The absolute certainty that housing prices will appreciate justifies any level of leverage or income committment on the part of buyers. Why even pay down your principal at all when you can build up principal by home price appreciation? Alan Greenspan won’t let the housing market fall. Besides, according to a Fed study, there is no sign of a housing bubble. And why should the bank care about credit quality when mortgages are packaged and resold on secondary markets, dominated by the government-sponsored ( maybe) enterprises Fannie & Freddie. The New York Times profiles a Southern California market where: a planned community in the southern part of Orange County, more than 1,000 people are on a waiting list for the chance to buy one of 27 unbuilt three-bedroom houses at prices starting in “the low $400,000′s.” In San Bernardino County, where some commute as long as two hours a day to jobs in Los Angeles and elsewhere, a five-bedroom tract house that sold for $378,000 a year ago is on the market again for $609,000.
Source link: http://blog.mises.org/2172/more-housing-speculation/
More Housing Speculation
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See also this summary of housing prices in 1Q04 (the link is at the bottom of this message).
The data (assuming no manipulation or other trickery, not necessarily a safe assumption) do not seem to support a nation-wide housing bubble. Here, I’m using the term “bubble” to imply a grossly over-valued market, one which is likely to fall 60% or more. Think Nasdaq, 1999.
However, it is pretty clear that certain metro areas, primarily in California and the Northeast, may be in bubble territory.
But bubble or not, it seems pretty clear that Fed policies have distorted the market considerably, and that a rise in interest rates could hurt values across the board, even in non-bubble areas.
Here’s the link:
http://www.ofheo.gov/media/pdf/1q04hpi.pdf>(Link):
http://tinyurl.com/3xhfk
Housing bubbles have two part a housing bubble proper and a rent bubble. The latter is in place in many places in the USA and Australia where I live. There are whole states, Vermont comes to mind, where the rent bubble has hit middle income people. Nurses, firemen, police can’t afford to live in the city or state they work in because land prices have pushed up rents. For some strange reason when the rent crisis hits it doesn’t push rents down, some how they become tied to the speculative land or housing prices. Probably because rates and land taxes tie the rents to the inflated land value and the lending agencies calculations of expected returns on rent are also tied to property value not rent affordablility.
In the US, rents have been declining, rather than rising. This is because so much credit is available for home financing that many former renters are purchasing homes. This credit is mostly the consequence of the easy money policy of the central bank, with money creation being funnelled into credit markets. So we have a situation where rentals are falling and home purchase prices are rising, unlike what you are describing. If land values were inflating here, then both should go up.
There is a tendency over time for the real values of land to rise in a market economy, at least in areas where land is more scarce due to population growth. The growth of goods and services can proceed at a faster pace than the growth of land so it is becoming scarcer relative to goods and services. But that is not inflation or a bubble, that is a consequence of economic growth. It comes from the growth of the purchasing power of wages over time.
Robert makes a good point but to those on fixed incomes who can’t bargain up their wages to match the local rent anomalies that occur in some places the situation is harsh. Sometimes zoning blocks middle and low income housing being built where its needed, sometimes residents sue to prevent low income housing in their back yard. Mean while the socialist and statists scream ‘market failure’! As always we need a plan B to advocate before the socialists come out with the plan R, Regulatory red tape.
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