Monday, May 29, 2006
The financial press is full of news that housing prices are no longer soaring, inventories are rising, and the bubble is deflating. I dunno. People have been calling the top of the American housing market for a couple of years now. I do, however, have two anecdotes to report, recognizing that the plural of anecdotes is not data.
First, later this week we will close the purchase of a house and six acres with palpable "mountain views" in the greater Durango, Colorado area. We are paying about 6% less than the property sold for about a year ago. Of course, the seller might have paid too much, or we may have gotten a particularly good deal. I doubt it. I think the market is softening.
Second, we were in Point Pleasant Beach, New Jersey this afternoon (in Jersey-speak, we were "down the shore"). There were "for sale" signs all over New Jersey and Atlantic Avenues, including on a house that was owned by my family for almost 90 years (yes, I will call for the listing price, but only out of morbid curiousity -- my great aunt sold it and an adjacent lot in 1994 for something like $240,000, and I'm guessing that the house alone is listed at well over a million), the house across the street that had been owned by great friends of our family, and a big new faux Victorian that replaced some non-descript Cape Cod just up the street. Now, real estate prices on the Jersey shore have gone through the roof in the last six or seven years, to the point that the current issue of Barron's (which devotes its cover story this week to the coming decline in prices for second homes) reckons that Ocean City is one of the ten most overpriced "second home" markets in the country. There is even a blog that covers the market from Asbury to Cape May, the "The Jersey Shore Real Estate Bubble" blog. That guy makes you wish you could short real estate.
The big question, of course, is if housing prices flatten and all those teaser ARMS adjust to the point that people have to trade down to cover their nut, what's going to happen to the economy?
OK, Tiger, you asked for it: a way to short the housing market.
I think what's really scary is the realization that TH and I probably spent the same lazy days and weeks at Pt. Pleasant Beach in our teens. We didn't own property, but it seems each family in our neighborhood rented there and each kid would be a guest.
The softening real estate market has implications for those of us on the conservation side of the equasion, too. In the Litchfield Hills of northwest Connecticut where I ply my trade, the last decade has seen land values soar so rapidly that few communities remain even marginally affordable and what woul dhave been classified as low value "back Land" is now assessed at $15,000/acre. Because non-profits cannot pay much above appraised value and remain in good standing with the IRS, the market has been accelerating faster than our appraiser can find comparable sales: hence, a developer will always be able to outbid a conservation group for an outright purchase of land.
In a softening market, we may be able to acquire land that has been up until now unaffordable. On the other hand, if our donors are losing money in real estate, they may not be able to make the kind of gifts we require to purchase conservation land.
One thing is clear; State and Federal conservation dollars have dried up to an extraordinary degree, putting the burdon on municipalities and private individuals to fund land protection. At the current rate of land protection, Connecticut will not reach ex-Governor Rowland's challenge to conserve 21% of the state by 2023 until 2073.
Bubbles - you know, so many folks have commented upon the growth of real estate prices as a bubble, that it frankly makes me skeptical as to whether we really have one. It is usually the case that virtually the entire market has suspended disbelief except for a few lonely voices in the widerness before we have a bubble. I would say that today, you would be a voice in the wilderness of you suggested the real estate market was poised for explosive returns.
Let me suggest a slightly different scenario and see what you think. The recent excellent performance of real estate as an asset class was the confluence of a number of factors -- a burst equity market bubble, low interest rates, easy and available financing, low unemployment and associated available disposable income to finance the investment in real estate.
Those are all conditions which suggest the risk for overinvestment in real estate, for sure. But what is real estate? It's a hard asset, a commodity, just like gold, or silver or oil. And those commodities have gone ahead and outpaced real estate. Nobody's hollering about a gold bubble or oil bubble...maybe they should be.
