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August 08, 2005
Real estate and Recession
There is a whole class of economist that doesn't believe we are in the midst of a serious real estate bubble, but is nonetheless quite concerned about the health of the real estate market. Barry Ritholtz, chief market strategist at investment firm Maxim Group, is in that camp.
He fears that a mere slowdown in real estate will lead to major job losses and much slower consumer spending. He marshals a lot of the recent evidence on his blog, The Big Picture.
Even worse, he thinks that even if housing prices don't fall by much, the economy could go into recession in 2006-2007. He wrote to clients today:
"Given the significance of this sector and the relative modest strength of the rest of the economy, we suspect the Fed will fail in their attempt to engineer a soft landing. We expect a recession in the 2006-07 time frame."
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I read that over the last three years, 40% of U.S. GDP, growth was related to housing constrution, I assume that includes re-fi on mortgages also, but it is the amount at stake in consumer leverage, and asset growth.
I posted on July 30, 2005 on affordable housing in San Mateo, Ca. needs $175,000 income, $646,000 homes are not upper income homes. Average yearly income here, is $83,000 now half the income needed to purchase a home in the Bay Area.
My yearly income will not even cover afford mortgage payments, let alone tax and insurance. I am retired and now live in a nice (BMR) Below Market Rate, city mandated program, apartment, the rent is $1200. The thing is that, my (BMR) rent, dropped last year. Even as San Mateo, home prices last year have gone from the $506,000 to $646,000.
I then wrote that, "Next year I may need to move from here to another city near by, but apartment prices in the Bay Area, are only now going up, and still not reflecting home prices".
On the first of August, I got the word that three of the seven buildings in my apartment complex, are going to be coveted to condo's, I will soon be looking for a new apartment.
I went to the local listing site on Craigslist, and put in all apartments $800 to $1200. What came up was 548 apartment listing on the Peninsula. Three years ago $800 to $1200 might get you 37 listings for apartments on the Peninsula at that price.
If rents prices and affordability, are taken into account as an indicator, there now is a break in pricing under housing, that needs to looked at.
Posted by: Mike Reardon at August 9, 2005 02:57 AM
It would only take a small dose of paranoia to crash the entire market. A couple consecutive reports that expose cracks in the housing market could cause small time investors to get cold feet and unload property, creating a buyers' market quicker than a cumulonimbus cloud over Kansas in July.
Where are the big-money folks? Sitting on South Beach drinking mai-tais and laughing about the entire process, thanking a higher power they cashed out of the market when they did. The same thing happened back in 2000. It wasn't the big money that got slammed; they pulled out early. The small timers and day traders pushed the market to the breaking point. Many of them lost their life savings and retirement accounts while the big money were losing amounts that looked like rounding errors.
The real issue here is that the same people who are creating the mania will be the ones that pay most for it. People in my demographic (educated, middle-class professionals) have the most to lose. Some of my peers who know nothing about financial markets and even less about repairing a sink faucet are buying rental properties, mainly responding to the market hype they overheard at Starbucks while buying a morning latte. This same group has been known to "weathervane", throwing money into the markets that seem to be hot without having a diversified, sustainable strategy to maximize long term wealth.
Just last night I was at Dallas-Fort Worth airport and there by a gate (C9) was a wall ad for condos in Florida. I also spoke with a lady who was traveling around the country looking for good real estate deals. When the small money gets into the game, it's time to bail out.
The thought that I have is will the next twenty years be marked by bubble after bubble? Prosperity is increasing in this country and combined with cheap money, there lies the tonic that allows major asset bubbles and when one pops everyone moves into the next bubble. The information age and increased reliance on news reports such as CNBC and Internet journals means that information is distrbuted more efficiently than ever before. More people are taking a proactive approach to investing without holding to tried and true methods of diversification (real estate, stocks, and bonds). Many people are putting all the eggs in the same basket. What happens when the handle breaks?
Posted by: Wes at August 9, 2005 04:23 PM
It all about marketing and what you have to market. The days of just selling square footage and nothing else may be over. But unique properties will continue to hold high prices especially in areas like New York. For buyers don't buy fades but quality. Check out SOFI in Manhattan. A small area from 32nd to 38th street on Fifth Avenue. There are four residential buildings there that I know of (445,425,372 and 325 Fifth Avenue). Does not take a genius to figure out a Fifth Avenue address will always be a solid investment.
Posted by: martin at August 12, 2005 02:23 PM
When will reality sink in ? My brother recently relocated from the Delaware valley to the Ft. Walton Beach, Niceville Florida area, the home prices there have gone up $200K over the last 19 months. The question is what can justify such increase. The area's major employer is Eglin Air Force Base and Military Airman. No major industry or corporate influx of cash.So the question is How many Air Force Captain's and Major's can afford such homes with a $50K salary let alone the sargents with their family's ?. The homes which would sell in a couple of days are now sitting in the market for nearly 90 days. My sence is that the bubble will burts in this area fairly soon. It appears that the realtors want to keep these prices inflated to they can cash in on higher commissions. My brother plans of sitting back for a couple of months and watch this bubble pop. Any takers
Posted by: mel at August 20, 2005 07:44 PM
I live in Washington, DC proper. A shell property will sell for six figures. However, with oil at greater than $60 a gallon, will the demand for housing closer in to cities like DC, NYC, LA, et al, continue to rise as even more people desire to get closer to the various downtown business districts, thereby cutting the cost of commuting? If yes, won't this further overheat the boom in housing costs in and around large cities?
Posted by: Takomaguy at August 22, 2005 04:52 PM
Interesting comments. I think the high gas price is a bunch of hubbub. I do not see people trading in SUVs in high numbers (look that GM sold record numbers of pickups this summer). Houses are not getting any smaller. There will likely be a certain segment of people who will look to move back in, but once people are accustomed to suburban life and the supposed pleasures that accompany it, I don't see any large scale migration back to the city. I think we will see high sales of Honda Civics first.
Posted by: Wes at August 26, 2005 10:51 AM
What about the Beijing real estate market? any thoughts on that? Everybody talks about the bubble that's gonna burst after the Olympic games. What if it doesn't? at least within the third ring road?
People say there will be an over supply, but I also doubt that anyone will keep on building after that date. So it might get tough to find something then.
Any thought that could enlighten my way?
Posted by: julien at June 12, 2006 12:17 AM
the realestate market is crazy people are going around offering you the lowest prices for your house even less then it cost to build it. This is bullshit...I agree the prices had to come down but not this much. real estate is still a great investment you got to live some were.The morgage rates are still very low .What are people waiting for????
Posted by: charles at August 16, 2006 01:46 AM
A substantial real estate drop is inevitable. The only question is to degree,and to what extent it will hurt the overall economy. The irrational overheated market might have corrected itself under normal circumstances if it didn't go on so long, and was not fueled by incredible financing schemes, the like of which was unknown before. I feel that this time it will be the first nationwide drop in prices in over 50 years, and areas that have inflated way beyond the incomes of the communitiy, and those with a large number of investors and second homes will fall the most. Moreover ,most people are in denial, as most of us own real estate. There were other times when investors were in denial, and look what happened!
Posted by: Ed Bohrer at September 20, 2006 01:59 PM
I am wanting to invest. However I am waiting for a decline in housing prices. Usually when this happens interest rates will soar. But...... If you have a large down payment and you wait till the market crashes the interest rates will not affect you much. Think about it and save your money untill the time is right. Then slap down a huge down payment and the houses can only go up, in a drastic downfall in housing prices. Its a lot of common sense and History proves it.
Posted by: Kloe at February 2, 2007 11:38 PM