Saturday, June 18, 2005

The Housing Bubble - A Short Memory Refresher


It astounds me that many of today's home buyers don't remember the stock market tumble of only five years ago.


In my previous blog, I threw out a hypothetical example where a $600,000 house would did not appreciate for 30 years. Think that is ridiculous? Well consider this:

At the local or regional level, there's a history of ups and downs in the real-estate market. The downturn in the oil industry in the 1980s affected real-estate values in many Southwest metropolitan areas, with home prices in Dallas and Houston dropping in 1986 and recovering three years later. In the wake of the 1987 stock-market crash and the subsequent layoffs in the financial-services sector, prices in Manhattan took a beating. In 1982, a buyer could have paid $237,000 for a Manhattan apartment and sold it in 1988 for $660,000, a 178% gain. But if a buyer bought the same apartment that year, by 1995 it would have fetched just $397,000. It wouldn't reach its previous high price until 1999, according to a study by Corcoran Group, a New York real-estate firm.

The lesson here is that from 1988 to 1999, that Manhattan apartment did not appreciate. So one doesn’t have to go back that far to find a protracted real estate slump. It also bears noting that the late 90s saw the beginning of the greatest stock and bond bull markets in history and that is what pulled up real estate from its malaise. I wouldn’t hold my breath waiting for another such boom. And I wouldn't be surprised if the next real estate bust is worse, given the risky leverage of today's adjustable rate borrowers.


1 comment:

Anonymous said...

I'd actually be curious to hear more comparison to the stock market bubble because I think it's so appropriate right now. People are so oblivious and so wanting it to be different this time, but all that's going to happen is these people are going to f up the economy with their astronomical overleveraging and speculation.