Is The Housing Market Cooling Off?

The money mavens at CNN seem to think so.

I’m not sure I’d classify a 6.6% year-over-year increase as “cooling off”, especially when inflation is less than 3%. No, I’d put it more into the category of another irrational jump in a real estate market that’s already every bit as crazed as the NASDAQ composite at the turn of the century.

The inflation number is something I’d take issue with, actually. This 3% nonsense is insulting. There are so many caveats, exclusions, and astrisks attached to the Consumer Price Index that it might as well be tracking prices on Fantasy Island. It doesn’t include real estate, energy, food, college tuition, certain taxes, and automobiles. Think about how much of your income goes toward those items.

The CNN article was accompanied by a fascinating chart entitled “Hot Housing Markets”. Orange County was number five on the list, with a 21.2% year-over-year gain. It doesn’t look as extreme when compared to the nearly 30% gain experienced by those living in the nine-oh-nine.

Until you look at the median prices, that is.

Orange County’s median home price is now $526,800. Or should I say, that’s what it was in December. It’s probably closer to $550,000 now. Compare that to a national median of $171,600. It’s the highest on the list. In fact, it’s the highest in the nation. Our real estate prices now make New York and San Francisco look cheap.

I would love to explore the thought process of those who are forking out $1 million for a small condominium. Even mediocre properties in a bad part of town are selling before they can make it into the MLS system. Mark my words, this is going to end badly for a lot of homeowners in Orange County. Shades of what happened in the late 80’s.

I don’t see how it can go any other way. Check out some of these comments.

My LTV ratio is down around 35%, yet I refuse to consider taking any cash out. Perhaps I’m just too conservative, but we live in an severely leveraged society, my friends. It’s unhealthy. One thing I know about markets is that they tend to return to equilibrium. So I’m taking my cue from the generation of Americans who remember the Great Depression. They are nearly gone, and Lord how it shows. Interest-only and negative amortization loans are but two examples of a real estate world gone insane.

Stay tuned. It’s gonna get interesting.

  4 comments for “Is The Housing Market Cooling Off?

  1. aunt bety
    February 24, 2004 at 6:02 am

    how much do you think it would cost for a tent these days? if it’s cheap enough, when things drop, we can fold it up and maybe find a house that has real walls.
    aunt betty

  2. Ron
    February 24, 2004 at 1:35 pm

    Don’t tempt me. I could buy an awful lot of tchotchkes with the equity in my overpriced house…

    P.S. Yes, I *have* been waiting a long time to fit the word “tchotchkes” into my site. šŸ™‚

  3. Dan Barley
    February 26, 2004 at 9:50 am

    Yes Ron, there have been the down turns at certain times in the cycle. The key is to be diversified and not panic when the going gets tough. Sure the crash of ’29 was devastating and those that lost it all for the most part just knuckled down, weathered the worst, and were ready to reinvest once conditions improved.

    The real estate down turn of the late 80’s early 90’s was also bad to some. But look at those that gutted it out until today. Losses have be regained and they have had the benefit of being in on the latest rise from the bottom. Believe me if you wait for the better deal of tomorrow the good deals of today will be gone. And the better deal of tomorrow may never come.

    But look at the demographics for real estate. More people on the earth each year vieing for a finite supply of real estate can mean only one thing in the long term, higher prices.

    At your age and future potential, I personally think it is folly not to leverage more of your LTV potential. To make money you have to invest money. To invest money involves risk. But man, real estate investment in populated areas has never been a bad thing over the long haul.

    Investing is scary at times but for the most part to the long term investor, very rewarding.

    Went to your web site to see your airplane stats but had to take a pop at this topic.

  4. Ron
    February 27, 2004 at 1:26 am

    You might be right about the LTV. I suppose taking some of my home’s equity and investing it in a diversified portfolio would generate good returns over the long run. Not only would it provide a larger mortgage deduction, but the ~5.5% interest rates are about the cheapest way to borrow money imaginable. Margin loans are around 9-10%.

    My net worth is already spread over things like equities, real estate, and (for the moment) aircraft. But with the spike in home values, it might be time to do some rebalancing.

    The thing that has me so down on home values is the rate at which it has gone up. My tiny condo has increased 250% in six years. I hate to think of my home as an investment, but when it’s worth a third of a million dollars, I don’t think I can afford not to.

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