Print

Email story

Comment

Email editor

Economist sees rising housing bubble

Q&A: JOE KEATING: AmSouth's executive vice president and chief investment officer likens the current real estate market to the dot-com craze.

By JEFF HARRINGTON
Published May 14, 2005

Like most economists, Joe Keating used to downplay the likelihood of a housing bubble.

That was before sharply escalating home prices in markets including Florida started adding up.

"In selected markets, housing prices have risen 40 to 50 percent . . . some isolated cases for waterfront properties are up 100 percent in a 3-year time-frame," Keating said during a visit to Tampa last week. "Personally, I do believe there is a chance of a bubble. I'm a better seller than buyer in real estate for the moment for speculative purposes."

Keating, executive vice president and chief investment officer for AmSouth Bancorp., zeroed in on those buying condominiums and single-family homes intent on flipping them for a fast profit. They're entering eerily familiar, and dangerous, territory.

He equated the situation to the dot-com craze "when everybody was rationalizing about why these properties could only go higher in price. When you start building rationales for why it can go only higher, it gets a little bit scary."

Don't get him wrong. Keating still believes in real estate investing, particularly the buy-and-hold strategy for people with their primary homes. It's still the top tax break for most people.

But short-term investors trying to capitalize on Florida's real estate run-up may soon find the pool of prospective buyers is tightening.

"If you were to invest in housing speculatively, to whom would you sell? That pool of "to whoms' is shrinking," Keating said. "I'm not saying the sky is falling. I'm just saying go into it with your eyes open just like some never did in 1999 with the dot-coms."

Keating, 53, joined Birmingham, Ala.-based AmSouth in 2001 after a banking career centered in Midwest, most recently with Fifth Third Bank.

Soaring housing prices aside, he was generally upbeat about the country's near-term economy. Before a speech to AmSouth clients, he chatted with the St. Petersburg Times. Among the topics:

What's the primary message of your speech?

The overall theme on the equity side . . . is that investors want proof of growth. The ability of the economy and earnings to continue growing - that's the real issue.

The market turned quite a bit more volatile in April. During the first three months of the year, we had seven movements of the Dow of 100 points or more - four down and three up. During April, we had eight: six down and two up.

To me the reason for that goes back to investors wanting proof of growth.

Every time the Federal Reserve goes about raising interest rates, you get into an interesting situation where good news is bad news. Good news for the economy is bad news for the stock market. The outcome people fear is that bad news is bad news - that the Fed has gone too far and pushed the economy into a recession.

Two things need to occur for the stock market to move higher: the Federal Reserve has to acknowledge the impact oil is having on the economy and that inflation is well-contained. You look at the statement from (two weeks ago). We got both of those.

It's pretty clear the economy has downshifted.

It's still our position that we will see the Fed blink. We don't think the Fed will take the funds rate above 3.5 percent. The Fed meets in June and August. We do expect (the rate) to be raised both times, a quarter both times . . . and they're going to be very close to ending then.

What do you draw from the latest, better-than-expected employment report?

There is potential for distortion of the data in April from both the weather and the five-week reporting period. It was really out of synch with the other data we've been seeing in terms of the economy downshifting.

I don't think it throws water on the argument that the economy is going to grow at a slower pace.

One of the keys to investors during 2004 is (they) needed to be really patient. All the gains in the market in 2004 came in the last 10 weeks of the year. We needed to get the election out of the way.

I think we're going to see a similar play-out here in 2005. The event we need to get out of the way is the Fed getting out of the way and ending their campaign to raise short-term interest rates.

What are your biggest economic concerns heading into the summer?

What happens to energy prices. That's No. 1. If we turn right around and head above 60 (dollars a barrel) and upward into the summer, the economy definitely will downshift even further than it already has.

I see prices basically staying in a band of $45 to $55 in the next few months. We're at $51 right now.

Any concerns beyond energy?

The other thing that could have a material effect is a crack in the asset prices. If we see investors throw in the towel in the equity market, which I'm not expecting, that would clearly cause there to be a reassessment of the future by investors as well as consumers.

Florida traditionally has fared better than the rest of the country when it comes to job creation, low unemployment and construction. What's your biggest concern about Florida?

The southern part of the nation, and Florida in particular, given the amount of coastline, is far and away one of the most desirable areas.

The concern is that the prices in the market have potentially gotten ahead of themselves. Just because there is strong, sequential growth in the demand for real estate here, doesn't mean you can't get into an overbought condition in the short run. People just need to be a little careful about it. When prices get so high, when do people start substituting in similar alternatives (for retirement) with other states in the Southeast?

Do you envision a slowdown in migration from the Midwest in particular?

Potentially - because of housing prices. You don't have the plethora of housing value to be transferred from a home in the Midwest to Florida like you do with the East Coast.

What's your bottom-line forecast?

For the second quarter as well as into the third: 2.5 to 3 percent growth rate . . . something slightly below the long-run average because of the persistently high energy prices and the fact the Federal Reserve is draining liquidity.

We think the stock market will turn higher the second half of the year.

What's the best buying opportunity?

We think the biggest play in the equity market is dividend-paying stocks. With the change in tax legislation, what's really key to investors is to have the ability for a fixed time to invest in a growing stream of tax-advantaged income.

For folks like myself, if you're in that baby boom generation but still have another 10 or so years to work, being able to accumulate assets where the dividend stream is going to grow is a fabulous investment strategy.

Jeff Harrington can be reached at 813 226-3407 or harrington@sptimes.com

[Last modified May 14, 2005, 01:17:08]