Friday, December 10, 2004

Bubble, Bubble...

by Tom Bozzo

The Office of Federal Housing Enterprise Oversight's House Price Index (HPI) release (large PDF) for the 3rd quarter has everything you wanted to know about house price changes down to the MSA level, and then some.

Kash at Angry Bear quotes Stephen Roach from today's Financial Times saying that the headline result — continued acceleration of house price inflation — makes it clear that there is a housing bubble after all. Kash thinks this is the common sense interpretation of the data, and suggests that a recent New York Fed paper that purports to explain how there really isn't a bubble is typical of a cognitive disorder that spreads to mainstream economists in the later stages of a period of speculative excess.

I largely agree with Kash and Roach. One thing that grabbed me from the release, I noted in comments over at AB, is that the last couple of quarters have dramatically reversed a pattern whereby the HPI has lagged a house price index based solely on purchases. (The overall HPI is based on both sales and appraisals for refinance loans.) In the third quarter, HPI was up 12.97% year-over-year versus 10.26% for purchases only.

So to whatever extent the actual sale price growth is crazy, the refinancing appraisals are just bats**t. Since the refinancing appraisals arguably have a considerable element of art to their determination, and perhaps get a push from parties with interests in the transactions, that they're taking off amidst various signs of what naysayers might call bearish fundamentals looks like an even later stage before the bursting of the bubble.

More discussion with local flavor over the weekend.
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