Housing Boom or Housing Bubble?
Last week, I read an article in Time that I found really annoying, talking about the housing boom in the United States. For me, I am renting an apartment, and am staying out of the housing market for one big reason: it looks way too much like the Nasdaq did around 1999.
Think back to the late 1990s and year 2000, where people were still talking about the "New Economy" that was going up and would never go down, and the "Goldilocks Expansion" (not too hot, not too cold), etc. Thousands of people pulled their life savings out of stable investments and threw it into this bull market, only to have the rug yanked out from under them in 2001. The bull market of the late 1990s and early 2000 was like an oversized Ponzi scheme; growing only by the virtue of all the other suckers piling their money into it. And, like the original Ponzi scheme in the 1920s, most of the suckers in the Nasdaq bubble got burned when it burst.
Today's housing market seems way too much like the "New Economy" Nasdaq for my liking. People are throwing around the same type of analogies, that that real-estate is a good investment, and that housing will continue to increase for the forseeable future. Personally, I am sceptical for two main reasons:
Reason #1: Interest Rates
The housing boom today is being fueled by historically low interest rates. Many people have responded to these low interest rates by taking out variable-interest mortages, and by buying a more expensive home than they could really afford.
For these people, the Grim Reaper cometh - in the form of higher interest rates.
As the economy continues to expand, inflation will become more of a factor, and interest rates will go up. All of a sudden, that mortgage payment that was affordable at 4% becomes unaffordable at 8%, and the homeowner is forced to sell, along with many other homeowners.
But, at the same time, the higher interest rates make the housing market less attractive for buyers, leaving the for-sale sign on the homeowner's front lawn for months. Eventually, the homeowner gets desperate to sell, and starts cutting his asking price, eventually selling his home for hundreds of thousands of dollars less than he paid for it - leaving the poor guy on the hook to the bank for the balance.
Enough of this type of selling pattern could produce a glut in housing availability, and precipitate a crash in the housing market.
Also lending into the current housing boom is the spending patterns of the post-war Baby Boomers. In the next few years, these Baby Boomers will start to retire, and will probably seek to move in large numbers to lower-cost areas (Florida, etc.) and away from higher-cost areas (New York, northern California, etc.).
If this migration occurs at around the same time as Reason #1, this could exacerbate a housing market crash fueled by interest rates.
Some economists have commented that the housing market could not crash like the Nasdaq did, arguing that a house has "intrinsic value" unlike stocks because you can live in a house. Personally, I think this argument is hogwash: mortgages (especially the variable-rate variety) are loans just like the margin accounts that got so many consumers in trouble in 2001, and what the brokers refer to as a "margin call" the banks call "foreclosure". Except with a margin call, you are sitting home cursing your broker, but with a foreclosure you're out on the street.
In short, this housing market may look attractive right now, but seems way to perilous for me. Ten years ago, I was a homeowner, and two years ago, I was a landlord. Now, I am just a tenant. I cashed my chips in because of my concerns about this unstable housing market, and I still believe I was right to do so. If this market crashes, it will be painful to see millions of people lose their life savings, but at least mine won't be part of the crash.