An interesting, if somewhat academic, discussion of whether the housing “bubble” will continue to rise or is headed for a bust. Unlike most prognosticators that I have read lately, The Economist magazine thinks that the U.S. could see a drop in housing prices of 15-20% in the next year or so. The article is a bit long and looks at the international picture as well as the U.S.:
http://www.economist.com/displaystory.cfm?story_id=1794873
Replies
IMHO, as if I actually knew anything, there are two, maybe more, conflicting forces at work. Houses serve two main functions. Machines for living and/or an investment. If they are handled as an investment bigger and more complicated is almost always better. For living, discounting very large families or other unusual needs, smaller and more efficient is more effective.
The previously market forces favored houses as investments so most houses seemed to be getting larger. Everyone was into creative credit and go-go investing. Buying high knowing they couldn't loose. Lately I hear about people resisting this trend and buying housing for raising a family. I don't know how deep this goes or how long it will last but it used to be rare. I have worked with a few families who have moved out of McMansion and into more modest, but very nice, homes. Most commented about how they are more comfortable, physically and financially, in the smaller digs.
This, if it rings true, means that there might be a shift going on. From show homes to family homes. If perceptions change and people start dumping the high end of the market it could be a bubble of sorts. People want homes. Single family homes. Part of the American dream but taste and perceptions change. Perhaps the bankers and speculators will have to make their money elsewhere.
On the up side renovation contractors should do well as people want to update, add to and customize smaller homes. Maybe they can move Wally Worlds and Martha-Marts into the empty McMansions or subdivide them for low income housing.
the pressure for housing is driven by the demand..
According to the 2000 census, there will be a demand for approx. 15 million homes in the next decade.. Average of 1.5 million new homes a year
On top of that the vacancy rate at most apartments is less than 2% or about the normal turn over..
to reach that 15 to 20 percent drop the market would suddenly need to be overbuilt which according to all estimates it's not..
clues to look for in a market downturn are the following..
slow sales of new homes.. greater than 90 days average to sale is a critical number to look for. Check with a realitor for local numbers, here in Mpls. it's less than 45 days.
A surplus of exsiting homes, again where average sale exceeds 90 days..
excessive spec building by contractors.. Most banks are well tuned to those numbers and a conversation with several bankers will yield you a clue of local conditions..
Right now the only force driving the economy is new home construction.. with record low interest rates homes today are more affordable than they have ever been.
I realize looking at the Mc Mansions offered by many builders it's hard to see where the source for that sort of money can come from but a simple look at the average rate of income for a two income family will show you that with a previous starter home many couples quailfy for that Mc Mansion..
With 600,000 people coming here each year and the developers scrambling around trying to put houses anywhere everywhere they can. I dont see it going down. Here people are buying homes just for the land tearing them down and building new ones. My boss for example communtes approx 2 hours each way a day. Commuting here in SoCal is a way of life. Land In Orange/ LA County is at a Premium.
Darkworks: No squilla, No Bling Bling.....
Just listed our home on the market yesterday. Out in the So Cal area(Temecula/Murrieta area) housing prices have risen approx 20% in the last 6-8 months. For all of you non Calif residents, prices are in the $125-$225 per sq ft and this isn't in the high rent district(Orange/Los Angeles/San Diego counties). 2 1/2 acre properties start in the $100-200,000 range for BARE land. This price increase out here where I live is mainly due to the skyrocketing housing prices along the coast. It has pushed home prices up $100,000 in the last year. The new home buyers are now having to make a 2- 2 1/2 hour commute to coastal counties, only 45-60 miles away. West bound highways start to back up 5:00 in the morning and Eastbound at 2:30 in the afternoon.
Just to put into perspective, my home:
2200 sq ft 5 bdrm; 2 3/4 bath single story home; 1950 sqft shop on 2 1/2 acres with view of valley; 884ft deep well; 45 miles from Orange County(2 hr commute) was listed for $439,000. I CANNOT comprehend these type of prices, but I'm not complaining. This not a sales pitch or bragging, it is just the way things are going out here on the West Coast. It really is mind boggling to how these new buyers must be large, dual income families. It really puts a strain on the real term of "family". I can't see how these prices can keep rising without another crash, like in the late 80's early 90's. It took ten years for the market to come back last time. Plus, all of thes commuters are driving $40,000+ cars, commuting 40-50,000 miles per year.
