The chief economist and strategist for American Express Co.’s bank says he is sure there is now a well-inflated bubble in home prices, and it will most likely cause problems — but not for a while.
The mismatch between prices and fundamentals is so large that it would take more than 10 years of stagnation and steady wage growth to correct, John Calverley said in an interview last week.
Despite all the recent press on prices and predictions of an impending bust, he says low interest and unemployment rates should sustain prices or even further inflate the bubble, especially its growing geographic scope, he said.
Higher inflation (and interest rates) will not provide the prick until somewhere around 2008 to 2010, Mr. Calverley said. Still, “if house prices keep rising, we’re going to be in a pretty abominable situation” when the bust starts, he said.
He made the same argument in a monthly investor publication Amex put out July 19.
In the interview — which Mr. Calverley followed up with a CNBC appearance — he dismissed the idea that surging interest by the news media and experts in proclaiming a bubble would do much to tame prices. Neither will it influence consumers’ savings decisions or plans for investing in real estate or other things, he said.
U.K. homebuyers were inundated with such talk in 2000 and 2001, “and then, of course, home prices went up,” said Mr. Calverley, who is based in London. “After a while, people stop believing A) there is a bubble and B) it’s going to burst.”
(He did note appreciation has cooled in recent years in the United Kingdom and Australia, two of the many places where prices surged.)
Robert J. Shiller, the Yale University professor who revised his book “Irrational Exuberance” this spring to add thoughts on a housing bubble, argues that a cascade of negative news reports usually is a major cause of a market bubble’s burst — like positive stories help create it.
However, at a May conference, Mr. Shiller explained in a brief interview that the accelerating appreciation during the current upswing in bubble stories by saying most buyers still imagine they could sell at the start of a collapse.
He also offered an analogy: Most gamblers know casinos usually win, but still play there.
Mr. Calverley said lenders should rein in their practices but can be emboldened to make risky loans by surging prices, because increases in borrower equity make their older loans look “very safe and secure now.” For this reason, in fact, “the percentage of their mortgage book at risk is really quite small.”
He also said, “At the end of the day … if somebody is offering one of these fancy mortgages, unless you offer something similar, you’re not going to be able to” compete.
Regulators will start paying even more attention to prices and lending, Mr. Calverley said. For instance, the Federal Reserve may end up raising rates too far, to dampen speculation.
Still, “it’s interesting that authorities here, including the Fed, have been warning about this for quite some time, but there’s no sign” of any more conservatism in lending.
Citing Amex’s experiences during a sharp drop in Hong Kong realty prices, Mr. Calverley said exposure to other consumer debt is much riskier than mortgages, “even in a housing bust.”
Because borrowers must live somewhere, they do everything they can to keep their homes, and bankruptcy reform may make it even more difficult to escape housing debt, he said.
It is unclear whether a recession will lead to a housing bust, or vice versa, but by the time a downturn comes, businesses will be vulnerable, because they will have shrugged off the caution of today, he said.
Modern monetary policy precludes a depression, but a housing bust will make the downturn much more severe than the 2001 recession, Mr. Calverley said. Investors could hedge against the effects of a housing bust by buying Treasury bonds when it starts, he said.
Mr. Calverley also predicted that similar froth in commercial realty prices would soon lead to a boom in such construction. The recent dearth of building makes the surge in prices relative to fundamentals less worrisome, he said.
