Let me kick off my inaugural column by saying how excited I am to be part of the whatbubble.com team. I think you will find our site to be a useful source for practical, straightforward, non-biased financial advice. Our columnists are here to help you identify and avoid the scum of the earth charlatans out there trying to stick you for your paper. With any luck we will succeed a time or two.
Every six to eight months The Economist runs out of stories about the fat wives of African dictators and writes an alarmist piece about the housing markets. The formula is the same: there is some part of the story about markets nobody cares about like Madrid or Sydney and then they throw in an example like New York. They show how much prices have appreciated in New York, toss in some pseudo-statistic like the “Housing P/E” and claim the American housing markets are on the verge of collapse. It is the dot-com boom all over again. Remember that crazy time when stocks were trading for 100x revenue? What happened to all those people holding those stocks? They lost all their money. The same thing is happening in the housing markets. There is going to be a 90% depreciation in housing prices.
Those claims are even scarier than paparazzi photos of Rosie O’Donnell in a bathing suit. People’s houses are typically their most significant asset. A collapse in the housing markets would likely wreck to US economy. The insatiable American consumer might even take is a break from watching American Idol and take notice. OK, that may be going too far.
The thing is, though, that people in America do not buy houses as wild speculative investments. They do not day trade in and out of houses based on whatever senseless utterance Mary Meeker happens to make that day. People do not buy homes because they have a few dollars to gamble. People buy homes to shut their wives up. It is true. A man can sit there and rationally look at the pros and cons of renting vs. buying. He can see the additional costs that go along with buying and reflect on the opportunity cost of the down payment. He analyzes all those things and then comes to the conclusion that he loves sex more than money. In order to keep his wife from bitching and moaning about how the Joneses have that cute little house on Main St. and how she will not raise baby Jorge in a rental home and how she is too embarrassed to talk to her friends because she does not have a house of her own he relents. He says to hell with all of that bitching and moaning. All he wants is to have a few minutes of piece and quiet to watch the Vikings get their asses kicked and if buying a house will give him that freedom, then call up the realtor it is time for some house hunting. Since man is inherently lazy, once he has that home he is done. Who wants to deal with moving again? That might interrupt the Cubs game. Screw that, one and done.
What about prices, you might ask. Just look, housing prices have gone up! How it can be? What could have happened to cause such a catastrophe? Housing prices are rising because of the same two forces that have defined much of recent American history: the spirit of the Gipper and the godless Commies.
The Republicans are in office and the rich are getting richer. Rich people and upper middle class people are the people who buy houses and their income growth is a major determinant of what happens to housing prices (not median incomes). GW Bush, when he is not spending the taxpayers’ hard earned money like an LBJ wet dream, is determined to give the rich back their money. In an attempt to invoke the Great Communicator, GW has decided that income tax cuts, capital gains tax cuts and dividend tax cuts are the way to go. People need to do something with those juicy tax savings (God forbid somebody saves a dollar or two), so they spend. They go out and buy a fancy new house, the biggest they can afford. What better way to show the entire world what a success you are?
The other major factor driving prices is that the Chinese are going to take over the world. It makes me sad to think about, but, you know what, I think they just plain want it more. Their willingness to suppress thought, the nonchalance they display when conquering neighboring lands and their ability to get rid of most of the fundamental principles of Communism in order to become an economic power all demand admiration. They had the most dominant culture on Earth for most of human memory and have only for the last couple of hundred years had to take a back seat to the West. In their minds that is wrong and they plan on changing it. So they are rapidly building up their economy in order to one day put the decadent Americans back in their place. Besides the obvious long term downside of our great-grandchildren living in slavery this also has the unfortunate short term side effect of driving up housing prices. The Commies want everything. They want steel. They want oil. They want rubber. They want concrete. They need all of those things to take their place back in the center of the world stage. Since, unlike transistors, the productivity associated with building a new home doesn’t double every 18 months (the good ol’ hammer is still with us after all these years), the end does not appear to be in sight for this problem.
The Home as an Investment
There are some people that think that buying a house is the same as guaranteeing your entry into financial nirvana. They feel that once they have bought a home all they need to do is sit back and wait for the pats on the back and the ‘atta boys when the money starts rolling in. Those people need the same reconditioning that Alex de Large underwent in Clockwork Orange.
Your house is consumption. Start thinking about it that way. You should no more expect to make millions off of your house than you do off of the new Prius you just bought. Owning a house gives you lots of nice warm and fuzzies inside and you should content yourself with that. History shows us that American house prices have been stable over time so, hey, you may even get your money back or make a buck or two. In no way should you fall into the trap of thinking about how you just cashed in on a run up in housing prices and should therefore tie up a hundred investment properties in order to make the money required to buy yourself that sweet little Maserati. That is a recipe for disaster.
America is a nice diverse place with lots of micro-economies. Las Vegas, or any random town in America, is not. Lots of towns are heavily tied to one industry that might experience a sudden economic downturn. Some towns might even accidentally elect a Democratic mayor who chooses to fire bomb the city. Those scenarios would be very bad for housing in that city and would drive a lot of nuclear families living in those towns to the next Boomtown USA. Southern California’s experience in the early 90’s following the base closures and slowdown in the defense industry should serve as a warning to anyone foolish enough to randomly speculate in a single city or area. If you want to make the money required for that new Maserati, work harder.
In the end, whether or not you should buy a house is an entirely personal decision. If you are comfortable spending the money required for a house, if it will make you and your family happy to own a house then, by all means, go crazy. If, on the other hand, you think you are going to make loads of money off of your new house or if you are thinking about buying that sweet little investment property that your cousin told you about in Miami – don’t do it. There are more exciting ways to blow your cash. I recommend high end vodka, exotic vacations or Mexican art.
