In response to Stephen Wright’s famous line – ‘You can’t have everything. Where would you put it?’ – Kevin Roon writes: ‘Obviously, you’d put it everywhere.’
[Some of you had trouble getting to the Davis columns. If I get time, I will link them all.]
T. Hardy: ‘Our question concerns the reality of the ‘housing bubble’ that is being written about fairly regularly now. We are in the mid-west, own our own home outright at this point and we are considering buying a new house. We are considering waiting until next year to see what happens to the ‘bubble,’ but I am wondering if this is a real phenomenon.’
☞ I am flying back from San Francisco and Los Angeles. These are certainly different markets from Cincinnati, and Cincinnati is different from Milwaukee or Mapleton, Iowa, or Columbus – and I have no doubt that various parts of the Columbus real estate market are different from each other – so the first thing to say is that every market is different and there are no ironclad rules.
But the second thing to say is that, yes, I think in many places there will be a correction.
In San Francisco, a once-wealthy friend is thinking of selling his second home. (He’s still doing OK, but his dot-com bonanza blew up.) It’s worth about triple what he paid five years ago, he tells me as he drives me to the airport, and I am screaming SELL!
Yes, there’s only one California, and yes, the nation’s population will continue to rise. But the biggest drivers of the phenomenal real estate appreciation he seems to have experienced, it would seem to me, are:
- Sharply falling interest rates, which makes the monthly payment on a $600,000 house no higher than the payment on a $400,000 house used to be. So what’s another $200,000? Well, yes – but rates could rise! Trouble! Or they could stay low, or go even lower. But if they do that, I fear it will be for ‘bad reasons’ – a terribly weak economy – which would not bode well for real estate prices.
- Phenomenal new wealth in the San Francisco/Silicon Valley area, which obviously spun sharply into reverse . . . leading more than a few people to take money out of stocks and put it into something tangible and safe, that can only go up. (How comforting it was to know, a while back, that stocks could only go up. Now we’ve found the new thing that can only go up.)
So, on the one hand, I don’t imagine the nation’s basic housing stock will decline drastically in value, if it declines at all – we are not likely talking anything even remotely like the 80% or so decline in the NASDAQ. Maybe more like 20% if you had to sell your house . . . or 30% if you were really unlucky and had to sell it in a hurry . . . or no decline at all if you just kept living where you’re living and waited it out.
But a luxury home that’s tripled in value in 5 years? What’s to say it can’t go back much or even all the way to its price of five years ago? Has it gotten bigger? More beautiful? What has made it so much more valuable? All that wear and tear on the roof?
My San Francisco friend thinks maybe there’s a fundamental shift – that people are going to start spending a larger slice of their income on shelter. That’s where the extra juice could come from to sustain continued appreciation in home prices.
But the housing slice – especially in California – is already pretty thick.
Let’s think this through. What are the competing sectors for the consumer dollar? There’s food; people might spend a little less on that, I guess. And they might conceivably spend a little less on transportation, keeping their existing cars a little longer before trading up, and buying more economical models when they do. I rather doubt it, but it’s possible.
But what about health care? Isn’t that a huge slice that will give housing a good run for the incremental dollar? Much of it is covered by insurance; but with rising co-pays and elective therapies people may increasingly want . . . it just seems to me as if the health care slice could grow as technology offers ever more – and more expensive – new treatment possibilities.
And what about retirement contributions! Isn’t that a big one? With shrunken 401(k) accounts, and a diminished expectation for the rate at which those accounts can grow, won’t a larger slice of our dollars be going into retirement accounts to make up for the lower anticipated growth rates?
I’m not saying people will direct a smaller share of their resources to shelter; just skeptical that it will be larger.
And what of all those 3%-down homes now in, or headed for, foreclosure? Won’t they turn what was at least until recently a seller’s market in many places into a buyer’s market?
One more rich-guy example before getting back down to earth.
In Los Angeles, I was staying with a friend who rents a pretty wow house in the Hollywood Hills from a pretty wow movie star (who lives next door in an even more wow house). He feels silly renting, and gets no tax deduction for his monthly check. He has been thinking of buying it – please don’t hate me for knowing people like this – for $2 million. But he pays ‘only’ $5,000 a month, and I am screaming: DON’T BUY!
Right? If you figure the carrying cost of that $2 million at 6%, that’s $120,000 a year in interest, or maybe $75,000 a year after the tax deductions – versus $60,000 in rent. But he’d also have to pay the real estate taxes! And the repairs! And the insurance! And he’d be the one to suffer the $600,000 loss if he ever moved back east and had to sell it for, oh, say, just $1.5 million less brokerage commission and closing costs.
Back on planet earth, where people rent houses for $900 a month and buy them for $120,000 or $240,000 or $360,000, I imagine any correction would be less severe.
(Then again, the current administration is reserving the bulk of its economic assistance for those at the top – hundreds of billions in tax relief over the next decade – so, you’ll be relieved to know, the high-end homes may hold up somewhat better than I imagine.)
And some places could even defy any correction entirely. A friend just bought yet another beautiful 19th century mansion in Buffalo for $15,000. Maybe Buffalo is dying; surely it’s freezing; but this is the kind of real estate speculation that appeals to my contrary nature.
And now to the Hardys’s specific situation.
Actually, I don’t know their specific situation (or how to spell the possessive plural of Hardy), but I’d venture the following:
First, what they should do depends on whether they were thinking of downsizing, because the kids have finally flown the coop, or buying ‘more house,’ as sounds likely from their question.
If it’s the former, Mr. And Ms. Hardy – go right ahead. It would be like selling part of your position in what may be an overpriced stock.
But if you’re planning on ‘moving up’ to a more expensive home, then it would be like buying more shares in that possibly overpriced stock. I think the prudent thing to do would be to wait. In the next year or two you may find some truly motivated sellers (including a lot of banks) who will make you a better deal than they would today.
Second, I could be wrong about all this, especially for your particular real estate market, (whichever that is). And, in any event, as my father used to say, life is not a business. If you find a place you love and can afford, maybe you should buy it anyway. Not because it’s a brilliant investment move, but because it makes you happy.
Bottom line: I would go with your current instinct, which seems to be to sit tight and not rush into anything.
Quote of the Day
The nicest thing about money is that it never clashes with anything I wear.~A model's remark to Al Rosenstein of Roseweb Frocks
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