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.”
F
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:
1. 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.
2. 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.