Friday, February 17, 2006

Housing Bubble? Or Narrow Views?

Where's that Crash
For the last three years, I have been hearing, seeing and reading dire warnings from many about a potential crash in the booming real estate markets in the USA. Many factors are attributed to this possibility, primary of which is the rise in interest rates thus pricing out many in markets with highest surges. During the last three years, I held my breath waiting to see that crash so that I could get in and buy my first home. I only saw the prices, where I live, go up from average of $600,000s to around $850,000s.

You buy a home because you need one
After this time, we finally decided that we needed a home nevertheless, not as an investment, but a home for our family. The rise in prices no longer mattered, so long as we could foresee no employment threats, and were going to be able to pay our monthly mortgage dues and the property tax. I am sure that a majority of home buyers belong to this line of thinking. To this date, seven months after our home purchase, and 6 more interest rate hikes later, prices in our area are either higher or maintaining depending on the home available for sale.

Yes, there are speculators too
I do not deny that portions of the market are covered by speculators who are only interested in flipping properties and at some point this will cause an increase in inventories. But traders in such illiquid markets dont wait a long time to dump their assets. They spread it out over a short period of time instead of concurrently doing thus getting sustained returns. Hence we dont see crashes but only softening.

Renters need a home eventually
Now, while its cheap to rent, it is too problematic for working professionals with families to keep moving to cheaper places each time an unacceptable rise in rents occurs, in addition to the restrictions associated with living on rent. At some point, families need a place of their own to call their own home. On a side note, it is a matter of time before the salutory effects of higher interest rates and a growing economy creep into the rental markets.

Get the larger perspective
In the US
Now consider this perspective. Over the period of 10 years, the house I bought a few months ago, appreciated in price by 120%. Over the period of the last 20 years, the price tripled (300%). Over the period of the full 41 years, the price has risen about 26 times the original price (i.e from 30K to 800K). During these many years, there was but one short period of three years when the prices in this area were either lower or stable. This was during 1989-1991. Now this is in the USA.

Other countries
Lets see a major city in other countries. For instance, in my city of birth, Bombay, India, around the 1950s, the city's suburbs were lined with single family homes priced in the range of the 50 thousands (let's forget currencies for the moment). Over a period of four decades, despite a socialist leaning government system for nearly four decades, the prices moved up by double to triple each decade. And during this time, the economy grew and single family homes gave way to tall skyscrapers with condominiums and lofts. Currently, with the liberalized and globalized world, the prices have doubled from decade ago, almost 500 times from the original price in the 50 thousands. And you dont get a spacious single family home but a condominium with just 800 odd square feet of living space.

Growing cities will have more town homes and Condos
Another factor that could return very high investment returns over a long period of time is the economic growth factor. Each growing year in a city brings with it additional jobs, affordability and more people clamoring for a home of their own. This puts pressure on the available land, leading to residences that are closer to work areas being converted from Single Family Homes to larger Condominiums and Town Homes. Consider this. Buying a single family home today will make way for higher percentage returns in about 10-15 years due to this factor alone. In the place I live in where we have large number of older Single Family homes, I already see new construction happening only for new TownHomes and Condos. Not a single development in my area occurs for Single Family Homes.

So place these perspectives in front of your mind while reading the narrow minded views of some who look at the Real Estate Market as a sort of a Stock Market with highly liquid assets and an exchange. Hardly the case. Yes economic factors do matter a lot. But balancing this with the realities of the market is necessary.
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