Housing Bubble*

April 24, 2002

* At Market Close

When new-home sales are reported Wednesday, the numbers are expected to still be strong. Thanks to low interest rates, economists estimate that new-home sales will have increased 0.6% during March, to an annual rate of 880,000 homes from 875,000 the prior month.

But investors still are worried about whether there is a housing bubble, noting that many home-builder stocks are flirting with 52-week highs.

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• The Dow industrials fell 47.19 to 10089.24, their lowest level in over two months, hurt by disappointing earnings news.1

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Three home builders report earnings Wednesday: Ryland Group, Beazer Homes USA and Standard Pacific. Bulls argue that home builders aren't as cyclical as they have been in the past and deserve higher multiples. They contend the industry speculates on land less, builds more prudently and has better access to capital than private competitors.

As interest rates rise, though, and consumer-debt levels continue to go up, those contentions will be tested, and fears of a bursting housing bubble will persist.

Some economists don't think housing is overly fizzy. Northern Trust economist Paul Kasriel has crunched a "price to earnings" ratio for housing, taking the value of a home and dividing it by money that could be made by renting out a house, minus the costs of homeownership.

Mr. Kasriel says this "P/E" is low by historical standards. "It does not really look like a bubble," says the perennially grumpy economist. "Much to my chagrin."

Durable Economy

Alan Greenspan may not mind that Americans are paying big money for homes, but he sure is keen on what they are putting in them. The Fed has repeatedly emphasized it is watching demand for goods and services to gauge if the economic recovery is sustainable.

So, investors will be focused intently on Wednesday's orders of durable goods, or items designed to last three years or more. The median economist prediction is that orders will be up 0.2%. If the number comes in low, the market will continue to think the Fed won't start raising rates until late summer. It will take a series of strong indicators, not just one, to change investors' minds.

Send comments or questions to tape@wsj.com.4

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In other major U.S. market action Tuesday:

Stocks retreated.5 On the Big Board, where 1.33 billion shares traded, 1,583 stocks rose, 1,587 fell.

Bonds gained.6 The 10-year Treasury note rose 3/32, or 93.75 cents for each $1,000 invested. The yield, which moves inversely to price, fell to 5.165%. The 30-year bond rose 6/32 to yield 5.660%.

The dollar strengthened.7 Late in New York, it traded at 130.19 yen, up from 129.93; the euro fell against the dollar to 88.86 cents from 88.96.

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