Posted on 10/03/2002 7:57:02 AM PDT by TroutStalker
Edited on 04/22/2004 11:47:14 PM PDT by Jim Robinson. [history]
Cracks are spreading in the foundation of the U.S. housing boom, as evidence mounts that the long run-up in home prices can't be sustained.
For the past several years, a rare confluence of factors -- including low interest rates, low unemployment, easy credit standards and tight housing supply -- have combined to stimulate an unprecedented surge in home sales, sending prices rocketing up. The result: housing has been one of the most important bulwarks of the U.S. economy, even as it gets buffeted by plunging stocks, business scandals and the war on terror.
(Excerpt) Read more at online.wsj.com ...
The idea that prices must continually rise or disaster occurs is simply poppycock. The houses are there. They are valuable assets. Somebody will live in them, regardless of what happens to this or that speculating owner. So most of their value will be realized. If somebody living in one can't make their payments, the bank will get the house and sell it to somebody else. Perhaps for less, but not for nothing. Mortgage rates are 2% over 10 year treasuries, a spread that easily covers modest losses (sometimes zero, sometimes 25%, rarely 50%) on a modest number of defaults (1.25% at most, according to the articles, counting the whole backlog in foreclosure).
Remember that most houses are not sold every year, so short term 2-3 year declines in prices only affect a small portion of homeowners. If you aren't forced to sell while the market is down, it scarcely matters that it is down for a brief period.
It is also a little funny that the article speaks of a generic "housing boom" without noticing that rising house prices and booming new house construction are opposite forces, not equivalent ones. More new houses keeps a lid on house prices, because it means increasing supply. Rising house prices are a signal to build more houses of course, one that builders cash in on. Eventually, sure, that will bring about enough supply to balance a demand that itself fluctuates, and can go down temporarily as well as up.
But the long term trend is there for a very good reason. The population of the US is rising a couple of million a year. Households continually form. As the whole country gets richer, people live in bigger houses. Households are smaller than they were 2-3 generations ago. More of the retired, who are living longer, own homes instead of living in apartments or condos. Demand for housing is not going to collapse. In the secular long term, it will go on rising along with the wealth of the whole economy.
Can you have periods where prices get ahead of themselves, followed by over investment in construction, overbuilding, more houses on the market than new households forming, and price declines as a result? Of course. But look for the signs that construction is experiencing dramatic overinvestment, of the sort say internet stocks did. If you look at the homebuilder companies, you will find they are making plenty of money - not a sign of oversupply competition. That despite double digit profit growth, their stocks are selling for under 10 times earnings - typically 7 times.
That is not a sign of bubblemania, it is a sign that people understand the relatively low barriers to entry in construction and that it is a fundamentally cyclical market. Semiconductors are just as cyclical, but leading chip makers saw 100 PEs in the tech bubble, and prices sometimes moved 7% not in a year, but in a day.
Is this is a great time to buy an overpriced house and leverage it to the gills, hoping to sell it again in 3 years and move up to an even bigger one? No, certainly not, for the sorts of reasons the article gives. But real estate you are actually going to live in, and can actually afford a fixed rate mortgage on, and plan to reside in for 10 years, is not going to kill you financially. No amount of gloom and doom peddling about it will make such decisions equivalent to taking flyers on hot tech stocks at triple digit PEs. There is no comparison between them.
Recovery can not take place without libery of action, and debtors unable to clear the slate will not provide that fountain of wealth creation.
I would advise trying to sell quickly, even at some sacrifice in price, in your particular situation. Because you don't want to be sitting there 2-3 years from now trying to pay for two houses. If you get a buyer within 3-4 months, great. If not, come down ~10% in list price. Good luck.
I am surprised by the high price of real estate in Charleston. This is why we are renting here after owning several homes in the last 25 years. The problem here seems to be people moving from cold areas of the country bidding up the really nice properties to New York/Boston levels, however...
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