I will never forget sitting around the holiday table. Everyone was there. Uncles, Aunts, and cousins.
My Uncle Benny, a huge man with a booming voice that rivals James Earl Jones deep bone rattling authority was leading the chat about the real estate market.
As the conversation turned into local real estate, Uncle Benny winced as he shared that he had the opportunity to buy Lake Arrowhead water front acreage for less than $40,000. Today, this area is Beverly Hills on a Lake. It is where Oscar De La Hoya resides and trains for his championship fights.
The ironic thing about this family gathering is that it took place in the mid 1980's. My good Uncle Benny was referring to a chance he had going back to the 1950's. Heck, I wish I would have bough Arrowhead property in the mid 80's. Any long time Angelino with family roots in Southern California has either had or has heard this real estate related conversation at several times while in L.A. residency.
Why I Believe that real estate is a good deal
The above story is true. Those that bought at those prices have no doubt passed on a legacy of wealth to their children.
I believe that real estate over time is a good deal. Interest rates are relatively low, compared to the last real estate jump which was boomed while at 10%. We are whining over 6.5%. How soon we forget.
Because of historically low rates, we have had the greatest real estate boom in our nation's history. Therefore, we have the largest rate of home ownership ever. It is for this reason that the market has slowed down. You great Realtors have sold everyone a house!
Meanwhile, an overabundance of home sellers have put their homes on the market, while the demand has softened. It has only softened because buyers are grappling between a higher fixed rate (which is still historically low), and Adjustable Rate Mortgages. At some point, they will figure it out and deal with it that 5% fixed is gone and will again swallow Adjustables as a viable way to finance a new home.
We are also moving into a stronger economy (which this real estate boom has fueled). It is hard to believe that real estate will burst while the general economy explodes.
There are more reasons that we do not have a real estate bust.
~Inflation is still low. One way to stop inflation from going lower is to keep rates low. Two sectors have kept inflation steady, while preventing a Japanese style deflation. Housing and Oil.
~Demand in many metro areas (including California) is still high and steady. Here, in many neighborhoods of Los Angeles, developers are splitting lots into two such that they build two or three unit townhomes.
~When you adjust for inflation, U.S. home prices are not up much at all since 1980… a gain of less than 2% a year.
Thus, I believe over the long run real estate is a good bet.
One Armed Economists
There is a story that economist Paul Pilzer shares about President Truman and his Top Economic advisor.
It seems that Truman wanted to know the state of the economy.
His Economist authoritatively exclaimed, "well on the one hand if GNP stays at its current levels we should come out of this recession, on the other hand if...."
Whereby Truman interrupted and commanded, "what we need is less two armed economists!"
There are always at least two sides to an economic opinion. I will offer you resources that say we will continue to have a real estate boom (or at least stay flat) and others that swear we will have a real estate bubble bust.
Real Estate Boom
Talk of Housing Bubble Has Fears Rising, but in Reality It's a Lot of Hot Air
In this article by James Flanigan, we get sources proving that "Nothing extraordinary will happen in the business of buying and selling houses," says Raphael Bostic of USC's Lusk Center for Real Estate, one of the more sober analysts around. Home sales and prices don't move dramatically — much less pop, Bostic explains — unless a major downdraft occurs in the larger economy.
Flanigan goes onto explain that incoming immigrants are helped to fuel the new and used home sales.
"Newcomers to the U.S. are boosting the nation's population by 1.3 million annually, according to the Census Bureau, bringing the overall increase to 2.8 million. Along with easier credit, the trend helps explain why the housing market saw 7 million new and existing homes sold last year, up from 3 million 25 years ago."
"Meanwhile, single women also have added to housing demand in the last decade — a phenomenon sure to continue. Over the next 10 years, retiring baby boomers also will swell the market for second homes."
Harry Dent: Dent is an economic forecaster who wrote "The Roaring 2000's". He also has penned his most recent, "The Coming Bubble Boom".
