Wall Street tunes into housing boom -- or bubble

Aug. 23, 2005 -- Research reports written by Wall Street's top gurus used to focus mainly on price-earnings ratios, highflying stocks such as Google and bull and bear markets.

Not anymore. In their missives to clients, investment strategists are increasingly shunning stocks and devoting more ink to the booming housing market.

Wachovia Securities, for example, devoted its 35-page midyear outlook to predicting what the economic and financial landscape might look like after home prices peak.

Money manager Cumberland Advisors published a three-part series on the real estate bubble, with provocative titles such as "Deflating the Housing Balloon: Ka-Pow! or Pssssssss."

Citigroup's chief U.S. equity strategist Tobias Levkovich penned a 14-page report headlined: "Homesick?"

How the real estate boom plays out "will determine what the economy looks like in a couple of years," says Rod Smyth, chief investment strategist for Wachovia Securities.

Hard assets have replaced paper assets as the topic du jour. The shift in emphasis reflects the growing amount of investor wealth tied up in real estate, housing's increasing clout in the overall economy and a sharp increase in client questions related to real estate.

"Real estate is a topic that has vaulted to center stage," says Ethan Harris, chief U.S. economist at Lehman Bros. "The reason the topic is hot and belongs on the front page of research reports is that the housing market is becoming more of an engine of economic growth but is also the biggest risk to future growth" if the boom goes bust.

Wall Street prognosticators are obsessed with trying to predict what impact a bursting bubble would have on the economy, consumer spending and the stock market. The demand for housing-related analysis is on the rise, because:

*Real estate has emerged as the investment of choice. Nearly seven out of 10 U.S. households now own homes, a record, the Mortgage Bankers Association says. And for most people, real estate, not stocks, is now their biggest investment.

"Over the last few years, we've had a number of clients liquidate a portion of their stock portfolios and move it to real estate," says David Kotok, chief investment officer of Cumberland Advisors. "Real estate has become an asset class with its own momentum, and it is natural for strategists to write about it."

*Housing-driven stocks are at risk. Clients want to know what will happen to stocks that have benefited from the housing boom, such as home builders, lenders, furniture makers and home-improvement retailers, if the bubble bursts, says Citigroup's Levkovich.

*The economy is vulnerable if housing cools. "There is a risk to the financial system," says Kotok. "There is a potential ripple effect, and my job is to explain our investment strategies and how and why we implement them" to deal with downside risks.

So until it becomes clear how the real estate boom will end, expect a bull market in real estate reports.

"Everyone's trying to put a housing angle on almost any investment trend," says John Caldwell, strategist at McDonald Financial.

© Copyright 2005 USA TODAY, a division of Gannett Co. Inc., Adam Shell.