The Definition Of Insanity, Real Estate Edition

4609752692_3255897307_oDespite the fact that the housing market has not fully recovered from the collapse of the last speculative bubble, and notwithstanding the fact that thousands of home still go unsold for months at a time, there are signs that people are getting to make the same dumb mistakes all over again:

LAS VEGAS — In a plastic tent under a glorious desert sky, Richard Lee preached the gospel of the second chance.

The chance to make money on the next housing boom “is like it’s never been,” Mr. Lee, a real estate promoter, assured a crowd of agents, investors and bankers. “We’re going to come back like you’ve never seen us before.”

Home prices in Las Vegas are down by 60 percent from 2006 in one of the steepest descents in modern times. There are 9,517 spanking new houses sitting empty. An additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale.

Yet builders here are putting up 1,100 homes, and they are frantically buying lots for even more.

Las Vegas is trying to recover by building what it does not need. It is an unlikely pattern being repeated in many of the areas where the housing crash was most severe.

“There’s a surprising rebound in the hardest-hit markets,” said Brad Hunter, chief economist with the consultant Metrostudy. “People are buying again.” From the recession’s lows, construction has nearly doubled in Las Vegas, Phoenix and Tucson. It is up 74 percent in inland Southern California and soaring in Florida.

Some of the demand is coming from families that are getting shut out of the bidding for foreclosures by syndicates that pay in cash, and some is from investors who are back on the prowl.

Land and labor costs have fallen significantly, so the newest homes are competitively priced. Some of the boom-era homes, meanwhile, are in developments that feel like ghost towns. And many Americans will always believe the latest model of something is their only option, an attitude builders are doing their utmost to reinforce.

It seems insane to add supply to a market that is still clearly over-supplied to begin with, but at least part of the factor driving the new building boom seems to be that buyers would rather buy a new home than a 15 or 20 year-old foreclosed home. Understandable, but one wonders what that means for the still growing supply over foreclosed homes that have yet to actually hit the market, and how the new homes can possibly maintain their value in the face of low-ball foreclosure sale prices in the next neighborhood.

It was more than just the actions of home builders that contributed to the last housing bubble, of course. Government policy, irresponsibility on the part of lenders and borrowers, and, most importantly, a loose monetary policy all played a role in creating a perfect financial storm from which we have yet to fully recover. But, increasing supply where it clearly doesn’t appear warranted and promising people that they can profit from the next housing boom don’t exactly sound like a good idea to me.

Benjamin Franklin once said that the definition of insanity is doing the same thing over and over again and expecting a different result. We appear intent on proving Mr. Franklin right.

FILED UNDER: Economics and Business, , , ,
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. john personna says:

    I’m fairly with you on this one, though the low interest rates could not have had the impact they did without a broken/corrupt bond rating system being in place at exactly the same time. People didn’t like low (or negative) returns, so they bought crap that was conveniently rated AAA. When it was an agent (say a manager of a teacher’s retirement fund), he could point to the AAA, even as he fed those teacher’s retirement funds into bad loans.

    Now, beyond that, repeating mistakes … what else do we do? Do you think a 10,000 DOW is anything other than another example of people fleeing low returns with a hope that this time it will be different?

  2. What moral hazard?

  3. Dave Schuler says:

    Builders build; bankers lend; politicians make promises they can’t deliver on. When the primary objective is to restore the status quo ante, of course you’ll make all the same mistakes again.

    IMO we’ve got a problem we’ve had for more than a decade now. We’re like addicts looking for the next fix. We’re looking for the next boom, the next bubble. Too many people are desperate to believe that the conditions of the late 1990’s were the norm rather than the exception.

  4. Dave Schuler says:

    Additionally, when you subsidize something you get more of it. The subsidies for purchasing automobiles and houses have lead to people making more automobiles and building more houses. What’s surprising about that?

  5. Dave,

    IMO we’ve got a problem we’ve had for more than a decade now. We’re like addicts looking for the next fix. We’re looking for the next boom, the next bubble. Too many people are desperate to believe that the conditions of the late 1990’s were the norm rather than the exception.

    I think that’s certainly a part of it. Just look at the stock market; what used to be considered a vehicle for long-term investment became a get-rich-quick scheme for people who had neither the time nor the inclination to do the research necessary really understand what they were investing in, and who were too impatient to wait for the rewards of investing for the long term.

    Of course, it’s not really a recent phenomenon. You can find examples of this mentality throughout history — the Tulip Bubble in Holland comes to mind.

    And you’re right about the subsidies too. Anyone who looks at the housing numbers from the past several months and thinks they mean the market has rebounded is kidding themselves — every realtor I know tells me that business has slowed down significantly since the eligibility date for the $ 8,000 tax credit passed on April 30th. And don’t even get me started about Cash for Clunkers.

