Bubble nostalgia?

Nobody can know whether the housing boom of the last decade will end as the dot-com frenzy did. But the parallels are raising alarms among many economists, even those who acknowledge that there are important differences between homes and stocks that significantly reduce the chances of another meltdown. [...] Still, perhaps the most troubling similarity, some analysts say, is the claim that the rules have somehow changed. In an echo of the blasé attitude that "new economy" investors took toward unprofitable companies, the growing ranks of real estate investors are buying houses they never expect to be able to rent at a profit. Instead, they think the prices of houses will just keep rising.

-- "Trading Places: Real Estate Instead of Dot-Coms," NYT, March 25, 05

There's a very good dissection of this general premise -- prices can only continue to soar! -- in Professor Piggington's Econo-Almanac for the Landed Poor. Even if San Diego real estate isn't your bag, looking at one man's analysis of a market's data should throw a little cold water on any overheated real estate speculation. Money's Sept 04, "Bubble Trouble" is another article that performs the radical service of looking at data to ask what it means for the real estate market. Their conclusion: "As economists like to say, if something can't go on forever, it won't."

[ETA: those of us who are trying to read the market for signs of when we're likely to see sanity again ... check out the weblog The Housing Bubble. Lots of chewy data.]

If you're still not convinced that paying bucketloads for a house isn't smart financial planning, check out Jonathan Clement's March 23, 05, WSJ column, "Soaring Housing Costs Are Jeopardizing Retirement Savings." The premise in the column: inordinate real estate costs will eat away at your retirement. He sums it up thusly:

"There is a fundamental relationship between what you earn, how much debt you have and what you can afford to save," Mr. Farrell says. "If you're servicing too much debt, you can't hit your savings target."

Real-estate junkies would no doubt respond that, come 65, they can cash out some of their home equity and retire in style. That strikes me as a dubious strategy, for two reasons.

First, it assumes that today's highflying real-estate market will keep on soaring. Second, even if home prices hold up, these folks have severely crimped their ability to save, because real estate is devouring so much of their annual income. After all, the big house means not only big mortgage payments, but also hefty maintenance expenses, property taxes, utility bills and homeowner's insurance.

It seems to me that if you plan to make a killing in real estate, you have to make enough to cancel out whatever hits your retirement funds have taken in the meantime. I know more than a few people who cashed out their 401(k) accounts to make a downpayment on a house in a hot market. What kind of savings catch-up do you think they'll have to play in order to make up what they've lost? Compound interest works most effectively when it's got a few decades in which to follow the rule of 72.

Getting back to the point of the first article: people have been saying there's a bubble for about three years now. The Rage Diaries has written about the is-it-or-isn't-it nature of this nonsense in Sept 04 (twice), July 04, and April 04.

Comments

[Jecca]

Thank you so much for that SD link, Lisa. I know so many people my age/demographic who are buying for the first time, at these crazy prices, and almost bankrupting themselves to do it. They say, "We have to buy now because it is only going to get worse, and besides, we can sell it in two years for a big profit." For their sakes, I hope they're right. But I also suspect (based on no chewy data at all) that they may end up stuck. I think my suspicions are from growing up hearing my dad tell the sad tales of real-estate markets going bust in Texas throughout the '80s.

[Roger]

I had not realized this was going on. Thanks for bringing it to our attention. I recently realized I've been in my house ten years (wow, ten!) and in that short time it's appreciated by 50%. That sure seems like a lot to me, even though it only works out to 4% per year. Perhaps this "bubble" helps explain the rise. It's tempting to sell with that kind of gain, but I know everything else is just as expensive, so I really wouldn't gain anything after buying another - just higher mortgage payments.

It seems to me more people are in apartments than ever, and that it's harder (more expensive) to buy a home than ever before. This sure helps explain why.

When will people learn? Of course boom times won't last forever, in any market. Any statement of "the old rules no longer apply" should scare you off no matter what the topic. It should scare us all that Bush's Social Security "reforms" are based on the same premises - that the gross domestic product will expand indefinitely. It doesn't matter that we'll have less workers in the future, because they'll be more productive. Or so he claims.

Nonsense proclamations like this are one reason I don't use Amazon. To this day I fault Jeff Bezos for fueling, if not starting, a lot of the hype in the tech bubble days. "You no longer have to make a profit to be successful." Yeah, right.