Real Estate Bubble Economy?
U. S. News has a fascinating feature article entitled, “The red-hot housing market reminds some of the latter days of the 1990s stock market. How will it end?”
After one of the broadest and longest run-ups in housing prices ever, most homeowners are sitting pretty. But there is a growing angst about how much longer the party can go on. Those who believe housing is now the new “bubble,” much like the ’90s stock market, point to slowing sales and rising interest rates amid nosebleed prices that have far outpaced growth in personal income. Take Las Vegas, for example, where the median home price has increased an eye-popping 54 percent in the past 12 months alone.
And while much of the middle of the country has enjoyed far more modest gains, red-hot coastal markets in California and the Boston-to-Washington, D.C., corridor, as well as in southeast Florida, have pushed up the national median sales price by more than 7 percent in the past year, three times faster than household income.
In cocktail party chatter reminiscent of the days when housewives and taxi drivers confidently traded stock tips, many have oversimplified the real-estate market’s underlying fundamentals, Shiller believes. “The typical simplistic view is that it’s just supply and demand,” he says. “That where they live is such a wonderful place and that since there isn’t enough land for everyone, prices have nowhere to go but up.”
In truth, sprawling housing developments across the country attest to the housing industry’s ability to readily supply the demand, and then some. Last year alone, America’s builders started construction on about 2 million homes, nearly twice the number of households the country added. Meanwhile, growth of so-called exurbs in outlying areas demonstrates Americans’ willingness to commute more than 50 miles one way to buy where prices are more affordable. Even in crowded places like Miami, a building boom that has transformed once moribund inner-city neighborhoods into massive construction zones is expected to add 25,000 condos in the next year and a half–about five times the number sold last year.
[A] lack of available housing didn’t stop real-estate prices from plummeting there amid the economic downturn that followed the 1987 stock market crash. That’s when Sheryl Lieberman bought her first apartment in Manhattan for $230,000. Six years later, a friend in the same building sold a similar apartment. “It was two flights higher, so it should have been worth more than my place. But she only got $160,000,” recalls the 45-year-old financial adviser. “People forget that what goes up can also come down. Like right now, they think real estate can’t fail. I heard the same thing in the early 1980s, and then came the late 1980s.”
I would note that home prices are far higher in most areas now than they were in the 1980s, even adjusted for inflation. Certainly, a massive increase in interest rates could make the current prices unsustainable in the short term, making people forced to sell their home take a loss on their investment. Those of us with variable rate mortgages could also be squeezed. However, real estate prices in major metropolitan areas will certainly only go up in the long term.
While supply and demand aren’t the only factors affecting home prices, they’re by far the most significant component. I live in the D.C. exurbs of Loudoun County. While I’m only 30 miles or so from downtown D.C., that’s still over an hour of driving each way during the morning and evening rush hours–and getting worse by the month. While there are people who manage daily commutes from as far away as West Virginia and Pennsylvania, the numbers willing to spend five hours a day commuting has to be miniscule. Housing that’s closer to the city will therefore always be at a premium.