Friday, September 21, 2007

Will housing Bubble Rise Again?

September 21, 2007

Downtown Orlando developer Cameron Kuhn, who built a portfolio worth more than $100 million just as the nation's housing bubble was inflating and peaking, said Thursday he expects another bubble before the market stalls and falls again.

Speaking to more than 100 small-business owners and operators in a panel discussion at Loch Haven Park, Kuhn said the Federal Reserve's decision this week to slash the federal funds rate by a half-percentage point will probably help reinflate home sales and prices in the short term.

"You will have another residential bubble," Kuhn predicted, noting that the nation's central bank is injecting more capital and liquidity into the market to forestall a possible recession -- a downturn some economists fear might be sparked in part by the slowdown in housing markets nationwide.

While the Fed's goal is not to reinflate the bubble but to prevent further erosion, a bubble is the likely outcome and could cause more problems when the excesses are finally wrung out of the system, Kuhn said.

"There's no way to offload that product," Kuhn said of the additional homes and condos that will be built and sold as a result of an easing of lending and credit restrictions.

The federal government is moving aggressively on a number of fronts to help offset the meltdown of the subprime-mortgage business, through regulatory action and enhanced services by the U.S. Department of Housing and Urban Development and other agencies.

The Fed's cut in short-term rates immediately prompted banks to cut their prime rate, a benchmark rate to which credit cards, home-equity lines of credit and other loans are often tied. While mortgages are more directly related to longer-term bond rates, any easing of consumer credit makes homeownership somewhat more affordable while boosting consumer confidence and stock values.

Many Realtors, who profited handsomely from home sales during the historic runup in prices from 2004 through mid-2006, have been pressing for government action. They cheered the Fed's rate cut and other steps taken to boost home sales again. Realtors, brokers, appraisers and others profit from a home's sale whether it is foreclosed on later or not.

Analysts generally have been predicting another year of weak or falling sales and prices, followed by a gradual rebound that could leave housing prices flat, or barely tracking inflation, for years to come.

Commercial real estate, which has remained far stronger than the residential sector, has been vexing developers with rising costs that eat into their profits, Kuhn said during Thursday's meeting, which was sponsored by Washington Mutual and moderated by the Disney Entrepreneur Center.

"We're losing margin on a consistent basis," Kuhn said. "What will pull us out is to innovate" and "to fix these costs."

Rising costs of material, labor and energy are being exacerbated by higher taxes and insurance, he added, and small businesses and builders "can't raise prices fast enough to keep up." Courtesy of Orlando Sentinel 9/21/07.