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House Beautiful

Housing bubble? What housing bubble? The signs are in place for a further run-up in real estate. Breathe easy, mortgage holders. There’s still no place like home.

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Do you keep waiting for someone to prick the housing bubble? Are you freaking out that you paid too much for your home, that you top-ticked the market with your buy? Do you wake up in the middle of the night, drenched with perspiration, convinced that your house isn’t worth a fraction of what you forked over, and that when the bubble bursts, you’ll be an indentured servant to the mortgage company?

Ahh, then this column’s for you, anxious friend. Because there is no housing bubble. Because you probably bought your house at a much cheaper price than you will be able to a couple of years from now. Because your house is worth much more than you think.

Given the huge—some would say ridiculous—price increases homes have undergone in the New York metropolitan area in the past few years, you have just cause for thinking that you paid too much. The business media, for example, are obsessed with generating stories about the housing bubble, in part because the media dropped their guard during the dot-com bubble. You could go to any story meeting in any press establishment in this country and say that it’s time for a housing-bubble story, and even if the organization did a number on housing last week, it would gladly repeat the hatchet job. I fully expect that the recent figures released by the federal government showing that housing prices in New York state have ceased to appreciate—home prices inched up 0.3 percent in the third quarter, although they’ve rallied 7.5 percent for the year so far—will generate another round of alleged bubble-pricking reports.

But these stories don’t jibe with the facts, particularly on the middle and high ends of the market. And they will remain wrong until someone comes up with a way to make more land.

In the past month, I have sat down with the CEOs of Lennar, Centex, and Hovnanian, three of the biggest homebuilders in the world. I queried them about their businesses because their stocks have been hotter than just about any segment of the economy in 2003, including technology and gold. I wanted to know whether the stock rises were because interest rates are being kept down unnaturally by a Fed that is trying to ensure that we grow new jobs in an election year. I came in as a skeptic, and not just because I recently paid a huge amount for a house in the Summit, New Jersey, area and immediately suffered the remorse that anyone who has purchased in this market instinctively understands.

“Stories about the housing bubble bursting don’t jibe with the facts. And they will remain wrong until someone comes up with a way to make more land.”

I came away thinking, Holy cow, we are still early in the cycle of appreciation. I came away wishing to buy some houses, keep them in inventory, and then flip them over the next few years. As much as I love the stock market, I think real estate in this area still has stocks beaten.

Here’s why. First, homebuilders, desperate for land, have taken to knocking down homes that are worth high-six and low-seven figures for the lots alone, because the scarcity of land is beyond belief. When homebuilders start tearing down million-dollar homes, a housing executive told me, the rapid price-increase cycle is just beginning. Homebuilders saw a similar process in Southern California and Florida that led to the doubling and tripling of prices over the next couple of years.

Second, the zoning laws have made it so difficult to build in the outlying suburbs of the metropolitan area that only the major builders can afford the litigation to fight entrenched residents and environmentalists eager to keep out big developments. Without the mom-and-pop builders erecting fill-in projects, there simply isn’t enough supply coming on the market to meet the demand.

Third, Wall Street, a principal driver of price increases, is finally through laying off people and cutting bonuses. Next year will be the first time in three years when there will be net hires in finance.

Not one of these major homebuilders can currently assemble enough parcels in the areas around New York City to change the supply-demand imbalance any time soon. All these homebuilders are confident that even if interest rates spike 200 to 300 basis points in a year—a highly unlikely doubling of the short rates—the demand will still not be sated. Why should we believe them? Aren’t they just talking their game?

I don’t think so. The homebuilders no longer just build homes; they bank land. The three I met with recently, as well as Toll Brothers, the biggest developer in the Northeast, constantly scour the country’s metropolitan areas for big parcels. They say there simply isn’t that much out there left to be had in this region. They can’t flood the area with new homes to take advantage of the price increases even if they wanted to.

How about the notion that pricing has moved up too far too fast? If that were the case, you would think that after the run that these homebuilders have made, the insiders would be bailing out of their shares. They’ve done that repeatedly in the past even as they told us things were good. But they aren’t this time. In fact, insider selling is lower than you would expect and certainly lower than we have had in previous up portions of cycles. Maybe the homebuilders recognize that they really are in a growth industry that is going to leave only a handful of large national companies building homes, wiping out the local builders who used to meet excessive demand with tons of spec projects that would tumble pricing.

Throughout this year, the “chic” bet on Wall Street has been for a housing collapse. Dozens of hedge funds have shorted these homebuilders, perhaps even as a hedge against what they may have paid in this allegedly inflated market. Yet I want to take the other side of the trade. Just as I think that the moves in Centex, Lennar, Toll, and Hovnanian are in their early stages, I am willing to bet that your home’s appreciation may turn out to be far greater than you would ever expect.

Which is why you should stop worrying about what price you paid and ignore those anxiety-producing bubble stories. Your home, alas, is not a dot-com, soon to be deflated and delisted. It’s simply the best investment you’ll ever make.


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