| Thursday, July 28, 2005
Don't let me burst your (housing) bubble
After writing an Internet column last month ruminating on
the astounding real estate price increases, I received
requests from strangers for specific advice about whether or
not they should sell their homes in places ranging from
Florida to Hawaii.
When people ask mewhether to buy or sell real
estate, then I gotta start thinking about moving to a
One recent newspaper article focused on the real-estate
boom in Bakersfield, of all places. Prices there are soaring,
with one in four purchases being made by an investor. I
suppose those investors are hoping there's always a bigger
sucker, willing to pay even more for that house.
Maybe these investors are on to something. Home prices have
basically tripled in six years in Orange County, with the
median now topping $600,000. Hey, this can go on forever,
Then again, only a tiny percentage of local residents can
now afford the median-priced house. With a 30-year mortgage at
6.25 percent, 20 percent down, the borrower would have to pay
about $3,600 a month in principal, interest, taxes and
insurance. What kind of income supports that payment? And who
has 120 grand lying around? Even with creative financing, that
house is costly.
Equity-rich Californians are swarming all over Western
housing markets, hoping for another market to double or
triple. It's a feeding frenzy in the loneliest towns. Someday,
someone is going to wake up and wonder why he has a $300,000
mortgage on a ranch house in Brawley.
Go to www.realtor.com, a useful Web site that gives prices
on houses for sale in markets across the nation. Orange County
will always cost more than Nowhere, Kansas, at least until the
Big One hits. But in small cities near my wife's Appalachian
hometown, you can find pages of single family houses for sale
under $20,000, with structurally sound houses on the market in
the $6,000 range. How's that for perspective? This is a
market. Home prices usually go up, and are good investments in
the long haul, but they can go down. Plus you've got to feed
the beast: pay utilities, make repairs.
Remember columnist Jim Glassman's prediction in 1999 of a
36,000 Dow? Well, keep that in mind as some experts predict
median home prices over a million bucks. Esmael Adibi, an
economist at Chapman University, is no pessimist, but he sees
trouble in the housing market. Current prices, he says, are
driven by psychology and easy credit.
Let's say interest rates go up, and those marginal buyers
who took out adjustable rate loans can no longer afford the
new payments. And the principal comes due on the interest-only
loans. We could see a flood of foreclosures, especially among
the latest buyers who got in with no money down and have no
equity in the property. Affordability levels are so low that
it's hard to believe that there will be enough new buyers to
ratchet things up to the next level.
So prices stabilize or fall slightly, and then investors
start getting nervous. That ranch house in Earlimart doesn't
seem like such a good buy any more, and - as is typical these
days - the rent payments don't come close to covering the
mortgage. The psychology changes, investors unload their
properties in droves, the market slips, and then it's lemmings
over the cliff. Then this psychology affects the economy.
During the last drop in home prices in Southern California,
the economy suppressed the values. This time, a drop in values
will suppress the economy.
People are spending wildly on remodeling and flat-screen
TVs, buoyed by the feeling of wealth they get from soaring
home values. What happens when they are feeling low about
their declining equity or increasing debt? Others say there
remains too little inventory, continuing job growth and the
enduring appeal of Southern California. Demand is still
greater than supply. No end in sight. Perhaps, but I'm
As the onetime owner of a house in Tennessee that I could
not unload, I can attest to the amount of pain that burden can
cause in one's finances and even in one's family when one is
stuck with an expensive, hard-to-unload asset. I'm not trying
to burst anyone's (housing) bubble here. I'm only making the
case for a little bit of caution. Then again, I wouldn't bank
too much on my real estate advice.
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