Chuck Ponzi June 27th, 2005

Is anyone else here bored of hearing about real estate? If the din of clamoring for a piece of dirt hasn’t left you stiff and sick to your stomach, sit right down and let’s talk about it more.

Recently, there have been an avalanche of new articles released in the press media about the real estate bubble. In fact, it’s so common, we no longer need to use quotation marks, kinda like the Great Depression. What it still lacks though is the proper noun status… maybe that is still to come. This gaggle of new stories has some interesting twists to it. First, I started noticing that there was a clear divide of opinion. Academics and economists (not associated with real estate) almost always warn of danger in the housing markets. On the other hand, self-proclaimed real estate experts, builders, and “investors” (note the proper use of quotes to show disdain) opine that no bubble exists in their town. Their babble seems eerily familiar to each other, they all decide their neighborhoods are not in a bubble, often for the same reasons. I have highlighted some of the most common for the sake of sick curiosity

1. Everybody wants to live here. Seriously. I have heard this from nearly 25 locales. These include some obvious places like San Diego, Los Angeles, and New York. But, you may not also realize that people in places like Florida, Connecticut, Arizona, New Mexico, Virginia, Washington, Oregon, Nevada, and even Minnesota have said the exact same thing… Can you believe that? In fact, never once have I ever heard anyone say that their home town is not desirable. Could it be that this opinion is just a little biased from the writer? Or, is it possible that truly everyone wants to live every place? I have heard this argument from people in Los Angeles, and believe me, noone wants to live in Los Angeles. It gets old very quickly. Besides, are there any hard facts to back this up? Do we have a national raking of best places that “everyone wants to live”? I think this would go a long way to silence those in Kansas City, MO, defending their speculative bubble.

2. Retirees are flocking here. This is a derivative of #1, and has been noted in the same locations. This is also interesting because it forebodes legions of baby boomers with vast wealth accumulated over 40 years of hard work and copius savings, willing to plunk down a sizable chunk of their retirement money regardless of price, just to have the right location. This in effect would mean that local economies don’t have to be a driving force in price and affordability, since well, everybody wants to live there. While I know that retirees usually have more money than I, I also know that they want to get the most for their money. I have a hard time seeing this one, and frankly a list like #1 would be helpful, something like, “best places to retire” list just so we can settle it. The study, however should not look at the cost of living, because, well frankly, they have all the money in the world, so who cares how much it costs?

3. Immigrants are driving up prices. This assumes that immigrants buy homes in as high or higher ratios than exist US homeowners. While we all know that the population is growing, this also assumes that with the doubling or tripling of prices, immigrants have unlimited price elasticity. They will buy, no matter the price. However, unless you’re a criminal in your own country with no extradition treaty with the US, why would you want to buy a 2 Bed cottage in San Diego, Connecticut, Virginia, or Oregon for the same price you could have a mansion, servants quarters, and servants in Buenos Aires?

4. Foreigners are driving up prices. This would a derivative of #3, but worth looking at. This would assume that wealthy foreigners with money coming out their ears, see no better way to spend their Euros, Yen, or Yuan than to invest in some real estate in the US. While the US dollar is remarkably weak, you would need to assume that these foreigners either plan on settling here (as in #3), or they are interested in some fairly risky currency speculation with unbelievable transaction costs. I find this a little hard to believe. While a vacation home in Yalta, Spain, or Italy seem believable, and perhaps even San Diego (it’s a stretch, I’ll admit), non-full-timers would more likely be interested in timeshare or luxury timeshare rather a separate property with all of the taxes, fees, maintenance, and headache that this presents.

5. Job growth is great here, and only recessions trigger housing downturns. This is really 2 issues, but intertwined. I can’t speak for other areas, but it’s clear to locals in SD that our entire economic rebound is based on housing. This includes real estate agents (too many to count), loan processors, banking, construction, architects, surveyors, cement, building suppliers, contractors, home improvement stores, oh… and let’s not forget nearly every retail job within 50 miles that is supported by home equity. What their disputing is that things can’t go wrong because that’s what policy makers tell us. Is it possible that despite UCLA’s economists’ predictions that we are entering a recession are right, and that policy makers are telling people this to keep panic from ensuing? The second is really a question… do recessions only trigger housing downturns? Just because the last one did, does that mean all of them do, or that it is a prerequisite? I have a hard time swallowing “always” for most anything. I don’t see myself as a contrarian, I just have learned that most rules have exceptions. Perhaps, this isn’t even a rule. How can you base a theory on a few data points? This gets into the realm of sociology, and consumer sentiment. Last time I checked, this is difficult to predict with single events without understanding the environmental factors. Humans do strange things when put in strange circumstances.

Well, if this has struck any of you as strange, feel free to post any other interesting defenses of price increases. I’d like to hear if any of the can truly be translated from one statistic to specific price increases through long-term trend analysis.

• Uncategorized