A Housing Price Bubble Does Not Exist, Freddie Mac Economists Say - 5/10/2004 - Mortgage Loan Refinance Debt Equity

A Housing Price Bubble Does Not Exist, Freddie Mac Economists Say

“We believe that at the national level a house-price bubble does not exist, and, in nearly all metropolitan areas, rising home values are firmly rooted in economic fundamentals,” wrote Amy Crews Cutts and Frank Nothaft in special commentary from Freddie Mac’s Office of the Chief Economist.

The economists said they don’t expect to see residential real estate values crash because inventory levels are at record low levels. Also, the transaction costs involved in selling a house average $20,000 compared to a $9.95 commission on an online broker, and that’s an impediment to the type of speculation that led up to the stock market crash of the 1990s.

The Freddie Mac analysts also calculated that it has been less expensive to own than to rent similar properties since 2000, and the cost of owning a home has been generally declining for more than 10 years. “Thus, it is understandable that homeownership rates keep rising even with a weakened economy,” they wrote.

“Clearly, some localized housing markets are at risk — those with a highly inelastic housing supply, such as San Francisco, for which demand shifts translate into large price movements — and they could see a fall in home values if demand drops,” according to Nothaft and Cutts. “But that is not a bubble, it’s just fundamental volatility.”

To read the complete commentary, including three charts, click here.