Temple says the bull will bail you out; Saville says HUI''s correction low is in


By Greg Ip
Staff Reporter of The Wall Street Journal
Thursday, April 3, 2003


WASHINGTON -- Housing booms are more likely than stock
booms to end in a bust, and they cause far more damage
when they do, according to a new study by the International
Monetary Fund

The IMF examined housing and stock booms and busts
across 21 industrialized countries in the last 30 to 40
years. It found housing price busts were less frequent
than stock busts, but the damage was twice as great,
"reflecting greater effects on consumption and banking

The study, released Thursday as part of the IMF's World
Economic Outlook, doesn't say housing prices are about
to plunge in the United States or any other country, but
suggests it's a significant risk. IMF research director
Kenneth Rogoff noted U.S. housing prices are up 27
percent adjusted for inflation since their mid-1990s trough,
the biggest such boom since its analysis begins in 1970.
Though less than many other countries, it still easily
meets "our statistical measure of a boom, which implies
a significant chance, perhaps 40 percent, of a later bust."

The study is likely to fuel debate over whether U.S. housing
prices are about to plunge, threatening an economy
already weakened by a burst stock bubble and war jitters.
The Labor Department said Thursday that initial claims for
unemployment insurance jumped 38,000 to an 11-month
high if 445,000 last week. Meanwhile, the Institute for
Supply Management said its index of nonmanufacturing
activity fell to 47.9 in March from 53.9 in February, the
first time in more than a year it slipped below the 50-level
that marks border between expansion and contraction.

Federal Reserve Chairman Alan Greenspan, who worried
early on about a stock bubble, says there's no such bubble
in housing prices today, although he has said prices could
recede a bit. Similarly, IMF deputy research director David
Robinson said, "I don't think I'd be ready to say it's a bubble
at this stage because there are economic reasons why
housing prices should have increased. One is immigration
and the increasing number of people in the United States.
Another is the increasing ability of low-income people to
borrow for housing, which means there's simply greater
demand for housing."

The study found that housing and stock booms differed in
several key ways. Housing price booms occurred once
every 20 years, compared to 13 for stock booms, but 40
percent of house booms ended in busts, compared to
about 25 percent of stock booms. Housing prices fall less
than stock prices in a bust, because houses are less easily
traded and their prices are less volatile. On average, about
60 percent of the runup in house prices during the boom was
given up during the bust, but in the biggest booms, the entire
runup was given up.

A fall in housing prices did more damage in part because
houses are more widely owned than stocks and the typical
family's house is worth more than its stock portfolio.
Furthermore, falling house prices were more likely to weaken
banks, which in most countries dominate lending for home
purchases. In the United States the banks share that role
with capital markets investors and the housing agencies
Fannie Mae and Freddie Mac, which should mitigate the
financial effects of such a decline.

The study gives few clues on what causes house price
booms and busts, but IMF economist Jonathan Ostry said
one factor that precipitates a bust is when the central bank
raises interest rates, which the Federal Reserve is clearly
not about to do. He declined to say what would happen when
the Fed eventually does raise rates.