Monday, June 20, 2005
More On Housing
This boom is unprecedented in terms of both the number of countries involved and the record size of house-price gains. Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history (see article). The bigger the boom, the bigger the eventual bust.Housing prices have been rather flat in Germany for a while! And in some markets in the US that experienced previous inflation, housing has been stagnant for a while. But The Economist makes the important point later on - investors and consumers are buying houses and land on the theory that the property value will rapidly rise, rather than for the long-term return on the property. Whenever that happens, you have a bubble and you have a risk. Housing values have historically been stable because people buy them to live in.
Throughout history, financial bubbles—whether in houses, equities or tulip bulbs—have continued to inflate for longer than rational folk believed possible. In many countries around the globe, house prices are already at record levels in relation to rents and incomes. But, as demonstrated by dotcom shares at the end of the 1990s, some prices could yet rise even higher. It is impossible to predict when prices will turn. Yet turn they will. Prices are already sliding in Australia and Britain. America's housing market may be a year or so behind.
But in some markets a huge amount of these sales are being made to non-occupiers (as high as 30%), which means that within 2 or 3 years a lot of these properties will be back on the market. And when it looks like the bubble is peaking, a bunch of people are going to try to sell at the same time.
This doesn't mean you shouldn't try to buy in some areas, but first consider the last three years of history. Has real property recently experienced substantial increases for several years running? Some markets are already past the peak and have shown pretty static prices. Previously I posted on the MSAs showing the highest increases in the last year. Here is a list of those showing the lowest (1st qtr 2005 ):
Beaumont/Port Arthur, TX, -6.5%
Canton, OH, -4.5%
Cedar Rapids, IA, -1.5%
Greenville/Spartanburg, SC, -0.3%
Syracuse, NY, -2.6%
Waterloo/Cedar Falls, IA, -2.6%
Prices increased Less Than 5%:
Atlanta, GA, 4.8%
Austin/San Marcos, TX, 2.5%
Cincinnati, OH/KY/IN, 2.7%
Columbus, OH, 1.7%
Dayton/Springfield, OH, 2.6%
Denver, CO, 1.8%
Des Moines, IA, 4.3%
Detroit, MI, 0.5%
Ft. Wayne, IN, 4.2%
Grand Rapids, MI, 4.6%
Greensboro/Winston-Salem/High Point, NC, 1.5%
Indianapolis, IN, 3.0%
Kalamazoo, MI, 2.7%
Kansas City, MO/KS, 4.2%
Lake County, IL, 2.9%
Lincoln, NE, 4.5%
Louisville, KY/IN, 2.4%
Memphis, TN/AR/MS, 1.5%
Omaha, NE/IA, 3.0%
Philadelphia, PA/NJ, 1.7%
Raleigh/Durham, NC, 0.6%
Richland/Kennewick/Pasco, WA, 1.6%
Saint Louis, MO/IL, 2.7%
Sioux Falls, SD, 2.0%
Youngstown/Warren, OH, 1.4%
A previous post on this topic is here. It contains lots of links so you can do your own research. According to my information, prices around Philadelphia are still inflating but prices in many areas in Philadelphia are collapsing. Trenton NJ increased 8.0%.
The existing home sales by state show that the following states showed a negative price increase for the prior year as of the 1st qtr 2005:
And in these states existing home sales increased less than 5% from the 1st qtr of 2004 to the 1st qtr of 2005:
New Jersey, 0.5%
Rhode Island, 3.3%
My belief is that the investors have already tapped out the market in the NE (Mass & NY still are showing high gains) and that high property taxes are the limiting factor for new families buying a house. I think that market has overall passed its peak. A lot of southern states show high price increases. Georgia came in at 14.2%, Arkansas came in at 15.3%.
I think the wave of retirees is already affecting the market, with older couples bailing to get their price increases and looking to move to cheaper markets. One can't ignore the demographics in this market. Arizona was 13.8%, New Mexico was 11.9%. West Virginia was 14.9%. Florida was 5.8%, but it also has the highest increases in local areas, and these look like bargain shopping as in Bradenton.
He told me that although prices were high, there was now some resistance, as in less than 2 years, real estate values will be reassesed for tax purposes.
It is anticipated that taxes will at least double- and that means insurance rates go up, and so on.
Those realities are now becoming realities to buyers. No matter how creative mortgage copanies get or how low rates stay, the fact that even in the event of a bubble bust, the repurcussions of high reasessments, etc., make home buying (and home selling, in case of a bust) an even bigger gamble.
In most places you can only challenge your assessment for a limited period of time. And then, I think a lot of areas are spending pretty much all of their increased tax receipts. The carrying cost of houses in some of these areas are going to force older people to sell, IMO.
Typically, what happens is that after residential tax hikes occur, the county will go out and and try to bring in business, with the attraction of reduced taxes for a certain number of years...you can connect the dots.
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