A View from Inside the Housing Bubble

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, 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.

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