Saturday, March 26, 2005
What’s the Real State of Real Estate?
One of my favorite topics to idly speculate about has become hot in recent days, starting when I saw Steven Taylor‘s post, positing that the situation with housing (hmmm… what about commercial real estate, and how closely are those tied together?) is structurally different from that of the dotcom bubble.
As often happens, this provoked a related post from James Joyner, who describes his own experiences, noting the regional nature of the market and the increased exposure of those with adjustable rate mortgages.
Of course, people who have financed a high percentage are in greater danger as well, depending on how much their property has appreciated before a crash, if any, occurs. There are sufficient interwoven factors that it less likely to be as spectacular a wipeout as can happen with stocks, and the impact level will be highly individualized.
I haven’t decided for sure I believe there will be a crash, but I can’t help but expect a slowdown, at least. Anticipating being in the house buying market in the next three to five years makes this a topic of great interest to me. I’d rather do it after than before a crash, and then hope the recovery is solid and terms don’t become onerous.
Jonathan Wilde links to a post by David Bernstein, who predicts a market top within a few months. He also has a firsthand story of the last real estate bust.
And he notes the oddity of localities where houses go up and up, but rents stagnate. I found that interesting in that it does not appear to be the case around here, though rent always has an elasticity lag to real estate. I you own a rental property you bought for X and reasonable rent that makes it worth renting is Y, the reasonable rent Y need only adjust for increases in costs such as taxes, water, etc. Increasing to keep current with newly purchased properties is optional, gravy if you will, and typically rent would change no more than once per year, building in slow change.
Rents around here have not been more static than you might expect, and are higher than I could have imagined possible several years ago. My income certainly hasn’t kept up. Which is my fundamental concern about real estate prices; how can it go up and up and up when people’s incomes fall behind, and when everyone who can be a customer in a loose market has become a customer? Granted, there is a second time buyer factor. The first house is almost impossible. Appreciation on the first can make the second, bigger house less difficult to achieve, and perhaps that adds enough fuel to the market for staying power.
But I digress. Jonathan sounds a cautionary note, reminding us what happened in Japan. I must admit, Japan is in the back of my mind all the time as I ponder what’s going to happen.
We definitely have to buy after things correct themselves, or hope it keeps going long enough that we can get in on the ride without serious consequences.
I think it’s enough of a bubble that there will be some kind of adjustment that is clear, if not sharp and painful. I wouldn’t be surprised if it happens sooner rather than later. I could be wrong.
This post ought to refuel the large number of housing bubble Google hits we get here from my previous posts. That includes specific searches for housing bubble in northern Virginia, Fresno, California, and probably other places I’m forgetting. The Boston or eastern Massachusetts region would certainly be a prime place to find popping at some point. When it happened before, I don’t remember it being this heated. On the other hand, interest rates were higher and money was probably tighter.
If the topic interests you, be sure to check out the posts I linked:
PoliBlog
Outside the Beltway
Catallarchy
Volkh Conspiracy