A View from Inside the Housing Bubble

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The banner
headline on the front page of today’s paper said only this: "$590,000."
It was in 72-point type — only events of 9/11 magnitude warrant a larger
size — and included no subhead for further information. No further information
was needed. In most parts of the country, such a headline would cause confusion,
but in Southern California everyone who is anyone understands what it means.

That
was the new record-setting median home price in Orange County, which, the story
explains, is the fifth time in six months that it hit a record. Despite the enormous
price of a median-priced home, the selling pace was faster than last year and
home prices went up an astounding 8.7 percent in just the last month.

For
that kind of money in Orange County, expect a 1950s ranch house with about 1,500
square feet and in need of a good bit of tender-loving care. That would be what
you might find in the less-desirable inland areas. Near the beach, I doubt a shopper
would find anything at all in the price range, except perhaps for a parking spot
or maybe a condo the size of a parking spot.

This
has bred a world of insufferable gloaters who stand around office water coolers
bragging about the latest spike in their house "values." Normal people
don’t stand around bragging about their salary or savings, yet they have no trouble
saying something like this to coworkers or even to total strangers: "Could
you believe a house on my street just went on the market for a bazillion dollars
and it doesn’t even have granite countertops? Mine has granite and a jacuzzi,
so I’d ask two bazillion dollars for it!" In the national media, the only
criticism I’ve seen of this vulgarity has
come from columnist Paul Campos
.

I
wonder what they’ll say if prices go south. I can’t quite figure out what’s going
on here, and am a bit concerned that once the bubble bursts, the economy will
burst along with it. In the late 1980s to late 1990s, Southern California real
estate prices had fallen and stayed pretty low. The price drop was related to
economic problems, some of which were tied to the closing of aerospace plants
throughout the region.

The
economy tanked, or so I’m told, and builders had amassed a huge inventory of unsold
homes. They stopped selling, the market was flooded and prices went down. When
I moved here in 1998, many of my colleagues had been upside-down in their homes
for several years, and they were thrilled to watch the market move upward again.

Now, everyone
is banking on appreciation. One friend, shopping for a house in Palm Desert, told
me the $875,000 price is a bargain because it will be worth a million next year.
I don’t know, but I warned that it could just as likely be worth $500,000. Yet,
people are tapping into their home equity, which is driving a consumer-based economy.
It’s also creating a false sense of wealth. People might not always use their
equity to buy things, but knowing it is there helps them justify buying those
$75,000 BMWs, Hummers and Mercedes that I drive by in my Ford Focus every day.
My suspicion is the opposite will happen this time around. Instead of the economy
killing home prices, falling home prices will kill the economy.

Nothing
dramatic has changed in the seven years since I’ve lived here, yet home prices
have more than doubled. It’s still a feeding frenzy, and it’s being fed by a media
that isn’t looking too closely at causes and effect. A recent Wall Street Journal
piece, tailored for the California readership, weighed both sides of the housing
bubble and served to soothe buyers. Syndicated columnist James Glassman argued
this week that "economic catastrophes rarely occur in markets that everyone
is watching and sweating over." That’s right. Tell it to those who invested
in those Bay Area dotcoms.

Fortunately,
LewRockwell.com has provided another side of the story, with writers pointing
out how unhealthy it is when nearly half of new home loans are interest-only deals.
When the buyer needs to start paying for the principal, that could spark foreclosures
and that could flood the market with overpriced tract houses. I would hate to
be holding the note on that $650,000 1,200-square-foot bungalow in the barrio
that a friend of mine just laughingly pointed out to me.

When
I first moved here, the Los Angeles Times featured a story on a couple
that moved pretty far inland, to the city of Riverside, then the market fell and
they were stuck miles from their jobs and unable to unload their house and move
back toward Los Angeles or Orange County. I remember one friend from New York,
which experienced a similar thing, talking about an acquaintance who bought a
few blocks farther into the ghetto as the boom was, well, booming. Then the market
crashed and he was stuck with a costly condo in the middle of the ghetto with
little chance of gentrification cleaning up the drug-strewn environs.

Who
would want to hold the note on that property?

A
few months ago I began shopping for desert land. Not the Palm Springs desert,
but the rural high desert where one could buy property for about $2,000 to $3,000
an acre. Bad timing, I know. This was NOT an investment idea, but a chance to
have a getaway place in the middle of nowhere. I love the desert and a friend
of mine’s Dad owns a trailer park in Desert Hot Springs. We could have all the
old ’50s trailers we could haul for free, as he upgrades the park to the latest
doublewide designs.

You
see the idea here: A trailer on five acres of desert, bonfires, cigar smoking,
drinking, ATV riding. A friend with a neighboring five acres. But the LA Times
published a Sunday feature article called "Desert Cool," with pretty
pictures of hip artist abodes out in the desert. The frenzy got started. Almost
every piece of property I looked at received multiple offers. The prices shot
through the roof, and people are still dropping $70,000 or more on raw desert
tracts for speculation purposes. They have no intention of building. Homes in
these lonely desert towns on small city lots are now hitting $300,000 to $500,000.
You know something is wrong.

I
give up. I’ll buy some land at a tax sale in a year or two. My point is this is
unnatural, even crazy. I don’t know why prices are so high, but I’m in good company
given the recent words of Alan Greenspan. But I suspect that Gary North has it
right when he argues that Californians ought to sell their homes and move some
place normal.

Not
a bad idea for any number of reasons, but I’d miss the palm trees, the desert
and the newspaper headlines once the prices start falling like a rock.

June
17, 2005

Steven
Greenhut (send him mail) is a senior
editorial writer and columnist for the Orange County Register. He is the
author of the new book, Abuse
of Power
.

Steven
Greenhut Archives

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