U.S. residential bubble risk limited

U.S. residential bubble risk limited
Thu Jan 12, 2006 By Nick Carey

CHICAGO (Reuters) - The risk of a housing bubble in the U.S. market is highly localized as supply is still catching up with demand in most of the country, U.S. real estate magnate Sam Zell said on Thursday.

"There will be a softer real estate market in some areas as a result, but I keep telling people there is no bubble," Zell told Reuters after an economic conference in Chicago where his headquarters is located.

"The fact remains that even with the gains of the past five years, American residential real estate prices in relative terms are among the cheapest in the world," he said.

Zell said a few areas in the U.S. market are suffering from oversupply, but he did not specify which ones.

House prices on average have surged more than 55 percent over the past five years, according to federal government data.

In some locations, the price gains have been more dramatic, such as California, which has notched price increases of nearly 113 percent over that period. Florida, Hawaii, Maryland, Nevada and Washington, D.C., have all seen prices jump more than 90 percent in five years.

"The residential market is going to level out for a while after years of huge gains, but that does not mean there is a bubble," Zell said.

He said U.S. commercial real estate is currently suffering from oversupply that has pushed down prices, but that the market would improve as demand rises to match supply.

In 2000 the funds Zell manages -- Equity Office Properties Trust (EOP.N: Quote, Profile, Research), Equity Residential (EQR.N: Quote, Profile, Research), Equity Lifestyle Properties Inc. (ELS.N: Quote, Profile, Research) and Capital Trust Inc. (CT.N: Quote, Profile, Research) -- developed 100 million square feet per quarter in the U.S. market.

In 2004 that had fallen to 23 million square feet a quarter and 17 million a quarter in 2005.

"There is oversupply at the moment," Zell said. "But we have lowered supply, and over the next 18 months the situation will get better."

He said barring an economic catastrophe or an attack on the United States, "I see nothing on the horizon that would threaten the U.S. economy."

Zell said the funds under his management -- which control assets in excess of $50 billion -- are still not investing in China due to the risk involved.

He also said they have mostly pulled out of eastern Europe -- in particular Russia -- because the "risk-to-reward ratio is too high."

"It is good to be a developer in those markets, but not good to be an owner because liquidity is too high," he said.

"The best ratio is still to be found in Mexico and the South," he said, reiterating criticism of Mexican legislation for real estate investment trusts (REITs).

He said that a new law on REITs in Mexico was flawed as it treated shares in the trusts as if they were still real estate. "So right now it's still not possible to have a REIT there," Zell said.