Posted on 06/24/2005 10:55:45 AM PDT by Tumbleweed_Connection
The current worldwide boom in residential real estate prices is "the biggest bubble in history," according to a disturbing new report in the Economist magazine.
Never before have home prices risen so fast, for so long, in so many countries including the United State, reveals a front-page story in the world's most respected financial periodical.
"Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000," The Economist reports. "What if the housing boom now turns to bust?
"Pain," the magazine says will result when the market "pops."
The figures detailing the bubble are daunting:
# The total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – an increase equal to the combined GDPs of those nations.
# The U.S. has experienced one of the largest increases in home prices over the past year, with the average cost of a home rising by 12.5 percent.
# In Florida, California, Nevada, Hawaii, Maryland and Washington, D.C., the average price rose more than 20 percent. And in Palm Beach County, Fla., the median price of an existing home shot up 35 percent in just the past year.
# Other countries have showed gains even higher than the U.S. in the last year, with prices rising by 23.6 percent in South Africa, 19 percent in Hong Kong and over 15 percent in Spain and France.
# A recent report by the National Association of Realtors (NAR) showed that sales of existing homes in the U.S. soared to a record high 7.18 million in April.
# But 23 percent of all American houses bought last year were for investment, not owner-occupation, showing that speculation in the real estate market is rampant. CNBC reports that in Miami, a hotbed of condominium building, an estimated 70% of condo buyers are investors/speculators, and not residents.
# Due to various new forms of riskier mortgages, 42 percent of first-time buyers – and 25 percent of all buyers – made no down payment on their home purchase last year, the NAR disclosed, making them especially vulnerable to a downturn in resale prices.
# In California, 60 percent of all new mortgages this year are interest-only or negative-amortization. These loans are gambles that prices will continue to rise.
Bigger Than the Dotcom Bubble
Noted stock investor Sir John Templeton described the 1990s tech boom as the "biggest bubble in history" before it crashed.
But that bubble appears to be superceded by the real estate boom.
The current real estate boom has seen prices go up more than 100 percent of many countries GDP -- a number that "is larger than the global stock market bubble in the late 1990s (an increase over five years of 80 percent of GDP) or America's stock market bubble in the late 1920s (55 percent of GDP)," The Economist notes.
"In other words, it looks like the biggest bubble in history."
The real estate boom in a few countries has already begun to fizzle.
According to one yardstick, average house prices have fallen by 7 percent in Australia since 2003, and in Sydney prices have tumbled by 16 percent.
Britain's real estate market has also cooled considerably. One index showed an increase of only 5.5 percent in prices during the first five months of this year, down from 20 percent growth in July 2004.
But in most countries – including the U.S. - home prices have risen since 1997 by much more in real terms (adjusting for inflation) than during any previous boom, even though for the month of May, the Commerce Department said the U.S. median sales price dropped 6.5 percent to $217,000 - perhaps the first signs of a cooling market in the U.S.
The boom in America has brought real gains more than three times larger than in previous housing booms in the 1970s and 1980s.
Great Depression Comparisons
One clear indication that residential real estate is overvalued is the relationship between home prices and rents.
The price of a home should reflect the future benefits of ownership, in the form of rental income for an investor or rent saved by an owner-occupier. When the price-to-rent ratio is high, property is overvalued.
House prices in relation to rent have hit all-time highs in the U.S., Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium.
In the U.S., the ratio is 35 percent above its 1975-2000 average. A drop in home prices is more likely today than after previous booms for three reasons, according to The Economist: Homes are more overvalued, inflation is much lower and many more people have been buying homes as an investment.
If prices begin to level off or drop, as they did in May, owner-occupiers will likely remain in their homes, but investors are more apt to sell, particularly if rents don't cover interest payments. That will increase the supply of homes for sale and further depress the market.
Also, residential real estate investment in the U.S. is at a 40-year high, while the number of households is growing at its slowest pace in 40 years. This is bound to create excess supply.
"With prices looking overvalued in more states than ever in the past, average American prices may well fall for the first time since the Great Depression," according to The Economist.
And a rebound in the real estate market could take some time – when British home prices fell in the early 1990s, a decade passed before they returned to their previous peak, after adjusting for inflation.
