I agree that the driving force behind this bubble was simply "expectation". Why else pay $500,000 for a 2-bedroom apartment (that was worth $150,000 5 years ago). Expectation - that it'll just keep going up and up and up and up. Aided by hype in the media, hype from the builders, hype from your real estate agent, hype from the corrupt appraisers... Then reality sets in and it ain't pretty...
If there's indeed a U.S. housing bubble - something most analysts now seem to acknowledge - it's deflation will have an impact, and perhaps a serious one.
We're probably going to find out over the coming months, because the evidence keeps piling up that the air is leaking out of the U.S. housing market.
The latest sign comes from sales of existing homes in December, which surprised analysts by dropping an unexpectedly sharp 5.7 per cent, to the lowest level in two years.
Price gains, which had been soaring at an annual rate of 16 per cent two months earlier, chilled to just over 10 per cent. The backlog of unsold homes, which had risen recently, remained high.
There are plenty of other signs that residential real estate is losing its powerful ability to boost economic growth.
Analysts at Deutsche Bank note that U.S. home-building activity is trending down, with new construction permits having receded to the level of a year ago. A measure of consumer attitudes toward home-buying conditions has dropped to the lowest level in more than a decade.
Ian Shepherdson, chief U.S. economist with High Frequency Economics, expects price increases to slow much more, deflating homebuyers' expectations of future price gains. "This will be the trigger for a serious collapse in home sales later this year," he predicts. "The housing market is a bubble and it will burst."
February 01, 2006
Housing bubble seems set to deflate
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9 comments:
"The housing market is a bubble and it will burst."
This for me is the major difference between the UK and US.
No one in the UK is prepared to admit that they are having a bubble, whereas economists seem to be falling over themselves to point it out in the US.
I left the UK because the house prices were causing a horrific drop in quality of life for those buying houses. More and more people are spending all their take home pay on servicing debt. It is no wonder that more and more retailers are reporting lowered profits. Even wallmart is suffering.
Unless we get some wage inflation to erode those debts (unlikely due to pressures of globalisation), then we are in for a rough ride.
That is why I sold my London flat almost 2 years ago and left the country :)
The whole nation has been fooled by the Blairites.
cashedout, enjoying Pattaya beech.
I was thinking of this scenario today. I'm renting and suppose that I wanted to buy a house because I'm throwing my money away on rent. Okay, fair enough. I should buy for the future price appreciation, right? Well there where is the rational when even the realtors are saying to expect 4-6% price appreciation this year. That is barely above the rate of inflation. My rent has been stable or declining the past couple years. I can have a garage and an extra bedroom, but I'll also have qunitupled by commute time (from 10 to 50 minutes) and doubled my monthly expenditure in payment alone. (800 to 1600). Plus, considering the year round heat, I should expect my power bill to quadruple as well since I'll be cooling a much larger home (50 to 200). Considering the fact that my car is a V8 powered car that will KILL me on gas, I will have to buy a new car. Now I've risen my car payments (0 to 250). My car insurance will go up since it's a new car (80 to 150). I anticipate water/sewer costs being rougly the same, but my home insurance will rise on a yearly basis from (130 to 1400 thanks to hurricanes). This doesn't even consider property tax either, which I don't even want to compute.
Right now I'm up at increased costs of $2450/mo just to own a home. I haven't even began to factor in buying furniture and the opportunity costs of sitting at home cutting grass instead of spending a Saturday fishing/relaxing in the shade along a river.
What am I missing about here? There is no mathematical way I can make buying a home make sense.
"What am I missing about here? There is no mathematical way I can make buying a home make sense."
Nothing at all. You're one of the few remaining rational people.
Enjoy life. Home ownership has become a jail for most people. Do they know their Home actualy owns them not the other way round.
Cashedout.
I did my own math. I have $600,000 in assets (which I did not get from selling a house). It is low risk fixed income investments getting a safe return of 4.5-5 percent. Each month, I'm getting around $2,000 in interest payments. I rent a beautiful family home in NW DC for $3,000 per month, which is about 25 percent of my monthly wage. According to my Landlord, the house is worth $1.2 million. If I wanted to buy this house, it would cost me $30,000 a year in foregone interest, while interest payments on a $600,000 mortgage are at least $2,800 for the first four years. Taxes in DC are about $500 a month.
However, this is a nice thing. If anything goes wrong with the house, this nice man I call the landlord comes around and fixes it for me. If I don't like the house, then after a year, I can find another one. And to top it off, rents haven't risen by more than 4 percent per year for ten years, while I have on average increased my salary betwen 5-6 percent every year.
Finally, I go to bed at night, and I don't have to worry about the housing bubble collapsing.
In summary, renting is great; and owning sucks.
Happy_renter,
I couldn't agree more with you.
I'm actually enjoying this delusion about Homeownership.
It keep the Rental markets less crowded and more affordable and enjoyable.
This is stealth Tax on people who are bad at Math.
Just like those people who frequently play the lottery, buying a home now has become a voluntary TAX on the innumerate among us.
Cashedout geek.
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