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| A nail in the coffin of housing? ?
October 17, 2005
Another Sign of a Housing Bubble?
Housing optimists like to talk about "unmet needs." As in: The housing boom will never end because there's a huge "unmet need" for more and bigger houses. You can find this viewpoint well expressed in the New York Times Magazine's cover story yesterday on Toll Brothers, the luxury home builder.
On one level, the unmet-need argument is indisputable. We'd all like bigger and better houses, wouldn't we?
On the other hand, housing is just one need among many that are competing for funds. Just for example, there are my own unmet needs for a 200-foot yacht, not to mention replacement liner bags for our 12-year-old vacuum cleaner.
In the last few years, housing has been elbowing aside other priorities. America has been satisfying the need for housing by diverting more and more scarce resources toward it. You can see that phenomenon in the chart below, which shows residential investment--i.e., the construction and remodeling of housing--as a share of GDP.
Has housing reached a permanently high plateau at around 6% of GDP? Or will its share of the economy soon fall back toward historic norms? Nobody knows for sure. But here's a parting thought: Imports have been soaring as a share of GDP--up 5 percentage points since 1990. To put it differently, we're living large in bigger and better houses by borrowing from abroad. I'm not sure how sustainable that is.
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Why even take something a home builder says seriously? Of course they're going to say there's still demand for housing - they are publicly traded corporations with stockholders. They'll stick to their story until the housing bubble pops. Meanwhile, if you dig deeper, you will see lots of insider trading currently happening with employees of these home builder companies selling their stocks.
Posted by: Matt Metzgar at October 18, 2005 03:24 PM
Over here in the UK we are constantly told that there are not enough houses because there is not enough land, and that this housing shortage is the reason for the property boom here.
These people forget that Canada, the USA and Australia have similar housing booms. Is Australia really running out of land too? It has only a third of the population of the UK, and many times the amount of land.
And if there is this housing shortage where are all the refugees living in tents and football stadiums in London? Funny thing is, I don't see them.
What we are seeing is the results of easy (borrowed) money, and a (so-far) self fulfiling prophecy that real estate prices only ever go up.
Posted by: Phil at October 19, 2005 06:29 AM
I agree with Matt, above. I also read the NY Times piece on Toll Brothers - it failed to mention that Bob Toll has sold nearly half a billion (yes, that's billion, with a "b") dollars of his own Toll Bros. stock in the past year. Actions speak louder than words....
Posted by: Drew at October 19, 2005 10:37 AM
I don't know if the market will continue to boom or bust-no one sure know the answer. And I also can't compared the Stock Market with the housing Market neither, because they are not the same.
For stock market, people don't have to invest, if they don't feel safe. Where as housing market, everyone wants to own their own home. Everyone wants a safe place to live and call it a home. And most people want to be a home owner.
However, as the fundamental of econimic, i don't believe the price of the housing market will increase double digit in the next years or so, because the interest rate is rising. The Fed sure is trying to do something about the real estate market, because they know that it's getting out of control.
Right now, people can afford to buy more houses, because of low interest rate and their equity in their house. Even with low interest rate, people still apply for ARM loan instead of fix loan. That shows that they can't really afforded a home and think that the price of the house sure will increase and never go down, and believe when they sell, they'll make profit.
I'm living in the bay area, the average price of a single family home is around $700k+, interest rate about 5.5%-6% (most people get ARM loan). They pay mortgage average of $2600-$3500/month, depending on property tax. Now, what happened if the interest rate is 7%-8% or 9%. People can't afford to buy a $700k homes with a 7%-8% interest rate. And salary hasn't increase much in the past years. What happen if people have to sell their house because job lost or because of their ARM loan have expire, they have to sell their houses at lower price, otherwise, they won't get buyer. When they sell lower price, they still owe money to the bank. And with the new bankruptcy law, it's difficult to run away from debt.
When people assume that the city will always have plenty of jobs and companies are always hiring. Do we ever ask ourselves, what happened if the government have strict regulations on tax, safety issue, etc. Company can't make much profit, than they will move to cheaper location, so they could make profit for share holder. If company don't make profit for investor, investor will pull their stock out.
In conclusion, I believe the housing market will go down to balance out with the inflation and the income; if the fed decided to increase interest rate and set more regulation on tax. If the Fed invole in the housing market and make it less attractive for investor, than the housing market will slow down, and not as crazy as now.
Posted by: Destiny at October 20, 2005 03:34 PM
Do you have any facts to support your first few paragraphs? You state that everyone wants to own a home (or do they just want a place to live and are willing to rent) and they can use the equity in their home to help pay for a larger house (what about first time home buyers who have no equity?). I believe your assumptions about the housing market may be limited to a small scope of the market and not really valid for the housing market in general.
Posted by: TheDude at October 22, 2005 10:36 AM
I'm in Toronto, Canada and here everybody denies the existence of a housing bubble. Just 2 days ago a senior economist at CIBC said "Prices will not fall":
I'm sure the same was said at the top of the previous housing boom, just before the fall. I've noticed that the Canadian economy is like a delayed version of the US one. Whatever happens in US, it arrives here 6 months later, so don't be surprised if the house prices start to fall in Toronto and other Canadian cities...
Posted by: Housing Bubble at May 7, 2007 03:09 PM