The Frenzied Housing Market

Mathew Emmert’s commentary Housing Still Frenzied is a good read. I agree with most of what he says, but there were two glaring omissions.

First, in the “Equity Schmequity” section, he misses the point of people’s argument when they say owning is superior to renting because you build equity. There are two ways to build equity in a home. One is by paying down the principal balance. As he noted, that doesn’t happen until many years after inception. The other way is through price appreciation of the home itself. In the last few years, most major metropolitan areas have seen unprecedented price spikes. That’s where most people’s equity comes has come from.

While I don’t believe this can continue, over the long term home ownership has been like equity ownership–they’ve both trended upward at a good clip, especially if you live in the right area.

That brings me to the second thought. At the end of the article he mentions several housing markets he has concerns about. Boston, New York, Washington DC, etc. I was astounded to see that Southern California wasn’t on the list!

I live in Irvine. Certainly a nice area. But let me tell you my story. I bought my condo in 1993 for $121,000. For that I got 978 sq ft, 2 bedroom, 1 bath, no garage, no a/c, no heat, and no yard. (see photos) In 1997 it was appraised at $90,000. Today an exact comp sells for more than $300,000. I paid my original $90,000 loan down to $85,000 then refinanced at $130,000 to pay a big tax bill. This means I’ve lived in my house for free for a decade. My mortgage payment, property tax payments, and HOA dues have all come back to me in increased equity.

My friend who lives just a few miles down the road bought his home there in 1978 for something like $23,000. He sold it recently for more than $700,000. He said the same thing–“hey, I’ve lived here for free for a quarter of a century!” He is not unique in any sense of the word.

The Southern California real estate market is truly out of control. Prices in my area have gone up as much as 300% in the past six years (sound like any other market we know?). During that time, traffic gridlock has increased dramatically. The schools are worse than ever. The state deficit is worse than ever. The business climate is worse than ever. So what accounts for the huge increases?

Yes, a lot of people are moving to Southern California, but it’s mostly poor immigrants and workers from areas where homes don’t cost half a million dollars. So who’s buying all these homes? Low interest rates can’t account for all of it. I just don’t understand how people can afford these home prices. Frankly, the property tax on a typical detached home these days is enough to give me nightmares. 1.25% of $500,000? No thanks.

I predict a major reduction in home prices in places like this. Personal bankruptcies and consumer debt at an all time high. Housing outlays at at an all time high when considered as a percentage of income. Savings at an all time low. It doesn’t take a genius to see what’s in the crystal ball.

I’m surprised the other shoe hasn’t already dropped. On the other hand, with the economy improving, the worst should have already happened. But I’ve noticed that prices in the housing market don’t move in lock-step with the rest of the economy. Prices in California bottomed out in 1997, and the economy was healthy at that time. They also hit a high back in the early 1990s when George H.W. Bush was losing the election to Bill Clinton over the economy.

Anyway, back to today. This market is a goldmine for some people. Those moving from Socal to Iowa, for example. Or older folks who are moving downward in the market now that the kids are out of the house. Retirees moving to less expensive areas. That sort of thing.

The good news is that for those who are observant and patient, when the market does turn, they’ll gain a lot of leverage and have their pick of many fine homes simply by virtue of being on the buyer’s side of the table. My advice (not that anyone asked for it) would be to keep cash on the sidelines, keep your debt low, and wait. Markets go up and they go down. When you’re purchasing an asset of such high value, a little market timing makes sense. Especially when the signs of excess are so clear.

  10 comments for “The Frenzied Housing Market

  1. November 18, 2003 at 4:02 pm

    Now that’s the best idea I’ve heard all day! Any suggestions on what I should get my girlfriend with that pile of cash? Flowers? Perhaps a maxed out Starbucks gift card? Tough choices…

  2. November 18, 2003 at 4:30 pm

    Consider it done! πŸ˜‰

  3. November 20, 2003 at 11:51 pm

    Oh, I figured you would make your fortune in Vegas. πŸ™‚

    The market will have to drop eventually. And I think I know how it’ll start. Might be a good subject for another entry…

  4. aunt betty
    November 21, 2003 at 7:07 am

    i seem to be having a problem getting the entire page of your commentary on the housing market. it is half covered by your index on the left, while your web site is up, i can’t move the outer edges. what am i doing wrong? as you can see, i am still a novice at this.

  5. November 21, 2003 at 12:04 pm

    Hmmm… I wonder why that’s happening. I looked at the site using several different browsers (Internet Explorer, Netscape, and Opera) and it looked ok.

    Have you always had this problem, or is it something new?

  6. Cousin Tara
    December 27, 2003 at 8:05 pm

    I feel all I have been doing is waiting for the prices of homes to drop.By the time they do I will have to send my son to college.Perhaps I should just pitch a tent some where and save on rent .

  7. tara
    December 27, 2003 at 8:08 pm

    Sorry everyone!!!!!
    I was trying to post and deal with the crying baby at the same time.Guess I kept pushing post between wiping the snot off my shoulder.
    That’s motherhood

  8. Lesley
    November 18, 2003 at 3:29 pm

    Your advice of keeping cash on the sidelines while waiting for the market to turn is a fine idea, but ANOTHER good idea is taking that cash and buying your girlfriend presents! πŸ™‚ Now, doesn’t that sound great??

  9. Lesley
    November 18, 2003 at 4:21 pm

    Oh, I think she’d be capable of maxing out a Starbucks gift card all by herself!

    Perhaps some Bellagio gelato?

    Or, if you love her a LOT, a PT Cruiser? πŸ™‚

  10. Greg N
    November 20, 2003 at 3:09 pm

    Don’t forget your friends Ron πŸ˜€

    I’m waiting for the market to drop as well…drop dammit!

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