But what does all this aggregagte interest in hard commodities suggest? Well, it may suggest that people implicitly don't much like paper assets -- securities, for instance. It may also suggest that people are worried about stuff. Worry certainly gives rise to gold purchases and oil purchases. Finally, it suggests worry about inflation. We had very accomodative monetary policy for quite awhile to help our economcy deal with the burst equity bubble and war. Now we had the famed Greenspan retire in favor of an unknown quantity at the Fed.
I think people are concerned about the value of paper assets -- certainly equities and the dollar -- and are buying hard assets to protect themselves. The one soft asset that hasn't yet fallen out of bed -- and it may just -- is BONDS.
So we shall see wherer the most "overinvested" sector is over time. But maybe it's not real estate after all. Who knows?
I do think that a large part of the bubble bursting will be played by the advent of expensive energy.
People who are used to traversing 20-60 miles a day to go to work are going to find themselves in a world of hurt when the price of gasoline and heating oil become impossible to afford.
Suburbs, which have afforded a great number of people the opportunity to purchase a home, were predicated on cheap energy. I am not convinced they will survive in their present form.
My prediction is a bursting of suburbian home prices once gasoline reaches an inprobable price, while homes closer to towns and cities will skyrocket in perceived value.
Guess we'll see, eh?
I think, Uptown, that it all depends on the slope of the price increase. If gas were to go to ten bucks a gallon in the space of a few years, I agree that the effect could be severe. If it happens slowly, the system -- including automobile society and suburbs -- will adjust. Gasoline is not the only fuel that can sustain the automobile economy over the long term, even if it is the only alternative this decade.
None of my reading suggests there are any real alternative fuel sources that will run our present society the way it is structured.
$10.00 a gallon gasoline does not only affect the commute in from the suburbs; the fact is we eat fossil fuels, coverting corn to fuel sounds nice but it is still based on the premise of petroagriculture.
We need the president to appoint a task force to study our rail system; we need our state governments to look into commuter rails (here in NC, the state is looking at connecting raleigh and asheville; asheville used to have small commuter trains that ran in each direction out of town, to the smaller towns nearby, they were paved over)
At $10.00 a gallon, short of riding 110 mile per gallon scooters to work; we are in some serious trouble.
My opinon, of course.
Your pessimism, Uptown, is typical of somebody who thinks in technocratic, statist terms. The truth is, we have no idea how transportation and other energy consumption will unfold in a world with expensive fossil fuels. What I do know is that all sorts of things that seemed impossible at $40 a barrel and unlikely at $60 a barrel will suddenly attract a lot of capital at much higher prices. That is why I support a permanent, long term and growing tax on oil in particular: we need to create a market dynamic that will attract capital to other solutions.
I continue to think, by the way, that the trick is to increase substitution between the electric grid and the transportation market. Once we get to cars that can run on a wide variety of sources -- gasoline, electricity, hydrogen, etc. -- the key will be building up the grid. I'm not sure the best way to do that, but the first thing I would do is remove obstacles to bringing down the price of electricity that do not consume fossil fuels. We need to make it a lot easier build big fixed plants, including particularly nuclear power plants, wind farms and hydroelectric plants. We have to recognize that local concerns, whether they be over a nuke nearby or Teddy Kennedy's view, just should not count.
i agree with you about wind, nuclear, and water energies. absolutely, but we better start building them right the hell now, because we will be using oil based energy to build whatever we come up with.
personally, i don't think im a pessimist, i think im a realist; but i'm also smart enough to know i might be wrong. to be honest, i think our society/culture/country needs to slow down.
jimmy carter was right about our energy policy, had we listened then, we would have already made great strides in alternative fuels, and made some of the great changes required.
but one way or another, be it a stagnant economy, falling dollar, or energy crisis things will be very different 20 years from now.
Good info. Thanks for the read!
As far as the real estate bubble goes, It looks much worse in San Diego.
I just came across a San Diego real estate brokers blog post that says the June values are down by 5% from a year ago.
The blog is at:
San Diego real estate bubble the url is: