Posted on 12/24/2004 6:43:51 AM PST by OESY
No boom lasts forever, and in countries like Britain and Australia, the housing market has suddenly turned lower, leading to discussions of how a plunge can be avoided and what will happen if it is not.
The American housing market received a scare yesterday, with a report that the pace of new-home sales slipped in November as the median price of a new home fell to the lowest level in a year. But mortgage applications indicate that a rebound has begun, and in any case, prices of new homes can fail to capture price trends for existing homes in areas without new construction.
A more reliable measure, albeit one that is reported more slowly, is an index that compares prices over time on the same house and is put together by the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac. Even though the index excludes many higher-priced homes, and thus probably understates house price inflation, it is booming like never before.
Through the third quarter, it showed prices up 13 percent over the previous 12 months. The index, which dates to 1980, had never before recorded even a 10 percent annual gain. In the last five years, the index shows a gain of 48.5 percent, while consumer prices for things other than housing have risen 11.8 percent. The absolute gain and the spread over inflation are records. The only time that was even close was the period through 1989, which was followed by a housing bust in 1990 that caused prices to plunge in some areas.
If this is a bubble, its creation can be traced in no small part to the Federal Reserve's efforts to deal with the bursting of the stock market bubble. It cut rates aggressively and the 2001 recession was a mild one. The very low cost of borrowing, coming at a time when alternative investments seemed less desirable, encouraged a big run in home prices, whose growth outstripped both personal income and rental prices.
There are indications that speculation is rising. Patrick Lawler, the chief economist of the agency that compiles the index, reports that the popularity of interest-only and adjustable rate mortgages is rising. That would indicate more and more buyers are straining to qualify for loans - and would be vulnerable if interest rates rose.
The housing market would not have to collapse to have a negative impact on the economy. Even a lack of appreciation could put a damper on consumer spending by depressing sentiment and the volume of refinancings.
House prices vary significantly by market, of course, and it is reasonable to think that a decline in prices would be most likely in areas that have had the strongest gains. And those areas are concentrated in states that voted Democratic in the last election. Of the 12 states with the fastest-rising home prices in the last four years, only Nevada and Florida voted for President Bush. The 12 states with the smallest gains all backed Mr. Bush.
Over all, states that supported Senator John Kerry averaged a 47 percent rise, while prices in Bush states climbed 24 percent. Rhode Island and California led the list of states, although neither could match the 80 percent rise in the District of Columbia. In California, the median-price home costs $460,000, and the state association of Realtors says only 19 percent of the state's residents earn enough to afford to buy such a home.
With the trade deficit hitting records, the American government seems to welcome a weak dollar. But there are surely limits to that. A nightmare for the Fed would be that it finds itself under pressure to raise rates to support the dollar, just at the time that a weakening housing market needs lower rates to avoid big declines. If that were to happen, the Fed might regret having done so much to encourage the boom in home prices.
You have to ask? Any time something bad happens, Democrats are ALWAYS the hardest hit. It's like a law or something.
New York Times headline above the fold for the apocalypse:
"World Ends: Minorities Hit Hardest"
Only 19% earn enough to afford those prices so what do the rest of the people do? Rent? There is no way that homes in California would ever drop to a more affordable price again like say $150k for a 3 bedroom.
When the housing prices go down in Democrat states it will be W's fault. Clinton would have done better. That's another law or something. If the prices go down in Republican states it will serve them right. They should have voted for Kerry. It was in their best interest. Those red state voters were just to stupid to realize it. They watch too much Fox News.
Remember median doesn't mean average.
Well they sure did take a tumble in Southern California after the Northridge earthquake in 1994. Look for the same thing to happen with the next one too.
The prices of homes in our area has tripled in the past 3 to 4 years.
The rest of the people bought their houses a long time ago, when prices were much lower.
The mortgage would have to be $4000-$5000 a month. I don't see how anyone, other than those at the top of the economic ladder, could afford such as home.
Right. It means that a large number of people are living in homes with $300K+ "current market value", which they bought years ago for $150K. It also means that the high prices are only sustainable if not too many people try to cash out. If lots of people try to cash out on their paper gains, the bubble will burst.
This means that if you are retired and thinking of moving out of California or other high-price market, the time to do so is now
All this means is that the Kerry states mostly have densly populated urban areas, so there's greater pressure on land prices. A lot of those higer priced homes cost far more than comparable homes in less populated areas.
The NYT is really reaching, clearly exhibiting frustration and attempting to politicize everything. They see Bush behind every tree (no pun intended). I suppose they could find similar patterns in just about any kind of market if they look hard enough. What a piece of garbage that paper is.
What the article conveniently ignores is that when property taxes go up (disproportionately) in the blue states, then who's fault is it? Applying the NYT's logic, it would have to be the Dems' fault.
They are all professional victims.
Median house prices are climbing rapidly (2003 $133k, 2004$167k) in the Kansas City - low cost-of-living area. It's due to the constant increase in demand due to a constant increase in immigration and population increase. Red States have more babies and there's only so much real estate.
To the extent DemoRat states are undesirable places to live, home prices will indeed fall. For example, New York with layer upon layer of taxes and a huge welfare population in NYC, or Massachusetts where the people are so smart they keep re-electing fools and frauds such as Kerry, Kennedy, and Barney Frank! The future is in the so-called "red" states, aka Bush Land!
...what do the rest of the people do? Rent?
...or move back with the folks. I don't wish 'the investors' bad tidings, but one of my prayers for this Christmas is a home for those that need them, and payments that won't strap their budgets.
A home is a place to feel safe and warm at night, not an 'investment'. Those in power (including realtors) should stop boosting prices, if they really care about AFFORDABLE housing.
One question is, why does it cost so much to build a home? It isn't just raw materials - lumber, sheetrock, concrete. What is it?
You are not considering all those who currently own a highly appreciated home buying up.
Always remember, in California, 20+ million more residents will be living in the state in addition to the 35 million current residents over the next 20 years. These folks will probably like to live in something other than empty refrig boxes.
A lot of housing will convert into rentals, a lot more new housing will be constructed and the median price of homes will continue to rise. Buy now...it'll just cost more later.
Some families, who shall remain nameless (but moved north to Caliornia), stay together in one home. My neighbor (with 3 grown sons and their families)after several years of combined incomes, sold that home and, as I understand it, each bought their own home.
Actually pretty smart, if you can humble yourself for that long.
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