  6. Dave Schuler says:

    As far as investors go, there’s something we really need to get through our heads. To the extent that there is an investment that gives high returns in the near term at low risk it is just dumb luck. There is no such thing as a safe investment that provides high, quick returns. Not for most people most of the time.

  7. KipEsquire says:

    Don’t forget that the Bureau of Land Management also plays a major and proximate role in Las Vegas real estate supply — they free up a certain amount each year for the developers to bid on and build upon. Hardly “strictly free market forces.”

  8. TangoMan says:

    I’m baffled by the prevalent mindset that residential real estate is considered an investment.

    Normally we don’t invest in consumer goods, say LCD TVs, and we don’t cheer when the price of consumer goods increases.

    Is it better for the price of residential real estate to fall so that more people can partake of the consumption or it is better for the price to increase and thereby reduce the size of the consumer market.

    Sure, I get it that those who have skin in the game now want their “investment” to increase in value and you know, back in the day when I was spending $6,000 on a workstation every few years I would have thought it was a great deal if I could sell my $6,000 workstation for $8,000 after a few years of use, but alas, the prices for computers have fallen instead of risen and now more people own computers.

  9. john personna says:

    I’m baffled by the prevalent mindset that residential real estate is considered an investment.

    I’m sure a good part of it is the money illusion:

    In economics, money illusion refers to the tendency of people to think of currency in nominal, rather than real, terms. In other words, the numerical/face value (nominal value) of money is mistaken for its purchasing power (real value). This is a fallacy as modern fiat currencies have no inherent value and their real value is derived from their ability to be exchanged for goods and used for payment of taxes.

    I think Dr. Shiller reminds us that on a national scale home prices have tracked inflation since the civil war. That is a sober statistic. There are areas that have done better, places with low supply … but I think people convince themselves they are in a special situation more often than they are.

    It takes some conscious thought to break that illusion.

    Sure, I get it that those who have skin in the game now want their “investment” to increase in value and you know, back in the day when I was spending $6,000 on a workstation every few years I would have thought it was a great deal if I could sell my $6,000 workstation for $8,000 after a few years of use, but alas, the prices for computers have fallen instead of risen and now more people own computers.

    Heh, what is that $6,000 in today’s dollars?

  10. Steve Plunk says:

    Tango,

    The problem started when residential real estate was looked upon as a short term investment (5-10 years) rather than an investment of a lifetime. Our mobile society makes it harder to invest in a home the old fashioned way but it’s still a great idea for some.

    When rent becomes high enough to nearly equal a mortgage payment and it’s likely you’ll stick around in your town buying makes a lot of sense. If your lucky there might be a day when the mortgage is paid off and you live rent free. Except for property taxes which can rise to unaffordable levels for those on a fixed income.

  11. TangoMan says:

    John & Steve,

    The buy and hold folks don’t worry me so much, it’s the buy and flip and the buy 2nd+ home as an investment folks that I wonder about. They’re tying up capital in a non-productive sector and the size of this “investment community” and their influence on national affairs means that policies get distorted in order to “boost” home prices for their benefit.

    What would people say if Obama distorted policy to create conditions where the price of used cars and new cars would go up in relation to incomes, years after year? When asked why he was doing this he’d point to the existing stock of car owners who didn’t want to see their “investments” diminish in value.

    I understand that real estate is a bit different from most consumer goods but it’s not really THAT different. I’d rather see capital being deployed into productive endeavors than into housing speculation, and I’d rather see house prices falling thereby making more of them affordable to more people, than house prices increasing thereby shutting people out of this consumer market.

  12. steve says:

    ” I’d rather see house prices falling thereby making more of them affordable to more people, than house prices increasing thereby shutting people out of this consumer market.”

    I’d rather people think of a house as a place to live than an investment. I would prefer that the price of these homes reflect non-distorted market values. Just a quibble, but otherwise, I would largely agree. Get rid of the interest deduction to help prices come down.

    Steve

  13. JKB says:

    Don’t forget that the this month the EPA started imposing the lead remediation rule on all homes built before 1978, not just those with at risk occupants. That is a real value hit on the old housing stock since repairs and remods are now more expensive.

    Smart money does not invest in the old housing stock in the inner city unless the prices go way up.

  14. sam says:

    @Tangoman

    The buy and hold folks don’t worry me so much, it’s the buy and flip and the buy 2nd+ home as an investment folks that I wonder about.

    There’s a German word for this, I think: Bübblemachen.

  15. john personna says:

    The buy and hold folks don’t worry me so much, it’s the buy and flip and the buy 2nd+ home as an investment folks that I wonder about. They’re tying up capital in a non-productive sector and the size of this “investment community” and their influence on national affairs means that policies get distorted in order to “boost” home prices for their benefit.

