Reading through this thread, I realized that I don’t have a good understanding of why real estate suddenly went crazy in the late 1990’s until now. I understand the reality because I own a home in the Boston area but I don’t understand the factors involved. The population of Massachusetts was largely stagnant or in decline during that period so there is one possible explanation gone.
Why did homes suddenly double, triple, or more in price during a short time. Why did this affect some areas much more than others?
Add to that the rate of population growth, which rivals that of some developing countries, and the fact that a great many people still want to live in only a few favored areas of the country. This tends to concentrate much of the demand in places like California and New York, which drives prices even higher there.
A LOT of the reason is that while we all talk about house prices, what we really buy are monthly payments.
IOW, when I’m house shopping I know I can afford $X / month. When interest rates are high that $X translates into a, say, $150K mortgage, When interest rates are low, that same payment translates into a $350K mortgage. So suddenly I hav a lot more “buying power” and oddly enough, so does everybody else.
Also, a LOT of the statistics are deliberately misleading in that they mix together the price of new & old construction. My county went through a pretty good run for the last few years, and everybody is crowing about the “median house price” being up 75%, and somehow they’re thinking that means their personal residence’s price is up 75%.
But what’s really going on is that when the area was mostly rural there was a relatively small number of 1000 square foot (sf) farm houses & mid 60’s construction working class housing.
Now they’re building a metric shitload of mid-market 1500sf starters and 2500-3000sf established family houses with many more fancy “features”.
Sure the median price of the local housing stock has gone up. Start with 10 old ranch houses and then add 50 new construction houses 3 times the size with 5 times the “amenities”.
But what does that mean if yuo’re thinking about buying (or selling) one house of one type or the other?
Exactly nothing. The price of either type could in fact be declining over time while the median price keeps climbing just due to ongoing construction and ever-bigger, fancier models.
That’s certanily not the whole story, but for areas of the country with fast growth in total housing stock (ie the non-snowy part), that’s a lot of the story.
The very low interest rate really contributes to it.
The Increase in home value in Monmouth County, NJ was extreme for both New & Existing Homes.
My home in 3[sup]1[/sup]/[sub]2[/sub] years has gone up 50% in value and the house has tripled in value from the selling price in 1995. This is a very real increase on a 45 year old house. I may be undervaluing the house as lesser houses in my town have sold for more than my estimate.
The low interest rates allow you to borrow more which increase your purchase power. In many cases houses were selling for asking price and quickly during the boom. This caused a general increase in value that spiraled upward until the bust finally happens. If we are fortunate, it will be a flattening out and not a 1989 style bust where houses saw up to a 25% decrease in value in a short time. I believe we are headed for a flattening soon. It looks like there might not be a bust this time.
Additionally, while money has been cheap, we should not overlook that lenders will typically allow a family to extend themselves more. The debt to income ratio has been going up. For example, if you were going to spend 38+% of your gross income on the mtg and other monthly payments some years ago, you would not get the approval for the mortgage. Now, your credit score is more of a driving force, and lenders will let you push the debt-to-income ratio pas 40%.
This encourages new home building/buying and allows home to have inflated prices (if lenders are going to approve people for more money, then sellers will react to increased demand and ask for more money).
Also, please not that a ‘real estate bust’ is not necessarily a DROP in value, but a decrease in the** rate ** at which homes increase in value. A bust can mean that the upward trend (if you graphed it) merely got less steep, or flattened at worse.
About 5 years ago a number of banks made changes to how they would give out mortgages. You remember how you used to need a hefty down payment before you could buy a house? And every month you’d pay a lot of interest and a little bit of principal?
Well forget that plan. You’re now able to buy a house with no money down, and you don’t even have to start paying the principal on your mortgage for years. Essentially, people are now renting their homes from banks, and they have to pay for all the household repairs too.
Real estate booms are always caused by low interest rates. High mortgage interest is what keeps speculators at bay in other times. Speculators are bad a predicting the future, but they can do the math on today’s cash flow.
There’s a story coming up on CNN in a few minutes. ‘Do you think you missed out on the real estate boom? You may have another chance. The sticks are not just for hicks anymore.’
I live in a seaside holiday community whose heyday was in the 1950s and 1960s. Bellingham, WA is over 20 miles away, and White Rock, BC is about ten. Vancouver, BC is about 30 miles away. As prices increase in Bellingham, Birch Bay is becoming more attractive to home buyers. There’s lots of new building going on here, and the population is expected to nearly double by 2010. After owning my house for two years, the friend I bought it from realised a 50% profit. Two years after I bought the house, its value has nearly doubled.
I plan to replace the fireplace in the big bedroom, repair the fireplace in the living room, and refurbish the middle-sized and small bedrooms. I also want to get rid of the built-on travel trailer and replace it with a garage, and upgrade the electrical system in the house. I’m hoping we get piped-in gas (the logical place for a new line is under my street). I’ve also thought about relocating the hot tub and expanding the deck, and maybe getting a retractable awning for the deck. If I can get all of that done, I’m sure the value of the house – which, BTW is in a very desireable location – will be more than the cost of the upgrades.
It seems to me that more and more people are trying to find places to live. Some places really can’t expand and costs go up. (I was paying a little under $800/month for my 1BR apartment in L.A. Last I heard – last Spring – the rent is up to $995/month.) I think there are a lot of rural areas where people can buy homes cheaply. But people are probably going to want to stay near the conveniences of cities. So such places as where I live are likely to continue growing and housing prices will continue to rise.
Once the stock market started to tank a few years ago, lots of people cashed out to buy land or homes as more stable long term investments. I know a couple people on the other end too. They owned their house for a couple years, price skyrocketed so they sold; but they were to stupid to realize everything else in the area was also more expensive, so they are living with parents slowly pissing away the $$ they made.