Dollars and Sense: Will the housing bubble burst again?

Not so quiet. Once again it was supposed to be a quiet week on the financial front, and once again it didn’t turn out that way. Monday, of course, was the Memorial Day holiday. The U.S. markets were closed, and traders were supposed to take the week off, since Memorial Day is the unofficial beginning of summer. We were expecting to see the old saying, “Sell in May and go away,” come to pass this week. But on Monday we saw a big sell off of Japan’s Nikkei stock exchange, with it falling 3 percent. It had dropped 7 percent in one day the week before. So on Tuesday morning, we saw some anxiety in the markets.

But not so bad, either. But—with apologies to Las Vegas—what happened in Japan mostly stayed in Japan. The Nikkei, after all, has nearly doubled in the past year alone, so traders expected a bit of a correction. In fact, U.S. stocks actually rose sharply Tuesday. The key reasons were reports showing consumer confidence rising in May and the real estate market picking up speed. The Conference Board reported consumer confidence rose to a five-year high this month, with consumers more upbeat about the economy over the next six months. Separately, the S&P/Case-Shiller home-price index for March rose 10.9 percent from the year-ago figure.

Not a fan. That said, not everyone is excited about the improvements in the housing market. The housing market is a primary beneficiary of low interest rates and all the money the Fed is pumping into the economy via its quantitative-easing program. But because credit standards are still very tight, it’s driving investors and speculators, and not homeowners, back into the market. Mark Vitner, chief economist of Wells Fargo Bank, said we actually have fewer homeowners in America today than we did a year ago. Some analysts think it’s a bit crazy that just four years after the housing bubble crashed, the government is creating a new bubble with these monetary policies.

A repeat, or an echo? So will we see the housing bubble burst again? Mark Twain said that history in fact does not repeat itself, but it does echo. So if the question is: Will we see a collapse like we saw in 2008 and 2009? I’ll say no. But if you’re asking if this housing market and the stock market are currently priced by factors other than the underlying value of the assets, I would have to say that there’s increasing evidence the answer to that question is yes. The problem is this: History tells us that the price and value lines can’t stay apart for long without coming back together, often suddenly.

The week ahead. What does the week ahead look like? Today is, of course, the last day of May, so in the coming week we’ll see a lot of monthly reports. The Institute for Supply Management issues separate reports on Monday and Wednesday. But the number everyone will be waiting for is the unemployment report, which we’ll get from the Labor Department next Friday. And we should get a preview of that report when payroll processor ADP releases its monthly report on Wednesday. The April rate was 7.5 percent, and except for last week, when new claims for unemployment rose, we got generally good weekly reports, so the expectation is certainly that the number won’t go up, and there’s some hope it will go down. Either way, I’m not sure the markets will react strongly based just on the unemployment rate itself. Traders will be looking at the underlying job creation numbers. If they’re not strong, or at least steady, that could mean that the economy is slowing down, and that will cause the markets to move.