August 11, 2004
The risks of a housing bubble.
The Nation has a good overview of the potential housing bubble in this article,
Bush's House of Cards, by Dean Baker. As you probably know, real estate prices are just about the only bright spot in a rapidly melting down economy, buoyed primarily by Alan Greenspan's cheap money policies rather than by any solid economics. The article reviews all this and analyses what could happen if the bubble burst.
The red-hot housing market has forced up home prices nationwide by 35 percent after adjusting for inflation. There is no precedent for this sort of increase in home prices. Historically, home prices have moved at roughly the same pace as the overall rate of inflation. While the bubble has not affected every housing market--in large parts of the country home prices have remained pretty much even with inflation--in the bubble areas, primarily on the two coasts, home prices have exceeded the overall rate of inflation by 60 percentage points or more.
The housing enthusiasts, led by Alan Greenspan, insist that the run-up is not a bubble, but rather reflects fundamental factors in the demand for housing. They cite several factors that could explain the price surge: a limited supply of urban land, immigration increasing the demand for housing, environmental restrictions on building, and rising family income leading to increased demand for housing.
A quick examination shows that none of these explanations holds water. Land is always in limited supply; that fact never led to such a widespread run-up in home prices in the past. Immigration didn't just begin in the late nineties. Also, most recent immigrants are low-wage workers. They are not in the market for the $500,000 homes that middle-class families now occupy in bubble-inflated markets. Furthermore, the demographic impact of recent immigration rates pales compared to the impact of baby boomers first forming their first households in the late seventies and eighties. And that did not lead to a comparable boom in home prices.
One of the curious things about this unprecedented rise in home prices is that, unlike in the past, rents are not keeping pace, and in fact in some markets are going down. Which would indicate that this rise is not being created by a greater demand for housing, but just economic manipulation. And the Bush administration is pushing real estate prices even more by eliminating Section 8 and other programs that help poor folks pay their rent, but increasing programs that help them saddle themselves with real estate loans.
In this context, it's especially disturbing that the Bush administration has announced that it is cutting back Section 8 housing vouchers, which provide rental assistance to low income families, while easing restrictions on mortgage loans. Low-income families will now be able to get subsidized mortgage loans through the Federal Housing Administration that are equal to 103 percent of the purchase price of a home. Home ownership can sometimes be a ticket to the middle class, but buying homes at bubble-inflated prices may saddle hundreds of thousands of poor families with an unmanageable debt burden.
A side note on one issue that isn't covered in the article. I live in Southern California, one of the areas that has seen the greatest rise in home prices, nearly 30% in the last year alone. (Which is enormous given how expensive they were to begin with.) And I've noticed that because people are making so much money off of real estate, and because it's so easy to get equity loans to provide virtually free and tax-deductible money for regular living expenses, people don't seem interested in working very hard, and especially in investing in new businesses. Why bother? There's no real need for the extra profits from businesses, which are long term anyway, and in any case the potential profits are dwarfed by those to be made in real estate. So people are just sitting on their asses, living the good life, and neglecting anything long term. Everyone's become selfish and spoiled, encouraged by the fact that the President himself is telling them that it's better to borrow than work. So much for traditional Republican values. Calvin Coolidge is surely rolling over in his grave.
