Remember 2000? I remember seeing CNBC on the TV at fast food joints, auto mechanics telling me about their stock holdings, and overhearing people discussing the Dow Jones Industrial Average at the next table over dinner. Shortly thereafter, the Dow and Nasdaq began to drop. The Nasdaq is still only at about 40% of the highs hit in 2000.
Here we are five years later. Nobody talks much about their stock portfolio anymore, but we sure do talk about real estate. And no wonder! Broad ownership of real estate is a stated goal of the Bush Administration, and a very successful one at that. It is accepted that home ownership is in general a Good Thing, and I promise to address whether or not it truly is at a later date. However, there is something going on that is not a Good Thing: there are signs that too many people are too heavily leveraged to the housing market.
You may see anecdotal evidence of this in your neighborhood and among people you know. A quarter says you know at least two real estate agents — even if you aren’t in the process of buying a house. Odds are even better that you personally know people who own investment property. And you almost certainly know someone who has either a second mortgage or some kind of special mortgage product that lowers their actual payment to something they can afford to spend every month. At least most of the time.
Now we have people like Paul Krugman telling us that (gulp) it was necessary to create a housing bubble — using the abnormally low interest rates that the Federal Reserve told us would create jobs — to mitigate stock market losses and sustain American spending. Sustaining spending is important because it makes up 2/3 of Gross Domestic Product, the official measure of whether or not the economy is growing and whether or not there is a recession. And there is no question that consumer spending continues to rise. Theoretically, Mr. Krugman points out, this created jobs, or at least meant fewer jobs were lost when the stock bubble burst. Allow me to excerpt a couple of paragraphs, inserting a couple of linked references lest anyone accuse him of misusing statistics:
But although the housing boom has lasted longer than anyone could have imagined, the economy would still be in big trouble if it came to an end. That is, if the hectic pace of home construction were to cool, and consumers were to stop borrowing against their houses, the economy would slow down sharply. If housing prices actually started falling, we’d be looking at a very nasty scene, in which both construction and consumer spending would plunge, pushing the economy right back into recession.
That’s why it’s so ominous to see signs that America’s housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble….
Many home purchases are speculative; the National Association of Realtors estimates that 23 percent of the homes sold last year were bought for investment, not to live in. According to Business Week, 31 percent of new mortgages are interest only, a sign that people are stretching to their financial limits.
Both the New York Times and L.A. Times wonder if maybe — just maybe — there might not be at least regional housing bubbles, regardless of whether they will burst. Although Alan Greenspan says there are signs of regional froth — but no bubble! — he admits that there is “an unsustainable underlying pattern.” This article about how the bubble won’t burst because interest rates aren’t going up points out that the median home price has risen 7% since March.
Remember when 7% was a good annual rate of return?
I am not saying it is time for everyone to sell their houses and find decent apartments. I am saying that you need to seriously reconsider overextending yourself in the name of “owning your own house.”
In closing, a thoughtful piece about healthcare, a not quite as thoughtful study about how our surroundings effect our lives, and Memorial Day: remember our most recently fallen soldiers, battles happening now, and those caught in the crossfire. And don’t forget to remember the women who helped us win the wars of the past, including “Rosie the Riveter.”