This is close to my concerns regarding the housing market, Sam, though I could take issue with whether perfect market efficiency is truly desirable.
The larger issue is the potential for a regular ‘boom and bust’ cycle in a completely free market (housing, in this case). While it’s easy to write that off as the market in action I find it impossible NOT to realize that the downstream effects of a bubble bursting are real and honest human misery. And as human being I feel an ethical requirement to examine the issue and attempt to smooth the bumps for others where possible.
Hence my desire to locate my new business outside any of the current ‘bubble’ zones.
There’s a difference between economic efficiency and social justice. The market is good at the economic efficiency part, but that doesn’t always correspond with what people think is right. This is especially true when it comes to our homes. Which is why governments tend to get involved heavily in the housing business.
For example, the inflation of home prices in the U.S. is probably in part due to the tax-exempt status of mortgage interest, which drives people into home purchases who otherwise might not choose to buy.
Here in Canada, the government provides a special insurance system that allows people to buy homes with 5% down. In exchange for this privilege, we have to pay an extra insurance premium, which is tacked on to the price of the house.
This is a triple whammy - it increases demand for housing, which drives up prices and makes houses less affordable, it allows people to buy houses without having to sink much of their own equity into them, and it increases the cost that poorer people pay for houses. $3500 added to a house can easily turn into $10,000 with interest.
In addition, it reduces the incentive to save when young. Yet almost everyone thinks this is a great program.
People are talking about interest only loans like they are always a bad thing. I’m in an interest only loan right now. It makes sense for lots of situations. If you know you’re only going to be in a mortgage for a few years or less, then you might as well get interest only. You don’t pay of principal for the first few years of a traditional loan anyway.
Another option that lots of people are going for is building. You can buy land and build a house for a lot cheaper than buying an existing home. This is especially true of modulars. The home construction industry is cranking out houses very fast right now.
I don’t think that high home prices are a bad thing. Sure, it sucks to not be in the market, but there are still ways to get in. Plus, home ownership is at record highs right now, so obviously it’s not preventing people from buying in.
IMHO, most of this boom is due to the policies of Bush. (:O) Cutting capital gains taxes on home equity has been a huge boom to the industry. People can actually sell their houses now and make money without being taxed into oblivion. Also, short and long term cap gains taxes are lower than usual. Putting more money into peoples pockets means they have more power to buy homes. Sure, the prices have gone up, but that will balance out in the end. More will be built, or prices will drop.
Also, as others have pointed out, people are fleeing from areas with high housing costs. MA is the only state in the Union with a dropping population. This is primarily because of the high housing costs. I know people who have fled to NH and North Carolina because they can’t afford to live in MA.
Actually, I think (in general, not knowing the particulars of the situation) that improvements are probably a good investment. Going from a traditional (fixed-rate, I assume) loan to an interest-only ARM is just nuts, though.
I have a traditional 20-80 (actually more like 25-75) fixed mortgage, and am putting about 70K into a new master suite (about half paid for with a home equity loan). I keep getting mailings trying to get me to switch to an ARM; my standard response is scrap paper in the postpaid envelope or a dead-air call the 800 number from a pay phone bank (depending on which return-contact method they offer).
No doubt that prices are insane elsewhere. I would expect prices in Manhattan, etc. to be much more than in my old neighbourhood in L.A. My old apartment, just up the street from Culver City’s Sony Studios, is going for about $1,000/month now. Not a bad neighbourhood (people generally stopped shooting in the area in the mid-to-late-1980s), but not great. A nine-unit condo went up across the street in place of the duplex that had been there, and they sold in 2002 for about $345,000.
What I was getting at in my post is that even fairly remote areas are becoming more expensive. The asking price on the cabin I mentioned is twice what my three-bedroom house sold for 3½ years ago. Though I paid 50% more for the house than my friend did, I’m not complaining. Rising prices mean that my place is worth that much more.
My mom owned the house I grew up in (until I was 15) in San Diego. When my parents bought it in the 1960s, it cost $19,200. My mom said that in 2003 she made $19,200 in rent from it. In 2003 it was appraised for $450,000. (My sister and I are not going to sell this property, but let it out and split the rent.)
My sister-in-law and her husband are looking to build on their land in Sedona. He’s got a few bucks, to be sure…but they can’t find anyone to build for less than arounfd $400/sq. ft. They need a larger place because they have to put the grandchildren up when they come to visit, so in essence, they’re not going to be able to build there. Housing prices have gone up everywhere. It’s insane.