Economy Will be Socked
Another troubling aspect is the effect a real estate downturn could have on the economy in general. Even a leveling of prices can lead to a sharp slowdown in consumer spending.
Consumer spending and residential construction have accounted for 90 percent of the total growth in the American GDP over the last four years, and more than 40 percent of all private-sector jobs created since 2001 have been in housing-related sectors, including construction and mortgage brokering.
The International Monetary Fund analyzed home prices in a number of countries from 1970 to 2001, and found 20 "busts" – when real prices fell by almost 30 percent. All but one of those busts led to a recession.
Japanese property prices have fallen for 14 years in a row, by 40 percent from their peak in 1991, and consumer spending has been weak, leading The Economist to conclude, "Americans who believe that house prices can only go up and pose no risk to their economy would be well advised to look overseas."
People are going to be much more reluctant to dump that kind of money into an asset that a bunch of two-bit local politicians can steal on a whim.
What the heck is a million dollar condo? Park Avenue New York?
No Virginia? No I haven't seen anything concerning increased bankruptcies and forclosures here? The only industry that was hit was telecom (WorldCom). The unemployment is around 5%? What are you talking about?
I do believe there will be a good dose of pain as this deflates. It happened in 1991-1993 so there's no reason it won't again when rates increase.
You're kidding, right? You can't even touch a condo on Park Avenue -- at least nothing decent -- for under $3 million. But the prices go up to $10 and $12 million.
I've heard that too, but I think that was the mantra about a decade or so again when we had higher interest rates.
1% per month should cover the mortgage, repairs, and property taxes, give or take. At 6%, a $100,000 that's thirty years requires $599.55 per month in mortgage payments. But at 8%, you've got to fork over $733.76 per month. You of course also have property taxes, landcaping, snowploying, repairs, etc. With a 6% mortgage, you should be able to cover the rest with the remaing $400.45 per month if you were getting a $1000 per month in rent. So if property taxes were $150 per month and other expenses were $200, you'd have a tax flow of $50 per month, but assuming you had it set up as a business, you could also take a depreciation allowance to offset other income.
Here you go, check it out --
http://www.corcoran.com/property/search.aspx
Almost sounds like I should find another line of work...but in Ohio things seem pretty reasonable.
I'm living in one (renting). Being in the downtown area of a fashionable, relatively crime-free California edge city is all it takes to break the million dollar threshold, these days.
And Park Avenue condos are going for more like five to twenty-five million. ;)
So what's the next bubble ?
BUMP
Commodities. Energy and metals.
Well, that's damned cheery. Inflation maintains housing prices, but bread costs four dollars a loaf...worse than the bubble popping, if you ask me.
Houses around here have appreciated more than 100%, in three years.
Cool. I'm hanging on to my Exxon stock.
This assumes people who are forced into lower paying jobs are not relocatable. In fact they should be. And as people move out of an "hot" real estate area the real estate will cool unless other new jobs move in to take the place of the jobs lost. Since you believe the new jobs will not have equal compensation, (even though other economic studies disagree), then the real estate prices will drop in this local area. This did happen in Austin TX in the mid 80's. But you are right about retireement homes which people are switching into.
The retirement boom will drive the real estate market in the Sun Belt and a jobs recession in the work areas (like Silicon Valley) would drive home prices down there. However the Silicon Valley firms do not plan on shipping all the jobs overseas, (it is really more like a 5% problem), and in the end it will be jobs that drives the market in job locations. I believe the jobs amd real estate are about ready to even out and the real estate in CA will run level for a while. It does not look like it will drip like a bubble burst, but we shall see.
It is happening. Housing is growing much faster than population. That means it isn't people that live in their "investment." It means lots of speculation. Which means a bubble that can pop.
Wrong Equitable Building. This is the one that caused all the commotion...
http://www.nyc-architecture.com/LM/LM059.htm
Oh- I was thinking the other one wasn't half bad
Heinlein said much the same thing...
A fake fortuneteller can be tolerated. But an authentic soothsayer should be shot on sight. Cassandra did not get half the kicking around she deserved
Part of the definition of a bubble is that hardly anyone identifies it as such. I think we've got more upside on prices, then when most people decide there are new factors never before seen, that's when it's time to get out.
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