Housing Bubble Versus Tech Bubble
Steven Taylor has an excellent discussion about the breathless coverage recently of the coming bursting of the “housing bubble” and various comparisons with the dot-com bust of the late 1990s.
[T]here are important differences. I have no doubt that there will be, at some point, a considerable cooling in the marketplace, but most of the drive in housing starts and home-buying isnÃ¢€™t the kind of Ã¢€œI bought four condos to sellÃ¢€ kind of activity that the story highlights. There is no doubt that there are markets in the US where insane rules apply (such as the Bay area and Silicon Valley).
However, it seems pretty clear that the main drive to buy homes is the historically low interest rates, that allow a lot of people to stop renting and start owning.
Unless a ton of people have gotten waaay over their heads with their mortgages, how will the bubble burst if housing prices cool off? I just donÃ¢€™t see a collapse that would be commensurate to the tech stock crash. There are real assets here which have actual usagesÃ¢€“unlike that pile of InterZero stock that was a Ã¢€œsure thingÃ¢€ in 1998, despite the fact that company didnÃ¢€™t make anything and never showed any profits.
Indeed. Aside from a huge regional economic collapse, the only real danger is to those of us with adjustable rate mortgages (ARMs).
Housing in the DC area is ridiculously expensive. The 2600 square foot house that sells for $175,000 in Montgomery, Alabama would be $750,000 out in Loudoun County, Virginia and simply non-existent much closer in to D.C. without spending $500,000 to buy a property, knocking the place down, and spending another $400,000 to build it.
Those of us without huge incomes who live in these pockets must use creative financing to buy houses. In my own case, I financed 80% with an ARM that’s a fixed rate for five years and adjustable thereafter, 15% with a second trust that’s adjustable monthly (and has adjusted three or four times, all upward, since I bought 18 months ago), plus 5% down. I’m not leveraged so tightly that the adjustability of the second trust is more than a nuisance but, certainly, I’d have to move or be making a lot more money three years from now if interest rates are radically higher when it comes time to refinance.
The silver lining, though, is that it is unlikely that the sizable equity gain caused by real estate prices continuing to skyrocket is going away any time soon. The market here is not speculative but rather a true supply and demand issue. Loudoun County is the fastest growing in the entire U.S. and that doesn’t appear to be changing, given the constant growth of jobs in the government and government support sectors. There are simply more people chasing housing than there are houses available.
Update (1253): David Bernstein disagrees:
And I don’t know how many times I’ve heard that “prices may stagnate, but you won’t lose money.” In 1988, a man drove up to my parents’ house in Queens, and offered him 500K, cash, for his house. Four years later, it would have been difficult to get $325 for that house, and it wasn’t worth 500K again until 2001.
That’s true when prices are artificially high, certainly. When there’s an actual shortage of a commodity for which demand is highly inelastic, though. . . .