Dent called this current real estate boom. He believes that the real estate is being driven to a great extent by the great wealth of the Baby Boom Generation.
Purchase Originations Should Stay Strong ...
There is no real-estate bubble about to burst, experts saying
TAMU: Real Estate Center's News Release No. 66.At the beginning of the 20th century, less than half of all Americans owned their own homes. Today, low interest rates have pushed homeownership rates to a record 68 percent, and that figure is still climbing. Experts say it will exceed 70 percent by 2013. ... Millions more new homeowners are coming down the road. As many as 1.63 million new households could be formed every year for the next decade. That translates to 2.17 million new homes needed annually.
Real Estate Bubble
Getting Ready for the End of the Housing Bubble
UCLA Anderson Real Estate Forcast
UCLA economists predict reasonably smooth sailing for California's economy - but also warn that another national recession could be looming as early as next year. Anderson believes in a real estate downturn, which will cause a recession.
Las Vegas Cools - Aug. 26, 2004
U.S. Real Estate Bubble Nears Its End
Why home prices are about to plummet--and take the recovery with them
"Only in about 20 metro areas, mostly located in eight states, does the relationship of home price to income defy logic. The bad news is that those areas contain roughly half the housing wealth of the country. In California, the price of a home stands at 8.3 times the annual family income of its occupants; in Massachusetts, the ratio is 5.9:1; in Hawaii, a stunning, 10.1:1. To some extent, there are sound and basic economic reasons for this anomaly: supply and demand. Salaries in these areas have been going up faster than in the nation as a whole. The other is supply: These metro areas are "built out," with zoning ordinances that limit the ability of developers to add new homes. But at some point, incomes simply can't sustain the prices. That point has now been reached. In California, a middle-class family with two earners each making $50,000 a year now owns, on average, an $830,000 home. In the late 80s, the last time these eight states saw price-to-income ratios this high, the real estate market collapsed. "
Speaking of bubbles . . . Californians have been jumping the border into my state (and currently we are welcoming them with open arms, even though it is becoming difficult to find decent pieces of raw land to develop)
- From Arizona
Posted by: paul | September 23, 2004 at 08:06 PM
Perhaps those denying the fact's are currently making their living off the real estate business? Real estate is a business like any other and the extreme reduction of interest rates in the past 10 years has resulted in millions of people becoming awash in [bank] cash and buying homes. Like any business seeing an opportunity to increase profit large numbers of people are now engaged in real estate speculation. The values of homes in certain areas of the country have doubled, triped and quadrupled in the last 5-8 years, and this huge increase in the selling price of homes is solely sustained by the ready availability of low interest rate loans to sustain the increase in selling price. Personal income has most certainly not quadrupled in this country, so how do you think people are getting the money to pay for these overpriced homes? Property values are nothing more than what people believe a property is worth. Sort of like tech stock prices in the early 90's don't you think? And we know what happened to them.
Posted by: Kevin | May 10, 2005 at 07:31 AM
Kevin-
Yes I make my money to a large degree from the real estate industry. And as an advocate I do attempt to give my contituency fodder to fight off the doomsdayers.
But I do sincerely believe that the real estate market will not burst. Underline burst.
It may soften as I too cannot believe how high the highs are.
However, that does not mean I think it will burst.
I do believe that making an analogy akin to the stock market and the burst of tech in the 90's is falty.
Unlike stocks real estate prices have continued to rise over time. Why can that be? Demand. People got to live somewhere.People don't have to own stocks.
Stocks at some point level off. Google's stock as an example, is about as good as it is going to get. Sure it may go up a tad, but for someone who wants security it is not the way to go.
The only ones that will make money on Google will be the ones who day trade and make money off parsing margins as they go up or down.
There are investors in real estate who try and do the same. They will get burned at some point. But the long term holder virtually is never burned in real estate.
Posted by: Tim O'Keefe | May 10, 2005 at 08:54 AM