    In their defense, I think the first flippers discovered an authentic business niche. There was a large disparity between what people would pay for a “fixer” and home they could just move into and enjoy. If they were handy, and knew how to fix a fixer for less than the price gap, they could fix the house and pass it on to someone busier, lazier or less handy.

    The bubble distorted everything though. Soon flippers were making as much or more on the appreciation of the house in the short time they held it. That led to less skilled flippers getting into it and the final flipper frenzy.

  16. Drew says:

    It looks like most of the RE issues have been identified and commented upon, and let’s not forget we are still in a free money, er, “artificially low interest rate” environment.

    I suppose we could construct theoretical arguments about housing prices overshooting equilibrium to the downside, providing a buying opportunity, or notions of pent up demand. All the usual banter. But you won’t see me rushing to a RE broker.

    But Dave hits on something that I have pointed out and think is most interesting and, I believe, pertains to the general economy. People want it to be “like it used to be.” And in this regard, almost every economic update on GDP makes reference to a drawdown in savings as a support to consumer spending, trying to get back to the good old days. Therefore, I just can’t see this as being sustainable. Unless, people have convinced themselves (and are right) that both the RE and stock markets are going to restore their wealth positions, the piggy bank is going to run dry.

    Lastly, I happened upon a radio program on Saturday the subject of which was the state of local banks, in part in light of the commercial real estate reset problem. Let’s just say the long awaited second foot is dropping, commercial foreclosures are rising, local banks are taking their hits, and this will take its bite out of the economy.

  17. Michael says:

    at least part of the factor driving the new building boom seems to be that buyers would rather buy a new home than a 15 or 20 year-old foreclosed home.

    It’s not entirely because they don’t want the older, foreclosed homes. My parents are currently buyers in search of such a property, to live in not to flip. Twice in the past couple of months they have been quickly out-bid on those types of properties by investors. Investors are picking off the under-priced foreclosures so fast that it’s easier for residents to buy new construction for slightly more, than try to compete with investors on find and closing on a good deal.

    Ironically, these investors who see a property boom coming, and want to build up their personal stockpile in advance, are the ones creating the demand for new construction that will ultimately bake their stockpile worthless. This is exactly what happened at the hight of the bubble last time, flippers dramatically (and artificially) increased demand in hopes of a future payoff, which naturally lead to a dramatic increase in supply.

  18. Michael says:

    I apologize for the plethora of spelling mistakes in the previous post, I usually do a final editing read-through before posting, but was in a rush to post and now regret not taking the extra minute.

  19. sam says:

    @Drew

    [Y]ou won’t see me rushing to a RE broker.

    I thought you did a shark patrol in Naples. No?

  20. Drew says:

    Sam –

    Yes, because the inlaws are there. But that’s an old story/decision. Me, I like the desert. Prefer Scottsdale, but am intrigued by Tuscon. So you won’t see me running to the RE broker for,say, Mountain Desert.

    Funny: About a month ago while in Naples saw a guy who was fishing (you know the area, right? – about a mile north of the Pier) pull a shark out of the water.

    However, this monster was all of, er, 18 inches long.

  21. sam says:

    I haven’t been to Naples. Farthest south I get is Sarasota. Here’s a sad story. The wife and I vacation on Anna Maria Island, just south of Tampa, north of Sarasota. Longboat key is next door — We like a restaurant there on a side street (Moore’s Stone Crab). Last time we were there (a few years ago), we saw a beautiful house, two-story Key West style, just finished, across the street from Moore’s. Beautiful house, beautiful landscaping. Expensive. This year when we went to Moore’s, we discovered that the house had been abandoned. The owner just walked away from it. Couldn’t make the nut. All the landscaping had gone to shit, and the house showed signs of decay. Depressing. I understand it’s happening all over Florida.

    BTW, I now live in the desert. Very dry. When the wife and I got off the plane in Tampa, we plumped up like two raisins in a pail of warm water. Wonderful.

  22. Michael says:

    The wife and I vacation on Anna Maria Island, just south of Tampa, north of Sarasota.

    Beautiful place, only about an hour from my house, I should go there more often.

    The owner just walked away from it. Couldn’t make the nut. All the landscaping had gone to shit, and the house showed signs of decay. Depressing. I understand it’s happening all over Florida.

    Sadly it is, only not just houses, entire subdivisions are sitting abandoned, with better than 3 out of 4 houses unoccupied. $400k houses are being rented as section-8 subsidized housing, because the owners can’t get anyone else to pay rent.

    They’re built over fields of weeds too, with the top soil stripped and cheap sod put in, even if people live there, the landscaping goes to hell very quickly. We’re still under watering restrictions, and grass doesn’t survive long in dry sand.

    When the wife and I got off the plane in Tampa, we plumped up like two raisins in a pail of warm water.

    It’s currently > 80 degrees and raining in Tampa, so it pretty much is a pail of warm water.