I don't see construction slowing down for the next year, but I think the sales prices need to slow down. It's making the lower middle class unable to purchase the American Dream. Even 2-3 bedroom apts. are going for over $1,000
Last summer,we traveled across the US and saw incredible homes on large lots for less than $100,000. Started to make us sick to our stomaches, to see these kind of prices. More land, larger homes for 1/3 of the prices of Calif.
Maybe this post is a little off suject, but it did give the time to vent.
This is a subdivision home in the boonies - 4 bedroom, 60' x 110' lot, $1,050,000. .
Phill Giles
The Unionville Woodwright
Unionville, Ontario
Well my SoCal brother.. According to the OC Register the avreage OC home price is $254.78 per sq ft. Thats not looking into upgrades location ect thats justper sq footage
Darkworks: No squilla, No Bling Bling.....
Yeh, in Orange County, were talking Riverside County. Environment between the two counties is night and day
Baltimore is not exactly SoCal or Manhattan but we are still seeing spectacular real estate gains here in this "poor city". 300% gains on rowhomes people have owned for 6 years. And this isn't anywhere near
the harbor which is even hotter.
Where is all this money coming from?
Is it all driven by low interest rates?
Is it some baby boom aftereffect?
I'm not sure and I don't think anyone is.
There is some thinking that people have kept their money
out of the stock market and put it into housing.
If so, what happens when the stock market turns around as it might
be doing now?
There may be no bust to the boom.
There may be just a slowing of the increases and a return to stability.
Since it's not as centralized as the stock market there may not be a
"bubble" to burst in any quick way. Especially if the economy recovers.
Tom
Migraine,
What is driving the demand for housing is population.. at 280,000,000 people in the United States now we are quickly reaching where the point where the growth will out pace our ability to build..
Water is the limiting factor in Southern California right now.. land that has access to water that is grandfathered in is going to command a premium.
The next decade promises the need for another 15 miilion new homes and southern California is one of the most attractive options. sure there is grid lock.. sure their is high crime rates.. On the other hand wind chill isn't part of their vocabulary, nor is blizzard or sub zero tempuratures.... In addition the economy is strong and diverse.
I suspect that out of 280 million people, 50 million are giving serious consideration to moving there at any one moment.
By the way, a serious part of that price rise is the 4 3/4 percent interest rates available that makes previously redicusly expensive prices possible. Another part is the fact that the United states has had a 15 trillion dollar increase in home values in the 90's Many couples live by the refinace method.. Home goes up in value, interest rates go down, it's time to use the tax benefits of home ownership.
Another factor is less travel means more time at home with attending interest in their homes. Add together the tax benefits and better than stock market rates of return, and you can easily see what is driing the market..
second hand info (wife talked to her boss, who talked to RE agent)
west of Boston
low end homes not selling
mid priced holding own
high end hot market.bobl Volo Non Voleo
I don't have anything to back this up, but I have long thought that no matter how good the ecconomy in an area there is some part of the RE market, price range/location, that is in the pits.
Likewise not matter now bad the ecconomy is there is some segment that is doing good.
Yeah, like the bums on wellfare. I'm not talking about the one's who legitimetly need it, just the fraud cases.
I gotta know , what's a 3/4 bath? You got a urinal, soap dispenser, or just a shower with almost cold water?<G> EliphIno!
My be in some other areas of the US, but not here. A 3/4 bath is a sink, toilet, shower. Full bath is a sink, toilet, tub, shower. A 1/2 bath(powder) is a toilet, and sink. If a full bath also has a bidet, does it bake a 5/4 bath? In France, if a full bath also had a bidet, would that make it a bath with 2 showers? You know, his and hers ;-)
I have one hour commute with no traffic to Palm Desert. In LA orange county metro area you can commute half that distance and still spend two hours doing it at rush hour. And if there is an accident of any size add another hour or more. One reason I choose to go the other direction.
Haven't seen the economist article yet (I haven't finished this weeks issue yet), but I'll venture an opinion anyway.
It seems that the increase in housing prices have outpaced incomes, and housing starts are probably growing with than population increases (I have not seen the numbers).
There was probably quite a bit of "pent-up" demand as a result of the recession in the eighties, which we are probably still catching up with. The unprecedented economic expansion, with low inflation and interest rates, had a real wealth effect which may also account for the increased demand for housing. Supply has lagged the demand, but may be catching up.
At some point, who knows when, supply will outpace demand and the over supply will probably start depressing prices. Also, as the present economic slowdown makes its way through the economy, demand may flatten. If that happens, prices may decrease even more.
I don’t know how much the slow down in the stock markets has affected the housing market. As the dot com bubble was at its peak, the housing market was also really hot.
paul