Perspective on Real Estate

March 23, 2005

April 6, 2005


After the boom, the bubble?

Business Week's April 11 cover story is "After the Housing Boom...What the coming slowdown means for the economy and you."

Because of the significant amount of speculative purchasing of homes across the country, I had become more concerned about the hyper-inflation going on in both land and product, as I wrote last week. Business Week is looking at the consequences of this situation as it cools way down. They quote one builder who says, "The whole bubble thing is really overrated," which means I don't pay attention to this guy. I guess being in Los Angeles or Southern California, it's no wonder -- fast-moving markets tend to mutate our vision.

Another one tells us that, "it's topped out for now," which is closer to correct in some parts of the country. The major reason is simple: the high velocity is due to accommodating bankers lending at very low interest rates. This pulled people out of apartment rentals to buy homes. It caused apartments to cost more because many could be converted into condominiums; it also allowed owners to refinance their mortgages and debts to get lower monthly payments, fix their homes, or speculate on another one or two.

This inflationary surge, lubricated by low interest rates and a benevolent attitude on the part of the Fed, will result in more people priced out and less people who will refinance by the end of this year. Since economists do not expect a recession, they also do not expect home prices to crash, just adjusting downwards as more supply clogs some markets. It will also affect those with adjustable rate loans.

Homeowners were using their refinancing money to make more consumer purchases, as well as for trips and rehab. From 2002 to 2004, some $400 billion in refinance were available to buy all kinds of things.

Construction jobs rose to form 16.6 percent of all new jobs in the past two years.

Homebuilders, optimists by nature, still feel that this will be a very good year, prices will hold and appreciate more slowly.

Usually the homebuilding business is faced with problems when interest rates rise, but generally do better if there is no recession, as is the case now.

Making predictions is fraught with risk, as crumbling crystal balls force projectors to eat glass. These times may be exceptional because of the rapidity of the inflation of housing's pricing. This usually means that sales and profits are being borrowed from future years and that has to catch up as interest rates change the velocity proportionately to the amount that rates are increased. There are places which are more vulnerable to price adjustments because of their rate of price gains.

San Diego leads the list, with L.A., Miami, Las Vegas, Washington, D.C., New York, San Francisco Bay and Boston following. All have had a significant percentage of sales because of speculation.

Another implication is how this inflation further divided the haves and the have-nots.

Speculation means that many more homes were built and sold than there was new job creation, which is not a good sign. The speculators expect that the economy will still grow at least by 3.5 percent annually and the number of new job formations will hit normal. Therefore demand will continue to be high and healthy.

A healthy sign is the amount of immigration numbers, which motivates the newly arrived (legal and illegal) into home ownership, so that they have some control over their lives -- not a landlord. It is very powerful with them, even when two or three generations of families join to share that home purchase.

This, plus the boomer crowd that is buying vacation or secondary homes, plus retirees looking for affordable places and quality of life environment, all add to market strength. But this pace of market heat must be relieved, otherwise the velocity of that inflation will destroy that market.

I also include in my projections what I feel are the factors that will injure our economy and I have inventoried them several times in recent months.

Goodkin has been a business ethicist and housing analyst since 1956. He may be reached at Appropriate comments may be published as Letters to the Editor.

March 23, 2005

April 6, 2005