Our townhouse (3 bdrm, 2.5 bath, 1 car garage, 2000sqft) cost us close to $120K four years back. An identical until next door to ours recently sold for $185K; two car garage units new were $135K and now go for $225K. The 2 car garage models are on the ends of the buildings and have more lawn area than the others. Part of our relatively low price is due to our location in an unincorporated area of Pinellas county.
Single family homes in our immediate area go for $185K and up. These are tract houses that were built in the 1960s, selling originally for $18-20K; usually 3 bdrm, 1.5 bath, carport, 1200-1500 sqft.
At a new development on a bay near us, 1 bdrm “hotel room” style condos are selling for $175K-$250K pre-construction, depending on waterview or not. Two bdrms in the same development start at $300K and go up from there.
I bought a tract house in Plano, TX back in 1962 for $14.5K; I wonder what it would go for now?
This must vary regionally, or at least with the market. I was looking for a modest (~1500 sq ft) place on at least 4 acres, and after talking to builders and looking at the existing homes that met my criteria (not many at all, in my price range…), I found I was able to get a much nicer used place then if I’d had to build.
At least in this area and this market, people (inexplicably, IMHO) really have a thing for new homes, which of course makes the “used” home market more affordable.
Also, I’m surprised that you’d list modulars–what region are you in? Around here, nearly all the available lots have deed restrictions that specify site-built homes.
I’m in eastern MA. The project I’m working on now is building two modular townhouses in Southern NH.
There would only be restrictions like you say on a subdivision type of land. They aren’t common (around here anyway) for raw land or the random lot or two in existing areas.
Even subdivisions are becomming much more rare to have restrictive builder tie ins nowadays.
Also, to spoke’s point: The rental market here is weak, due to many people buying condo’s as you say. You can tell the market is soft because the landlords are paying the month’s rent fee to the brokers rather than the other way around.
Oh, and for people who are saying building is expensive, check out modulars. I’m building mine for about $80 a square foot. I’m using Excel homes. They are the second largest home manufacturer in the US right now. Modulars in general account for 40% of all new homes built these days.
The building market is hot, so I have no doubt that some builders are jacking up the prices though. A common tactic for contractors of all kinds is to never turn down a job. If you are too busy to take a job, just quote them a outragously high price. They’ll turn you down. Or, if they do say yes, you have a whale of a profitable client to make money on. This might explain why people are seeing $400/ ft prices on building. That’s stupid money!
I pity all those condo owners when interest rates jump higher, though. A lot of them are going to wind up in a negative equity situation, methinks. Trapped for years in the condo, or forced to rent it out or sell at a loss.
The amount of money that Americans owe on home loans has tripled in the last 5 years.
(cite: the financial advise section of my local paper, quoting a CNN story dated April 8)
Lots of people are living on borrowed money, and (since time is money), they just might be living on borrowed time, too.
The number of speculators buying RE in “hot” markets has greatly increased.
This means a “bubble”, which will soon burst. Not like “tulipmania” or the crash- since the properties are still worth a substantial amount, even without speculation.
Yes, but in expensive New England $80 is very cheap. A decent small piece of land that is buildable here costs 150-200K. You certainly can’t buy an existing home for $80/sf. I bet modulars down south are even cheaper.
I’m pretty sure it is legit. I got that figure from marketing literature from the modular companies. However, it’s referred to by many of them, so it seems to be the standard that everyone refers to.
I moved to the suburbs of New Jersey from Staten Island about three years ago. I paid $289 for my house and could probably sell it now for at least $450. Our combined family is in the high five figures. Where did we get the money to buy our current house? From the 95K tax free profit we made selling our old house. Profits on my previous house exceeded even my wildest expectations. (A number of my neighbors predicted we’d get 50K less than the house actually sold for.) Between that profit and paying down the mortgage we had $140K to sink into this house.
It’s a similar story all over my neighborhood. Most people who live here either moved here before the real estate boom or made lots of money selling another house. All the profits from their previous houses have been rolled over into the current house. Even then most people have a household consisting of at least higher wage income income earner and one part-timer. Everyone works even when they have young children. Or they put off childbearing until their thirties when they can afford to live in a good neighborhood.
The other thing that probably helps at last some people is parental assistance. I know a few people who’ve been gifted with a down payment.