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Analysis Last Updated: Feb 28th, 2006 - 01:06:06

Bubblicious: Looking at the U.S. real estate market
By Seth Sandronsky
Online Journal Contributing Writer

Feb 28, 2006, 01:03

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Many eyes are on the U.S. real estate market. �During the past five years, home prices have risen at an annual rate of 9.2 percent,� according to the 2006 Economic Report of the President released on Feb. 13.

Was this normal growth, or not? We need the historical context of home price increases to reply.

The White House's Council of Economic Advisers recent report sidestepped this data, as did AP coverage that day. For the relevant historical data on recent home prices, we turn to economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC.

�Through the post-war period 1950 to 1995, house prices grew at approximately the same rate as the prices of other goods and services,� he wrote last July.

The Consumer Price Index of goods and services rose at an annual rate of 3.4 percent in 2005, a five-year high, according to the U.S. Bureau of Labor Statistics. Between 2001 and 2005, the CPI annual rate, on average, was 2.56 percent.

By contrast, the annual growth rate of home prices was 9.2 percent during these five years. Home prices rose at an annual rate of more than three and a half times the annual rate of consumer price increases in the same period!

Some economists have a technical term for the U.S. real estate market -- a bubble. They are part of -- not apart from -- the national economy.

Recall the stock market bubble of the 1990s. Share prices climbed to record highs.

Federal Reserve Chairman Alan Greenspan claimed concern about investors� �irrational exuberance� on page eight during a 10-page speech. This was an exception to overheated rhetoric of a �new� economy shaped by the stock market.

Meanwhile, tens of thousands of people across the country are buying overpriced new homes. Many first-time homebuyers are scraping by to pay their monthly mortgages.

For them, losing a job or accepting lower-paying employment will make it tougher to make ends meet. Corporate downsizing and outsourcing can and do drive this process.

Other homeowners have used the increasing market value of their homes to take out new loans. For some, second mortgages expand their debt.

They are borrowing and consuming with the expectation of a future rise in their home prices. Such spending based on lending instead of rising real wages (what people�s pay can actually buy) will cool when the hot housing market loses heat.

Building of some 2 million new homes began in 2005. Some 25 percent of these new starts were bought by real estate speculators with expectations of selling at higher prices down the road, according to Baker of the CEPR.

Concerning national residential construction activity, the Feb. 13 White House report called for it to lose speed quietly rather than loudly. "A gradual slowing of homebuilding appears more likely than a sharp drop because the elevated level of house prices will sustain homebuilding as a profitable enterprise for some time."

That scenario may or may not prove true. Like bubbles of the past, uncertainty rules the future of the U.S. market for real estate.

It can be no other way with so many actors and factors involved. In other words, nobody is really in control.

Seth Sandronsky is a member of Sacramento Area Peace Action and a co-editor with Because People Matter, Sacramento�s progressive paper. He can be reached at:

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