Nbadan
03-27-2005, 04:22 AM
Trading Places: Real Estate Instead of Dot-Coms
By MOTOKO RICH and DAVID LEONHARDT
Published: March 25, 2005
Real estate-crazed Americans have started behaving in ways that eerily recall the stock market obsession of the late 1990's....
***
Nobody can know whether the housing boom of the last decade will end as the dot-com frenzy did. But the parallels are raising alarms among many economists, even those who acknowledge that there are important differences between homes and stocks that significantly reduce the chances of another meltdown. For one thing, houses are not just paper wealth: you can live in them.
Still, perhaps the most troubling similarity, some analysts say, is the claim that the rules have somehow changed. In an echo of the blasé attitude that "new economy" investors took toward unprofitable companies, the growing ranks of real estate investors are buying houses they never expect to be able to rent at a profit. Instead, they think the prices of houses will just keep rising.
Indeed, the government reported yesterday that sales of new homes jumped sharply in February, in the biggest monthly increase in four years. A strong economy and an improving job market contributed to the gain. But many buyers were also trying to beat rising mortgage rates, which could eventually cool the market....
***
"We're going through something very similar in real estate that we did with stocks," said Robert J. Shiller - a professor of economics at Yale, whose prescient book on stocks, "Irrational Exuberance" (Princeton University Press, 2000), appeared just a few months before technology stocks began their slide. "It's driven by the same forces: that investments can't go bad; that it has the potential to make you rich; that you'll regret it if you don't do it; that it looks expensive but is really not."...
Ny times (http://www.nytimes.com/2005/03/25/business/25boom.html?hp&ex=1111726800&en=08664a5d74ed1c79&ei=5094&partner=homepage)
Take a look at this graph...
http://www.edab.org/newsletter/Quarterly/q7-04_files/image007.gif
The black line is the change in wages and the turquoise is the change in home prices.
These skyrocketing increases in home prices without a corresponding increase in wages is unprecedented in the last 35 years with the exception of a short period in the mid-80s, however, even then, wages didn't decrease -- it was only that the rate of increase dropped. Every time they've gone below zero (ie, shrunk), so have home prices. That hasn't happened yet. So something is fucked up.
What is it that's making people gamble on buying a home even though they're not getting richer?
Well, it's probably two or three things. First, their homes have increased in value so much, that people are feeling richer. The big money they make selling their homes they roll back into buying another home, thinking that things can only go up. Second, credit is making people feel rich. Who cares if your salary isn't going up? Buy your consumer goods on credit and use your salary to pay your mortgage. 40% of Americans who carry credit card debt have an average debt of 10K. That can't go on forever. Debt is expensive and it just grows. At some point it's going to get in the way of owning a home. A third reason people can afford more home without having more cash is the 110% home mortgage. You don't even need cash to get into heavy mortgage debt now.
Now, another thing that's important to note: the two times in the last 30 years when real property values tanked heavily were in TX when the oil industry caved, and in Los Angeles when the CA economy tanked (I think because of earthquakes and the defense industry's evisceration as the cold war lost fuel). So, the thing that causes home ownership to become a money losing proposition on a broad scale is a really really bad local economy.
The thing about that that is relevant today is that it's the real estate industry that is driving the economy now. Real estate isn't influenced by things going on with the economy. It IS the economy. It's not manufacturing or oil or defense alone or collectively that is pushing the economy forward. It's home equity and second and third mortgages that are supporting consumer spending (which drives 2/3rds of the economy). In CA, apparently, 50% of the economy is driven by real estate and 1 in 50 jobs are directly related to real estate and 1 in 200 Californians is a real estate agent. An article in the Express-News yesterday reported that 25% of homes being sold nationally are for investment purposes and not for the owners primary residence.
So there's a very fragile cycle there. If real estate prices drop for any reason, it'll be the equivalent of an earthquake or an oil shock. It'll spiral down fast.
By MOTOKO RICH and DAVID LEONHARDT
Published: March 25, 2005
Real estate-crazed Americans have started behaving in ways that eerily recall the stock market obsession of the late 1990's....
***
Nobody can know whether the housing boom of the last decade will end as the dot-com frenzy did. But the parallels are raising alarms among many economists, even those who acknowledge that there are important differences between homes and stocks that significantly reduce the chances of another meltdown. For one thing, houses are not just paper wealth: you can live in them.
Still, perhaps the most troubling similarity, some analysts say, is the claim that the rules have somehow changed. In an echo of the blasé attitude that "new economy" investors took toward unprofitable companies, the growing ranks of real estate investors are buying houses they never expect to be able to rent at a profit. Instead, they think the prices of houses will just keep rising.
Indeed, the government reported yesterday that sales of new homes jumped sharply in February, in the biggest monthly increase in four years. A strong economy and an improving job market contributed to the gain. But many buyers were also trying to beat rising mortgage rates, which could eventually cool the market....
***
"We're going through something very similar in real estate that we did with stocks," said Robert J. Shiller - a professor of economics at Yale, whose prescient book on stocks, "Irrational Exuberance" (Princeton University Press, 2000), appeared just a few months before technology stocks began their slide. "It's driven by the same forces: that investments can't go bad; that it has the potential to make you rich; that you'll regret it if you don't do it; that it looks expensive but is really not."...
Ny times (http://www.nytimes.com/2005/03/25/business/25boom.html?hp&ex=1111726800&en=08664a5d74ed1c79&ei=5094&partner=homepage)
Take a look at this graph...
http://www.edab.org/newsletter/Quarterly/q7-04_files/image007.gif
The black line is the change in wages and the turquoise is the change in home prices.
These skyrocketing increases in home prices without a corresponding increase in wages is unprecedented in the last 35 years with the exception of a short period in the mid-80s, however, even then, wages didn't decrease -- it was only that the rate of increase dropped. Every time they've gone below zero (ie, shrunk), so have home prices. That hasn't happened yet. So something is fucked up.
What is it that's making people gamble on buying a home even though they're not getting richer?
Well, it's probably two or three things. First, their homes have increased in value so much, that people are feeling richer. The big money they make selling their homes they roll back into buying another home, thinking that things can only go up. Second, credit is making people feel rich. Who cares if your salary isn't going up? Buy your consumer goods on credit and use your salary to pay your mortgage. 40% of Americans who carry credit card debt have an average debt of 10K. That can't go on forever. Debt is expensive and it just grows. At some point it's going to get in the way of owning a home. A third reason people can afford more home without having more cash is the 110% home mortgage. You don't even need cash to get into heavy mortgage debt now.
Now, another thing that's important to note: the two times in the last 30 years when real property values tanked heavily were in TX when the oil industry caved, and in Los Angeles when the CA economy tanked (I think because of earthquakes and the defense industry's evisceration as the cold war lost fuel). So, the thing that causes home ownership to become a money losing proposition on a broad scale is a really really bad local economy.
The thing about that that is relevant today is that it's the real estate industry that is driving the economy now. Real estate isn't influenced by things going on with the economy. It IS the economy. It's not manufacturing or oil or defense alone or collectively that is pushing the economy forward. It's home equity and second and third mortgages that are supporting consumer spending (which drives 2/3rds of the economy). In CA, apparently, 50% of the economy is driven by real estate and 1 in 50 jobs are directly related to real estate and 1 in 200 Californians is a real estate agent. An article in the Express-News yesterday reported that 25% of homes being sold nationally are for investment purposes and not for the owners primary residence.
So there's a very fragile cycle there. If real estate prices drop for any reason, it'll be the equivalent of an earthquake or an oil shock. It'll spiral down fast.