into homes, hoping for a better return." UCLA's Leamer says that these buyers may be disappointed as the housing cycle peaks and price corrections begin.

According to McGee, both Baker and Leamer agree that the increasing divergence of price and annualized rents is evidence both of the investment emphasis being placed on home buying and of bubble formation.

"The term bubble implies a bust," McGee says, "but John Burns doesn't see it that way. He says that several factors could postpone a correction for quite a while. He mentions continued home ownership growth, low interest rates, restrictions on new housing supply, and income growth in the upper middle class as factors that might even forestall a correction."

McGee also pointed out that the reduced liquidity of real estate makes a NASDAQ type price crash less likely. "Yes, it takes a preponderance of sellers over buyers to start a correction," she said, "but severe price crashes happen only when asset liquidation gets competitive. That can happen in the highly liquid stock market, and it has. But real estate, by its very nature, is much less vulnerable to that kind of thing." She did add the caveat that in highly over-inflated markets, the initial correction can be quite steep before slowing as rent/price and income/price ratios return to more realistic levels.

"The consensus at Foreclosures.com," McGee concluded, "is that the current price appreciation rates in some overheated markets are not sustainable, but that we'll see a leveling off and some price stagnation and moderate rates of decline, rather than a big bust."

And what's the outlook for defaults and foreclosures? "As price appreciation slows in areas with high and protracted unemployment," said McGee, "refinancing as an option for curing a default will be curtailed." She added that over-financed properties such as those carrying over 100% second mortgages would be the first to blow up. "But we don't know when," she said. "For now, the market remains strong even in areas suffering from a recession hangover."