After The Housing Boom

GDO Report

"Weak dollar helps fuel foreigners' purchase of U.S. property"

*** Publisher's note: Gwinnett Daily Online will continue to keep our readers updated with both sides of the story to help our fellow homeowners make the most informed decisions possible.  Please email us with any housing news you uncover so we may communicate it with others and help keep our readers in the know.

"After The Housing Boom"

From BusinessWeek comes an article painting a fairly optimistic view of the real estate market.

According to the article, home prices won't experience a sharp downturn, but instead will stabilize, in spite of the record run-up. In the words of Richard Berner, chief U.S. economist for Morgan Stanley - "Home prices will rust, not bust, for the next few years."

Why? Several reasons:

The economy is expanding and the job and wage situation are improving. In the past 40 years, national new-home prices have fallen only twice, and both times were during a recession.
Baby boomers are driving the second-home market with an eye toward both investment and future retirement.
Immigrants are increasingly becoming first-time home buyers.
Do you believe that? I don't.

First, the economy is expanding precisely because of the real estate boom, not parallel to it. Residential construction makes up less than 5% of the U.S. economy but accounted for over 12% of average yearly growth since 2002. Similarly, construction jobs tally just over 5% of all payrolls, but hiring at building sites has accounted for 16.6% of all new jobs in the past two years. Additionally, if the US expansion continues, interest rates will continue to go up. Low interest rates are the main cause of the boom.

Second, Baby Boomers have already pulled a significant amount of equity out of their homes. In just three years, from 2002 to 2004, homeowners who refinanced their mortgages took out a phenomenal $400 billion in cash.

Third, California has one of the largest immigrant populations in the country as well as some of the most expensive real estate markets. The median price of a home in California is north of $475k. At a 30-year fixed-mortgage rate of 5%, a buyer with an income of $100,000 and a $40,000 downpayment can bid as much as $421,000 for a home. I don't know about you, but I find it hard to believe that there are large numbers of immigrants pulling in $100k a year.

It seems folks have gone blind to the fundamentals. There is only one reason why the real estate market has continued to defy all rational sense - cheap, easy, and dangerous debt instruments such as adjustable-rate mortgages and interest-only mortgages.

The Ripple Effect

People flush with real estate cash, but priced out of hot markets are turning towards cheaper, less desirable towns to make continue their real estate gambles. It's a formula that may backfire, if the story of Florida's Treasure Coast is any indication.

Loan managers, warehouse managers, electrical workers and other middle class workers are finding themselves priced out of the local market as prices there have doubled. The median wage in the Treasure Coast (Martin and St. Lucie) counties in 2004 was just $24,470. But the median price of a single-family home in the two counties broke $200,000 in September. Two hurricanes within three weeks failed to slow the boom. Even homes with damage are commanding premium prices.

What's fueling the boom? Out-of-towners, some flush with real estate cash looking to invest, others priced out of their own even higher-priced local markets. It's a ripple effect, a wave of price increases washing out from the most hyperinflated markets in the country.

The outcome is more commuting and transportation trouble as workers move further and further away from their jobs. It also means local employers will have to raise wages by raising prices and passing these higher cost off to consumers. So what's the outcome of all this home price mania? Lower quality of living, higher prices, and skyrocketing personal debt. And that's the optimistic view if prices don't fall. If prices do fall, these outlying areas are likely to see some of the largest price drops since the local population will be unable to pay out-of-town speculation level prices.

You simply want a house, a nice place to live and raise your family. You're not looking to flip it, get rich off it, or drain the equity on a vacation, hottub, or a plasma TV. But these are bubble times, so only the house you can afford is a run-down dump next to the freeway. And the only way you can afford it is through an adjustable rate mortgage. So you buy it, convinced that if you don't do it now, it will only be harder, if not impossible do so in the future.

Congratulations, you're the latest victim of bubble psychology. If you're lucky, you're helping to pave the way for the next batch of suckers. If you're not, you'll be stuck with a home worth much less than you paid and rapidly escalating mortgage payments. Foreclosure could push the dream of owning ever a home again out of reach.

If you are a renter, don't be so hard on yourself. You may have missed the boat on the boom, but you now are in a pretty good position to take advantage of the eventual downturn.

An article from MSN Money talks about the frustrating pressure of being locked out of the market and examines the 3 worst reasons to buy a house in today's market.

The 3 reasons worst reasons to buy a house:

A house is a better investment than the stock market The stock market crashed a few years ago, remember? It's not that hard to do better than that. Irregardless of how much your friends made selling their condo, prices do and will go down. After dropping more than 20% in the 1990s, Los Angeles home prices took almost 10 years to regain their peak.
I’m tired of throwing away money on rent When you're a renter, you often forget about the perks. Renters don't have to pay for maintainence or repairs. If the neighborhood you rent in starts to go bad, you can simply and easily move. Not so with a house.
I need the tax deduction The interest rate deduction is one of the sweet deals of homeownership. But paying less taxes in not the right reason to pay more for a home.

Be honest with yourself, if you can't afford to buy a house, don't. And don't feel bad about it either. You can't afford a house because houses are unaffordable, it's that simple.

Weak dollar helps fuel foreigners' purchase of U.S. property

While domestic demand for homes may be weaking due to increasing interest rates, foreign demand for U.S. real estate is strong, according to an article in the Miami Herald.

The primary reason? The weak U.S. dollar. The U.S. dollar has fallen significantly over the past three years against the 12-nation euro and the British pound. Another reason is technology. The Internet makes it easier for foreign investors to look for properties in the United States and then market them to potential renters.

Historically, coastal areas have gotten the most attention from foreign investors. But recently, foreign interest has broadened to interior cities such as Las Vegas, Chicago and Atlanta.

Will foreign investment in U.S. real estate be enough to prevent the dramatic deflation of home prices? What do you think?