Where are we in the progress of the housing bubble?

Hard to say. It is clear that sales are down and inventories are rising, especially in the most extreme bubble areas, such as South Florida, Phoenix, Las Vegas, San Diego and so forth. However, there has been little downward movement on prices although the rapid rises seen last year seem to have stopped in most place, although not all. Some areas are still seeing bidding wars and price increases. The first cracks in the bubble occurred in late summer of 2004, with Pulte’s drastic price reductions in Las Vegas showing that there were, in fact, limits to the ability to raise prices. What is clear is that new house builders are increasingly cutting prices and adding incentives to move the product. But the less skilled sellers of existing houses are still holding their ground and hoping for higher prices. If not now, in the fall. Or spring 2007. Or whenever.

What we saw in Australia and Britain was an initial drop, then a leveling out in housing. One certainly cannot rule out the same thing here. However, the real issue os not the bottom falling out of the housing market but the end of the “housing ATM” which has been funding consumption for the last few years. This should show up in M2, usually a good indicator for consumer spending. So far (as of the end of March). it has not done so. So I think it is too early to conclude that the housing bubble has burst, although the behavior of the new house builders and the rising inventoriea are a clear warning signal that the end is near.

We will be watching the weekly mortgage purchase index (from the Mortgage Bankers Association) for signs of movement, and also M2 as a leading indicator of consumer spending.