Wednesday, March 01, 2006

Don't Fear a Bursting Housing Bubble

Just in case you thought I was making all this stuff up about a real estate bubble in Marin, in the Bay Area, in California, on the West Coast, on the East Coast, in the South East, in Arizona, in Vagas, in Nevada, in Hawaii (which doesn't get enough press IMO), in the UK, in NZ, in AU, in China, in most of the EU, etc. (must I go on?), there is this guy (thanks to sfjack for the reference; you readers are the best resource). A bursting bubble is your friend. Embrace it.

First, here is the graph from the article (I edited it so that it would better fit into this space; just click on it to see a larger view):


Some choice quotes:
In New York, inflation-adjusted prices dropped almost a third in less than a decade. The fall was even worse in Los Angeles, and it wasn't pretty in Boston, San Francisco or Washington, either. Thousands of families were forced into much smaller homes. Many have never lived as well as they did in those giddy pre-crash years. It was a painful preview of what the dot-com meltdown of 2000 would bring.

What? You don't remember any of this? You think I just made up those numbers about plummeting house values?

I didn't. The real estate crash really happened. The median house price in the New York area fell 12 percent from 1988 to 1995, which is nearly 33 percent in inflation-adjusted terms.

But instead of panicking, most homeowners should be taking a deep breath. The real estate slump of 2006 offers a fresh chance to puncture the No. 1 myth about the nation's No. 1 topic of conversation: the idea that we should all be rooting for high house prices. The myth is good for real estate agents, but it creates needless anxiety for everyone else. It's time that most of us learned to stop worrying and love the bursting bubble... The bad news is that a big part of the country's economic policy has been built on the myth.

THE best way to think about the value of your house — at least in the short term — might be to compare it to Monopoly money. Having a big pile of it feels good, but you can't really spend it.

As long as you are living in the house, you have no way to lock in your gains. Yes, you can borrow against those gains, but new debt is not exactly found money. And when you move, odds are that you will go someplace that has a real estate market very much like yours. Whatever profit you make you will just plow back into a new home.... This is why the housing boom of the last decade, unlike the dot-com frenzy, has not made many people rich.

Worst off would be the families who have borrowed heavily against their homes. For them, a price drop could erase all of their equity, leaving them with no money for a down payment when they move. This happened to some Californians in the 1990's.

So there is a good argument that society has a compelling interest in keeping house prices from getting too high. Reasonable prices allow young, middle-class families to buy a house without going into too much debt. They also let people live where they want. Right now, there are a growing number of workers making long commutes from places like Hagerstown, Md., and Stockton, Calif., solely because they cannot afford a decent-size house in a close-in suburb.

2 Comments:

Anonymous Anonymous said...

Awesome graph--nothing else so clearly shows how "rich" SF homeowners have become! Why work, when my house is doing it for me?

Mar 1, 2006, 2:36:00 PM  
Blogger peterbob said...

Great Article and RIGHT ON. Can you think of any other good besides housing in which people would think that it's GOOD that prices skyrocket through the roof? Food? Gasoline? Cars? Tuition?

Mar 2, 2006, 11:09:00 AM  

Post a Comment

Links to this post:

Create a Link

<< Home

Terms of Use: The purpose of the Marin Real Estate Bubble weblog (located at URL http://marinrealestatebubble.blogspot.com/ and henceforth referred to as “MREB” or “this site”) is to present and discuss information relating to real estate and the real estate industry in general (locally, state-wide, nationally, and internationally) as it pertains to the thesis that recent real estate related activity is properly characterized as a “speculative mania” or a “bubble”. MREB is a non-profit, community site that depends on community participation and feedback. While MREB administrators do strive to confirm all information presented here and qualify all doubtful items, the information presented at MREB is neither definitive nor should it be construed as professional advice. All information published on MREB is provided “as is” without warranty of any kind and the administrators of this site shall not be liable for any direct or indirect damages arising out of use of this site. This site is moderated by MREB administrators and the MREB administrators reserve the right to edit, remove, or refuse postings that are off-topic, defamatory, libelous, offensive, or otherwise deemed inappropriate by MREB administrators. You should consult a finance professional before making any decisions based on information found on this site.

The contributors to this site may, from time to time, hold short (or long) positions in mentioned and related companies.